Improving Pricing Accuracy:

Transcription

1 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors

2 2 Contributor Recognition This paper is a major step toward defining industry best practices to improve pricing alignment between distributors and manufacturers. Many volunteers contributed their time and expertise to develop these recommended best practices. Among the many companies that have contributed to this effort: 3M Health Care All Med Medical Supply B Braun Medical Baxter Healthcare Corporation Beckman Coulter Becton, Dickinson and Company Buffalo Hospital Supply Cardinal Health CareFusion Corporation The Claflin Company Clock Medical Supply Cornell Surgical Covidien Ltd. Crosstex Distributor Data Solutions First Quality Fisher HealthCare Global Healthcare Exchange Grove Medical Henry Schein Innovative Healthcare Corporation JMS North America Johnson & Johnson Health Care Systems Kimberly-Clark Corporation Kreisers LABSCO McKesson Corporation Medical Action Industries Medline Industries Midmark Corporation MMS - A Medical Supply Company Moore Medical MSISI NDC Nestle Owens & Minor Preferred Medical Professional Hospital Supply Schiller America Seneca Medical Smiths Medical North America Steris The Stevens Company Strategic Marketplace Initiative Welch Allyn Special recognition also goes to the Healthcare Distribution Management Association (HDMA) which previously identified some of the best practices included in this document. HIDA s Improving Pricing Accuracy: Best Practices in Contract Communications is published by the Health Industry Distributors Association, Copyright All rights reserved. For more information about HIDA membership, products, or services, please see page 19, contact HIDA at or visit Health Industry Distributors Association (HIDA) 310 Montgomery Street Alexandria, Virginia

3 Table of Contents Executive Summary... 4 Background... 4 Driving Forces... 4 Summary Recommendations... 5 The Complexities of Contract Management in Healthcare... 6 Pricing Overview... 6 Chargeback Process Overview... 6 Automation of Contract Management Processes... 7 Price Authorization Acknowledgment... 7 Price/Sales Catalog End-User Sales Tracing Chargeback Reconciliation Standards Adoption Standardized Timing For Contract Activation Types of Contracts New GPO Contract Award New Local Contract GPO Price Tier Activation/Changes Extending/Expiring Contracts Summary Appendices Definitions and Data Elements Contract Notification Data Template Visual Representation

4 4 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors BACKGROUND, DRIVING FORCES, SUMMAR RECOMMENDATIONS Executive Summary Background In 2013, the Health Industry Distributors Association began a Thought Leaders initiative to provide insights on the unprecedented changes occurring in healthcare markets. HIDA enlisted McKinsey & Company to conduct indepth interviews with dozens of healthcare provider executives across all healthcare settings. HIDA s own Thought Leaders then developed recommendations for the industry as a whole. The top recommendation from these thought leaders: fix the contracting process. As one participant stated, We re all doing these incremental customer agreements individually, independently. This adds a cost for all of us. What we need to do, as an industry, is unite for a standard contracting process. This led to an industry-wide effort to identify and disseminate best practices in contract management. This white paper results from that ongoing work. Driving Forces Pricing discrepancies in the healthcare supply chain increase operating costs for all trading partners including providers, manufacturers and distributors. In today s healthcare environment, these wasteful costs can no longer be tolerated. Solving pricing alignment issues is extremely challenging. Thousands of distinct processes, nonstandard facility definitions and data formats exist. It often seems that every relationship in the supply chain spawns a unique protocol. In an effort to move toward greater pricing alignment, HIDA s Contract Administration Workgroup has developed suggested best practices to reduce pricing exceptions between distributors and manufacturers. This paper presents these recommended practices, focusing on standards for contract timing and communications. These recommendations aim to improve contract administration processes based on three guiding principles: Automation. Ideally, 100% of communications and transactions should be electronic. Any process that cannot be automated should be redesigned. Standards. Non-standard processes and identifiers create confusion and add cost. For product and location identification, GS-1 standards are strongly endorsed. For transactions, EDI standard formats are the gold standard for communicating information, with CSV files matched to EDI formats an acceptable alternative. Timeliness. All parties need to embrace contract negotiation deadlines that allow timely notice of contract changes so that everyone has time to load accurate pricing and avoid mismatches and costly rework. EXECUTIVE SUMMAR

