DIR Reform: what you need to know

By Bhavesh Desai, PharmD, J.D.

DIR fees have been a focus of debate since their implementation and for the past decade, they have been increasingly scrutinized in congress as well as at the state level. The companies (Pharmacy Benefit Manager – PBMs) responsible for reporting true and accurate drug prices to the CMS have used loopholes in legislation to their advantage. A select few PBMs control a vast majority of the prescription volume in our country and they operate with minimal oversight. This coupled with vertical integration has allowed them to grow their sphere of influence and use DIR fees to clawback monies from pharmacies through retroactive fees.

Many pharmacy and patient advocacy groups have spoken out against the obscure methods employed by PBMs to increase their profits. These groups have advocated for the fees to be applied at the time a patient picks up the medication at the pharmacy rather than subjecting pharmacies to these fees months later. CMS finally mandated that PBMs implement the DIR fees at the point of sale starting January 1, 2024. While this is a win for patients, pharmacies and CMS, recent reports indicate that PBMs have increased the fees against the pharmacies and have placed pharmacies in precarious position as they strive to care for the public. Now more than ever, advocacy groups need to highlight the detrimental effect these PBM policies are having on their ability to provide the services necessary to manage the health conditions of the population.

What are DIR fees?

DIR stands for Direct and Indirect Remuneration. DIR fees were implemented with the creation of the Part D program through the passage of the Medicare Modernization Act of 2003. Congress intended the DIR fees to encompass Medicare Part D sponsors and their Pharmacy Benefit Managers (PBMs) to include the true costs of drugs to determine the net amount paid by CMS and the Medicare beneficiaries. When a pharmacy processes a prescription for a Medicare beneficiary, the out-of-pocket cost paid by the beneficiary and the reimbursement amount shown in the claim detail is generally not the actual cost of the drug paid by the Pharmacy Benefits Managers (PBMs). The true cost of the drug is determined by factoring in manufacturer rebates, any subsidies, or any price concessions from any manufacturers, pharmacies, or any other person (42 C.F.R § 423.308).

How are DIR fees determined?

Due to lack of CMS guidance on how DIR fees are to be determined and lack of any other oversight, individual PBMs have implemented their own DIR fee designs, resulting in no standardized method of determining DIR fees. Each PBM has a different methodology in determining the DIR fees collected from the pharmacy. Instead of calling DIR fees, the PBMs generally call them “performance fee”. Some PBMs charge DIR fees to pharmacies based on a percentage of the drug ingredient cost, while others charge based on a percentage of average wholesale price, whereas some charge a flat fee per prescription. Other criteria utilized by PBMs include medication adherence rates, generic compliance ratios, generic effective rate, and medication therapy management implementation. These are the different “performance” matrix used by PBMs to determine DIR fees.

Why are DIR fees controversial and what is their impact on Pharmacies, Patients and CMS?

There are several issues related to DIR fees and their application to pharmacies. PBMs opaque and vague tactics to determine how DIR fees are calculated, and these “fees” are assessed months after the prescription has been dispensed to the patient. Because the fees are assessed against the pharmacies months after the prescription is dispensed, they are termed “clawback” fees.

Despite the retroactive nature of these fees, the Pharmaceutical Care Management Association (PCMA) notes that Pharmacy DIR is NOT a retrospective “fee” associated to pharmacies. They further note that Pharmacy DIR is NOT a clawback of payment to pharmacies.¹ it is helpful to keep all perspectives in mind irrespective of how divergent the view is to what pharmacy groups have been advocating for years.

Another concern related to the DIR fees is when these fees are assessed against the pharmacy, the PBMs generally do not include claim level details and hence the pharmacies are unable to reconcile claims with any degree of certainty. This lack of transparency interferes with the pharmacy’s ability to make operational decisions. Given the lack of details provided by PBMs, the pharmacies are unable to predict the fees they are to likely incur, and many times results in negative reimbursements for drugs previously dispensed. What compounds these issues further is the fact that PBMs are not required to define or explain how the fees are levied against the pharmacies or to CMS.

