Why wait for declining profitability before implementing enhanced contract analytics?
Often companies don’t seriously perform some sort of “analytics” to determine if the signed contract makes financial sense until after they see their margins and profitability declining. Traditional thinking says as long as rebates paid are more than compensated by increased volume then there is a good deal in place. There is much more to consider and the sooner you do, the sooner you can avoid the inevitable slippery slope of increasing discounts and declining profitability.
Many Companies perform pre-deal Contract versus No-Contract analytics, and basic NPV and ROI valuations. Analysis however should not stop there. Several questions should be asked:
- Are there other “Profitability Metrics” that should be used? One could clearly generate other financial measures that could help understanding the financial implications of a Contracting Decision. For example, what is the Profit elasticity of the deal? In other words, how high or how low the Rebate needs to be in order to move Market Share substantially and profitably?
- How deep should a company go within its P&L to measure profitability of a deal? Should the analysis stop at the Gross Margin levels, or should it consider Discount & Co-pay cards, promotion or direct selling activities? Which overhead expenses should be included and which excluded? How about incremental taxes, inventories or Account receivable impacting Cash Flow?
- What is the Trade-off impact of this new Contract? Given that the “pool of Rebates” a company has available is finite, where should Rebates be “invested”? Which accounts will provide a better incremental profitability and best RoIs? Which payers should receive the rebate dollars to modify their formularies that might have a “spillover” impact over other health companies not receiving Rebates?
- How to accurately Forecast future performance for a new Rebating Contract? How can someone predict what will be the impact of a Contract? Your company needs accurate metrics that will help predict the ability of individual payers to effectively move market share, or increase volume for a contracted product. Your company needs to develop and continuously update and how well a Payer can move market share or otherwise ease the access hurdles to your product that justifies the rebates paid. Additionally, how does the dominance of a payer in a market generate Spillover and is that effect included in your profitability analysis.
- What are the Performance Metrics to track? When generating incremental Profitability analysis, are the performance metrics established and communicated to those engaged in Contract Pull-through? What are the metrics that were established in exchange for the rebate granted? Market Share Growth? Sales Volume? Patients treated? Health Outcomes? Evidently, it is essential to establish, and record the metrics that will be used to measure performance, but more importantly, it is necessary to communicate and cascade these targets to Account Executives and to Sales Teams. Accountability for delivering results and contract pull-through must be tracked to ensure that the pharma company is obtaining the established return on investments made when Rebates were negotiated.
Companies must continuously update their contract analytics in order to deal with the increasing complexity of the pharma environment. When was the last time you looked at and updated your company’s Contract Analytics?
About the Author: David Velez is a founding partner of NavAxxess Health Solutions, LLC. With over 35 years of Pharmaceutical Health Care Experience in senior leadership roles in domestic and international. He has hands-on experience in the Federal Segment (VA, DoD), Medicaid (FFS and Managed), and with Commercial and Medicare Health Plans. Over the last 15 years, he has authored and led the development and implementation of state-of-the-art Managed Markets Contract Profitability Analytics.
NavAxxess Health Solutions, LLC has developed a highly integrated array of analytical Solutions to effectively address the complex challenges of managing Profitable Market Access in an environment of high prices, increasing competition and Formulary Restrictions. If you are interested in additional information, please contact David A. Velez at DVelez@NavAxxess.com or check: www.NavAxxess.com.
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