Finding the value in outsourced contract

Finding the value in outsourced contract administration
The growing complexity of managed-markets contract support makes outsourcing a near-necessity for Small Pharma, and a better option for Big Pharma
By John Still, PharmaMetrics Inc.
The breadth and depth of prescription, transaction,
reimbursement and channel data has never been as accessible as it
is today. Big Pharma companies have invested tens of millions of
dollars or more in contract administrative software, along with related
implementation costs, to manage and process payer agreements
and minimize the potential risk linked to governmental legislation.
In many cases, components of the investment may be justified by
the returns obtained in better contract compliance with payers and
government entities; a faster and more accurate view of marketplace
activity. Access to third party data sets including claims and formulary
information have become a core requirement to determine an
enhanced level of contract compliance.
Yet the question should be asked: Is the expense and complexity
of administrative systems to achieve these results worth the cost?
Can contract administration be performed more economically and
more efficiently? Our answer is that yes, for some organizations, the
advantages of outsourcing these tasks are a better choice. For many
small to medium sized pharma organizations, it is a cost-effective,
strategic alternative that should be considered.
Optimizing managed markets contracting
Up until the early 2000s, the more common managed care
contracts were fairly straightforward; often a fixed “base discount/
admin fee” and various types of incentive based terms often linked
to market share or volume movements. Today, managed markets
agreements entail more complex interplay between pharmacy benefit
managers (PBMs), insurance companies as well as group purchasing
organizations (GPOs) for the institutional channel. Formulary
placement has become critical and is often linked to various tiers
associated with patient copays and “disadvantage” language is linked
to brand positioning within a drug class.
Companies that have licensed software from a vendor will often
have it customized to meet specific contracting needs, and if required,
will update the software as new releases become available. In coming
years there will be different contracting structures, most likely
“value-based” plans that involve commitments on patient outcomes.
Government-funded programs, from Medicare Part D to so-called
340B discounts to state-based exchanges will add an extra layer of
complexity, as well as regulatory compliance responsibilities.
Industry’s response to this complexity has been to adopt more
complex contract administration practices that place an additional
level of burden on IT resources and employ staffs of business analysts.
How does the software license structure usually work? The most
traditional model has been a substantial software license fee and
related implementation costs in the first year and maintenance
payments in the following year(s). Maintenance fees can often be
15–25% of the software license fee. The cost of the software and
related implementation costs will vary depending upon the size of
the pharmaceutical company, the number of operating divisions, the
number of NDCs, the contract structures and the number of modules
in play. Depending upon the complexities, the implementation costs
can often be as much as the license fee.
Small and start-up pharmaceutical companies may often pay
license fees that are a larger proportion of their year one and year
two revenues, with large maintenance fees in the following years.
When software vendors release a significant upgrade, clients are
often required to pay a substantial amount to install and validate this
upgrade within their data.
Additionally, pharmaceutical companies will require
administrative staffs to manage and process all contracts driven
by governmental legislation as well as the unlimited number of
contracts covering PBMs, HMOs, Medicare Part D, Medicare Part
D Coverage Gap, GPOs, Extended Care State Medicaid and others;
almost an impossible task for a limited staff. Utilization is often
submitted electronically, at the prescription level, which requires
enhanced software to load the data from various payers into a central
database to scrub, analyze and reconcile the utilization linked to the
amount paid to the contract owner. IT systems maintenance as well
as reporting responsibilities will be ongoing costs. Don’t forget that
the various payers change and update their systems periodically too,
which will likely affect the format of the submitted data.
Where are the analytics?
One of the other trade-offs with this complex, highly administrative
process is that almost the entire focus is on making accurate payments
(of rebates and the like), regardless of whether there is expected Payer
and product performance and related profitability analysis linked
to the ROI of the contract. In reality, administrative teams often
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Reprinted from the January/February 2014 issue of Pharmaceutical Commerce
rush to complete the processing of these millions of dollars in rebate
payments to meet a deadline, regardless of the required product
formulary compliance as it relates to the terms and conditions of
the contract. Analysis is pushed to the back burner and there is little
to no time and often limited resources with relevant experience to
understand and complete the full financial analysis. The CFO’s office
and financial team is now required to be more directly involved in
the analysis of contracting strategies on Gross to Net. More strategic
trends toward using “fact based” contract pricing methodologies are
becoming more prevalent as a recent white paper discussing managed
markets pricing and analytics stated:
“The use of “What If?” forecasting models is commonplace.
TGaS has found “What Should?” forecasting models to be an
“above benchmark” practice. These models use various inputs,
analysis and analogs to accurately predict expected ROI and what
discount levels and performance requirements (if any) should be
offered to customers.” [“Managed Markets’ Contract Management
Teams: Going Beyond Efficiency to Increase Capabilities and
Strategic Partnerships,” Brian Deppen, TGaS Advisors, a division of
KnowledgePoint360]
The “analysis challenge” existing in large and mid-sized
pharmaceutical companies is just as prevalent with small and start-up
companies. Pre-deal financial analyses are rarely completed prior to
the contract start date so there is no ability to perform post-mortem
analysis. As contract utilization submissions continue to accelerate,
there is less available time for channel, contract and product analysis.
