How Not to Handle Rebates - Pharmaceutical Executive

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How Not to Handle Rebates


Pharmaceutical Executive


Quality Control of the Contract


12: Tips to Escape the Rebate Black Hole
It's a no-brainer that the finance and legal departments should be involved in the contract process. Yet they are often brought into the picture only when a crisis has occurred: a Medicaid "best price" violation, a "Most Favored Nation" clause violation, or when total annual rebates come in over budget due to poor or overly optimistic forecasting. For best results, the finance and legal departments must sign off on both the performance and the financial tools used in the pre-contract and ongoing contract analysis.

There is always the question, Whose contract template should we use? Whenever possible, use your own—it was developed by your team, is focused to meet your product's goals, and integrates your company's philosophy into the terms and conditions. When the contract template is not yours, the language is always up for interpretation. For example, as previously discussed, there is often substantial vagueness in the definitions of "open," "restricted," and "closed" formularies. These inconsistencies often impact the prescription as it travels through the pharmacy/MCO systems.

Auditing the Data for Contract Compliance


Contract Copay Compliance
Since the late nineties, many companies have been scrubbing rebate data on both the commercial and the government side, and this process has been found to be very cost-effective on a retroactive as well as a proactive basis. In the past year or two, the "compliance" audit has become more frequent and is a very useful tool to detect violations and measure strategy. For example, a recent contract stated that there needed to be a minimum of a $10 copay differential between formulary and nonformulary products. But an audit of the actual transaction data revealed that more than 25 percent of the plan/employer group utilization was in violation of the contract. These noncompliant accounts all had average copays for the product under contract that were less than the required favorable $10 copay differential with their competitors. (See "Contract Copay Compliance" chart.)

A drugmaker can address such violations in any number of ways. The two extreme reactions are "do nothing" and "full breach." The preferred scenario is somewhere in between.

Align Compensation and Contract Incentives

In a perfect world, the account executive's compensation package would parallel a company's overall goals. However, such incentive plans are often based instead on market share, utilization, or number of contracts. Therefore it should come as no surprise that account managers gravitate toward offering the lowest contract price. This would not be the case if incentive plans were based on discount percentages offered or contract profitability. A recent AMR Research study found that less than 5 percent of drugmakers correlated their account manager's compensation to corporate profitability goals.

As an example, say a top account executive approaches you and asks, "By canceling two large contracts, over $15 million would fall to the bottom line. How will I be compensated if we implement my recommendation?" Currently, most incentive plans do not support this scenario. The result, most likely, would be moving the individual to another department. With today's technology and business tools, an account executive's performance can (and should be) monitored and linked to corporate goals.

Too often contracts are written with the bulk of the rebate linked to the access (non-performance-based) discount. This imbalance may not offer enough of an incentive for the contract owner to "move share" unless there is very strong contract language wrapped around the access discount.

Since a pharmaceutical company does not always get the "bad news" in the data submitted by the customer, it has no way of knowing whether the contract owner is helping, hurting, doing nothing—or even whether it is compliant. If the contract owner can receive a healthy discount for simply placing a product on the formulary alongside its competitors, the motivation to drive share via higher copays, prior authorizations, and product not covered is minimized. It is not uncommon for as many as seven brands to be listed as "preferred" within a single drug class at a specific account. In that case, is any one really "preferred"?

Realizing Rebates' Full Potential

An analysis of market dynamics tends to show that most drugmakers have some level of non-performing or marginal investments in their portfolio—and that these investments are often pushed to the back burner. It is disturbing to find out that when marginally performing contracts are identified, "Don't tell Finance!" can be the standard response. A more proactive approach is to understand that the problem likely stems from the fact that initial pricing decisions were based on limited data and limited business tools.

Today's advanced business tools can provide richer data and pricing methodologies for a more accurate determination of a customer's full potential. Add in the means to track customer performance, and the result is the ability to not only clarify the dynamics of the Rebate Black Hole but also to make big strides toward escaping it altogether.

John Still is the president of PharmaMetrics, Inc. He can be contacted at
. David Carlson is a senior manager at Accenture's contracting and managed markets practice. He can be contacted at
.


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