Contract management is a complicated business for medical device and pharmaceutical companies. Frequently, manufacturers rely on spreadsheets to help with the management process. This is often handled outside of the normal sales, accounts receivable (AR) and accounts payable (AP) processing functionality of their ERP system due to the indirect nature of their sales. While some manufacturers do sell directly to their customers, many rely on a complex sales process that has evolved over the years as a result of new legislation and cost-cutting initiatives. Furthermore, there are strict auditing and state Medicare reporting requirements to consider.
Pricing Lifecycles Have Changed
Many manufacturers in these industries no longer negotiate prices directly with individual customers or hospitals. They often sell through distributors to members of one or more buying groups referred to as Group Purchasing Organizations (GPOs) or Pharmacy Benefits Managers (PBMs). Rather than a traditional business model where a distributor buys at a wholesale price and then sells to the customer at a higher price, life sciences companies participate in a complex lifecycle which includes negotiating prices with GPOs/PBMs, selling to distributors at a high price, paying chargebacks or rebates after the sale, and paying service fees and administrative fees.
Adding to the complexity, customers may belong to multiple groups at the same time or change groups. This happens frequently, often making the maintenance of buying group contract and membership details – and keeping up with changes – a time-consuming manual process. Accurate group membership is important to ensure the customer is getting the correct contract price. Group membership changes are often communicated by email or via a website or portal. Manufacturers may use spreadsheets to maintain this data, which can be prone to error, or they may simply rely on the distributor’s records supplied through sales trace or chargeback files. Some statistics estimate that 4-6% of revenue is lost due to incorrect management of groups and chargebacks in life sciences companies.
The Chargeback Process
The chargeback process entails claim requests submitted from the distributor to the manufacturer with details of the indirect sales at the individual invoice line level. Due to the high volume of sales-related data necessary to prove out the claim process, these sales trace files are often electronic. Manufacturers need to generate claims in order to pay the chargeback or approve deductions taken from distributor payments with the assumed claim amount. Additionally, a service fee is usually paid to the distributor as a percentage of the sales. GPOs receive administrative fees from the manufacturer after a GPO member makes use of a GPO contract. Again, spreadsheets are often the go-to record-keeping tool for keeping track of this data.
During the course of a month, the manufacturer’s controller or CFO may want to know what their current outstanding liability is for these chargebacks and claims. This can result in many hours of work for the resident pivot-table guru in the company each time a request is made. Similarly, at the end of the month, an accrual must be made for these open claims that have not yet been paid. Without an integrated solution, this all happens outside of the other daily financial processes.
Avoiding Death by Spreadsheet
Wouldn’t it be great if there was a way to utilize your ERP system to manage all of this complexity and avoid death by spreadsheet? QAD Trade Activity Management (TAM) has seamless integration with the operational and financial modules of QAD Cloud ERP and Enterprise Applications and helps manage all of this complexity. It allows for the definition of contract agreements as well as all the processing that goes along with them, including claims, deductions, indirect sales, accruals, and related General Ledger journal entries. QAD TAM supports Excel uploads for GPO members and indirect sales trace files (chargebacks). Claims and administrative fees can be automatically generated and approved or manually created.
QAD TAM includes detailed transaction history and reporting. Documentation to support fraudulent charge refusal and financial regulatory compliance are integral parts of the solution. Additionally, there is robust functionality to support promotional trade spend on direct sales. The major solution components are listed below.
What types of contract management challenges are you experiencing? Do you have an interesting use-case to share? Let us know your thoughts in the comments below and learn more on how QAD supports Life Sciences manufacturers.