Business vehicle reimbursements and other driving expenses represent a constant, but controllable, cost
Margin pressure is nothing new for the pharmaceutical industry. But faced with a fresh crop of competitive and regulatory challenges, pharmaceutical business leaders need creative ways to overcome these hurdles without sacrificing their bottom lines.
Patent cliffs remain an imminent threat to pharma revenue: in 2015, patent expiration milestones led to a $14.2 billion reduction in brand spending. A portfolio of products with a combined pre-expiration value of more than $56 billion was subject to a patent cliff this year alone. At the same time, dramatic price hikes around products like Mylan’s EpiPen have triggered backlash from patients, insurers and employers – all calling for stronger price moderation among drug manufacturers. Today, more brands are wrestling with price pressures targeted around specific treatment categories including insulin, TNF inhibitors and biopharmaceuticals.
Given these acute obstacles, pharmaceutical executives are on the hook to find new opportunities to rein in costs. A smart, although not always obvious place to look, is their business vehicle program.
Diagnosing the Pharma Industry’s Business Vehicle Status Quo
Business vehicle reimbursements and other driving expenses represent a constant, but controllable, cost for pharmaceutical organizations.
Today, Fortune 500 pharmaceutical companies reimburse sales employees an average of $630 per month for driving 1,300 miles, according to Runzheimer data. This is more than 20 percent higher than the average amount all Fortune 500 employers spend on monthly per-driver reimbursements.
Aside from spending thousands each month on driver reimbursement, large pharmaceutical employers are some of the few to still offer company cars as an employee perk. Though a fleet of business vehicles can be a sensible option for sales teams (not to mention a way to enhance compensation packages), they inevitably expose organizations to unwanted risk and expense. Liability costs from fleet vehicle accidents quickly add up, and are far beyond any vehicle program manager’s control. Employers also have to contend with manufacturer risks, such as model recalls that necessitate expensive repairs or replacements.
Looking ahead, company cars may not sustain their status as a valuable employee benefit either. Seventy-one percent of HR managers say Millennials are less likely than Gen X and Baby Boomers to ask for an employer-provided vehicle – calling into question the efficacy of fleet investments going forward.
Getting a Grip on Runaway Mileage
Creating a business vehicle program that is optimized to a pharmaceutical organizations’ unique driving needs is a valuable way to reduce administrative expenses – helping eliminate wasteful spending and protect profitability. To start, finance and operations leaders need to weigh the available alternatives: providing a company car or a reimbursement program.
- Company-provided vehicles: fleet programs can ensure employees are driving a vehicle consistent with the company’s image. Some of the best savings opportunities come in the area of determining personal use charges, which are often set low and with little data to defend them. Implementing mileage tracking automation to more accurately measure business use of the vehicle, enabling calculation of a true personal use cost, ensures that IRS requirements are met and that employees are paying their fair share for the vehicle. The downside to company-provided vehicles is that such programs expose an organization to risk 24 hours a day, seven days a week.
- Unlike managing company-provided vehicles, direct reimbursement programs shift most vehicle liability risk from the employer to the employee. Reimbursement approaches come in three flavors:
- Flat allowances: Allowance programs are one of the most straightforward to manage – employees who drive personal vehicles for work receive a flat fee to cover all related vehicle expenses. Just as fleet vehicles are positioned as perks, allowances can be treated as taxable bonus income. Allowance programs’ simplicity, however, comes at a certain price. Some employees may be over-compensated while others are short changed, since allowances aren’t scaled to any particular employees’ region, average mileage or vehicle costs. And because allowances are subject to FICA and local payroll taxes, employers typically inflate the amount to make up the difference.
- Cents-per-mile (CPM) reimbursements: Reimbursing drivers according to the IRS Safe Harbor rate (or a custom rate) is one of the most widely used business vehicle program approaches. CPM programs are a sensible option for employers with drivers who don’t meet the IRS definition of “business driving” (i.e., logging 5,000 miles per year for work). This rate tends to overcompensate road warriors.CPM savings opportunities can come in the form of mileage log automation, which can minimize time spent by employees and greatly improve accuracy. Organizations that have adopted such automation typically realize 10% – 30% reductions in mileage reimbursements. The IRS requires employers and employees to keep accurate, thorough documentation of every trip’s start and end points, duration and reason for travel. Implementing mileage capture technology can automate most of this recordkeeping, rather than creating an administrative nightmare for drivers. These tools also give operations leaders actionable insight into their teams’ driving habits – data that can be used to optimize sales territories or detect additional areas for cost savings.
- Fixed and variable rate reimbursement (FAVR): Especially for pharmaceutical companies with employees dispersed across different regions driving 5,000 or more miles per year, 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 one employee, helping organizations save as much as $3,000 per driver. Automating mileage log recordkeeping brings additional savings.
Plenty of obstacles lie ahead for pharmaceutical business leaders, from continued patent cliffs to potential regulatory shifts under a new federal administration, but business vehicle programs don’t have to be one of them. By rethinking their current mileage reimbursement policy, pharmaceutical organizations can devote more of their most valuable resources – employees’ time and internal budgets – to protecting and enhancing the bottom-line.
Heidi Skatrud is senior vice president of operations and product management at Runzheimer. During her more than 20 years at Runzheimer, Heidi 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.