Government Price Reporting – Operational Challenges and Solutions

©2004 Deloitte Development LLC. All rights reserved.

2004 Pharmaceutical Regulatory and Compliance Congress

Government Price Reporting –Operational Challenges and Solutions4.02 Pharmaceutical Price Reporting Issues, Challenges, and Solutions

Jody Ann Noon RN, JDNational Practice Leader, Life Sciences & Health Care RegulatoryDeloitte & Touche LLP

November 16, 2004

Ben Barrameda CPA, JDSenior Manager, Life Sciences & Health Care RegulatoryDeloitte & Touche LLP

Copyright © 2004 Deloitte Development LLC. All rights reserved. 2Confidential and Proprietary Material of Deloitte Consulting. Copyright © 2002 Deloitte Consulting (US) LLC. All Rights Reserved 2

2004 Pharmaceutical Regulatory

and Compliance CongressHistorical Perspective • The government pricing requirements have been in place since the inception

of the Medicaid Drug Rebate Program in 1990. In 1992, the Veterans Health Care Act required additional pricing requirements.

• Enforcement has intensified in recent years. Recent settlements involving allegations of false or fraudulent price reporting include the following:

Settlement Date

Company Settlement Amount

Allegations

July, 2004 Schering-Plough $345 million Underpayment of Medicaid drug rebates on Claritin

December, 2003 AstraZeneca Pharmaceuticals

$355 million Fraudulent marketing and drug pricing involving inflation of AWP for Zoladex

April, 2003 Bayer Corporation $257 million “Lick and stick” concealment of discounts to a HMO related to relabeled Cipro to fraudulently inflate Best Price and reduce government rebate payments

April, 2003 GlaxoSmithKline $88 million “Lick and stick” concealment of discounts to a HMO related to relabeled Paxil and Flonase to fraudulently inflate Best Price and reduce government rebate payments

October, 2002 Pfizer $49 million Concealment of discounts to a HMO to fraudulently inflate Best Price and reduce government rebate payments for Lipitor

December, 2001 TAP Pharmaceutical $875 million Fraudulent marketing and drug pricing involving inflation of AWP for Lupron



and Compliance CongressToday –

•Governmental Price Reporting is a monumental challenge due to –– Numerous legal & contractual requirements that

have varied price calculations– Complex business processes with many types of

customers & transactions– A variety of business IT systems that do not integrate– Information that is required but unobtainable



and Compliance CongressPricing Requirements

• Manufacturers must calculate and report BP and AMP to CMS within 30 days of the end of each quarter for all outpatient drugs covered under the manufacturer’s rebate agreement with CMS.

• Manufacturers must pay rebates to each State Medicaid agency within 30 days of receiving Medicaid Utilization information for the covered drugs paid for by the Agency in the quarter.

Medicaid Rebate Program

•Best Price (BP)•Average Manufacturers Price (AMP)

•Unit Rebate Amount (URA)




• Manufacturers must calculate and report non-FAMP to the Dept of Veterans Affairs (VA) within 30 days of the end of each quarter for all drug products covered under the manufacturer’s Pharmaceutical Pricing Agreement with the VA.

• Manufacturers must calculate and report non-FAMP for all covered drug products by November 15 of each year for the one-year period ended September 30.

• Manufacturers may not charge more than the FCP for covered drug products purchased by Federal Agencies and State homes represented by the VA.

Veterans Affairs

• Non-Federal AMP (non-FAMP)

• Federal Ceiling Price (FCP)

• Federal Supply Schedule (FSS)




• Manufacturers must calculate and report ASP to CMS within 30 days of the end of each quarter for all Medicare and Part B drugs and biologics covered under the Medicare Prescription Drug, Improvement, and Modernization Act and the Social Security Act.

• ASP will be used to calculate payment allowances to manufacturers for covered drugs and biologics effective January 1, 2005.

Medicare Modernization Act

(MMA)

• Average Sales Price (ASP)




• Manufacturers may not charge Federally-qualified health centers and other entities enrolled in the 340B Program more than AMP reduced by a rebate percentage calculated for the preceding calendar quarter for outpatient drugs covered under State plans for medical assistance.

Public Health Service Act (PHSA)



and Compliance CongressComplex Business Process

Customer Order and Sales

Contract Management

Chargeback Processing

Incentives & Rebates

Pharmaceutical Manufacturer

Drug Sales

Payment per Contract

Adjustments/Credits

Chargeback Payment

Rebates Payment

DrugPurchaser

Government Price Reporting

Government PricesReported to

CMS, VA

FCP, PHS Prices forVA, PHS Sales

Claims Processing

URA forCalculation ofState MedicaidDrug rebates



and Compliance CongressComplex Business Process - Sales

•All U.S. sales (and Puerto Rico for non-FAMP)•All products participating (practically all)•All distribution channels•All rebates and discounts given•All adjustments to transactions (e.g. shipment in

error, picking error, damaged shipments, etc.)•All other marketing incentives given to induce sale

(e.g. non-bona fide grants)



and Compliance Congress

Complex Business Process – Accounts Receivable & Accounts Payable

•Sales are recorded in period that they occur•Chargebacks are recorded when they are received

and may have 15–45 days of lag time. Chargeback adjustments are received up to 6-8 months later

•Rebates are recorded when they are paid – usually with 2-3 quarters of lag time

•Returns are recorded when received – as much as 1 year of lag time

•Other adjustments may come with several quarters of lag time (e.g. volume discount adjustments, disputed items, etc.)




