Contracting in the pharmaceutical industry is increasingly complex, forcing manufacturers to navigate risks on both a financial and legal level. As payer dynamics continue to evolve, manufacturers are exposed to even more complicated risks, such as legal non-compliance and a greater variance of true ROI on contracts. Most notably, this complexity has resulted in an issue causing financial strain on the pharmaceutical industry at an overwhelming scale: rebate leakage.

As consumers, we’re all familiar with the concept of rebates, the incentive programs that offer refunds or rewards when we make certain purchases. In the pharmaceutical industry, however, rebates are used to secure formulary positioning or medical policy inclusion. To gain coverage for their products, manufacturers create contracts with payers and pharmacy benefit managers (PBMs) that include rebate offers for preferential placement of the manufacturer’s drugs. 

When contracts are not accurately validated during the rebate payment process, however, manufacturers can suffer from rebate leakage—the payout of rebate dollars to payers against invoices that are either not contractually compliant or based on inaccurate claims, including non-adjudicated and duplicate claims. To reduce the risk of overpaying, manufacturers must comb through every invoice to verify their product’s positioning and ensure contractual terms are met—a manual and highly inefficient process. 

MMIT’s research indicates that a surprisingly high percentage of contract terms are not reflected as intended in the formularies being applied. For example, the manufacturer may have contracted and paid for exclusivity, yet their product ends up being one of three instead. The number of term-level violations per contract can reach well into the hundreds.

Rebate leakage already drains millions in revenue from pharma companies each year, and the problem is likely to grow in magnitude with the increasing influence of group purchasing organizations (GPOs), which create another layer of separation between pharma and payers. Based on MMIT’s research, the average mid-to-large pharmaceutical manufacturer spends around four to five billion dollars in rebates annually. Yet industry experts estimate that 4% to 5% of rebates are comprised, which can result in hundreds of millions of lost revenue. In more competitive spaces, insufficient contract validation can have significant ramifications not only for rebate leakage, but also for ensuring that drug utilization meets expected forecasts.

Manufacturers have been attempting to combat rebate leakage for quite some time. However, it has historically been difficult to develop strategies that effectively address the issue at scale given the multitude of contributing factors. Each individual problem requires a unique solution.

Understanding the causes of rebate leakage

One of the most consistent factors impacting rebate leakage is the inaccurate bridging of enrollment files to formulary/policy nomenclature present in payer documents. Internal formulary names on rebate invoices are not the same as the names on public-facing formulary documents, leaving contracting teams to bridge the gap. Without dedicated resources to manually tie each individual policy name to the overarching payer or PBM, it’s nearly impossible to determine which policies relate to which contracts.

Other factors that contribute to widespread rebate leakage include the lack of visibility into payer policies, poor data granularity, and short payment timelines, which can lead to pharma contract teams processing payments too quickly only to request clawbacks at a later date. Human error is another critical factor, as the technical and clinical nature of payer documents can lead to mistakes in rebate evaluation. When pressed for time and resources, pharma teams may even skip the process of formulary validation entirely, which leaves manufacturers vulnerable to widespread rebate leakage.

How can we solve rebate leakage?

So how can pharma manufacturers ensure they’re not losing potential revenue? To develop an effective rebate leakage strategy, manufacturers should begin with these steps:

1. Begin with the highest-value contracts impacting the greatest number of lives. You can significantly reduce leakage while correcting policies, leading to higher utilization for your products.
2. Consider where your coverage data is being sourced and whether it can be relied upon to accurately validate your contracting positions.
3. Ensure that discovered policy mistakes are communicated to your broader market access team. Make sure to supply the necessary documentation to facilitate their conversation with payers.
4. Look across contracts to see if there is any commonality regarding which contract terms are frequently violated.

Once your contract team has these structural elements in place, they should re-evaluate how they incorporate data and technology into every stage of the contract validation process. Consider these three critical steps to reduce rebate leakages and ensure contract compliance:

• Invest in automation: Seek out new methods and processes to validate contracts using automation, leaving behind the process of manual checking. As the pharmaceutical landscape grows in complexity, the old methods will eventually become non-functional. Investing in software that can translate the most complex contractual terms into standard, consistent rules that can be repeatedly validated will help to alleviate many common issues.
• Leverage real-world data: Manufacturers should consider the data from their validation process when forecasting the gross-to-net impact of any individual contract. Real-world data (RWD), including claims and billing activity, can help manufacturers determine a contract’s true worth and prioritize contract violations to address and rectify.
• Prioritize data granularity and accuracy: Any amount of data cross-checking is tedious and risks human error. By using highly accurate, timely data, manufacturers can achieve better visibility into contract terms and payer policies while also obtaining evidence for payment adjustments.

In addition to reducing leakage, an automated contract validation process can also help manufacturers mitigate risks—enabling true evaluation of patient access, better customer relationships, and innovative contracting positions. By sourcing the best coverage data and implementing automation capable of processing the most complex contracting terms, pharma manufacturers can save millions in reclaimed revenue—which can then be redirected to R&D to enrich patient lives. 

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Tracey McCarrick is the Vice President of New Product Commercialization at MMIT, the leading provider of market access data, analytics, and insights. She is responsible for driving MMIT’s success with new solutions, including Contract Validation, and leading pharma partners through strategic solution implementation, change management, and adoption to ensure realized value. For more info: www.mmitnetwork.com