How Not to Handle Rebates

May 01, 2008

As financial pressures increase, pharmaceutical companies are paying greater attention to cutting costs and increasing efficiency. With more than 70 percent of prescription utilization going through managed care, rebates have a major effect on a company's bottom line. Yet rebate expenditures continue to expand—in part because of the industry's imperfect understanding of the relationship between discounts invested and value received. The complexities of managed-markets contracting can be overwhelming. By looking at the origins and rationale for rebates, we hope to throw light into the Rebate Black Hole.

There are steps that every drugmaker can take to turn rebates from a significant "expense" into a significant "investment"—steps that may even result in savings. What's required is a system to make rational, performance-based decisions within the immensely complex world of managed-markets contracting. A data-driven strategy can help you deal with these critical issues:

  • Deciding which accounts to contract to—and at what discount—in order to maximize market share
  • Tracking the complete picture of a brand's "product locks," "prior authorizations," and "copay differentials"
  • Calculating incremental profits on discount investments
  • Analyzing the cost/benefit ratio of paying for formulary position and discount decisions for contracted accounts
  • Measuring the impact of a formulary position on volume and share
  • Establishing performance benchmarks to monitor a deal by customer channel, customer segment, or geographic region
  • Applying regional formulary data in order to improve position sales and marketing efforts
  • Quantifying the "margin for share" financial investment

All of these variables will assist in determining the difference between the rebate investment and the rebate expense.

Rebates and the Fight for Formulary Status

The concept of managed care came onto the national stage in the late eighties and early nineties. The premise was simple: Find the lowest-cost means to safely and adequately care for patients. Managed care organizations (MCOs) were fixated on promoting preventive care as a key component of driving down costs. Pharmaceutical therapies, being far less expensive than surgeries and emergency room visits, were at the core of this strategy.

This presented the need to reimburse providers for these products along with the challenge of managing ever-growing drug expenditures. Drug formularies were created as a way to control costs by determining which drugs would be covered—and therefore, in an indirect way, which would be most frequently prescribed, and even demanded. Ever since, the pharmaceutical industry has been faced with the dilemma of determining the level of rebates, or post-purchase refunds, to be paid to various segments of the managed care market.

Rebates have long been viewed as a way to gain a preferential position, referred to as formulary status, early in the life-cycle of a drug. As the concept caught on, the bidding became increasingly aggressive. In 1990, the federal government passed the Medicaid Reform Act, which brought Medicaid into the rebate arena.

Pharmacy benefit managers (PBMs) and health maintenance organizations (HMOs) also brought sophistication and complexity to the rebate process with utilization-measurement tools, such as bid grids, complex performance structures, and innovative contracts that were often exceedingly difficult to manage on both sides of the table. This presented the drug industry with the need for more robust contracting systems, increased data scrubbing, and contract compliance measures. One area that has lagged substantially has been a drugmaker's ability to analyze customer and contract performance with an objective measure of margin and profitability.