Pharmaceutical companies deal with a number of players along the supply chain. Drugs are manufactured by a businesses, sold to wholesalers, potentially purchased by buying groups and finally bought by consumers. Because such drugs often fall under insurance and medical assistance programs, insurers and government agencies are also often involved in payment. With so many parties involved, transactions are not a sure thing for pharmaceutical companies, which leads to a chargeback.
Why Chargebacks Happen
A pharmaceutical chargeback can occur in two similar situations. In the first situation, a wholesaler buys drugs from the pharmaceutical company according to a contract price, and sells them to consumers according to another contract price. When the consumer contract price is lower than the pharmaceutical version, the wholesaler avoids losses by charging the pharmaceutical company for the difference. In the second case, the chargeback is the result of a failed transaction in which the entire payment must be returned to the consumer.
Chargebacks always result in a loss of some kind for the pharmaceutical company. While the companies try to minimize chargebacks through accurate supply chain contracts, some chargebacks are necessary to make room for mistakes and differences in purchasing prices. Drug manufacturers may deal with thousands of contracts per year, each with a chargeback clause.
Chargebacks are typically based on approval by the pharmaceutical company when a wholesaler submits the request. This can become complex, since most chargeback submissions do not include information on the sale that created the chargeback, only the amount. This leaves room for duplicate chargebacks and unauthorized submissions, among a variety of other problems. To minimize the issues, pharmaceuticals attempt to link chargebacks directly to individual sales, giving wholesalers something to link back to.
To avoid the financial losses and administrative work required to handle chargebacks, companies can take measures to prevent them in the first place. One way is to ensure that wholesalers provide the correct price that consumers will pay so that the pharmaceutical company is not later charged a difference in contract prices. Another way is to monitor orders for failed transactions to ensure that all the order information is complete, the order itself is valid and payment is successful.
Because chargebacks are such a vital part of the pharmaceutical business, specialization is common. Furthermore, the process of managing chargebacks can be complex. To assist with the process, companies have dedicated software to deal with chargebacks while interfacing them with sales software. Many companies also create positions dedicated to managing chargebacks and negotiating chargebacks in contracts.