Aggregation –> Chargeback Accuracy –> ROI

Last week I attended my favorite annual conference on pharma serialization and tracing in the U.S.:  The Healthcare Distribution Management Association’s (HDMA) Traceability Seminar.  They call it a “seminar” because the subject of the sessions are generally the same every year, but it is better than any other third-party conference, primarily because the right people attend it:  lots of people from drug manufacturers, wholesale distributors and some dispensers.  With this ideal spectrum of attendees, it is very easy to get your questions answered, in the hallway between sessions if not in the sessions themselves.

Of course, every year the folks from the FDA who are directly responsible for writing regulations related to the Drug Supply Chain Security Act (DSCSA) provide an update and “answer” questions from the audience.  I put the word “answer” in quotes because they really cannot provide the kind of answers that everyone would like to hear, but they do a respectable job regurgitating the language of the DSCSA instead.  I understand the situation they are in and I am happy that they are willing to stand in front of such an audience when they know they cannot share the kind of details that everyone wants to know.  They can only “speak” in official guidances, and they should have several new guidance documents going through the internal approval process right now.  We should see them in the next few months, but they cannot give out information that will be contained in those documents until they are approved and available to everyone.  Watch RxTrace for notice and analysis of those guidances once they are published.

I always look forward to the sessions when the various wholesale distributors present their current thinking about how the industry should meet different aspects of the law.  I like to keep an open mind, but I also try to read between the lines by applying what I know about the internal workings of a large wholesale distributor.

This year the wholesaler session on data exchange caused me to change my mind about what manufacturers should do about wholesaler demands for aggregation data.  Regular readers know that aggregation data is not a legal requirement until perhaps 2023, and may not even be required at that time (see “When Will The DSCSA Ever Require Investments In Aggregation?”).  However, I have also been recommending that manufacturers would benefit from making investments that allow them to capture and retain aggregation data for themselves (see “The Aggregation Hoax and PIA”).  After I heard the wholesale distributor’s current argument in favor of manufacturers providing them with aggregation data, starting by November of 2017, I changed my mind and now agree with them, but with one important caveat.

They “got” me with their discussion of the difficulty with handling the 2% of their shipments that are returned as “saleable” product.  That is, drugs that are perfectly resellable and can be put back into stock and sold to someone else.  According to the Center for Healthcare Supply Chain Research/2014-2015 HDMA Factbook, 94% of product returned to wholesale distributors was reported as saleable.

Wholesale distributors cannot afford to figure out which manufacturer made the product, and then request verification of that drug from that manufacturer the way I proposed in “Wholesaler Confusion Over DSCSA Aggregation Explained”.  This would take too much time considering the DSCSA gives the manufacturer 24 hours to respond to those requests.  The DSCSA requires wholesale distributors to verify that the drug manufacturer assigned the serialized product identifier found on the returned package or homogeneous case, starting on November 27, 2019.

The alternate way is for all drug manufacturers to provide the wholesale distributor with aggregation data for all shipments.  That way, when saleable returns are received by the wholesale distributor, they can simply do a look up to confirm that the manufacturer assigned that serialized product identifier without making a request outside their own network.


Drug manufacturers are increasingly looking for some type of return on their investments (ROI) in serializing all drugs—something they must do in the U.S. by November 27, 2017 as the result of the DSCSA.  In my view, gaining a positive ROI may not be possible, but offsetting some of the costs is certainly possible.  The only problem is, extracting value from serialization beyond compliance will require the involvement of multiple departments within an organization in ways that may not be typical today.  That is, the packaging, supply chain, contracts, marketing and regulatory compliance groups will need to work closely under a single plan, and corporate objectives must be adjusted, or these things are not likely to be successful.  Most companies have silos that are pretty strong, and they will get in the way of the kind of changes that will be necessary to extract value beyond compliance.

But this insistence by the wholesale distributors that drug manufacturers provide them with aggregation data from the start represents one way that drug makers can capture some value beyond compliance.  Some companies will be able to capture more than others, as I will explain below.


Chargebacks are one of the many complications of the U.S. pharma supply chain.  Here is how they work.  Hospitals and other drug buying organizations band together into Group Purchasing Organizations (GPOs).  The primary purpose of a GPO is to negotiate a lower price for certain pharmaceuticals from the drug manufacturers on behalf of their members.  Once established through a contract between a given GPO and a given manufacturer, the various wholesale distributors are notified of the terms, including the negotiated price for each NDC.

But because the wholesale distributors don’t know which unit will be sold to which hospital or pharmacy, or under which contract, when they buy from the drug manufacturer, their purchases are priced at a single, “average”, non-contract price.  Then, whenever drugs that are the subject of one of these contracts are sold by the wholesale distributor to one of the GPO-member hospitals or pharmacies, the customer only pays the wholesale distributor the (lower) negotiated price.  This leaves the wholesale distributor with a loss, which they then submit as a “chargeback claim” with the drug manufacturer for reimbursement, providing the details of the customer, the contract and the product.  Once paid, everyone gets what they expected under the contract.  It is intended to result in a zero-sum equation between the manufacturer and the wholesale distributor.