Pharmacies WholesalersMedicaidPatients

Doctors

StateMedicaidAgency

What Can BePrescribed(Formulary)

Cla

ims/

Utiliz

atio

n

Prescriptions

Cla

ims

Paym

ent

Bill for Medicaid Rebate

Pay Medicaid Rebate

Federal Government

(CMS)

Government Price Reporting

Price Information Drug

Sales

Business Process – Medicaid Rebates


Payments Per

Contract

Rx




Business Process – Managed Care Rebates

Remit Rebates

PBM

-Process/Administer Data

- Program Changes

- Formulary

DoctorsPatients

Pharmacies

Contract

What Can BePrescribed(Formulary)

Transmit Claim Summary

HMOs

PPOs

Networks

Insurers

Employers

Maintain Contract

Transmit Enrollment Data

Generate Summary of Claims Filed/Paid

Medicatio

nPrescr

iptionPayment

Formulary; Claims PaymentPayment

Prescription

Transmit Data

PharmaCompany

Calculations for Government Price

Reporting

Rebates



and Compliance CongressBusiness Process – Chargebacks

Wholesaler

Customer/Patient

Wholesale Price = $20

Customer Pays Contract Price =

$18

Contract Price = $18

Chargeback (CB) =

$2 ($20-$18) Wholesaler

Delivers Drugs


Chargebacks Calculations for Government Price

Reporting

Rx




A Variety of Non-integrated IT Systems

• Many of the systems are legacy and/or customized systems that rely heavily on manual inputs – Contracting system – Invoicing System – Chargeback System– Rebate System– Sales ERP System– Financial Reporting System (general ledger)– Accounts Payable System– Government Price Reporting System– Medicaid Rebate System– Sales ERP system– Various Excel spreadsheets– Access database– Medicaid rebate system– Hardcopy (e.g. customer contracts)



and Compliance CongressUnavailable Information

•Obtaining class of trade of members of GPOs•Tracing back chargebacks to the original

invoice•Tracing back expired products to the original

sales invoice•Obtaining units of returned damaged products




Source: Deloitte Consulting client and vendor experience and analysis

• Identify the business units & departments engaged in any aspect of the supply chain with respect to contracting, sales & collections

• Map all the processes

• Identify the systems that support the processes

• Identify related policies, procedures and business practices

Identify the Current Processes & Technology

•Identify alternatives to improve or change the processes and systems

•Perform system selection analysis if indicated

•Identify areas requiring remediation and/or corrective action (e.g. SOX, Regulatory or Contractual)

•Develop a plan and a budget

Identify Solutions

Implement Plan

• Purchase & implement new systems

• Draft or revise procedures

• Conduct training

• Conduct testing

Action Plan




Improved Payment Accuracy

Increased Market Share

Increased Profitability

AC

TIV

ITIE

S

Improve access to business information and analytic capabilities

Improve customer experience (self-service, support)

Improve automated validation processes

Ensure accuracy level of calculations

Ensure adherence to Sarbanes Oxley requirements

Increase focus on high-value and high potential customers

Improve anticipation and understanding of potential regulatory/ legislation

Improve account management strategies (including retention, win-back strategies)

Improve access to information and analytics

Improve access to business information and analytic capabilities

Improve emphasis on account/ relationship development

Increase emphasis on staff development (user training)

Improve account management tools and methods

Proactively manage transition points (using notifications, alerts)

Improve responsiveness to customer needs (self-service, support)

Improve tailoring of offerings to customers

Improve account management tools and strategies

Improve breadth, depth, quality, and timeliness of business information

Improve identification and understanding of defection candidates and drivers

Focus/refine retention priorities and strategies

Improve identification of valuable customer relationships

Improve management of contracts and agreements

Develop more comprehensive contract development strategies

Improve access to information and analytical capabilities

Improve integration of source systems

Improve/redesign processes to minimize manual processing, where possible

Ensure adequate documentation maintained (audit trail)

Align internal audit practices with business and risk objectives

Increase focus on risk management and regulatory compliance

Improve security of applications, systems, and data



Financial ManagementRevenue Growth Business Performance

Management

Reduced Operational

Costs

ReducedRisk

Improved Cash Flow

Key Business Goals

DRIVERS

Source: Deloitte Value Map – Life Sciences

Strategically, core contracting and pricing processes – and enabling systems – are important drivers of revenue, profitability, and ultimately, shareholder value