5 Summary Recommendations This paper details specific processes for standardizing contract communications and contract activation timing. Standard fields, definitions and order of elements are explained, and an accompanying template is provided. The recommendations include detailed procedures for automation of contract management processes. Among them: Price Authorization Acknowledgments Manufacturers should use price authorization acknowledgments in an EDI 845 or CSV file format matched to the 845 to send distributors information about pricing contracts. Each price authorization acknowledgment transaction should represent one pricing contract agreement for one customer or group of customers. Designation of a sold-to and ship-to pricing hierarchy is required to ensure that distributors set up pricing accurately for a group of customers. Manufacturers Price/Sales Catalogs Communication of changes to the distributor acquisition cost (DAC) must be sent separately to distributors in an EDI 832 or CSV file format. This data should not be sent as an EDI 845. End-User Sales Tracings Manufacturers must be able to process chargeback claims with standardized EDI 867 chargeback requests or using a CSV import. The distributor price used for the chargeback calculation is the distributor acquisition pricing set in effect at the time the purchase order was created by the distributor. Distributors should transmit chargeback claims to the manufacturer no later than 45 days after the sale; the chargeback claim should be processed by the manufacturer within 30 days of chargeback transmission. Distributors should deliver their sales tracings to manufacturers as a request for chargeback rebate payments daily, weekly or minimally at least once a month. Chargeback Reconciliations Manufacturers send back a chargeback reconciliation with resubmittal responses via an EDI 849 or CSV file indicating which requested rebates they will pay. If the chargeback claim submitted has errors, the manufacturer will transmit a chargeback reconciliation with line-item detail of the item(s) found to be in error. Because so many errors result from parties having too little time to load pricing before it becomes active, the paper also recommends standardized time frames for contract activation. The recommended time frame for activation of new GPO contracts is approximately 75 days. The paper also provides recommended time frames for: GPO contract extensions New local contracts Local extensions Local renewals New product additions to existing GPO or local contracts Price changes for products already on a contract To realize the efficiencies and savings available from improvements in contract administration, distributors and manufacturers are encouraged to adopt the standard practices explained in this paper and the accompanying template. Some of these recommendations require changes to information systems. Others require culture change. In particular, standards for timing of contract activation require all parties to begin negotiations early and finish on time, avoiding the temptation to allow negotiations to go till the 11th hour in hopes of greater concessions. Sales staff must be trained and incentivized to complete contracts on time. With adequate time, customer, distributor and manufacturer systems are in sync, resulting in price matches, no chargeback errors/disputes, accurate GPO administrative fee payments and significant cost savings for the healthcare system. 5

6 6 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors PRICING OVERVIEW, CHARGEBACK PROCESS OVERVIEW, PRICE AUTHORIZATION ACKNOWLEDGEMENT The Complexities of Contract Management in Healthcare Pricing Overview Pricing for healthcare products has evolved into a very complicated system. Most typically, group purchasing organizations (GPOs) negotiate with manufacturers to obtain contract prices for their healthcare provider members thousands of health systems, hospitals, nursing homes, physician offices and other facilities with tens of thousands of individual ship-to locations. Many of these products are then delivered to the facilities by distributors, who must invoice each provider at the agreed-upon contract pricing. The process is inherently complex, and many factors add to the complexity. For example: GPOs negotiate multiple pricing tiers to allow manufacturers to provide more attractive pricing to individual customers based on their purchasing volume, class of trade or other factors. Manufacturers typically negotiate thousands of contracts per year across different GPOs and providers. Some providers belong to more than one GPO. Some providers also negotiate independent contract pricing agreements with manufacturers directly. Ensuring provider customers are charged the correct contract price requires price synchronization among multiple entities: the manufacturer, the GPO, the distributor and the provider. Complicating the challenge is the fact that even though the negotiations typically occur between the GPO and the manufacturer, the task of invoicing the customer at the correct price usually belongs to the distributor. Chargeback Process Overview Contract prices are usually lower than the distributor acquisition cost (DAC) or wholesaler acquisition cost (WAC) 1. When a distributor buys a product from a manufacturer at DAC and sells the product to providers at a contract price lower than the DAC, a chargeback is required to keep the distributor whole. The chargeback is the difference between the manufacturer s price to the distributor and the contract cost to the provider. Distributors submit chargeback requests to manufacturers on a regular basis (daily, weekly or monthly), and each request may contain thousands of line items for review. A typical midsized manufacturer will process hundreds of thousands of chargeback requests per year and transfer hundreds of thousands of dollars per year in chargeback payments. 1 Because the differences between DAC and WAC are subtle, for this paper only the term DAC will be used. THE COMPLEXITIES OF CONTRACT MANAGEMENT IN HEALTHCARE

7 Automation of Contract Management Processes Industry-defined EDI transaction sets can be used by trading partners (in an EDI or CSV file format) to automate the end-to-end contract and chargeback management processes. However, these transaction-sets have not been adopted widely and are not used in a consistent manner. In the section that follows, best practices are outlined for streamlining communication processes, standardizing transaction sets and automating end-to-end processes, which will lead to improved operating efficiencies throughout the healthcare supply chain. Price Authorization Acknowledgement Manufacturers should use price authorization acknowledgments in an EDI 845 or CSV file format to send their authorized distributors information about pricing contracts for designated products to eligible facilities. Manufacturers can send a full refresh or changes of their price authorization data to distributors. In the CHANGE TPE FIELD AT A CONTRACT HEADER LEVEL, identify one of the following: Add A new, renewal without changes, or extension of contract price authorization Change An update to an existing contract, renewal with changes or expiration of contract termination Delete/expire Terminating an inactive or active contract CHANGE TPE AT THE ELIGIBLE BUER LEVEL: The type of action being taken. Add Adding an eligible buyer to a contract. Change Changing the eligible buyer information (GLN, HIN, etc.) on the contract. A tier change, for example, would include expiring the eligible buyer on the current contract tier and adding the eligible buyer to the new contract tier. Delete/expire Removing an eligible buyer from an inactive or active contract. Workgroup Member Tip Refresh copies should be available upon request. We find it works best if the change is received separately, noting the nature of the change and a refresh copy is also attached. Even though the refreshed copy may not need to be imported, the copy of the contract on file is updated at all times, making searches, etc. easier and faster. CHANGE TPE AT THE PRODUCT AND UOM LEVEL: This type of change is for a product and UOM update where separate detail lines are included for every possible selling UOM (case, box, pack, each, etc.). Add Adding a product to the contract. Change Updating the price or product ID or dates for a product on the contract. Delete Expire a product from the contract. Workgroup Member Tip Be sure to include all sellable units of measure. Many times the manufacturers only send one UOM and time consuming conversions need to take place prior to the contract being loaded. AUTOMATION OF CONTRACT MANAGEMENT PROCESS 7