The likelihood of finding staff that is also fluent in contract and
market analysis is not as rich as the complexities demand.
The outsourcing alternative
Over the past few years, the concept of outsourcing these services
has become a viable alternative and has gained momentum across the
industry. The cost of outsourcing contract administration services will
almost always be substantially lower than the licensing structure and
the related resources needed to support the investment: and often can
be as little as 25% or less of the cost of the license fees, maintenance
fees and ongoing costs of upgrading and maintaining the software
which also results in a reduction of IT hardware and software costs.
The fee structure may be as limited as managing and processing
claims for a single segment (Managed Care, Medicare Part D,
Medicaid, etc.) to a full service that would include support of all
Fig. 1. Rebates should be designed to result
in an increase in incremental profits.
administrative functions, as well as contract, customer and product
“analytics” and ongoing managed markets advisory services. A more
advanced service will often include “subject matter experts” to analyze
claims data as they relate to other third-party data sets.
Due to the volumes and complexities of the contracts under
management, outsourcing service providers usually have extensive
managed markets background and experience within each area.
As contract volume and complexities vary, within and across
years, the outsourcing model can usually support the incremental
workload through the use of more flexible work forces, rather than
requiring a pharmaceutical company to approve and increase full time
staffing. Certain components of the software that have already been
expensed may not be required for months, if not quarters, waiting
for contract submissions, as a result of preparing for product launch,
ongoing contract negotiation with payers and other product related
delays (FDA, manufacturing, etc.). The contract administration
and supporting staffs and systems sit idle, but the costs continue to
accumulate.
Fig. 2. An outsourced contract-operations service can provide substantial initial savings.
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An outsourced team of experienced advisors and analysts become
an asset to any size pharmaceutical company when they analyze
contract performance while utilizing Symphony, IMS Health, MMIT,
Fingertip Formulary or other third-party data sources. Within these
data sets are often the answers to the drivers of product movement
and the potential answers to questions that will help determine the
performance of single contracts, as well as the portfolio of managed
market performance. Within pharma, too often the third-party
data, purchased for a premium, may be unused or underused, or
in a department that may not have as much focus on contract and
customer performance. Effective management of the relationship
of multiple data sets is often a core function of outsourcing
organizations. Big or small, understanding the analytics can change
the way organizations might approach the investments linked to their
entire contracting and managed markets strategy.
The pendulum toward outsourcing started shifting in the mid
2000s and continues to move in that direction. This solution can
be extremely cost effective and will bring in levels of expertise
needed to optimize the administrative and analytical components
of contracting, usually at a substantially lower cost. Small and startup pharmaceutical companies are already moving in the direction
of outsourcing because they understand the level of experience and
expertise they need to optimize their administrative investment.
There are numerous examples within the market today where
pharmaceutical companies have either mothballed their licensed
software or have reached out to the outsourcing vendors to manage
specific components of the contract life cycle, including advisory
services on contracts and scenario building.
As each pharmaceutical company, large or small, goes through
the process of evaluating or re-evaluating the business, financial
Fig. 3. A contract re-negotiation that raised the discount percentage resulted in lower product locks
and prior-authorization requirements, generating higher market share.
Outsourcing at Big Pharma?
The process for large pharma to consider outsourcing large
components of contract operations can be a little more complex.
These organizations have already invested years and years of human
and capital resources in staffing, software and hardware to support the
growth of their comprehensive contracting requirements. Individuals
within the contracting environment often have spent years managing
and understanding the complexities of their specific contracts and
contract customers. Transition to an outsourced environment could
be more challenging since the new organization would have to be
up and running, day one, with all existing agreements and pricing
structures as well as all historical data.
Based upon the upfront and ongoing costs to install and license
the software as well as the ongoing annual maintenance costs, a more
likely scenario would be to transition specific components of the
contracting processes to external resources. This may include, for
example, systems and resources to scrub prescription-level claim data,
resources to manage incremental contracting overflow or resources
to serve as the primary or secondary function to analyze the shortand long-term aspects of channel, contract, customer and product
performance. The outsourcing of unbiased analytics can bring
substantial value because of the knowledge of the dynamics of claims
data and formulary movement.
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and resource requirements of implementing the components of
the Contract Life Cycle, combinations of both licensing and/or
outsourcing solutions should be under consideration.
About the Author
John D. Still is the founder and president of
PharmaMetrics, Inc. With over 25 years of
experience, John has deep understanding and
expertise in all aspects of the Contract Life Cycle,
including portfolio analysis, payer price
determination and contract operations within the
Managed Care and Managed Markets segments of
the pharmaceutical industry. John’s strong
understanding of both the financial and operational dynamics of the
managed care markets has enabled PharmaMetrics to develop
PharmaLytics, PharmaMetrics’ Customer Valuation, Rational Pricing
and Pre-Deal software offering as well a broader set of managed
markets contract management and processing as well as consulting
services.
Reprinted from the January/February 2014 issue of Pharmaceutical Commerce