and Compliance CongressContract Development Process - Sample

Typical Contract Development Process

Con

trac

tA

dmin

istr

atio

nPay

men

tsG

over

nmen

tP

rici

ngIn

form

atio

nTe

chno

logy

Prici

ngSeg

men

t Developcontractstrategy

Developcontractmaterials

Preparecontracts for

customersignature

Maintaincontracts

Process andpay

chargebacks

Process andpay incentivesand rebates

Calculate andreport

governmentprices

Prepare systemto store

incentives andrebates

Build reports tosupportcontract

Ongoing evaluation of segment and contract performance

Ongoing support for field and customers

Ongoing processing of payments, reporting QA and support for Finance

Ongoing dispute resolution, Medicaid invoice payments, quarterly submissions

Ongoing dispute resolution, Medicaid invoice payments, quarterly submissions

Developtraining

materials

Provide trainingto supportcontract

Notifywholesalers of

bid award

Maintaincontract

membership




Technology SolutionsFunctional Capability Spectrum

Incentives & RebatesModule

GovernmentPricingModule

ChargebacksModule

• Contracts Library

• Workflow Capability

• Standard templates

• Extensive analytical tools

•“What if” scenarios

• Rule based notification broadcasting

• Rule based automatic alerts throughout contract lifecycle

• User generates all reports

• Customer self service

Contract Management

Module

Middle ofClass

Basic System

Best in Class

• Basic analytical tools (e.g. contract profitability)

• Standard templates

• Some notification capabilities

• Reporting requires IS support

• Captures basic contract information and supports ERP sales system

• No analytical capability

• No standard templates

• Automatic validation

• Integrated Credit/Check generation process

• Customer self-service capabilities

• Sales force self-service capabilities


• Automatic submission of chargebacks

• Validation is not integrated and time consuming

• No self-service capability


• Manual submission of chargebacks

• No systematic validation

• No reporting capability

• User friendly template creation process

• EDI interfaces for input/output

• All transactions are handled by system (no manual processes)

• Settlement process is integrated

• Sophisticated analytical tools (e.g. “what if” scenarios)

• Customer self-service


• Manual uploads

• Few templates; complex transactions are performed manually


• User templates are available but requires expert assistance to use

• Some analytical capabilities

• Settlement process is not integrated

• Complex transactions are processed manually


• Fully automated. Government prices are automatically calculated with minimal manual review

• Audit trails are built-in. Fully supports compliance requirements (e.g. SOX)

• Extensive analytical tools (e.g. “what if” scenarios)

• Automated reconciliations

• EDI interfaces (input/output)

• User generates customer reports

• Integrated settlement process

• Systems are fragmented and manual processes are extensive


• Few audit trails

• Ownership is defined but accountability is still issue

• Some system integration. Some government prices are fully automated

• Canned reports available to users

• Some audit trails

Source: Deloitte Consulting client and vendor experience and analysis




Technology SolutionsFunctional Capability Spectrum

Change Management

GeneralInterfaces

• Web based MVC Architecture

• Service oriented architecture

• Object oriented programming language

• Rules based and configuration driven changes

• Compliance with standards

Architecture

• Monolithic application architecture

• Mainframe driven

• Highly customized with proprietary language

• Non modular/tired architecture

• Web based architecture with thin client

• N Tired architecture

• Modular division of functionality

• Use of standard programming languages

• Business Process driven integration

• BPM capability

• Standards based – BPEL, WSDL,XML

• Plug and play with canonical messages format

• Standards based message format

• Process driven EDI capability

• Point to Point interfaces

• Proprietary message formats

• Batch/File based interfaces

• Proprietary communication

• Manual error handling

• Enterprise Application Integration technology

• Synchronous and Async capability

• Publish/subscribe architecture

• Application specific message formats

• Basic EDI capabilities

• Automated error handling

• Available Knowledge base

• Workflow driven process

• Well defined SLA with the users

• Audit controls and documentation

• Historical analysis and rollbacks

• Planned releases based on release numbers

• Manual change management

• Ad hoc process for changes

• Ad hoc release management

• No prioritization

• No audit control and history tracking

• Database to log problems

• Proper analysis for changes

• Planned releases

• Defined process for assignments

• Load balancing and H/A

• Session management and Transaction recovery capability

• Search engine capability

• No High availability

• More than 85% change requests need changes to code

• Need of specialized resources

• H/A

• More Configuration based changes

Basic System

Best in Class

Middle of Class




Jody Ann Noon RN, JDPrincipalNational Practice LeaderLife Science and Health Care Regulatory PracticeDeloitte & Touche [email protected](212) 436-2558

As an RN, JD, Jody utilizes her past experience practicing law to assist life science companies to develop systems to comply with complex legal and regulatory requirements. Jody has experience working with the OIG Compliance Guidance, the federal False Claims Act, Anti-kickback Statute, Medicare & Medicaid requirements, Physician Self-Referral Law (Stark) and Privacy requirements.

Ben Barrameda, Esq., CPA, MBASenior ManagerLife Science and Health Care Regulatory PracticeDeloitte & Touche [email protected](212) 436-3555

Ben is a senior manager in Deloitte’s Life Science and Health Care Regulatory practice, and he is one of Deloitte and Touche’s leading pharmaceutical pricing practitioners. Ben has over 15 years of experience in providing dispute consulting and litigation support, due diligence, internal investigations, developing, implementing and monitoring corporate compliance programs, audit, control, financial modeling, and business processes.




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Government Price Reporting – Operational Challenges and Solutions