8 8 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors PRICE AUTHORIZATION ACKNOWLEDGEMENT Daily EDI transaction processing is recommended for price authorization acknowledgments. For non-edi business partners, weekly updates are recommended for changes. Complete refreshes are recommended at least twice a year and upon request. Changes received separately, indicating the nature of the change, would help to expedite any research. The price authorization acknowledgment transaction set should be used by a manufacturer to transmit specific data relative to the status of or changes to outstanding price authorizations. The price authorization acknowledgment is sent to the distributor to indicate a price authorization on a contract or a change to a price authorization on a contract. This notification should include all awarded products, all sellable units of measure, prices and eligible customers for the awarded contract. Distributors may choose to process a single unit of measure and perform a conversion to the other sellable units of measure. BEST PRACTICES FOR PRICE AUTHORIZATION ACKNOWLEDGEMENT PROCESSING AND COMMUNICATIONS 1. Each price authorization acknowledgment transaction represents one pricing contract agreement for one customer or group of customers. 2. Designation of a sold-to and ship-to pricing hierarchy is required to ensure distributors set up pricing accurately for a group of customers. The facility hierarchy should be defined by the provider and should be supported within all manufacturers and distributors systems. Any misalignment can result in pricing errors at a ship-to level. The exact definition of facility hierarchies requires further discussion and should include GLN and other customer cross-referencing tools. 3. Price authorization acknowledgments should be used by manufacturers to notify appropriate distributors of any changes to existing contracts as changes occur while the contract is in effect. 4. Manufacturers can utilize Add, Change or Delete status fields to notify distributors of early contract expiration or removals from tiers due to customer or product additions to other contract pricing. It has also been shown that communication with an explanation will ensure timely processing. 5. When a customer or product is removed from any contract due to an addition to a different contract, manufacturers should send two notifications: one for expiring from a contract, and the second for adding to a new contract to avoid confusion and any possible timing gaps. 6. When distributors receive a price authorization acknowledgment from a manufacturer, they should place the contract information in a price authorization acknowledgment contract upload queue. After validating the data in the contract and addressing any missing information, distributors will run an update that creates, expires and updates pricing contracts in their ERP system. During the update process, the system should create a pricing contract for each contract detail line item, and then it should remove the line item from the price authorization acknowledgment in the queue. Any line item for which the ERP system cannot create a pricing contract should remain in the queue,where the distributor can view the contract detail and review the errors. Regardless of processing approach, errors need to be managed at the line level. AUTOMATION OF CONTRACT MANAGEMENT PROCESS

9 7. Manufacturers should define business practices for GPO designations with distributors upfront to avoid any misunderstandings related to GPO eligibility, whether they support multiple GPO affiliations or enforce the designation of one GPO. Updating the distributors every 30 days or upon request would also help to remove most conflicts. When manufacturers do not require providers to designate only one GPO affiliation, customer transitions between GPOs will be handled by providers, designating their primary GPO with their authorized distributor. 8. If all GPO members are eligible to receive the contracted pricing, a separate communication should be sent to distributors with clearly defined processes for them to update the distributors membership eligibility directly from the GPO membership roster. 9. Distributors should maintain a one-to-one relationship of material vendor IDs and manufacturer IDs. This can usually be accomplished by working with the manufacturer. Reducing the number of materials lists will streamline on boarding. 10. For termination of an entire contract, sending only a header is suggested. A contract header termination would be used to process expiration for all lines in the contract. 11. For extensions, only the header would be required. However, for renewal of a contract, the header and all lines should be sent to avoid any misinterpretation and handle any pricing or other changes sent at the time of the extension or renewal. 12. Manufacturers should not reuse contract numbers, and distributors should not reuse customer numbers, to avoid confusion or overlap of previously communicated information. See White Paper Definition Grid on page 20 for recommended data elements and definitions for Price Authorization Acknowledgement (EDI 845). 9

10 10 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors PRICE/SALES CATALOG, END-USER SALES TRACING Price/Sales Catalog Communication of changes to the distributor acquisition cost (DAC) must be sent separately to distributors in EDI 832 or CSV file format. This data should not be sent as an EDI 845. The price/sales catalog transaction set is used to provide the prices of goods or services in the form of a catalog. The price/sales catalog is used by manufacturers to provide detailed product information to their supply chain. Recipients of 832 transactions can integrate the data directly into their business software. Information in a price/ sales catalog, such as minimum order quantities, case-pack quantities, etc., can then be used in the ordering process. The price/sales catalog generally includes two basic sets of information: product information and prices. More specifically, the price/sales catalog transaction can include: Seller name and contact information Terms of sale information, including discounts available Item identification and description Item physical details including type of packaging Item pricing information including quantity and unit of measure Manufacturers can send a current snapshot of their price/sales catalog data or a future price/sales catalog to distributors. In the Type field, identify one of the following: Current Current snapshot of data effective as of today s date Future Future-dated pricing that will be effective at a later date End-User Sales Tracing The distributor s ERP system tracks sales of products tied to pricing contracts and reports these sales when they send an end-user sales tracings file (via EDI 867 or CSV file) to the manufacturers that sent them the contracts. The calculation for rebates depends on the difference in the distributor acquisition cost and the contracted sell price to the end customer. For example, if a widget s distributor acquisition cost is $100 and the contract price (cost) is $80, the difference of $20 is the chargeback rebate amount. The end-user sales tracings transaction set supports the trading partner practices relative to the reporting of sales. Normally, the end-user sales tracings report transaction set will include all of the following: Intra-company product transfer or consolidated distribution center (CDC) sale set by distributor Sales of product from one or more locations to an end customer Chargeback claims Returns from end customers to distributors Credits/re-bills End-user sales tracings data can be used to calculate chargeback claims, providing the distributor with an electronic mechanism to request reimbursement from the manufacturer. The end-user sales tracings chargeback transaction also can be used by distributors to send an electronic credit memo (reverse chargeback) to the manufacturer in cases when a previously chargedback product has been returned by the eligible customer to the distributor or manufacturer. AUTOMATION OF CONTRACT MANAGEMENT PROCESS

