By Zack Rinat, CEO, Model N, Inc.
IntroductionPharmaceutical manufacturers are faced with an unprecedented market challenge – managing dramatically accelerating competitive pressure in combination with increasing regulatory scrutiny. As a result, many pharmaceutical companies do not realize millions of dollars in revenue potential each year that is already available within their existing contract relationships. Why? Because they don’t have the tools on hand or the processes in place to minimize the risks of revenue leakage.
In addition, regulatory compliance risk associated with sales to both commercial and government customers is increasingly in the forefront of management concerns. Life Science companies have paid over $2.5B in fines during the last two years. While some very high profile non-compliance situations have highlighted a certain lack of ethics, in many cases non-compliance was due simply to a lack of adequate visibility into price, discount and incentive combinations. Now, Sarbanes-Oxley is also bringing additional pressure to bear on the control of critical business processes in the revenue life cycle.
The Revenue and Compliance ChallengeFor many pharmaceutical companies, managing thousands of contracts across complex indirect channels, buying groups, managed-care organizations, and government agencies has been delegated to departmental staff, using spreadsheets, text documents, and in-house systems. Now, companies are realizing that the risks from price erosion, revenue leaks, overpayment of incentives, and increasing regulatory scrutiny are too serious to approach in such a fragmented and inefficient way.
Effectively managing the revenue life cycle is complicated by the fact that it is a series of complex business processes spread across multiple departments within an organization. Consider the breath of processes that make up the revenue life cycle in the typical pharmaceutical manufacturing company:
* Planning revenue strategy within and across product lines
* Establishing pricing strategy, price lists, and incentive and discount policies guidelines* Executing pricing strategies through generation of customer offers and sales negotiations
* Capturing and approving negotiated terms in contracts
* Managing contracts and terms throughout contract life, including applying accurate pricing to orders, resolving overlapping contract terms, managing membership and eligibility, price and product changes, expirations and renewals, and effecting agreed-upon price increases
* Measuring and analyzing contract performance against the terms of negotiated commitments of volume, marketshare and products
* Validating, calculating, and processing incentives such as rebates, chargebacks, and administrative fees
* Calculating and processing Medicaid Drug Rebate Program claims
* Monitoring and reporting on regulatory compliance issues
More often than not, each of these steps is managed by different departments – marketing, finance, sales, contract administration – and information related to that aspect of the process is generally controlled in a departmental spreadsheet or custom system. Each group is focused on just a portion of the process, utilizing tools that do not easily share information or enable collaboration among the various groups.
As a result, gaps occur in the revenue management life cycle, creating the conditions for revenue loss and regulatory compliance risk. Price erosion stems from gaps in the enforcement of pricing guidelines, discounts given that do not reflect customers’ performance history, and missed contract expirations or renewals. Revenue leaks result from underperformance on contract discount terms, inefficient management of commitments across multiple products, and inaccurate payments of incentives, fees, and chargebacks.
Even with effective monitoring of initial contract pricing, if commercial customers are not in compliance with performance terms, the manufacturer may be – however inadvertently – offering better prices to commercial customers than to the government. Regulatory compliance to government best pricing requires monitoring actual prices. Accurately tracking this information is a major challenge for most companies.
Preventing revenue loss and managing regulatory compliance exposure are difficult; companies must integrate all of the people, processes, and information involved in every aspect of the revenue life cycle of pricing, contracts, and settlements. While customer relationship management (CRM) systems cover the processes from contact to offer, they lack the pricing, incentive, product, and contract performance aspects. Enterprise resource planning (ERP) systems manage from order to cash but lack pricing, contract, and settlements control and visibility. A spreadsheet is not suited to fill the strategic gap that exists between these two major enterprise applications.
The Revenue Management SolutionRecently, technology has been developed to address the specific revenue life cycle challenges of the pharmaceutical industry. With this new technology, you and your company can manage revenue from beginning to end. By setting better prices, you will improve your potential for revenue. By enforcing standard prices and discounts in the sales process, you will create better contracts. By effectively managing commitments, product mix, and promotions as well as by paying the right incentives to the right parties for the right products, you will reduce revenue leaks and realize more revenue.
A revenue management solution offers modular systems that address the specific business processes of pricing, contracts, settlements processing, and regulatory compliance performance while providing better integration of people, processes, and information across multiple departments. It utilizes web architectures for faster cost deployment and shared services such as pricing engines, catalogs, workflow, alert systems and data management tools to ensure better process integration across applications and better collaboration between users.Revenue management is an integrated solution consisting of applications that may be implemented individually to solve a specific problem or together to address broader revenue and compliance exposure issues. A comprehensive revenue management system should include applications for pricing strategy and execution, contract management, contract compliance, and processing chargebacks, rebates, and administrative fees. In addition, applications for specific regulatory compliance or claims processing such as government pricing and Medicaid claims processing should be included.
Revenue management is a complement to existing ERP applications for pharmaceutical companies. In fact, many companies pioneering revenue management technology integrate these systems with their core enterprise applications. Revenue management software often becomes the system of record for real-time price resolution, contract terms, regulatory audit trails, and settlements processing and approvals. Common problems in the order-to-cash process such as increased days sales outstanding (DSO) due to invoice reconciliation issues are resolved because of the interaction of the two systems.
Managing compliance and revenue risk in an increasingly competitive and regulated market is top of mind for many executives in pharmaceutical companies, but the tools at their disposal have been inadequate. Investments in managing the cost side of the business over the last few years have hit a point of diminishing returns. Revenue management – transforming the entire revenue life cycle by bridging the gaps in pricing, contracts, settlements, and compliance-monitoring business processes – is now the single biggest opportunity for pharmaceutical manufacturers to drive company value and reduce the risk of government auditing and fines.