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Charge Back

Charge Back

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.