Welcome to our five-part series on Pharmaceutical chargeback mistakes that cause revenue leakage for Pharma manufacturers
Today we’re talking about mistake number one, contract notification errors, but before we do don’t forget to like this video and click the subscribe button down below for more content like this.
OK, so mistake number one, contract notification errors, what does that mean?
Well, when a pharma manufacturer has either a new contract or an update to an existing contract, they have to notify all the wholesalers that are servicing that contract.
There are two ways to handle this. You can send an e-mail to the contract department at the wholesaler with an Excel spreadsheet that has all the information or two you can use an EDI 845. An 845 is just the document number that represents the contract update.
In order to do this you need a contract management system that’s capable of generating 845’s. If you don’t have a system that can generate 845’s or you’re interested in setting up EDI 845’s please reach out to us because we can help you with that.
OK, so that’s the contract notification part.
The error part comes in when the manufacturer makes a mistake on the contract price that’s communicated to the wholesaler and that incorrect price is then put into their system and then when they generate chargebacks the chargebacks come through with an incorrect amount.
WAC = $100
Contract Price = $60
$100 - $60 = $40/unit
Now you basically have two scenarios when sending an incorrect price.
A price that is higher than the actual price
If you look at the scenario of you sending a higher price, let’s say that instead of $60.00 for the contract price you sent $70.00.
So, putting that into our formula we’ll take our same $100 WAC price and we’ll subtract the incorrect contract price of $70 to get a $30 per unit chargeback amount. That means that instead of paying $40 per unit you’re paying $30. So, you’re underpaying the wholesaler by $10 per unit. Now if they sell 1,000 units you have underpaid them $10,000 this increases your risk and your exposure as a business and most likely the wholesaler is going to find that discrepancy.
In most of the terms and conditions, they can go back up to about 5 years, do an internal audit, and realize that you underpaid them and send you an invoice for it.
I have actually seen customers get invoices for over $100,000 out of nowhere from wholesalers because they feel they were underpaid, and you do not want this happening to your business.
A price that is lower than the actual price
If the incorrect price that you communicated to the wholesaler is lower than the actual contract price.
So, if we use our example, let’s say that we communicated $50 for the contract price instead of the $60 that we were supposed to.
So, using our formula again that would be a WAC which is $100 minus our incorrect contract price of $50 creating a $50 chargeback amount per unit. However, we’re supposed to only be paying $40 per unit. This means that we’re overpaying the wholesaler $10 for every unit they sell.
Again, going back and saying they sold 1,000 units now we’ve overpaid the wholesaler $10,000. Good luck getting that money back because it was your mistake when you communicated to the wholesaler that you overpaid them the money they asked you why and you told them it was because you made a mistake on the contract price it’s going to be challenging to get that money back from the wholesaler.
Now if you have a contract management and pharmaceutical chargeback processing system and you entered the correct price in your system, but you communicated the wrong price to the wholesaler then most likely your system will catch that when the chargebacks come in with the incorrect price and you can probably resolve it fairly quickly.
However, if you entered the incorrect price into your system and communicated the incorrect price your system’s not going to flag that as an exception, and most likely you will not catch it. And it could go on for quite a while.
On the other hand, if you don’t have any system at all that means that you’re absolutely using spreadsheets to manage this, and you might never catch it because when those chargebacks come in if you don’t have a system to validate every single line, you’re not going to see the discrepancies and you might not catch it. Again, this increases your risk and your exposure to your business over time.
So how do you prevent contract notification errors?
Well, the solution is actually pretty simple. Double or even triple-check the work before it gets communicated to the wholesaler.
So have one person enter the information into your system or into the spreadsheet and have a different person compare it to the contract pricing and make sure that everything is 100% before it ever goes out to a wholesaler. For added safety check it with a third person. The extra time it’s going to take you to do this is going to pay off big time.
It’s much better than the alternative of sending an incorrect price and paying out chargeback amounts that are incorrect putting your company at risk and exposing you to all kinds of money that you might owe the wholesalers over time.
So today we’ve covered mistake #1, contract notification errors, of our five-part series. Hopefully, you found this content useful, and you will implement these safeguards to ensure that you never send an incorrect price to the wholesalers again.
Thank you for reading!
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