When it clicked and I really understood — Why blockchain?

Mike Hill
September 8, 2020
Blog Articles
June 23, 2023
June 23, 2023
This post won a Logistics Brief MVP Award for one of the Most Valuable Posts of 2020

When I joined Chronicled in January 2020 to lead Marketing, I knew enough about blockchain to be excited about its potential. In Life Sciences alone I knew about many use cases for blockchain being explored, but as I dove deeper, I often found unsatisfactory answers to the question: Why blockchain?

I spent a lot of time understanding the answer to this question for Chronicled’s chosen use case, pharmaceutical chargebacks. This post explains the moment when it finally clicked for me and I truly understood why blockchain is so disruptive for contracting and chargebacks in the pharmaceutical industry.

Chronicled background: Chronicled’s core product, the Contracts & Chargebacks solution built on the blockchain-enabled MediLedger Network, eliminates chargeback disputes that cost the pharmaceutical industry billions of dollars every year.

Chargebacks background: In the pharmaceutical industry, drug dispensers (Hospitals, pharmacies, clinics, etc..) negotiate pricing contracts with manufacturers either directly or through Group Purchasing Organizations (GPOs). Distributors then sell drugs to these dispensers at the negotiated prices. The negotiated price ($60 for example) is usually lower than the distributor’s purchase price (Wholesale Acquisition Cost, $100 for example), and so the distributor submits a chargeback claim ($100 — $60 = $40 for example) to the manufacturer to make up the difference.

The chargebacks process in the pharmaceutical industry

Today, roughly 5% of chargebacks in the industry are disputed which results in manual processing costs, cash flow delays, revenue leakage, and customer service issues that nobody wants.

In our Contracts & Chargebacks solution, blockchain plays a specific role to enforce rules on chargebacks that guarantee accuracy and eliminate disputes. In our solution, there are several other crucial components and technologies, but I will only focus on the blockchain component here.

So back to the core question: “Why blockchain?” I’ll start with what happens today.

Today, contract updates and chargebacks are sent via an EDI (Electronic Data Interchange) message. Manufacturers send contract updates through EDI 845 so that distributors know what price to offer which customers and Distributors send chargebacks through EDI 844 back to manufacturers based on the contract terms. EDI communication is done in batches with rough standards in place for how the data should be prepared. Batch processing means there is always a slight delay and there is nothing to prevent companies from sending updates with slightly different formats, missing information, and errors. These errors lead to errors and disputes, which collectively cost the pharmaceutical industry $10–20 Billion per year in manual effort, revenue leakage, and working capital costs when cash flow is tied up. In summary, the primary problem with EDI is the lack of any ability to enforce rules.

The only other alternatives to EDI for rule enforcement would be a “middle-person” or a court of law. A “middle-person,” or central database, would require everyone in the industry to send everything to a single party who maintains the database, permissions, and rule enforcement. It has never been done because it gives too much control and places too much trust in a single company. The other option for rule enforcement, a court of law, is simply cost-prohibitive for resolving the vast majority of small disputes between trading partners.

Now the simple answer to the question, “Why blockchain?”, is that blockchain automates this business rule enforcement.

In the Contracts & Chargebacks solution on the MediLedger Network, each participant runs software called a “node.” A manufacturer and distributor’s node each have an exact copy of all pricing contracts between them and an exact copy of the blockchain. When a manufacturer updates a price or adds a customer to a contract, that update is only sent to trading partners if the blockchain network accepts the update. This acceptance depends on a majority of the nodes in the network agreeing the update meets established business rules for validity and accuracy. This guarantees that all trading partners have the same valid copy of the contract.

Since blockchain ensures all trading partners have the exact same contract terms at any given time, chargeback accuracy, which depends on contract terms, can also be enforced by the blockchain. Accurate chargebacks mean no more disputes!

Every participant has a copy of the blockchain (the data), and the rules coded into each node. Each participant’s node independently checks updates against that node’s copy of the rules. No single company can change the rules or accept an invalid update because a majority of the network’s nodes have to agree for the blockchain to accept the update.

When I joined Chronicled, it finally clicked for me with this analogy: Blockchain is like an automated court system for “enforcing agreements” between parties. If another company is not following established rules or contract terms, filing a lawsuit is generally the only real method of enforcement. However, the vast majority of disputes between companies are not worth enforcing through legal proceedings and are therefore worked out bilaterally. When companies have to manually deal with errors, delays, and disputes all of these costs are almost as bad as going to court!

Blockchain eliminates this manual effort and prevents the need to ever ask the question “who was really at fault?” With tight contract execution, huge amounts of revenue leakage are reduced and trust is maximized. Trust can speed up cash flows once unpredictable disputes no longer occur and financial approvals no longer need double-checking.

There are many other use cases we plan to tackle at Chronicled, but the chargebacks process is our focus today because companies need an onramp. We see the Contracts & Chargebacks solution as that onramp; a place to start with immediate ROI that makes it easy to get onto the highway with trading partners so everybody can start moving faster together.

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