11 INDUSTR BEST PRACTICES FOR SUBMISSION OF END-USER SALES TRACINGS FOR CHARGEBACKS 1. Because of varying system capabilities, manufacturers must be able to process chargeback claims with standardized EDI 867 chargeback requests or using a CSV import. 2. When purchasing items from a manufacturer, distributors should enter purchase orders using the distributor acquisition cost. 3. When distributing products to a provider, the distributor will invoice the provider at the prices set forth in their contract pricing agreement as supplied by the manufacturer in the price authorization acknowledgement, plus any other markups or charges negotiated between the distributor and the provider. 4. The distributor price used for chargeback rebate calculation is the distributor acquisition pricing in effect when the purchase order was created by the distributor for the products. 5. Chargebacks are authorized by manufacturers when they designate a distributor as an authorized distributor for a facility and send contract pricing. 6. Including the DAC in the end-user sales tracings (at time of purchase order from the customer) results in less chargeback reconciliation issues. 7. Distributors should transmit chargeback claims to manufacturers no later than 45 days after the sale. The chargeback claim should be processed by the manufacturer within 30 days of chargeback transmission. 8. This end-user sales tracings transaction set may be used by a healthcare distributor to report sales transactions to a manufacturer. 9. This transaction is not to be used for reporting returns from the distributor to the manufacturer. However, it is used for reporting returns from the customer to the distributor which may result in a negative chargeback claim. 10. Chargeback claim detail will be provided in distributors sellable unit of measure (UOM) to the customer or provider. The UOM used between the distributor and the manufacturer could be at a higher level than the purchasing UOM used by a provider (i.e., each vs. case ). 11. Distributors will calculate the chargeback based on the contract and distributor acquisition cost in effect at the time of the customer s original purchase order to distributor. 12. Distributors may submit a negative chargeback anytime a transaction for which a chargeback was submitted is reversed or cancelled, including a) when a distributor accepts a customer return on a contract item previously submitted for chargeback credit, b) when an invoice is cancelled or credited because of an ordering error, billing error or mis-shipment; or c) when an invoice is cancelled or credited, resulting in the original transaction being reversed or cancelled (damages, credit/re-bills, etc.). Distributors should deliver their sales tracings to manufacturers as a request for chargeback rebate payments daily, weekly or minimally at least once a month. When preparing the sales tracings file, the Start and End Date fields should be entered to ensure the invoices (for purchases and return credit memos) are included in the report. The recommended practice is sharing with manufacturers the detailed version of the report, which lists each transaction line by ship-to facility, product code and UOM for which you are eligible for a chargeback rebate. It is important to note that the chargeback summary report does not provide the necessary detail at the facility level to validate the chargeback rebate claim, and it should not be used for this purpose. See White Paper Definition Grid on page 20 for recommended data elements and definitions for End User Sales Tracing (EDI 867). 11

12 12 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors CHARGEBACK RECONCILIATION, STANDARDS ADOPTION, TPES OF CONTRACTS Chargeback Reconciliation Manufacturers respond with a chargeback reconciliation with resubmittal (via an EDI 849 or CSV file) to a chargeback claim received from the distributor through the end-user sales tracings. This response tells the distributor the rebate amounts the manufacturer will pay. The manufacturer then processes the chargeback claim and sends an electronic credit document to the distributor through the transmission of a chargeback reconciliation transaction set. This is used by the manufacturer to reduce paperwork and expedite the chargeback payment process. The chargeback reconciliation with resubmittal response should detail any errors the manufacturer finds in the chargeback claims, whether they are deemed to be too high or too low. If the chargeback claim submitted by the distributor is found to be without error, the manufacturer will transmit a chargeback payment process. If the chargeback claim submitted by the distributor is found to include errors, the manufacturer will transmit a chargeback reconciliation with line-item detail of the item(s) in error. This chargeback reconciliation should include credit for the undisputed and adjusted credit amounts, along with any line item denied for credit. Only items found in error (adjusted or denied) should be transmitted back to the distributor with a reject reason code. Adjusted credits for under-submitted chargebacks should be included with reason codes for distributors to correct their system and the pricing to the provider customer. Workgroup Member Tip It is important to clarify that manufacturers should communicate both positive and negative errors in chargeback claims. Most manufacturers only notify the distributor if the rebate claim is determined to be too high -- if their records show that the distributor has not claimed all the rebates that they should, they don t do anything. Standards Adoption GS1 standards allow companies and trading partners to use a common language to identify items in the supply chain. This common language allows companies to then identify, capture and share supply chain information globally. Most importantly, standards enable collaboration with trading partners, an optimized supply chain and more efficient business processes that reduce human error and cut costs. Manufacturers and distributors should be able to create cross-reference data maps for contract number, product, unit of measure (UOM) and customer ID with industry-standard identifiers for customer IDs GLN, HIN, DEA, wholesaler customer ID, group (GPO) customer ID, your internal customer ID and product IDs GTINs. Credit and debit memos issued by manufacturers should include the distributor division, claim number, amount and date of the transaction. Minimally, the month and year of transaction credits should be noted. Line-item detail information should not be included unless there is a discrepancy in the chargeback rebate data. Chargeback discrepancies should include a discrepancy reason code and the original transaction detail. AUTOMATION OF CONTRACT MANAGEMENT PROCESS

