The following is a guest post from Heidi Skatrud, senior vice president of operations and product management at Runzheimer.
Margin pressure is an everyday challenge for the pharmaceutical industry. Faced with unique competitive and regulatory challenges, pharmaceutical business leaders need inventive ways to overcome these hurdles without forgoing their bottom lines.
Supply chain costs continue to rise and represent nearly 45% of hospital or healthcare systems operating expenses, according to Gartner research. Organizations throughout the healthcare supply chain are searching for ways to reduce costs and bring them under control.
Given these expensive obstacles, pharmaceutical executives are searching for ways to rein in costs. A smart, and less obvious, place to look is their business vehicle program.
A look at the industry’s business vehicle usage
Business vehicle reimbursements and other driving expenses are a constant cost for pharmaceutical organizations. However, these expenses are controllable.
According to Runzheimer data, Fortune 500 pharmaceutical companies reimburse sales employees an average of $630 per month for driving 1,300 miles. This equates to more than 20% higher than the average amount spent by Fortune 500 employers on individual driver reimbursements.
Supply chain costs continue to rise and represent nearly 45% of hospital or healthcare systems operating expenses
Heidi Skatrud
SVP of Operations and Product Management, Runzheimer
Aside from spending sizeable amounts monthly on driver reimbursement, large pharmaceutical employers are some of the few left to offer company cars as an employee benefit. Though a fleet of business vehicles can be a sensible option for sales teams, they inevitably expose organizations to unwanted risk and expense. Employers also must not only contend with liability costs from fleet vehicle accidents, but manufacturer risks as well, such as model recalls that necessitate expensive repairs or replacements.
Looking ahead, it’s unlikely company cars may will remain a valuable employee benefit. After all, Millennials are less likely than Gen X and Baby Boomers to ask for an employer-provided vehicle, which calls into question the practicality of fleet investments going forward.
Getting a hold on drivers’ mileage
Creating a business vehicle program that is optimized to a pharmaceutical organizations’ exclusive driving needs and challenges is a valuable way to reduce administrative costs. To start, finance and operations leaders need to evaluate the current alternatives: providing a company car or a reimbursement program.
Company provided vehicles ensure employees are driving a vehicle consistent with the company’s image. But with fleets, organizations need to navigate the challenge of determining personal use charges, which are often set low and with little data to defend them.
Implementing mileage tracking automation can more accurately measure business use of the vehicle. This technology can enable accurate calculation for personal use cost, ensure that IRS requirements are met and that employees are paying their fair share for the vehicle. The downside to company-provided vehicles is that organizations are at risk 24 hours a day, seven days a week.
By rethinking current mileage reimbursement policies, pharmaceutical organizations can devote their most valuable resources to protecting and enhancing the bottom-line.
Heidi Skatrud
SVP of Operations and Product Management, Runzheimer
Unlike managing company-provided vehicles, direct reimbursement programs shift a majority of vehicle liability from the employer to the employee. Below are three common approaches for reimbursement programs:
Flat allowances
Through a flat allowance reimbursement model, employees who drive personal vehicles for work receive a flat fee to cover all related vehicle expenses. Allowance programs are one of the most straightforward to manage, and they can be treated as taxable bonus income.
However, allowance programs’ simplicity doesn’t provide the most accurate reimbursement. Some employees may be over-compensated while others are short changed, since allowances are not scaled to an employees’ specific region, average mileage or vehicle costs. And because allowances are subject to FICA and local payroll taxes, employers often inflate the amount to make up the difference.
Cents-per-mile (CPM) reimbursements
Reimbursing drivers by the IRS Safe Harbor rate (or a custom rate) is one of the most widely used business vehicle program approaches. CPM programs are a good option for organizations with drivers who don’t meet the IRS definition of “business driving,” that is driving 5,000 miles or more per year for work.
The IRS rate tends to overcompensate road warriors. However, organizations can save money using a CPM program by implementing mileage log automation, which can minimize time spent by employees tracking and recording miles and improve the accuracy of mileage logs. Businesses with this type of automation in place typically see 10 to 30% reductions in mileage reimbursements.
The IRS requires employers and employees to keep accurate, thorough documentation of every trip’s start and end points, travel duration and purpose for travel. Implementing mileage capture technology can automate most of this recordkeeping, rather than creating additional administrative headaches for drivers. This technology also offers business vehicle program leaders actionable insight into their teams’ driving habits. The data can be used to optimize sales territories or detect additional areas for cost savings.
Fixed and variable rate reimbursement (FAVR)
For pharmaceutical companies with employees in varying regions driving 5,000 or more miles annually, FAVR programs offer some of the fairest, most accurate and defensible vehicle payments.
Employers simply select one (or a few) vehicle models to base the program and reimbursements around. Employees with personal vehicles that meet these requirements qualify to receive both a monthly fixed payment (which covers insurance, taxes and depreciation) and a variable amount scaled to their specific location (to compensate for gas and maintenance costs). Aside from being tax-free and enabling employees to choose their own vehicle, FAVR programs mitigate the risk of over- or under-reimbursing any employee, helping organizations save as much as $3,000 per driver.
Plenty of obstacles lie ahead for pharmaceutical business leaders, from rising supply chain and distribution costs to potential regulatory shifts under a new federal administration, but business vehicle programs don’t have to be one of them. By rethinking current mileage reimbursement policies, pharmaceutical organizations can devote their most valuable resources to protecting and enhancing the bottom-line.
During her more than 20 years at Runzheimer, Heidi Skatrud has earned a reputation as an active problem solver and strategist. Heidi has led HR, strategic alliances, product development, and currently leads the operations and product management teams. She has become an expert on workplace mobility, representing Runzheimer at industry events.