So you can see that wholesale distributors are not a party to the signing of these contracts, but they are an integral part of the implementation of them.

Not all drugs are candidates for the chargeback process.  According to Dr. Adam Fein of The Drug Channels Institute, the type of drugs that are most commonly the subject of GPO contracts and therefore chargebacks are what he termed as “less differentiated brand products”.  Some drug companies have lots of products that are involved in GPO contracts/chargebacks and others have no products in that category.  According to Dr. Fein’s “2015-2016 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors”, wholesaler chargebacks were 20.3% of net sales in 2013, growing from only 15.2% in 2009.  Clearly, the importance of chargebacks is on the rise.  This is partly due to the growth of hospital purchases that fall under the 340B drug program, as Dr. Fein notes in the same report.


But you cannot complete a proper explanation of chargebacks without also explaining “reverse chargebacks”.  This is usually where people’s eyes glaze over and they just start nodding, but this is where the magic happens and where the knot is that will tie all of these loose strings together.  So pay attention.

A “reverse chargeback” is paid by the wholesale distributor to the drug manufacturer whenever a drug for which an earlier chargeback claim was filed and paid, is returned to the wholesale distributor.  Get it?  This is money that the drug manufacturer receives in order to keep the chargeback mechanism a zero-sum equation, as it is intended.  It is up to the wholesale distributor to recognize whenever a drug is returned to them for which a reverse chargeback payment is consequently owed to the manufacturer.

The problem is, before serialization, it is pretty hard to figure that out in all instances.  Contracts change.  Drugs sit on shelves for a while before they are returned.  Dispensers receive the same product lot from multiple sources and in multiple shipments.  Drugs are exchanged between pharmacies and may be returned from a different address than they were originally shipped.  Sometimes it is Monday.  There are all kinds of things that can lead to inaccuracies in the payment of reverse chargebacks.  But the unfortunate thing about these inaccuracies is that they always result in a loss for the manufacturer.  Nick Basta wrote a highly readable article in Pharmaceutical Commerce magazine back in 2010 about an estimate by IDC Health Insights that these losses amount to $11 billion per year (also see this).

But with the advent of the unit-level serialization in late 2017, it will be possible to eliminate these errors and shift that estimated $11 billion from the wholesale distributors back to its rightful owners, the drug manufacturers who participate in contracts with GPOs using the chargeback mechanism.


To get your part of that estimated $11 billion, all you need to do is negotiate with your wholesale distributors.  Since they need your aggregation data to help make their processing of returns more efficient, you should give it to them.  But in exchange, you must insist that they include serial numbers in their chargeback claims, and then provide you with the serial numbers of all of your drugs that they receive from their customers as returns.  That way you can confirm that they are properly using that information to eliminate those errors in the chargeback and reverse chargeback process.  This will not slow down their returns handling processes because the data transmission is not time-critical, as long as it gets back to you eventually.  The cost to implement and operate such a solution for the wholesale distributor is a very tiny fraction of the costs to implement and operate the collection of aggregation data for drug manufacturers, especially when considering how many manufacturers there are.  So your cost of collecting the aggregation data for the wholesale distributors will be repaid over time by the elimination of these errors.  There is your ROI, and you don’t need to wait until 2023 to start getting it!

Don’t think this will work?  Leave a comment below and explain why not.


3 thoughts on “Aggregation –> Chargeback Accuracy –> ROI”

  1. Agree with the near-term role of serialization for accounting for chargebacks. As discussed, serialization is also important for pharma to provide service beyond the script for high cost specialty pharma. Believe both will drive adoption sooner that required by regulation. Off to Vienna next month for a Parenteral Drug Association on smart delivery systems.

  2. Dirk,

    I’m glad the conference (seminar) was beneficial, data always goes a long way over emotion, and I agree… we need to look at this as a supply chain entity…. cost to one body needs to be offset by benefits, or drug prices will go up.

    I believe what the one gentleman presented will provide the opportunity to actually vet out these discussions with facts, and arrive at an industry compromise as the best solution.

    Crazy to think that some of us kinda overlook 2019…. but that number presented was pretty impactful.

  3. Dirk,
    Happy to see you are willing to change your position. There are other ways that wholesale operations can be streamlined through the use of manufacturer provided aggregation data. As far as chargebacks are concerned, I think you have to agree that it is a pretty convoluted process, and would not exist in its current form if the manufacturers had had a way of administering and implementing contracts at the time the process was conceived. But today is different and 2017 will be different still. We need to re-look at that process and see if it still makes sense, and if not, change it. There are a whole lot of costs that can be wrung out of the supply chain, and you are right that these need to be equitably distributed across all the supply chain participants so one player does not suffer unnecessarily. And the savings will need to find their way to the patient as well. There is, and will continue to be, enormous pressure to reduce the costs of healthcare, while improving outcomes. Its going to take a lot of work between manufacturers, wholesalers, hospitals payers and others to re-engineer the process and increase the value proposition.

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