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Rebate Leakage: How Pharma Companies Can Prevent a Multimillion-Dollar Problem

By Jay Shah

Every consumer is familiar with the rebates one may get when purchasing a product or service. However, if the rebate was invalid or was not submitted properly, the money does not always get back to the consumer. A similar issue of ineligible rebates and incurred costs also consistently occurs in the pharmaceutical industry, but on a much larger scale. As a consumer, you would be angry if you didn’t get your money back from a rebate. Why should pharma companies let this issue go unresolved?

Every year, pharma companies lose millions of dollars due to rebate leakage—revenue that’s lost throughout the convoluted rebate payment process. While most pharma companies are aware of rebate leakage, many do not realize the magnitude of this issue. According to MMIT market research from 2021, the average mid-sized pharmaceutical manufacturer spends $4 to $5 billion in rebates annually, and 2% to 3% of revenue is compromised due to rebate leakage. This means that manufacturers lose an average of $150 million every year from overpaying rebates, and this number is even higher for large pharma companies.

The Root of the Problem

Pharma manufacturers form contracts with payers and PBMs that include rebate offers for preferential placement of the manufacturer’s drugs on the formulary—the better the placement, the higher the rebate. In theory, rebates that manufacturers pay get passed down to the patient, reducing the patient’s spend. In reality, however, PBM fees tend to eat up much of the rebate.

These rebates don’t always flow as intended because contracts between pharma manufacturers and PBMs are typically extremely complex, and the process of validating the contract’s rebate offers is manual and inefficient. Once the PBM sends the pharma company an invoice for all available rebates, manufacturers need to ensure that the contracting terms are being adhered to, and make sure that what was agreed upon is actually being represented in their policy documents and coverage. This involves fact-checking the rebate invoice, confirming where their product is positioned on the formulary, and paying the rebate that corresponds to that placement.

Internal formulary names that appear on the rebate invoice do not match the names on public-facing formulary documents, so pricing and contracting teams must bridge internal and external nomenclature. To make matters worse, internal nomenclature is often complex and illogical, and it requires a deep familiarity with payers and PBMs to correctly bridge. Examples of internal formulary names include “2021 SWH MAPD MEDD” and “Prime NRA ND F-series Full 6T.” Would you know what the corresponding public-facing nomenclature is?

Once the nomenclature is matched, pharma teams must then manually verify the drug’s position on the formulary. PBMs do not always share their formularies directly with pharma companies, so teams often must search for public-facing documents. Only after formulary documentation has been found and nomenclature has been bridged can pharma manufacturers then validate where their product is positioned and determine which rebate offer applies, or check if the payer or PBM is adhering to their contract.

Because the process of formulary validation is so labor-intensive and time-consuming, many pharma teams do not conduct it comprehensively or may even skip it entirely. But when manufacturers do not verify positioning, there’s a higher potential of overpaying rebates. The manufacturer may pay a rebate based on what they believe to be the drug’s position on the formulary, but if a drug has a less preferential placement tied to a lower rebate offer in the contract, manufacturers will likely overpay. Moreover, when an invoice comes in, manufacturers must pay them within a certain time limit or risk a penalty. This time limit often increases the pressure to send payments out immediately, leaving little time for validation.

How to Solve It

While pharma companies are aware of rebate leakage, they lack the visibility to identify the root cause of inaccurate payments. Without manually conducting formulary validation, it’s impossible to know whether PBMs are adhering to the positioning outlined in the contract and whether the rebate invoice is accurate. This process is inefficient, error-prone and unsustainable, and pharma companies need a better approach. A strong strategy to address leakage during the rebate payment process requires visibility, maintenance and accuracy.

First, pharma companies need greater visibility into their contracts with payers and PBMs, the rebates outlined in them, and any additional costs such as administrative fees. The rebate payment process is opaque, and it can be difficult for manufacturers to pinpoint where money is lost. While contracts are likely to stay complex, improved communication between manufacturers, payers, and PBMs can prevent pharma companies from getting left in the dark throughout the process. PBMs should make their formulary documents more easily available—ideally sharing them directly with manufacturers—so manufacturers do not need to search for them online. Payers and PBMs should also be more transparent about any fees they charge manufacturers other than rebates since these additional costs tend to be inconsistent and unexplained.

Pharma companies also need a plan to conduct ongoing reviews of formulary placement and restrictions on their products as well as competitor products, since many rebate offers have competitive requirements. Such maintenance will help manufacturers identify and prevent overpayments.

Above all, pharma companies must ensure that each step of the rebate payment process is completed fully and accurately. This includes scrubbing claims to remove any from the invoice that aren’t eligible for payment, matching internal and external nomenclature, and determining whether public-facing payer documentation adheres to the requirements in the contract.

A strategy rooted in automation is the best path to simplifying and streamlining the formulary validation process. The most cost-effective route is to bridge formulary names and take the burden off pharma teams to make sense of nonsensical nomenclature. Another key element is to automatically verify formulary positioning of the manufacturer’s products and competitor brands. With the right strategy and tools in place, pharma teams can instantly identify where their drugs are positioned, the qualifying rebate amount, and whether the formulary placement matches what is stated in the contract.

It’s time for pharma companies to start acknowledging the severity of rebate leakage and taking steps to address it. Not only are manufacturers leaving millions of dollars on the table every year, but they are also losing valuable time and productivity due to manual processes. Are you ready to ease the burden of costly, inefficient rebating?

MMIT’s new solution, Contract Validation, can help pharma companies streamline the rebate payment process and reduce leakage.

© 2024 MMIT
Jay Shah

Jay Shah

Jay Shah has an industrial and electrical engineering background, graduating from California Polytechnic University of Pomona (Cal Poly). His technical background married with his passion for the pharmaceutical industry has been a pillar in his career to help manufacturers intersect data and business to help solve complex problems in order to draw insights to support strategy, initiatives and key decisions. Jay recently joined MMIT in June of 2021, however prior to his time with MMIT he was a consultant for ZS Associates, who helped various pharma companies with their business operations. As a solutions consultant for MMIT, Jay supports our pharma clients by being a technical lead in aligning some of our new MMIT solutions to their business needs.

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