Stop the Bleeding - Pharmaceutical Executive

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Stop the Bleeding
A prescription for rebate validations

Pharmaceutical Executive


Handling Rebate Overpayments

Somewhat surprisingly, most manufacturers have not focused on claims validation and the clear opportunities it offers for revenue recovery. There are two main reasons: some have tried and failed, and others are simply not aware of the issue.

Many tier-one pharmaceutical manufacturers with annual gross revenue of more than $5 billion fall into the first category. They're aware of rebate overpayments, and have tried to build and implement their own internal systems to gather and analyze detailed sales data from trading partners. But there are many challenges in building complex, data-intensive information systems, and the results have been less than satisfactory.

Other manufacturers have hired vendors to gather and analyze the data externally. But in this "one-size-fits-all" solution, the vendors were unable to drill down to the manufacturers' individual trading partners and uncover specific errors and discrepancies. This is due to the fact that these vendors perform an identical, limited set of data validations for all PBM submissions. Manufacturers are, therefore, unable to alter validation parameters for particular PBMs or data submissions in order to target entity or data-specific error trends and known issues. As a result, they could only produce high-level reports that were not much better than what PBMs were offering.

Many tier-two and smaller pharmaceutical manufacturers, those with annual gross revenue below $5 billion, fall into the second category: they simply are not aware of rebate overpayment. They typically don't have the resources or infrastructure to identify such issues in the first place

The Storm Approaches

According to the Centers for Medicare and Medicaid Services' (CMS) National Health Care Expenditures Projections: 2005–2015, prescription drug costs will grow an average of 8.1 percent over the next 10 years. This indicates that at least $446 billion will be spent on prescription drugs in the year 2015(roughly double the expenditure in 2007.) Based on those projections, revenue leakage for manufacturers will skyrocket to almost $4.5 billion by the year 2015.

The advent of Medicare Part D has also thrown fuel on the fire. Perhaps the biggest script processing risk imposed by Medicare Part D is the potential massive switching of participants on a yearly basis between various Medicare Part D managed care plans. As of September 2007, more than 26 million individuals were enrolled in Medicare Part D, and this number is expected to grow to 43.8 million by 2015, further increasing the risk for error.

Another major issue stems from the fact that Medicare Part D is administered by commercial entities—the same entities that administer commercial drug plans. At its creation the government, looking for cost efficiencies and not wanting to create additional infrastructure, outsourced management of Part D to these companies because they already had the infrastructure in place to manage the programs.

But this consolidation has led to a host of rebate errors. The companies that manage Medicare Part D distribute prescription drugs under the various programs but with different price structures, and process the sales data through the same computer systems internally, often resulting in mispriced drugs, duplicate rebate submissions, and other discrepancies that are passed along to the pharmaceutical manufacturers. Add to this scenario the switching of participants between Medicare Part D and commercial plans, and you have a recipe for disaster.

Further roiling the managed care rebate atmosphere are significant changes taking place within the commercial PBM industry. For one thing, smaller PBMs are growing at the expense of larger ones. In 2002, the top three PBMs by prescriptions-per-year—held over half the total market share. By 2Q 2007, their share of the market had dropped to 44 percent. That same quarter, the top five PBMs' share dropped from 70 percent in 2002 to 61 percent.

These industry dynamics increase the risk for error in a variety of ways. Rapidly growing, smaller PBMs may have more immature processes and higher manual intensity, thereby increasing the risk of poor script quality and/or rebate processing errors. Mergers and divestitures among PBMs could also bring about organizational, process and automation/IT risks. All of these factors put increasing pressure on pharmaceutical manufacturers to incorporate a process through which they can validate claims and stem the flow of lost revenue.


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