After legislation passed in 1990 requiring pharmaceutical companies to give rebates to state and federal governments for pharmaceuticals purchased for Medicaid patients, Bob Shah had an idea.

Shah, president of Data Niche Associates, Inc. (DNA), a Libertyville, Ill., research firm specializing in data for the pharmaceutical industry, knew that there were problems with the rebate process. One of the biggest was the fact that the information states supplied to pharmaceutical companies was often vague.

For example, each quarter a state Medicaid program sends a "bill" to Drug Company X stating that over the past three months it has reimbursed pharmacists for 1,000 units of its Product A and 500 units of its Product B. Based on that consumption it asks for a rebate.

The problem, Shah says, is that the states don't provide a detailed breakdown. "It's like the phone company sending you a bill for $500 of long-distance without showing you a list of the calls. All they say is, 'According to our records, these are the figures.' And the pharmaceutical companies look at their internal sales documents and those from their wholesalers or other audits that they have to make a comparison and they find that there are errors on both sides. Many times the state information is inaccurate." 

Prescribing habits

So the staff of DNA worked for two years to develop a system that processes Medicaid prescription records from 20 states to provide clients data on the prescribing habits of physicians and pharmacies serving Medicaid patients. This information gives the pharmaceutical companies another source to consult when examining rebate claims.

"We get the transaction data and we can break it out at the pharmacy level so that the pharmaceutical companies can look at consumption of their own products at the pharmacy level and at the trend within that pharmacy over a four-quarter period to see if it compares with their internal record," Shah says.

"We saw that the private enterprise system wasn't really functioning in the area of Medicaid. In the rest of the marketplace the pharmaceutical industry has done the target marketing. They know who the physicians are in private practice and what their prescribing patterns are. But the Medicaid market was kind of left alone. There was the feeling that it was for poor people and inner-city people. And because they can only afford cheaper generic products you couldn't do much in the way of marketing."

Largest customers

That used to be the case, Shah says but the passage of the Pharmaceutical Prudent Purchasing Act legislation in 1990 changed things. "Medicaid is a $5 billion chunk of business. The federal and state governments are the largest customers of the pharmaceutical industry. So the government said that if the pharmaceutical industry is giving rebates to other customers, why not to the state and federal government? In turn, the pharmaceutical companies said, we will provide you with the rebates you're asking for, but you should open up your formularies to all the products. Why should the Medicaid people be deprived of the good products that are available?

"So that meant that instead of a restricted market with cheaper generic products, the Medicaid market is now like any other. You have the whole gamut of products available. That changed the market dynamics. Before, the pharmaceutical companies weren't really calling on the physicians that provide health care to the Medicaid population. Now there is the need to identify who they are, what their needs are what be able to tell them about the company's products that are now available on the formularies."

States aren't equipped

In general, the states acknowledge that they aren't equipped to provide detailed information on their rebate claims. They don't have the resources to deal with 400 manufacturers and give them printouts of product usage. "An intermediary like ourselves can do that more efficiently and economically," Shah says.
It's been an exercise in patience dealing with the state bureaucracies, which are slow to change and which were initially resistant to the system because it serves as a kind of watchdog, Shah says. "But as we explained to them, they have to provide this information. In addition, I've heard figures that almost one-fifth of the claims were in dispute. There are several pharmaceutical companies saying that if the states' claims don't come close to what they know to be true they're not going to pay. The only way to solve those issues is to have some information at the pharmacy level."


Along with helping the reimbursement process, the information can also aid pharmaceutical companies in their marketing efforts, Shah says. "Most micro-marketing or target-marketing efforts are dependent on projected data. In our situation, we have complete information on all Medicaid transactions which we can segregate to activity for high prescribers. When a client company takes a look at our information by therapeutic category, they have the physician's name, address, specialty and exactly what he prescribed in the past 12 months, how many, what products, the dollar amount reimbursed. A client can ask, is that physician a prescriber of my brand or a competitor? If he's a big prescriber of a competitive brand you can plan your sales presentation to point out the strengths of your brand."

No data on usage patterns

Shah says the idea for the system took hold after he attended a meeting of Medicaid pharmacy administrators. "I asked them if they had looked at drug usage patterns among Medicaid users as to what products are more prevalent in the Medicaid population. And they said, 'We don't have that kind of information. We don't have the resources for that.'

"The demographics of the people who receive Medicaid benefits are different from the rest of the population. Their medical and pharmaceutical needs are different. And when I discovered that this kind of information really wasn't available, the idea for the system became clearer.

"The other audit services are set up on a national sample on the assumption that the market is homogeneous. Medicaid actually occurs in pockets in the inner cities and around nursing homes and we felt that it wasn't adequately represented in other information that exists in the marketplace."