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Contract management: What it means and how to optimize key processes

March 13, 2023

Authored by RSM Canada LLP

Joe E. Reilly, CPA, CA, CBV shared this article

ARTICLE | March 13, 2023


Contract management is a critical element of success for pharmaceutical companies. Organizations must maintain efficiency and attention to detail to continue growth while ensuring accuracy and compliance. Pharmaceutical manufacturers maintain two types of distribution contracts: direct, for wholesalers and distributors; and indirect, for end buyers.

For direct sales, wholesalers and distributors purchase at wholesale acquisition cost (WAC) and submit chargebacks to the manufacturer when they make an indirect sale. Indirect sales can be to any entity licensed to purchase pharmaceuticals, including pharmacies or hospitals in a group purchasing organization (GPO), commercial retailers, government agencies, and specialty distributors and pharmacies. 

Chargebacks are deductions, or credits, wholesalers take when the WAC price varies from the end buyer contract price. The price difference multiplied by quantity sold—(WAC minus contract price) x quantity—becomes the chargeback amount. Accuracy in matching the chargeback to the contract, order, shipment, return and accrual is critical to prevent revenue leakage. Since chargebacks are usually submitted to the manufacturer before the payment terms from the direct sale are met, monitoring and managing cash flow is crucial.

Manufacturers also pay various rebates and fees to wholesalers, buying groups, GPOs, pharmacy benefit managers and state Medicaid programs, among others.

If pharmaceutical manufacturers sell to the government, various calculations such as average manufacturer price, nonfederal average manufacturer price, average sale price, and best price need to be made and reported to the federal government. These calculations are also used to determine what price the manufacturer can charge for products sold to the federal government and its agencies.

Forecasting net revenue and managing cash flow can be difficult due to the complexity of negotiated contracts and the timing of posting of accruals or adjustments (credits, rebates, discounts, etc.). Predictable cash forecasts, with profitability by segment, contract and product, are key business drivers beyond compliance.  

The solution to your challenges

RSM streamlines the complex life sciences revenue management process by leveraging Microsoft Dynamics 365 to handle contract management, chargeback adjudication, rebate and fee processing, and calculations of gross-to-net and government pricing.

To address contract management challenges, RSM developed a revenue contract management (RCM) application for Dynamics 365’s Finance and Supply Chain Management, building on these Microsoft solutions for two primary reasons:   

  1. Dynamics 365 is an ideal enterprise resource planning (ERP) platform for RCM because it can track the information required to verify proper chargeback and calculate gross-to-net: orders, items, pricing, shipments, invoicing, rebates, payables and returns. Dynamics 365 also assists with managing workflow and division of duties, and integrates with the Power Platform for analytics and automation.
  2. Our RCM application inherits Microsoft Azure features such as 99.9% high availability, robust disaster recovery, system and organization controls (SOC) compliance, continual updates and automated regression testing.  

RSM’s RCM application is a robust solution for pharmaceutical manufacturers, delivered within Dynamics 365 as an integrated ERP/contract management system or as a service for clients that haven’t yet replaced their ERP with a single solution. Drawing on our extensive experience providing SEC attestation services, we built the RCM application with the auditor in mind, providing real-time transparency through analytics and transaction-level querying and reporting. 

Definitions to know

  • Best price: The lowest price paid by all customers.
  • Government pricing: The Centers for Medicare & Medicaid Services (CMS) and state Medicaid agencies require drug manufacturers to pay a rebate for pharmaceuticals purchased by a Medicare or Medicaid patient. 
  • Class of trade: The buyer classification (e.g., hospital, pharmacy, prison, etc.), used to determine if a sale qualifies for government pricing.
  • Gross to net (GTN): The calculation of the net price from the list price minus chargebacks, rebates and fees. Used to forecast and optimize pricing strategies.
  • Average manufacturer price (AMP): Calculated monthly and quarterly based on an organization’s gross sales minus excluded and ineligible transactions. AMP is the price wholesalers pay to manufacturers for drugs distributed to retail pharmacies, and it helps determine Medicaid drug rebate liabilities. 

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