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‘Revenue Management’ Comes to the Rescue of Pharma’s Complex Pricing Environment
Model N’s latest software offering focuses on pricing analytics
In that vision of a purchasing decision at a remote pharmacy causing a order to be filled at a warehouse, an invoice being issued to an insurer, and a reimbursement zipping across multiple databases to hit a pharma company’s accounting office, and thence to a quarterly statement of revenue and profitability reported to shareholders, some key gaps are being filled in by the latest version of Model N’s Revenue Management system, version 5.4. As outlined at the company’s annual Rainmaker conference in late February, the latest module, Performance Analytics, builds on the existing capabilities for monitoring contract compliance (between a manufacturer and its customers) and regulatory compliance for reporting pricing to government entities.
The key difference is that Model N’s suite of transactional software tools now becomes more of a resource for proactively managing a business’s actual market performance—going beyond retroactive reporting and monitoring. Model N uses the terminology “information to insight to income” to describe the capability. In a presentation at the meeting, B. Scott McCallum, VP of sales operations at Boston Scientific, likens the capability to automobile driving. “Until recently, managing pricing and performance has been like driving down a road at night. You can see in front of you, but you can’t see very far down the road, or what’s alongside you. Now you have a bigger picture of where the business is going.”
Model N also announced a partnership with Selectica, a San Jose, CA developer of contract management and sales configuration IT tools. Selectica will get greater entrée into life sciences, while Model N gets a beefed-up capability to give clients the ability to author, monitor and revise contracts over those contracts’ life cycles. Contract management sounds like routine business operations, but the complicated relationships that pharma has with multiple types of clients, ranging from wholesalers to PBMs, GPOs or chain pharmacies complicate the process. And the contract terms, of course, are what feeds into the revenue measurement of a customer relationship—even when that customer might have multiple affiliations with GPOs and others.
Mismanaged contract terms are one of the “revenue leakage” sources that IDC Health Insights (Framingham, MA) identified as costing the pharma industry upwards of 4.4% of gross revenue (Pharmaceutical Commerce, Jan/Feb, p. 24). That’s as much as $11 billion—“the equivalent of a major pharma company” as IDC put it—being lost each year.
Finally, the annual meeting gave Model N CEO Zack Rinat a chance to talk about the company’s success in the past year which saw 32 clients go live with implementations (a minority of whom are in the electronics industry, for which Model N has developed a separate set of industry-specific applications).
Reporting and compliance
Over the past decade, Model N has built up a group of modules that address most facets of how commercial and government business deals are structured and monitored, all focused on how revenue is accounted for in commercial transactions and, now, doing analyses and modeling of what the transactions could or should be (Fig. 1). These include:
These have been continually upgraded as reporting requirements change. In general, the system takes resolved invoices or claims from the databases where they reside, stores those data in a metadata form that makes accessing them quick, and then performs the compilation of results. Users define interfaces, although a number of pre-built dashboards are offered for common life-sciences applications. Model N runs a “Lighthouse” partnering program, wherein clients that seek a new capability within the modules work together with Model N; the resulting collaboration can become a new feature of the system for all users.
The power of these systems come together neatly in Performance Analytics. One of the dashboards (see Fig. 2) shows how data on current sales can be assembled into a scatterplot. Defined averages or other summations are displayed; each dot represents a distinct contract or client. Drilling deeper into the plot, individual sales can be shown; these, in turn can be displayed by sales-territory geography so that the performance of distinct territories appear. Model N clients say that the tool is a powerful resource for finance, sales and sales operations, as well as its obvious value to marketing. One company presenting at the Rainmaker meeting said that when the company’s CEO saw the dashboard, he requested his own version. “The entire sales organization knows that the CEO can be watching, with daily updates, the performance of their sales force,” said the presenter. Another said that doing just one report of this nature would take a minimum of two days’ work to prepare, and if an update or changed parameter was needed, another two days would be consumed. Now the analysis appears with the click of a few keys.
FIG. 2. SCATTER PLOT OF CLIENT ACTIVITY
Here comes PPACA
One could almost make a case that many of the features of how pharma pricing will be structured (at least for government contracts) under the Patient Protection and Access to Care Act (PPACA) was written with the capabilities of the Revenue Management Suite in mind. In addition to changed definitions of eligibility of patients and providers under the various government-run programs (Medicare, Medicaid, and the Public Health Service), and changed Medicaid rebate percentages—all of which will take some serious reprogramming of existing reporting mechanisms—there are complex interwoven calculations where the government’s policy changes a pharma company’s reporting process, which in turn changes a government calculation.
A good example of this, according to Alice Curran, a partner at Hogan & Hartson (Washingon, DC), is the calculation of the $2.5-billion market share fee on pharmaceutical sales to government, scheduled to go into effect in 2011 (and rising to $4.1 billion in 2018). The fee is on the entire industry’s sales, which means that each pharma company’s sales (to each government entity) must be summed up, then proportionally assigned to each pharma company. Only then will the pharma company know what its tax bill will be. Further complicating the matter, there are exemptions for certain sales volumes, making any forecast of the eventual fee that much harder to calculate.
PPACA has just been passed; there will follow months if not years of rulings and interpretations from CMS and other government agencies on how industry is to comply with it. For the time being, says Kamal Ahluwalia, VP marketing at Model N, the company has set up a Healthcare Reform Advisory Board of stakeholders, and will be issuing quarterly “healthcare reform packs” of software enhancements to smooth the process of adjusting business processes to the new regulations. The first such reform pack has already been distributed.
Although it claims, with some justification, to be the inventor of “revenue management” as a software application, Model N is not the only game in town for these types of capabilities. Its most direct competitor appears to be I-Many, widely used by pharma wholesalers and others in the life sciences business. Specialized companies like ValueCentric focus on the manufacturer-wholesaler transaction data flow, although it is making moves toward retail pricing and sales analysis through a new relationship with CVS Caremark announced last month. IMS Health has traditionally added analytical services on top of its basic reporting of sales data, and has commonly been used as the first step in determining sales force performance and commissions. And the major ERP houses—SAP and Oracle—cut their teeth on financial reporting and have either complementary or competing software offerings (Model N partners with both, as well as with IBM/Cognos, among quite a few others).
Model N takes some satisfaction from its track record of helping life sciences clients prepare accurate reports for government pricing, and managing contracts with large, complex clients, such as GPOs. With performance analytics, it is positioning itself to be a key resource in business planning and operations. As the “front end” of healthcare—providers—get their arms around electronic health records and other forms of automation, the “back end” of suppliers to the industry are getting their house in order as well. PC