13 Standardized Timing for Contract Activation The expectation of price accuracy begins as soon as the contract becomes effective, but the industry currently has neither standard practices nor expectations shared by all involved parties. Customers, manufacturers, GPOs and distributors are all impacted by problems caused by inconsistent implementation of new contracts (whether GPO or local), GPO tier activations/ changes and expiring/extending contracts. These problems manifest themselves in costly rework due to increasing occurrences of: Pricing variations (A/R increases, short pays) Chargeback denials (credits, re-bills, disputes handling) Because the industry lacks a defined timeline agreed to by all parties, short time frames often exacerbate the problems because of work backlogs/ queues, contract negotiation strategies to delay and improper expectations presented to the customer. Establishing a standardized time frame for contract activation is a key to eliminating redundant effort and costs. The HIDA Contract Administration Types of Contracts This paper provides recommended timelines for several different types of contracts and changes. To avoid confusion from differing definitions, the types are defined below: New GPO Award GPO goes through formal process to award manufacturer a contract position; uses a new GPO award identifier GPO Extension Existing GPO award is extended; uses existing GPO award identifier New Local Contract Customer and manufacturer agreement for customer-specific pricing; uses a unique contract identifier Workgroup has identified industry best practices as a first step toward developing a template for the activation process. The objectives are to: Improve visibility Create predictability Drive for accuracy Be proactive Leverage common expectations Pricing is accurate. Workgroup Member Tip Buy a desk calendar if you have to. It sounds simple, but trading partners should always know and be prepared for when contracts are going to expire. Price tier placement is correct. Rework is eliminated or minimized. New products can be purchased soon after introduction. Administrative fees (if applicable) are accurate. Local Extension Existing local contract is extended; uses existing contract identifier Local Renewal Existing local contract is extended with price modifications; uses a new contract identifier New Product Addition New products are added to GPO or local contracts with agreed-upon pricing; uses existing contract identifier Price Changes Products on a contract have prices that are increased or decreased; uses existing contract identifier STANDARDIZED TIMING FOR CONTRACT ACTIVATION 13

14 14 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors NEW GPO CONTRACT AWARD, NEW LOCAL CONTRACT New GPO Contract Award INDUSTR BEST PRACTICES FOR NEW GPO CONTRACT AWARD 1. Sufficient time is allowed to assign customers to the appropriate price tier, through pre-slotting or through a Letter of Commitment (LOC) process. 2. Manufacturers use new contract numbers. 3. Manufacturers use conference calls with distributors to share informational aspects of the contract that will assist with customer awareness. 4. Distributors receive advance notice to communicate new award pricing to customers. 5. Customers have sufficient time to validate, challenge, and load pricing to internal systems. GPO New Award 6. Contracts are activated on the first day of a month and end on the last day of a month. Sample Timeline GPO New Award Sample Timeline 75 Calendar Days GPO awards contract Manufacturer notifies distributors Customers buy using new award Calendar Days (average) Manufacturer tiers customers and loads pricing 6-14 to 7-13, 2015 Distributors load pricing and communicate to customers 7-15 to 7-31, 2015 Customers load pricing 8-1 to 8-29, Calendar Days 17 Calendar Days 30 Calendar Days BOTTOM LINE FOR NEW GPO CONTRACT With adequate time, customer, distributor and manufacturer systems are in sync, resulting in no price variance, no chargeback errors/disputes and accurate GPO administrative fee payments. Approximately 75 days duration Provides manufacturers 30 days to implement the award, assign price tiers to customers and communicate with distributors Provides distributors 15 days to load and communicate with customers Provides customers 30 days to review, audit, challenge and load pricing STANDARDIZED TIMING FOR CONTRACT ACTIVATION

15 New Local Contract INDUSTR BEST PRACTICES FOR NEW LOCAL CONTRACT AWARD Manufacturers utilize new contract numbers. Manufacturers provide advance notification to distributors to communicate new local pricing to customers. Customers are given sufficient time to validate, challenge and load pricing to internal system. Local contracts start on the 1st or 15th of a month and end on the last day of a month. New Local Contract Sample Timeline New Local Contract Sample Timeline 60 Calendar Days Customer and Manufacturer sign contract Manufacturer notifies distributors Customers buy using new local contract Calendar Days (average) Manufacturer loads pricing 6-12 to 6-29, 2015 Distributors load pricing and communicate to customers 7-1 to 7-20, 2015 Customers load pricing 7-21 to 8-14, Calendar Days 20 Calendar Days 25 Calendar Days BOTTOM LINE FOR NEW LOCAL CONTRACT With adequate time, customer, distributor and manufacturer systems are in sync, resulting in no price variance (A/R issues and short pays) and no chargeback errors/disputes. Approximately 60 days in total duration Provides manufacturers 15 days to properly review contract, implement pricing and communicate with distributors Signed between the 1st and 15th Implemented on the 15th of the month Signed between the 16th and 31st Implemented on the 1st of the month Provides distributors 15 days to load and communicate with customers Provides customers 30 days to review, audit, challenge and load pricing 15

