Research has shown that a 1% loss in net price can lead to a >5% decrease in operating profits. With the ever-increasing payer pressure for higher rebates, price protection, and other forms of concessions managed markets teams need to adopt best practices to minimize revenue leakage from unintended contracting events.
The primary source of revenue leakage can often be traced to contracting decisions that result in decreased net revenue or less net revenue than expected. Of course, there are a number of strategic reasons to execute such contracts: for instance, increasing rebates via a market share contract prior to competitive product launch is a well-worn strategy to preserve market leadership.
Unfortunately, many times contracting teams make decisions that do lasting damage to their net revenue outlook while yielding little strategic value.
As you work through your payer strategies for 2015 and beyond, here are 3 contracting mistakes that you should look to avoid:
1. Aiming for Tier 2, unrestricted status with every contract
Who doesn't like unrestricted access with the lowest patient out of pocket cost for their brands? But in the absence of a methodical ROI analysis brands usually, end up paying more incremental rebates than what the contract is worth. This becomes more pronounced in organizations where Tier 2, unrestricted becomes a coveted sales message that can be worked into the sales call plan. Increasingly, prescribers understand that great access is not necessarily Tier 2 status or even unrestricted access, and managed markets teams can protect lifecycle value by being more receptive to other access options.
2. Neglecting total market size when estimating future market share
Consider a competitive contracting scenario where you have the choice of "upgrading" from a parity contract to a preferred contract for an additional rebate of 10%. Let's say that the updated contract will deliver 100% market share for all new patients starting therapy. Sounds great, right? Now, let's assume that 90% of volume comes from existing patients and physicians are unwilling to switch stable patients. In this scenario, the market share will be 100% for only 10% of the total volume and the contract will likely be unprofitable due to the increased rebates. ROI models need to clearly isolate patient/plan segments where the contract will generate disproportional upside, and make sure those upside assumptions don't spillover to the rest of the patient/plan population.
3. Maintaining contracts beyond the point of usefulness
When a contract has been in place for a while, often there is an unwillingness to re-evaluate the rationale for the contract unless the customer proposes a change to either the rebate terms or the formulary status. Account managers understandably prioritize other accounts where customers ask for contract changes. Many of these "stable" contracts become stale over time and end up costing rebate dollars in perpetuity long after the incremental value of the contract dwindles to zero. A large number of such contracts can cumulatively degrade the overall profitability of the brand.
The contracting strategy and governance process should be mindful of these pitfalls and have appropriate checks and balances in place. Here are 3 tips to jump-start your revenue protection plan:
- Create a pre-deal checklist that reminds the governance and account management teams of potential mistakes and missed opportunities
- Put in place a working group that re-evaluates apparently "stable" contracts to check for relevance and strategic value
- Update account management training plans to include case studies of contracts that were less successful than expected. Training teams love to showcase successful case studies, but equal emphasis and discussion should follow when things don't go well
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