How Not to Handle Rebates - Pharmaceutical Executive


How Not to Handle Rebates

Pharmaceutical Executive

The Road to "Rationalized Pricing" Info

Currently there are few tools available to rank and prioritize your customer base. In fact, all too often prioritization is relegated to an informal hallway or cafeteria discussion about a specific customer. Unfortunately, many pharma and biotech companies lack the technical resources to accurately analyze the return on the rebates invested in an account. (To clarify, the "return" is the monetized value of a change in behavior due to the revised discount rate or contract terms—the bang for your rebate buck.) What is needed is an understanding of how each customer fits into your overall managed markets portfolio and the value each presents.

Obviously, not every customer can be the most important, and this is precisely why customer prioritization is so important. Until recently, developing this prioritization process was hampered by the limited quantity and quality of the data. Gut feelings and best guesses were often the deciding factor. In contrast, today there are numerous information sources with rich data that can be leveraged to answer such basic questions as: Who's helping, who's hurting, and who's doing nothing for you (and your competition)?

Yet these data points often remain incomplete, inconsistent, and even inaccurate. The information tends to reside in databases that are functionally siloed and technically disjointed; a subset of the total data set is often carved out for an entirely different purpose.

When a company invests in directly linking its managed-markets pricing guidelines to the prioritization process, the result is generally a net price that correlates more closely to the value placed on the account. Such fact-based "rationalized pricing" information enables the account-management team to enhance the negotiation process, determine relative profitability, and ensure that discount levels correlate to customer value.

Pricing Guidelines and Levels of Control

Too often, pricing guidelines (and related customer pricing) are defined in, to put it politely, an unscientific manner with minimal variances among the "open," "restricted," and "closed" levels of control. "Restricted formulary" can mean just about anything to each side of the negotiating table. Utilization with little or no level of control somehow tends to fall into a "restricted" discount level simply because the definition is left vague.

It is critically important to develop pricing guidelines that parallel the levels of control within each pricing segment. Companies often underpay for results within the "closed" component of the business while overpaying for the "open." And the "open" component often reflects a large percentage of the customer's product utilization, resulting in drugmakers getting the worst of both worlds: subpar performance at inflated prices.

1 Brand, 1 HMO, and 4 Rebate Scenarios
Almost every contract can be viewed as profitable when proper expenses are allocated against it. But the question is, How profitable is it compared with other scenarios? For example, is an investment valuable if you invest $12 million in a customer that can move market share from 15 to 20 percent, while your national share sits at 30 percent? Without the proper performance-measurement tools, answering such questions is not easy, to say the least. (See "'Actual Performers vs. Key Biz Scenarios" chart, below.)

Measuring Performance

The best way to go about evaluating a contract's performance is to complete the performance components of budgets with the customer. This process ensures that so that all parties are on the same page regarding expectations. It also sets the stage for productive quarterly (or annual) business reviews.

The concept of "margin for share" is a fundamental benchmark against which contracts are negotiated and implemented. Too often, the analysis of contracts is done using only transaction-based data. While this data may be very accurate, it has significant drawbacks, such as reflecting factory-based, rather than demand-based, utilization. Such information tends to provide only the good news regarding approved claims utilization. It skimps on the bad news—rejected claims, say, or high copay values—and tells you little about your competitors.


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