Solving the Chargeback Challenge for Manufacturers and Distributors in Healthcare Contract Administration

Who Is Involved in the Healthcare Supply Chain?

While chargebacks are the key to many healthcare manufacturers’ and distributors’ profitability, they are often managed as if an afterthought.  Despite the publication of industry-wide recommendations by the Health Industry Distributors Association (HIDA) more than a decade ago, the complexity of the existing landscape has prevented organizations from adopting best practice standards.  As a result, chargeback administration is still largely manual in even the largest enterprises involved in the healthcare supply chain.  

Before we can identify opportunities to streamline and automate the chargeback process, it is critical to first understand the various players and their roles.

The healthcare supply chain extends across four key players:

• Manufacturers are responsible for producing medical supplies, devices, pharmaceuticals, and other products used in healthcare settings.  While they may distribute products directly to healthcare providers, within the United States, manufacturers more often leverage a distributor to efficiently and effectively land in a healthcare environment.
• Distributors are the intermediaries in the healthcare supply chain. They facilitate the movement of products from manufacturers to healthcare providers.  By purchasing products in bulk from manufacturers, they are able to efficiently store, package, and distribute directly in smaller increments to points of care.
• Providers deliver medical services to patients in a variety of settings.  Provider organizations such as hospitals, long-term care facilities, and surgery centers represent clinicians, physicians, nurses, and others who directly administer care.
• Group Purchasing Organizations (GPOs) aggregate the purchasing power of multiple healthcare providers to negotiate contracts with manufacturers on behalf of their members.  These contracts are ultimately administered by the distribution partners that facilitate the movement of products from the manufacturer to the provider.

What Are Chargebacks in the Healthcare Supply Chain?

Chargebacks are the true-up transactions between the manufacturer and the distributor.  They  reflect the contract negotiated by the GPO between the manufacturer and the provider.

For example:

1. A GPO negotiates a contract pricing agreement between a manufacturer and a member provider for $X cost and $Y sell price.
2. The distributor does not know to whom they will sell the product when they purchase in bulk from the manufacturer, so they buy it for $Z (sometimes called Distributor Acquisition Cost (DAC) or Wholesale Acquisition Cost (WAC)).
3. When the distributor sells the product to a member provider, they identify the active GPO contract for which the member provider is eligible to determine the appropriate contract pricing. The distributor then sells to the member provider for $Y to honor the contract.
4. Once the product has been sold to a member provider, the distributor will notify the manufacturer of that sale to the member so that they can be reimbursed for the difference in contract cost. ($Z-$X)

Identifying the eligibility of each transaction requires a 4x4 match end-to-end…

Players

• Manufacturer
• Distributor
• GPO
• Member Provider

Match

• Eligibility (Date) 
• Member
• Product
• Price
  

The Pain of Administering Contracts in Healthcare

If there were a standard data model and exchange framework to which all four players were aligned, this would still be an incredible exercise in coordination; unfortunately, the ability to conform to the HIDA standards still eludes many.

• Each organization manages its own unique item master.
• Each organization manages its own unique customer master and hierarchy.
• Each organization has a distinct view of a transaction (order date, sell date, ship date).
• Each organization stores these unique versions of the data in distinct and often disparate systems with inconsistent integration options.

As evidenced by the width and depth of this process expanse, these complexities are an industry-wide problem.  Many efforts have been made to implement industry standards:

• HIDA formulated contract communication standards more than a decade ago, and the industry as a whole is in favor of the guidelines; however, legacy systems and processes continue to impede widespread adoption.
• Definitive Healthcare has introduced standard provider identifiers; however, this still requires aligning each organization’s customer identifier to this standard identifier.
• GHX has created a marketplace of sorts to enable the exchange of information in standard formats; however, there is still a dependency that those file formats contain “apples to apples” rather than “apples to oranges.”

While great ideas and good intentions have enabled massive improvement, the landscape is still fraught with challenges:

• What if a provider moves from one parent company to another and the other three parties are not notified?
• What if the distributor can’t automatically ingest standard contract notification formats?
• What if the manufacturer can’t store multiple GPO membership associations for a single customer?
• What if the manufacturer product Unit of Measurement (UOM) constructs are different from the distributor constructs?
• What if a distributor classifies a provider as a different market segment than the manufacturer or GPO?
• What if any of the eligibility information changes and one of the three parties does not update within the 45-day window for a chargeback to be filed?