16 16 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors GPO PRICE TIER ACTIVATION/CHANGES, EXTENDING/EXPIRING CONTRACTS GPO Price Tier Activation/Changes INDUSTR BEST PRACTICES FOR GPO PRICE TIER CHANGES GPOs, manufacturers and customers proactively collaborate on LOCs, compliance issues, and anything else impacting tiers. The distributor is not the first to communicate with customer on any price tier change. Distributors are notified in advance to communicate new price tier pricing to customers. Sufficient time is provided for customers to validate, challenge and load pricing to internal system. New price tiers start on the 1st or 15th of a month and end on the last day of a month. GPO Tier Activation/Changes Sample Timeline GPO Tier Activation/Changes 60 Calendar Days Sample Timeline Customer and manufacturer complete LOC Manufacturer notifies distributors Customers buy using new price tier Calendar Days (average) Manufacturer loads pricing 6-12 to 6-29, 2015 Distributors load pricing and communicate to customers 7-1 to 7-18, 2015 Customers load pricing 7-19 to 8-14, Calendar Days 18 Calendar Days 27 Calendar Days STANDARDIZED TIMING FOR CONTRACT ACTIVATION

17 Extending/Expiring Contracts INDUSTR BEST PRACTICES FOR EXTENDING OR EXPIRING A CONTRACT/AWARD Extending a contract/award, no changes Manufacturer notifies distributors 45 days prior to effective date Distributors notify customers 30 days prior to expiration date Extending a contract/award with changes Manufacturer notifies distributors 45 days prior to effective date Distributors notify customers 30 days prior to expiration date Expiring a contract/award Manufacturer starts early 90 to 120 days to decide to expire Manufacturer notifies distributors 45 days prior to expiration Distributors notify customers 30 days prior to expiration Replacing a terminating GPO award with a courtesy contract Follow the new contract process 17

18 18 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors SUMMAR, APPENDICES Summary Adopting the standard practices explained in this paper and the accompanying template is an important first step toward realizing the efficiencies and savings available from improvements in contract administration. Most of these changes are not easy. Some require reprogramming of information systems. Many require changes to company policies and processes. The timing recommendations require not only process change but also culture change. All parties must commit to beginning negotiations early and finish on time, avoiding the temptation to allow negotiations to go until the 11th hour in hopes of greater concessions. Sales staff must be trained and incentivized to complete contracts earlier. The many manufacturers, distributors, and industry partners who participated in the development of this white paper believe these efforts and investments will pay off. With standard processes and adequate time, customer, distributor and manufacturer systems are in sync, resulting in price matches, no chargeback errors/ disputes, accurate GPO administrative fee payments, and significant cost savings for the healthcare system. About ContXt ContXt Corporation provided important consulting and support for the Pricing Accuracy Initiative. ContXt Corporation takes big concepts ( culture shift, Our Mission, merger-driven procedural changes, etc.) and translates them into simple, effective tools that get entire organizations on the same page to achieve strategic objectives. Using visual- and discovery-based facilitation, communication and proven learning methods, ContXt helps clients from high-tech and energy to healthcare distribution and education bring their organization together and get results that make them stronger. ContXt organizational alignment processes: Communicate your vision and value proposition, and help your organization understand, connect and stand behind them Assess focus areas and drivers for growth, set priorities and get buy-in at every level Accelerate process improvement through smoother teamwork Implement a successful learning/communication/culture campaign Align groups with organization values and strategic objectives Train employees for new capabilities with interactive workshops To learn more, call or visit SUMMAR

19 Appendices The HIDA Contract Creation Working Team produced definitions and data sets templates to assist all healthcare industry contract trading partners in the efficient processing of 845 and 867 EDI transaction sets or their csv versions. The appendices contain the following charts: 1. Definitions and transmission data elements for price acknowledgement (EDI 845) and end-user sales tracing (EDI 867) transaction sets 2. Contract notification data descriptions To download a copy of HIDA s Improving Pricing Accuracy: Best Practices in Contract Communications and these appendices in Excel form, go to Also included in this download is an example EDI 845.csv template About HIDA The Health Industry Distributors Association (HIDA) is the premier trade association representing medical products distributors. HIDA members offer logistics services that increase the efficiency of the nation s hospitals, nursing homes, physician practices and other healthcare providers. HIDA also works closely with the manufacturing community through the HIDA Educational Foundation. Advocacy HIDA s Government Affairs team offers insight and advocacy for current issues impacting member distributors and their customers, healthcare providers. Resources include legislative and regulatory summaries, reimbursement updates, news alerts, advocacy letters, and issue-specific resource centers. Business Intelligence Research Data Analytics Business Intelligence (BI) services support member distributors and manufacturers by developing industry-specific market research publications. HIDA Analytics Service provides customized decision support tools equipping companies to better meet market challenges. Networking and Events HIDA events provide valuable networking opportunities and education programs that together form a foundation for success. Events include the Streamlining Healthcare Conference, Executive Conference, Washington Summit, and Market Conferences. Education Accredited in Medical Sales (AMS) Training HIDA and the HIDA Educational Foundation are dedicated to providing the medical products industry with quality education to improve bottom-line performance and increase overall industry knowledge. For more information call (800) 549-HIDA (4432) or visit APPENDICES 19

