Finding the value in outsourced contract administration

Pharmaceutical CommercePharmaceutical Commerce - January/February 2014

The growing complexity of managed-markets contract support makes outsourcing a near-necessity for Small Pharma, and a better option for Big Pharma

Fig. 1. Rebates should be designed to result in an increase in incremental profits.

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 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.

Fig. 2. An outsourced contract-operations service can provide substantial initial savings.

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 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. 3. A contract re-negotiation that raised the discount percentage resulted in lower product locks and prior-authorization requirements, generating higher market share.

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.

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 short- and 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.

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 start-up 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 and resource requirements of implementing the components of the Contract Life Cycle, combinations of both licensing and/or outsourcing solutions should be under consideration.


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.

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