SAP Compensation Management covers many different wholesale distribution scenarios. Any any business that uses sophisticated pricing contracts or chargebacks (or chargeback variants, such a price protection or bill-backs) needs a way to manage those processes.
For this series, I’ll present the business process for pharmaceutical wholesalers as an example, and show how Compensation Management can be used for contract pricing and chargeback management.
The diagram below shows the pharma wholesale business process from contract negotiation through chargeback reconciliation.
The contract pricing and chargeback process begins when a drug manufacturer negotiates a pricing contract with one or more customers. The contract defines discounted pricing for certain products. The Contract may be signed with an individual customer, but more often it is an agreement with a Group Purchasing Organization (GPO) that represents multiple customers.
The manufacturer sends the pricing contract information to wholesalers that carry its products. The contract is sent via EDI 845, email or fax. Contracted products are identified by NDC number. Eligible customers may be listed explicitly by DEA or HIN number, or the contract may just indicate that some customer group is eligible (for example, a GPO’s customer membership or a particular class of trade).
When an eligible end-customer purchases a contracted product, the wholesaler invoices the customer at the contract price. Contract prices are generally below the Wholesale Acquisition Cost, or "WAC" (the standard price that a wholesaler pays to purchase a product from the manufacturer). This means that the wholesaler is often in a position where it must sell product below at a price below its own acquisition cost.
To make the wholesaler "whole" again a chargeback request is submitted to the manufacturer. The chargeback request is a request for a credit of the difference between WAC and contract price. For example: if WAC for a product is $100 and the contract price is $90, the wholesaler will sell the product to an eligible end customer for $90 – but it will also submit a chargeback request to the manufacturer for the $10 difference between WAC and contract price. The wholesaler’s profit margin is derived from marking up the contract price, or other means (such as collecting a cash discount from the manufacturer).
The chargeback request is sent via EDI 844 or EDI 867, email, or fax. The request includes detailed information about one or more sales to end customers (called the "line items" of the chargeback). This information includes: the sale date, customer identifier such as DEA or HIN number, the product NDC code, and pricing information such as quantity, WAC price, contract price, and requested chargeback amount.
The manufacturer validates the chargeback request against its own contract pricing system. If the request is approved, the manufacturer issues a credit to the wholesaler, or, if the chargeback is determined to be invalid, it may be partially paid or not paid at all.
The manufacturer then sends the wholesaler a chargeback response via EDI 849, email or fax. The response lists the payment amount for each chargeback line item. If a line item was rejected or partially paid, the response also lists rejection reasons explaining why it was not accepted.