20 20 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors DEFINITIONS AND DATA ELEMENTS Definitions and Data Elements Definitions drafted by the HIDA Contract Creation Working Team in August of 2014 to assist all healthcare industry contract trading partners in the efficient processing of 845 and 867 EDI transaction sets or their CSV versions. Definition Only Category Field/Descriptor Customer Customer Effective Date Customer Customer Expiration Date Customer Eligible Buyer/Sold to DEA Customer Eligible Buyer/Sold to Distributor Defined ID Customer Eligible Buyer/Sold to GPO ID Customer Eligible Buyer/Sold to HIN Customer Eligible Buyer/Sold to GLN Customer Eligible Buyer/Sold to ID Customer Eligible member city Customer Eligible member name Customer Eligible member state Customer Eligible member street address Customer Eligible member zip code Customer End user customer Customer Sold to/parent Header Buyer Group Contract Number Header Buyer Group Health Industry Number (HIN) ID Header Buyer Group Name Header Buyer Group Type Header Contract Description Header Contract Effective Date Header Contract Effective_Date Header Contract Expiration Date Header Contract Expiration_Date Header Contract number Header Contract tier number Header Distributor ID Header Distributor name Header Manufacturer HIN ID Header Manufacturer Name Header Previous Contract Number Header Publish Control Number Header Publish Date Header Transaction Type Header Manufacturer ID Product Change Type APPENDICES

21 Definition The effective date of the customer on the contract The expiration date of the customer on the contract A number assigned to a health care provider (such as a medical practitioner, dentist, or veterinarian) by the U.S. Drug Enforcement Administration A distributor issued set of characters that uniquely identifies them apart from others. A member identifier most GPOs create and provide in their membership roster A global identifier that uniquely enumerates the locations of services and activities. GS1 Global Location Number that used to identify a location and can identify locations uniquely where required A healthcare provider issued set of characters that uniquely identifies them apart from others. Eligible member city A member of a buyer group which has been recognized by a vendor to receive a specific tier or other price on a contract Eligible member state Eligible member street address Eligible member zip code Usually a healthcare provider that has access to a contract and would be the member of a buyer group A GPO or other affiliation identification of top customer hierarchy A GPO or other affiliations assigned contract number A global identifier that uniquely enumerates the locations of services and activities. A GPO or other affiliations with members who can utilize a contract negotiated with a vendor A GPO or other affiliations category Agreement explanation The effective date of the contract Contract effective date The expiration date of the contract Contract expiration date A number assigned to a contract by a buyer group or vendor. Assigned by vendor to identify the contract tier to which a member has access and is the contract cost used by the distributor to calculate chargebacks. HIN or other (GS1) identifier Distributor name A global identifier that uniquely enumerates the locations of services and activities in the healthcare industry. The entity which has control over contract pricing and chargebacks and has negotiated a contract with a Buyer Group - a GPO or other affiliations representing members who can utilize the contract, or with an end user customer using a local vendor contract (LVC) Preceding contract number A unique number that distinguishes a transaction from all other transactions. For EDI integrations this is the ST02. Date the updates were communicated Add a new or reissue contract price authorization. Change an update to an existing contract. Delete/Expire - expiration of existing contract HIN or other (GS1) identifier Add a new or reissue material/um price authorization. Change an update to an existing material/um. Delete/Expire - expiration of existing contract 21

22 22 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors DEFINITIONS AND DATA ELEMENTS Definition Only Category Field/Descriptor Product Contract Unit Price (Cost) Product DAC (Distributor Acquisition Cost) Product GTIN Product Item_Description Product Material Effective Date Product Material Expiration Date Product Packaging Product Unit of Measure Product VN_Item_ID/MF Item ID DC /Branch # DC /Branch Name Distributor Distributor Item ID Invoice Date Invoice number Pricing Date Quantity Rebate $ Extended Rebate $ per Unit Sales Type Code Vendor Vendor name 845 EDI transaction set 867 EDI transaction set Chargeback Contract Contract tier CSV Customer Distributor Markup EDI GPO GS1 Standards Item Number LOC Local Vendor Contract (LVC) Member Rebate WAC APPENDICES

23 Definition The special cost of the specific product negotiated by the vendor and the buyer group/end user. Often referred to as contract price but technically is the contract cost upon which the contract price is determined after the distribution mark-up is applied. For purposes of the communication between manufacturers and distributors the contract price will reference the cost portion only, including the definition used for Rebate (Chargeback) calculations. The product cost invoiced to the distributor by the vendor GS1 Global Trade Item Number (GTIN) that can be used by a company to uniquely identify all of its trade items. GS1 defines trade items as products or services that are priced, ordered or invoiced at any point in the supply chain Usually created by the vendor and describes the item The effective date of the material on the contract The expiration date of the material on the contract Standard unit or system of units, by means of which a material or item is packaged. Standard unit or system of units, by means of which a quantity is accounted for and expressed. Can be stock, purchasing or selling unit of measure, e.g. piece, each, box, case Manufacturer assigned number for identifying its products Distributor Branch ID Number Distributor Branch Name Selected by the member by way of the LOC process to supply the member products on the contract and then use the chargeback process to fund margin pursuant to the contract from the vendor after the sale to the member by the distributor Distributor assigned number for identifying its products Date the end customer was issued their billing statement Distributor invoice number for sale to eligible member Date the end customers order was processed for billing Quantity SO Total refund requested. The difference between DAC and the contract price for a product on a contract Refund requested. The difference between DAC and the contract price for a product on a contract Invoice transaction description (standard stock sale, return, adjustment, etc.) The entity which has control over contract pricing and chargebacks and has negotiated a contract with a buyer group - a GPO or other affiliations representing members who can utilize the contract, or with an end user customer using a local vendor contract Vendor name Used by vendors (manufacturers) to send contracts to distributors. Bid award / contract notification / Price Authorization Acknowledgement or status. Identifies contract information on individual or group contracts, including eligible customers, products, Used by distributors to send chargebacks (rebates) to vendors (manufacturers) for the distributors to be reimbursed from the vendors for the difference between DAC and contract cost. End User Sales (sent from a distributor) or Product Transfer and Resale The difference between DAC and the contract price for a product on a contract An agreement between a vendor and a buyer group which members can utilize or an LVC Various levels of prices for products on a contract accessed by members by reaching or maintaining contract requirements. Character-separated values that stores tabular data (numbers and text) in plain-text form. Easily created from Microsoft Excel, Notepad, Google Spreadsheet and other applications. The health care provider or end user that is charged contract cost plus, if applicable, distributor markup. An eligible member of a GPO is a customer The percentage or amount the distributor will add to contract cost to create the sell price to the eligible member or customer Electronic data interchange, an electronic communication system that provides standards for exchanging data via any electronic means Group purchasing organization, the most prevalent kind of buyer group GS1 is dedicated to the design and implementation of global standards and solutions, to improve the efficiency and visibility of supply and demand chains globally and across sectors. The GS1 system of standards is the most widely used supply chain standard Usually assigned by the vendor and identifies the specific item The abbreviation for letter of commitment that a member would initiate on a contract asking the vendor to approve a tier or other price that the member would receive A vendor contract not associated with a buyer group The entity which is affiliated with a buyer group. See Chargeback Wholesaler acquisition cost, same as DAC except WAC is the product cost invoiced to the wholesaler by the vendor 23