Skrrrrt. Yep. Distributors must file chargebacks within 45 days. And manufacturers must respond within 30.

So, not only do you need to move all of this information around as if you have a Rosetta stone, you also need to do it quickly. If any of these exceptions require research, the clock is already running. 

If a distributor does not file within 45 days, it cannot request reimbursement. This means it has sold product at an unexpected loss. 

If a manufacturer does not respond with a meaningful rejection within 30 days, it is expected to pay whatever the distributor requests. This may mean it also sold product at an unexpected loss. 

This means that thousands – likely millions – of dollars are moving back and forth unsubstantiated, without oversight or defense.

The Solution to the Chargeback Challenge in Healthcare

So, what to do?

Creating the interoperability required to coordinate this data complexity is well within the reach of existing technology. That’s what tech does… it moves data through streamlined and standard channels at scale. Most, if not all, organizations have access to systems designed to do this in some shape or form.

There remain two key pain points where the tech is still not tech-ing:

• Data matching
• Standardized formats

The solution for each is ironically opposing:

• Data matching can be solved by building standard processes that translate oranges into apples so that Roster Member 123 is known as Distributor Customer 456 and also Manufacturer Customer 789.some text
  • Current State: Repeated, manual review of large data sets
  • Future State: One-time match decision that never needs to be reviewed or repeated
• Standardized formats can be conformed to by implementing custom routines to translate the legacy system source data into an output that aligns with the modern guideline destination.some text
  • Current State: Repeated, manual manipulation of large data sets
  • Future State: One-time definition of source-to-target data structure

By implementing these solutions at scale, the team members who previously spent days (weeks, months, years …) reviewing each and every transaction can now take a step back and focus on only the exceptions. 

This means that, without any variation, matches made last month will all be made this month – no human touch required.

This means that people can spend their valuable time chasing down true exceptions and resolving source data challenges rather than just trying to push as much information through the process as possible in hopes that it is directionally correct.

How ProfitOptics Can Help

So… how to do it?

If you’re facing this challenge, ProfitOptics’ SmartMatch solution can execute a sample data match exercise in less than a week, and matching services can be live within two weeks of our first conversation.  

Our SmartMatch solution can integrate directly with your data sources or leverage flat files, depending on the sophistication of your current systems. Output can similarly be delivered via flat files or integrated directly into your technology stack.

Here’s what it looks like:

The Distributor Matching Experience

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• Evaluate the Distributor Customer Master against the GPO roster to determine Customer Eligibility.
• Evaluate the Distributor Customer Master against the Manufacturer Contract Notifications to determine Pricing.

‍Note: There are similar parallels from the GPO and Manufacturer perspectives.

The next-level opportunity is unlocked when orchestration goes beyond matching and coordinates the creation, dissemination, and resolution of the chargeback artifacts.

The Manufacturer Orchestration Experience

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• Evaluate the Manufacturer Customer Master against each GPO Roster to determine Customer Eligibility and create Contract Notifications for dissemination to each distributor.
• Evaluate the Manufacturer Customer Master against each distributor’s Chargeback Claims to determine Transaction Eligibility and generate Chargeback Response to each distributor.

‍Note: Again, there are corresponding and complementary processes from the GPO and Distributor perspectives.

By automating large-scale data matching and comparison, the process flows end-to-end as triggered by receipt or update of core data without any hands on the keyboard or eyes on the screen until something unexpected requires review. We all know something will require review, but how much more satisfying is it to chase down the exceptions rather than working incredibly hard just to follow the rule?

The benefits of this type of automation include:

• Increased accuracy in GPO rostering
• Increased customer pricing accuracy
• Increased eligibility evaluation accuracy
• Reduced chargeback disputes
• Better trading partner relationships
• Reduction of team member time spent on all of the above activities
• More robust profitability view

Contact our team today for more information about how we can orchestrate your contract administration and chargeback processes.

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