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Chargebacks exists to resolve a specific type of contractual arrangement between
purchasing entities (‘Providers’ or ‘Customers’) and a Manufacturer called a
‘Chargeback’ contract. The purpose of the contract is to negotiate a better sale price
while increasing utilization of the Manufacturer’s products.
To get a better rate, Customers join together with a negotiating group called a
Contracting Entity (often a Group Purchasing Organization) who negotiates a deal with
the Manufacturer and sends the Contract parameters to the Wholesaler for their
reference. Whenever a Customer orders one of the products on the Contract, they pay the
GPO’s Contract Price instead of the normal price. This is a sale loss to the Wholesaler.
To get back the difference, a Chargeback is created and sent to the Manufacturer.
This Chargeback needs to be verified and a response sent back to the Wholesaler.
Since the Wholesaler is constantly purchasing products from the Manufacturer, they are
‘repaid’ through a credit on a future purchase.
Chargebacks represent the single largest deduction from gross sales for most
pharmaceutical and healthcare products companies. As companies continue to discount
Wholesale Acquisition Costs, the volume of transactions resulting in chargebacks and
related dollar value will increase. Additionally, manufacturers are entering into
Inventory Management Agreements (IMAs) with wholesalers, with the objective of the
wholesaler providing inventory level data (daily, weekly or monthly) to the manufacturer
to further analyse the supply chain pipeline. Most manufacturers have developed data
analysis capabilities to audit information received from wholesalers. However, certain
key issues often cannot be uncovered in the data normally supplied by the wholesalers
(e.g. alternate sourcing of product, certain chargeback processing errors, accuracy of
data submitted under an IMA by the wholesaler). Chargebacks sophisticated data analysis
and testing approaches to help manufacturers close some of the gaps
Chargebacks process focuses on key areas of industry concern, including the
following:
Negative chargebacks — Wholesalers invoice and ship products to
contracted or other problems. Although manufacturers submit a chargeback claim at the
time of
initial invoicing, the wholesaler may fail to issue a negative chargeback. There is also
a risk that the wholesaler may resell the returned product and improperly request an
additional chargeback, known as ‘double dipping’
Potential chargeback processing errors — Wholesalers could potentially
claim a chargeback for a product that was never shipped or that was shipped to a
noncontracted customer and therefore ineligible for a chargeback
Diverted or non-sourced product — The wholesaler could purchase a product
from alternate sources or end-market customers and subsequently sell it to your
customers. There are three potential risks from this activity. First, the wholesaler may
inappropriately claim and receive chargebacks for products not acquired directly from
the manufacturer. Second, such activities may violate a manufacturer’s chargeback or IMA
agreement. Third, the wholesaler may not have sufficient product quality controls in
place, which could lead to the potential introduction of a counterfeit or spoiled
product into the distribution chain
Inventory Management Agreement (IMA) — the data submitted by the wholesaler under an IMA
may not be accurate or complete
What Is a Pharmaceutical Chargeback?
Pharmaceutical companies deal with a number of players along the supply chain. Drugs are
manufactured by a businesses, sold to wholesalers, potentially purchased by buying
groups and finally bought by consumers. Because such drugs often fall under insurance
and medical assistance programs, insurers and government agencies are also often
involved in payment. With so many parties involved, transactions are not a sure thing
for pharmaceutical companies, which leads to a chargeback.
Why Chargebacks Happen
A pharmaceutical chargeback can occur in two similar situations. In the first situation,
a wholesaler buys drugs from the pharmaceutical company according to a contract price,
and sells them to consumers according to another contract price. When the consumer
contract price is lower than the pharmaceutical version, the wholesaler avoids losses by
charging the pharmaceutical company for the difference. In the second case, the
chargeback is the result of a failed transaction in which the entire payment must be
returned to the consumer.
Financial Results
Chargebacks always result in a loss of some kind for the pharmaceutical company. While
the companies try to minimize chargebacks through accurate supply chain contracts, some
chargebacks are necessary to make room for mistakes and differences in purchasing
prices. Drug manufacturers may deal with thousands of contracts per year, each with a
chargeback clause.
Chargeback Approval
Chargebacks are typically based on approval by the pharmaceutical company when a
wholesaler submits the request. This can become complex, since most chargeback
submissions do not include information on the sale that created the chargeback, only the
amount. This leaves room for duplicate chargebacks and unauthorized submissions, among a
variety of other problems. To minimize the issues, pharmaceuticals attempt to link
chargebacks directly to individual sales, giving wholesalers something to link back to.
Chargeback Prevention
To avoid the financial losses and administrative work required to handle chargebacks,
companies can take measures to prevent them in the first place. One way is to ensure
that wholesalers provide the correct price that consumers will pay so that the
pharmaceutical company is not later charged a difference in contract prices. Another way
is to monitor orders for failed transactions to ensure that all the order information is
complete, the order itself is valid and payment is successful.
Chargeback Management
Because chargebacks are such a vital part of the pharmaceutical business, specialization
is common. Furthermore, the process of managing chargebacks can be complex. To assist
with the process, companies have dedicated software to deal with chargebacks while
interfacing them with sales software. Many companies also create positions dedicated to
managing chargebacks and negotiating chargebacks in contracts.
What Is a Pharmaceutical Chargeback?
Pharmaceutical companies deal with a number of players along the supply chain.
Drugs are manufactured by a businesses, sold to wholesalers, potentially purchased by
buying groups and finally bought by consumers. Because such drugs often fall under
insurance and medical assistance programs, insurers and government agencies are also
often involved in payment. With so many parties involved, transactions are not a sure
thing for pharmaceutical companies, which leads to a chargeback.
Why Chargebacks Happen
A pharmaceutical chargeback can occur in two similar situations. In the first
situation, a wholesaler buys drugs from the pharmaceutical company according to a
contract price, and sells them to consumers according to another contract price. When
the consumer contract price is lower than the pharmaceutical version, the wholesaler
avoids losses by charging the pharmaceutical company for the difference. In the second
case, the chargeback is the result of a failed transaction in which the entire payment
must be returned to the consumer.
Financial Results
Chargebacks always result in a loss of some kind for the pharmaceutical company.
While the companies try to minimize chargebacks through accurate supply chain contracts,
some chargebacks are necessary to make room for mistakes and differences in purchasing
prices. Drug manufacturers may deal with thousands of contracts per year, each with a
chargeback clause.
Chargeback Approval
Chargebacks are typically based on approval by the pharmaceutical company when a
wholesaler submits the request. This can become complex, since most chargeback
submissions do not include information on the sale that created the chargeback, only the
amount. This leaves room for duplicate chargebacks and unauthorized submissions, among a
variety of other problems. To minimize the issues, pharmaceuticals attempt to link
chargebacks directly to individual sales, giving wholesalers something to link back to.
Chargeback Prevention
To avoid the financial losses and administrative work required to handle
chargebacks, companies can take measures to prevent them in the first place. One way is
to ensure that wholesalers provide the correct price that consumers will pay so that the
pharmaceutical company is not later charged a difference in contract prices. Another way
is to monitor orders for failed transactions to ensure that all the order information is
complete, the order itself is valid and payment is successful.
Chargeback Management
Because chargebacks are such a vital part of the pharmaceutical business,
specialization is common. Furthermore, the process of managing chargebacks can be
complex. To assist with the process, companies have dedicated software to deal with
chargebacks while interfacing them with sales software. Many companies also create
positions dedicated to managing chargebacks and negotiating chargebacks in contracts.