24 24 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors CONTRACT NOTIFICATION DATA TEMPLATE Contract Notification Data Template USAGE NOTES: Multiple notifications can be included in a single file. Each contract line represents a new transaction. Only one contract line per contract/tier combination should be sent per file. Eligible buyer and product pricing information will be tied to the preceding contract/tier line. Contract Information Required Data Types Defined Values CT Change Type M Defined Values Original, Change, Reissue, Termination Notification Date M m/d/yyyy Contract Number M Alphanumeric Previous Contract Number O Alphanumeric Contract Name O Alphanumeric Contract Description O Alphanumeric Tier Level O Alphanumeric Tier Description O Alphanumeric Contract Effective Date M m/d/yyyy Contract Expiration Date M m/d/yyyy Buyer Group ID M Alphanumeric BG Name M Alphanumeric BG Contract Number O Alphanumeric BG Type M Defined Values GPO, Local, IDN Manufacturer ID M Alphanumeric MF Name M Alphanumeric Distributor ID O Alphanumeric DS Name O Alphanumeric Eligible Buyer Information (Optional) Required Data Types Defined Values Change Type M Defined Values New, Change or Remove Customer Eligible Buyer ID M Alphanumeric EB Name M Alphanumeric EB Address1 M Alphanumeric EB City M Alphanumeric EB State M Alphanumeric EB Zip M Alphanumeric EB Effective Date M m/d/yyyy EB Expiration Date M m/d/yyyy EB Distributor Defined O Alphanumeric EB HIN O Alphanumeric EB DEA O Alphanumeric EB GLN O Alphanumeric EB GPO ID O Alphanumeric EB Facility ID O Alphanumeric Product Pricing Information (Optional) Required Data Types Defined Values Change Type M Defined Values Add, Remove or Change Item PD MF Item ID M Alphanumeric PD VN Item ID O Alphanumeric PD Item Description M Alphanumeric PD UOM M Alphanumeric PD QT M Numeric PD Unit Price M Numeric PD Basis Unit Price O Defined Values Contract, Net PD Effective Date M m/d/yyyy PD Expiration Date M m/d/yyyy PD Restrictions O Alphanumeric PD GTIN O Alphanumeric APPENDICES

25 Pipe or comma delimited file. Do not include column headings. Termination notifications should only contain contract header information, including the new expiration date. Contract terminations should not include eligible buyer and pricing information. Do not include dollar signs when sending currency information. Use a period for decimal places (4.13 rather than 4,13). If an optional value is not sent, a comma must be inserted as a place holder. Each value must come in the correct position. Description Define the transaction. Applies to the contract information. Date the transaction was created; this does not apply to contract effective/expiration dates. Manufacturer-defined ID for the contract. This will be used for rebate requests. This will be used for renewals/reissues if the contract number changes. Manufacturer-defined name for the contract. Manufacturer description for the contract. Pricing tier for this contract. Pricing tier description; this can be used to add restriction notes to the contract/tier. Date the contract is effective. Date the contract expires. Manufacturer-defined ID for GPO. GPO name This is the GPO-assigned contract number. Buyer group type Manufacturer-defined ID; must be registered with GHX Manufacturer name Manufacturer-defined ID; must be registered with GHX Distributor name Description Defines the change to member or product. Manufacturer-defined ID; if registered with GHX, the address information is optional. Eligible buyer (member) name Date the membership on this contract starts. Date the membership on this contract ends. Eligible buyer ID assigned by the distributor. Eligible buyer ID assigned by HIBCC. Eligible buyer ID assigned by FDA. Eligible buyer ID assigned by GS1. Eligible buyer ID assigned by GPO. Description Defines the change to member or product. Item ID assigned by the manufacturer. Item ID assigned by the vendor. Item description Unit of measure for the item. Quantity (default value is 1) Price per unit Defines contract or suggested (NET) pricing. Note to define tier restrictions. 25

26 26 Improving Pricing Accuracy: Best Practices in Contract Communications Guidelines for Manufacturers and Distributors VISUAL REPRESENTATION APPENDICES

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