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Friday, March 08, 2019

Going Beyond Supply Chain Basics: Pricing Alignment in Healthcare

posted by: Susan LaFountain, Product Contract Data Manager, GHX

Two decades ago, a few healthcare supply chain partners decided to automate basic transactions so that they could improve efficiency and accuracy and reduce costs – and the GHX Exchange was born. Today over 10 thousand supplier divisions and 19 thousand provider facilities use GHX standards to automate the four core supply chain documents: The purchase order (850), purchase order acknowledgment (855), advance ship notice (856) and invoice (810). These “basic” supply chain transactions encompass the processes around placing an order, delivering the products and billing for those products.

While the healthcare industry saves $1B annually through automation of these basic supply chain processes, we are still missing out on a major opportunity for cost savings in the area of pricing alignment and reconciliation. Thousands of contract price changes happen each day, and manufacturers, distributors and providers attempt to manually reconcile them within their systems, which is quite frankly impossible to do. The advanced transaction sets required for contract price alignment are complex, labor intensive and, without any standards or automation, generate significant work, rework and costs for all parties involved.

So what do I mean by “advanced” transactions? Let’s take a look:

  • Product Price Catalog (832): This contains item details, packaging, pricing unit of measure (UOM) and packaging strings, as well as current and future prices. The manufacturer or distributor sends the price catalog, typically a snapshot of the last 6-12 months of purchases, to the hospital buyer. Because most hospitals don't have a good way to electronically consume and update pricing in their materials management information system (MMIS), the buyer must manually enter the data, resulting in errors and delays.
  • Contract Price Authorization Acknowledgement (845): This is the most complicated of all advanced business processes. Manufacturers use it to convey local or group purchasing organization (GPO) contract price notifications to the distributor. Because manufacturers have historically delivered this information to distributors in a variety of formats, it has been virtually impossible to automate. As a result, distributors must manually update the pricing within their systems, leading to additional delays and inaccuracies.
  • Sales Tracing from the Distributor to the Manufacturer (867): This is the report of who bought what and at what price. It also includes information on returns and the credits and rebills between the hospital buyer and distributors. And sometimes the sales tracing is used for chargeback requests. All of these processes are highly complex and extremely challenging to maintain manually.
  • Rebate Request from Distributor to Manufacturer (844): This report identifies on-contract customer purchases, requesting to make whole the difference of the contract price to the distributor acquisition cost (DAC) or wholesaler acquisition cost (WAC). It often results in a dialog between the parties as they work to reconcile the differences, adding time and labor.
  • Response to Product Transfer Account Adjustment to Distributor – Response to the Rebate (849): Distributors use this report to indicate which requested chargebacks and rebates they will pay, and/or provide rejection codes. This process too is more of a dialog back and forth between the parties as they attempt to resolve the issues.

As evidenced by the above transactions, pricing alignment in healthcare is highly complex, time and labor intensive, and prone to human error when all of the parties to a contract are manually communicating ever-changing information with one another, and attempting to keep it updated and synchronized within their various systems. The operational and financial burden impacts everyone in terms of:

  • Excessive labor and operations costs
  • Delayed processing
  • Poor reporting and lack of visibility
  • Overpayment on chargeback requests
  • Price exceptions
  • Inaccurate GPO admin fee reporting
  • Penalties for non-compliance

So why hasn’t the industry done anything about it?

Well, in fact, it has. The Health Industry Distributors Association (HIDA), recognizing the industry need for standardization in the contracting process, has collaborated with over 120 organizations throughout the healthcare supply chain to develop best practices for pricing alignment that promote automation of these advanced transaction sets.

In the next blog post in this series, I will present information on HIDA’s price alignment standards, and why 2019 will be the year for action among healthcare stakeholders.

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