Introduction
The way pharmaceutical firms price their drugs and administer rebates and discounts, has put the industry in a potential governmental spotlight.
Key topics likely to be investigated include:
- How discounts are set
- How drug makers establish and monitor rebates
- How pharma firms report their pricing details
Background
Around the world, pharmaceutical manufacturers are under increased pressure from governments and the public to reduce consumer drug prices. In some cases, the amount consumers pay for medicines has skyrocketed. One example cited by Endocrine.org is the cost of an insulin dose rising from $170 in 1987 to more than $1,400.
A 2019 Time magazine article attributes rising consumer drug costs to a complex drug supply chain. Pricing is set by a combination of pharmaceutical manufacturers, pharmacy benefit managers (PBMs) who serve as middlemen, and insurers.
Typically pharmaceutical companies set a non-discounted “list” or base price for each product. Many pharmaceutical companies offer discount coupons and rebates. Depending on a consumer’s health insurance coverage though, some patients may be forced to pay the undiscounted list price for specific medications.
According to Time, manufacturers provide discounts based on the drug and the buyer. Typically these discounts are in the form of rebates negotiated with individual PBMs. The PBM gets paid for its efforts to reduce the amount the manufacturer charges. The final price—which may or may not include any rebates or discounts—is then passed to the insurance companies, who in turn pass the pricing on to consumers.
In addition to negotiating pharma rebates, PBMs also wield power by determining where a particular drug appears on an insurance company’s hierarchy, Time states. These middlemen can make a given drug the most discounted, and therefore most prescribed, medication. They can also exclude it, forcing patients who want or need it to pay more.
Prescription drug price negotiations often happen behind closed doors, leaving patients and physicians out of the discussion despite the impact drug pricing has on the health and treatment of patients,” The American Medical Association (AMA) stated in a 2019 online article on how prescription drug prices are determined.
Raising the price of prescription medicines forces patients with limited funds to skip doses, split pills or abandon treatment, the AMA states. All of these actions, plus growing demands for prescription drug price reforms, are causing the U.S. government to further examine medicine prices.
Figure: 1Percentage of Revenue Spent on R &D
Governmental Scrutiny
Federal government agencies such as the Department of Health and Human Services (DHHS) are paying extremely close attention to how much consumers actually pay. Agencies want to know if the actual prices reflect the research and development (R&D) and other costs of creating and manufacturing new products. Or are consumer prices a way for an unscrupulous company to use its hot new medication as a way to boost profits and stock prices?
The Biden Administration froze drug price reforms started by the previous administration pending further review. One reason for reviewing these proposals is the fear of higher insurance premiums, an online article by Joshua Cohen in Forbes states.
Cohen suggests that the Biden Administration may require health insurers “disclose current list prices and historical net prices for prescription drugs and provide patients with personalized estimates of cost sharing.
Figure: 2Amount of Revenue Spent on R &D
Setting Discounts
One way pharma companies can protect their integrity is by using Enterprise Resource Planning (ERP) software such as Microsoft’s Dynamics 365. ERP software allows pharmaceutical manufacturers to set various discounts and rules for each price break. For example, one rule in Dynamics 365 Commerce asks, “is a coupon required to obtain a discount?” A slider lets authorized users select Yes or No. When this feature is active, the discount only appears when a coupon or bar code is provided. This section also has “All discounts” and “Pricing and discounts management” workspaces, letting companies create customized discounts.
ERP software works by creating a series of properties for simple pharmaceutical discounts and quantity price breaks. For example quantity tiers must be reached independently for each line or product.
Microsoft Dynamics 365 Commerce lets companies select between four types of discounts: “Discount,” “Quantity,” “Mix and match” and “Threshold.”
Users also have the option to determine which discounts compete on a transaction. Values are “Exclusive,” “Best price” and “Compound” with “Exclusive” always being calculated first.
Individual products or product variants can be selected along with categories, units of measure and many other variables. Other options include setting up sales lines and invoice discounts.
When there are issues with drug quality, the “Quality management” section establishes rules for pharmaceutical chargebacks.
Managing Rebates
Microsoft’s Dynamics 365 Supply Chain includes a “Rebate management module” with an important feature for pharmaceutical companies. “The setup on this page is shared across all legal entities and can be modified by users who have the appropriate security permissions,” Microsoft states.
This module makes it easy to create contracts, deals and agreements with customers and vendors. It lets firms calculate and keep track of rebates, deductions and royalties. The information is stored in a central location for easy review.
Rebates can be created for customers or vendors. The function also allows inputting notes about a specific deal. For example, a pharmaceutical rebate may be given to one company instead of another. A note can explain the reason like a long-standing business relationship.
Since pharmaceutical rebates appear to be a likely focus of government action, documenting a firm’s rebates makes it easier to show what is taking place.
Reporting
With transparency being a likely focus of governmental action on drug pricing, investigators may ask to see pricing reports. ERP programs like Dynamics 365 have a number of powerful reporting features. A Report Wizard lets users select from a series of previously created reports and update them. Tables and charts can be included.
A big part of Dynamics 365 Supply Chain is tracking the status of each rebate for reporting and inquiry purposes. Reports can be linked to web pages, static files and dynamic Office-based files that read data from a Dynamics 365 database. Reports are filtered using SQL or FetchXML queries depending on the software in use.
Summary
Consumer drug pricing is becoming a hot topic in Washington, D.C. Pharma manufacturers are likely to face increased scrutiny on how they set pricing. ERP programs like Microsoft’s Dynamics 365 let firms set and track rules for discounts and rebates, as well as generate all necessary reports.
Get a consultation on how to manage pharmaceutical discounts in dynamics 365 supply chain management.