The intent behind CMS implementing the DIR fees was simply to account for the true cost of drug paid to the Part D sponsor. Unfortunately, the PBMs have used DIR fees as a means to enrich themselves. While there is lack of most current available data, DIR fees have increased by double digits year over year.² As of 2018, DIR fees have increased to over six percent of the overall Medicare drug sales. ³

While the PBMs benefited from the manufacturer rebates and other fees that they collected, those savings were never passed down to the Medicare beneficiaries. This resulted in the beneficiaries sharing a higher out-of-pocket burden as a result of the retroactive DIR fee structure in place up until January 1, 2024. It wasn’t just the Medicare beneficiaries who were subjected to higher cost, CMS also was saddled with higher costs. There are three coverage phases in a Medicare recipient’s drug design. The initial coverage phase where the beneficiary generally pays a deductible and a co-pay for the drugs they received. During the coverage gap phase, the beneficiary generally pays a significantly higher out-of-pocket cost. In the catastrophic phase, Medicare pays 80% of drug costs while the PBMs cover 15% of the cost. With DIR fees being applied on a retroactive basis, the Medicare beneficiaries enter the catastrophic phase earlier and thus require Medicare to subsidize the higher drug costs.

Given the negative impact on Medicare beneficiaries, Medicare and the pharmacies, CMS along with many patient and pharmacy groups for years have advocated a change in how DIR fees were calculated and collected. On April 29, 2022, the Centers for Medicare & Medicaid Services (CMS) issued the highly-anticipated Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs Final Rule (“Final Rule”). This rule went into effect on January 1, 2024.⁵

What is the new CMS final rule and how will it impact pharmacies?

The final rule will prohibit Medicare Part D plan sponsors and their PBMs from retroactively assessing DIR fees for prescriptions adjudicated under the Part D benefit. By removing the retroactive nature of fee assessment, this rule eliminates the “clawback” and improves the predictability of pharmacy cash flow. This rule neither eliminates the DIR fees nor does it remove the loopholes which the PBMs use to their advantage.

The pharmacies will be subject to a double whammy for the first six months of 2024. While the elimination of retroactive fees is a welcome change, there are many PBMs who have not assessed DIR fees from June 2023 through December 2023. These will now be collected through June 2024 along with point-of-sale DIR fees for claims adjudicated beginning January 1, 2024. As previously noted, these fees represent a substantial cost to the viability of a pharmacy’s survival. With nearly 12 months of fees being assessed within a six-month period, pharmacies will notice a significant negative impact on their cashflow and operations. CMS is aware of the cash flow concerns faced by pharmacies and have issued a letter expressing concerns “about the sustainability of these businesses, especially small and independent pharmacies, and their potential closures that may leave pharmacy services out of reach for many people, especially those in rural and underserved areas.”⁴

The final CMS rule also does not address the numerous unilateral below-cost reimbursements dictated by the PBMs, it does not prevent PBMs from steering patients to their own pharmacies and, pharmacies remain blind to the “negotiated price” calculations employed by the PBMs.

Conclusion

Pharmacies operate on slim margins. Every below-cost reimbursed prescription can have a detrimental impact on the sustainability of a pharmacy. While the point-of-sale DIR fees have been implemented as of January 1, 2024, and the pharmacies are able to see the total reimbursement they are to receive for a particular Part D drug, their woes are far from over. The PBM reimbursements have plummeted to a new low. The PBMs continue to use obscure methodology to determine DIR fees and many of the pharmacists I spoke with are more concerned now than ever before. They see numerous negative reimbursements daily, especially on branded medications. When a pharmacy receives a reimbursement that is several hundred dollars below cost for a single prescription, the pharmacy struggles to survive. But when you have scores of prescriptions a day that are reimbursed below a pharmacy’s cost, the pharmacy is likely to shudder its doors.

CMS in their final rule “requires Part D plans to apply all price concession they receive from network pharmacies to the negotiated price at the point of sale, such that the beneficiary can also share in the savings.” ⁵ This negotiated price is the lowest possible payment to a pharmacy and with the uncertainty of any additional “performance” payment to be received by a pharmacy, the pharmacies remain in a precarious position. The PBMs continue to dictate unilateral terms given the lack of significant regulatory oversight. Many states have begun to scrutinize PBM practices and bring them under their purview, but the challenges faced by pharmacies are imminent. While there is hope of more PBM reform in the future, the pharmacies will need to find ways to survive in the interim. Pharmacies will need to seek out additional sources of revenue and not rely solely on cost of goods reimbursement.

References:

By Bhavesh Desai, PharmD, J.D.

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