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Formulary Frustrations: Overpayments Plague Pharma Manufacturers

by Chanan Greenberg, Model N December 16, 2023

Drug formularies support better patient outcomes by encouraging the use of safe, effective, and affordable medications. These lists specify preferred drugs covered by a plan or institution and serve as a guide for prescribing and dispensing medications. Formulary placement is critical to pharmaceutical manufacturers because it affects market access and pricing.

Rapid drug advancements mean formularies frequently change. Ineffective formulary tracking and validation by manufacturers can restrict patient access to medications and cost manufacturers millions of dollars. Pharma manufacturers must develop strategies to navigate this shifting landscape.

The costs of formulary management

The pharma industry spends an estimated $170 billion annually on market access rebates to Pharmacy Benefit Managers (PBMs) and payers to secure preferred positioning in formulary plans. However, pharma manufacturers often do not receive the negotiated prioritized placement.

Pharma manufacturers failing to validate their formulary position before paying invoices shell out millions of dollars in inaccurate rebates. Model N research reveals overpayments can cost individual pharma manufacturers between $25M and $75M yearly due to incorrect rebate administration and formulary contract non-compliance. Recovering those funds is highly unlikely. Manufacturers typically only recoup about 10-20% of disputed funds after prolonged settlement processes, which require significant time and resources.

These overpayments exacerbate the pain of lost market share — non-preferential formulary placement limits patient access and reduces overall revenue.

Hurdles to effective formulary management

While validating positioning, proactive payment is optimal, but many pharma manufacturers struggle to verify compliance within the rebate payment cycle timeframe across products and formulary plans. Several factors hinder effective formulary management.

  • Frequently changing formularies

The quickly evolving drug development field prompts frequent formulary plan changes. However, limited resources prevent pharma manufacturers from validating plans more than once or twice a year, forcing pharma to calculate a significant proportion of rebates based on outdated information. A manufacturer might pay rebates for a drug no longer on formulary or no longer compliant based on these changes.

Formulary changes often involve multiple factors, such as the addition or removal of drugs, pricing tier changes, and coverage criteria adjustments including restriction techniques like prior authorizations, step therapy and quantity limits. Reconciling and accurately applying these differences to rebate calculations proves to be challenging, especially when done manually.

  • Data accessibility

Formularies, prescription claims, and contracted rebates originate from numerous sources — PBMs, health plans, pharmacies, and other vendors — and their formats differ widely. Teams must consolidate and standardize this information prior to processing.

Data is frequently incomplete, outdated, or inaccurate. PBMs don’t always share the formulary, creating more data collection hurdles. The hassles delay or inhibit validation, negatively impacting payment calculations.

  • Manual processes

Relying on spreadsheets and manual management methods to audit and verify compliance and calculate rebates produces slow turnaround times, insufficient data visibility, and a high likelihood of human error. Rebate agreements contain numerous compliance conditions and requirements. With manual processes, teams struggle to handle and reconcile massive prescription volumes with thousands of complex contracts. This cumbersome workflow creates delays or mistakes in confirming correct rebates, leading to overpayments.

These obstacles transform validation into a long, laborious process impossible to complete in the short payment timeframes.

Best practices for formulary compliance

Data management is central to accurately calculating rebates. Relying on manual processes leads to bottlenecks, visibility issues, and unnecessary business risks around proper rebate execution — a situation that becomes a non-issue with automated data collection and management.

A digital data solution dismantles silos to create a centralized repository and automatically gathers and monitors all the data required to properly manage rebates, including formulary updates, contracts, claims, and prescription volumes. The technology executes validations across all formulary plans and products, improving rebate accuracy and timeliness. The streamlined process leverages data to:

  • Increase patient access.
  • Grow market share.
  • Revitalize payer relationships.
  • Enhance operational efficiencies.

Pharma manufacturers receive an additional benefit from automated solutions: post-deal analysis capabilities. These evaluations reveal the actual performance of rebate deals and provide valuable insights for future contract negotiations.

Formulary management represents a complex balancing act for pharmaceutical manufacturers. Advancements in automated data solutions offer a path forward. By centralizing information sources and enabling continuous monitoring, pharmaceutical manufacturers can ensure contracts align with up-to-date formularies. Streamlined validation generates accurately administered rebates. Model N understands the challenges of formulary compliance and is working to support life sciences in revenue optimization.

Want to learn more about how integrating data and analytics can help your organization transition to revenue optimization? Watch this webinar from Model N experts.

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