Purchase-based Contracting Operational Considerations within Specialty Pharma

Since the infancy of specialty drugs on the market in the 1990s, specialty pharmaceuticals have attracted attention in part due to the complex supply chain and high-touch requirements before, during and after administration, according to the National Pharmaceutical Services (NPS), 2018.

How are specialty drugs different?

High cost is only one of the many factors that distinguish specialty drugs from traditional drugs (Bergstrom, 2015). Specialty drugs also need:

  • Special handling via a limited distribution network
  • Specialty storage at dispensers
  • Specialized administration often by a trained provider
  • Intensive clinical monitoring
  • Necessity for patient training and/or compliance assistance

Regardless of how “specialty pharma” is defined, with specialty drug spending growth exceeding 25 percent in 2014 and trending towards 50 percent of the overall drug spend this year, the segment will only continue to attract more attention from all stakeholders across contracting organizations and their downstream beneficiaries. In particular, those involved in purchase-based contracting – manufacturers, distributors, group purchasing organizations (GPOs), integrated delivery networks (IDNs), dispensers, payers and controllers (McCain, 2012), will need to account for and provide for operational considerations of purchase-based (unlike utilization-based) contracting levers by contracting methodology.

Challenges in implementing purchase-based contracts

Across the specialty and traditional segments, manufacturer organizations may face common operational challenges (listed in the table below) when operationalizing purchase-based contracts between manufacturers and distributors or customers.

Incentive Type Contracting Levers Challenges
Upfront Discount Contracting
  • Tiered discounts based on volume or growth commitments
  • Discounts conceded by percentage or by dollar ($) amount off pricing basis (i.e., Wholesale Acquisition Cost (WAC) or Average Sales Price (ASP))
  • Trading Partner-specific contingencies within the same channel
  • Time-intensive compilation and cross-walking across data sources from internal and external sources, such as GPOs, IDNs, etc.
  • Manual maintenance and validation of data for the purposes of calculating compliance targets
  • Difficulties in enforcing volume or growth commitment compliance
Backend Rebates
  • Volume or growth-based rebates
  • Retention bonuses
  • Data submission incentives
  • Time-intensive compilation and cross-walking across data sources from internal and external sources, such as GPOs, IDNs, etc.
  • Rebate calculations exceptions due to lack of standardized training and procedures
  • Complications due to true-ups and quarterly rebate payments on financial reporting

Growing pains

Though many of the challenges of purchase-based contracting are not unique to specialty pharmaceutical manufacturers and specialty drugs, some of the distinguishing characteristics of specialty drugs can increase the complexities of purchase-based contracting in this segment:

  • A limited distribution network and restrictions in the supply and storage chain decreases the negotiation power of manufacturers. Therefore, contracts may include additional concessions, such as trading partner-specific contingencies within the same distribution and contracting channels.
  • An increase in the negotiation power of GPOs or IDNs increases the pressure for incremental, upfront pricing discounts in the form of multi-level tiered discount structures; not only are group discounts offered to GPOs and IDNs based on tiered commitments at the aggregate level, individual GPOs members may also be eligible for incremental discounts based on individual commitments.
  • A limited supply and potentially short shelf-life of specialty drugs, paired with limited dedicated storage at specialty pharmacies and/or dispensers may drive the usage of days on hand requirements in specialty pharma contracts; specified days on hand ranges can increase the likelihood of predictable inventory volumes for manufacturers, distributors, and end customers.

Best practices

Keep these best practices in mind when negotiating and operationalizing a purchase-based contract in specialty pharma. Due to the complexity of purchase-based contracts, especially in the specialty pharma space, ensuring compliance and rebate accuracy can prove difficult.

Best practice responses to pre-empt or resolve such challenges include:

  • Increase communication between deal teams and operational teams to verify data needs required for post-purchase compliance and rebate calculations
  • Use a third-party aggregator to consolidate data sources across contracting channels
  • Standardize contracting clauses (e.g., tier structures) across contracting teams within market access
  • Establish a Center of Excellence and Standard Operating Procedures (SOPs) for quarterly rebate and compliance calculations

Adopt leading practices

In summary, specialty pharma has been making headlines due to distinguishing characteristics, complex supply chain and the necessity for high-touch management.  Although some of the challenges in purchase-based contracting are common across non-specialty and specialty contracting organizations, the specialty segment’s trending growth and increasing share of the overall drug spend, have increasingly driven complex purchase-based contracting strategies.

As the specialty market evolves, manufacturers need to consider adoption of leading practices to pre-empt or resolve the challenges that arise.

References

Bergstrom, K. (2015). Emerging Trends in the Specialty Drug Market. San Francisco, CA, USA.

McCain, J. (2012). Part 1: Distribution models for biologics and other specialty pharmaceutical products. Biotechnology Healthcare, 9(2), 8–13.

National Pharmaceutical Services (NPS). (2018). Specialty Medications. Boys Town, Nebraska, US.