At the August NACDS Total Store Expo conference in Boston, one key topic that resonated with many of the attendees was understanding how pharmacy could address the current issue of retroactive “DIR” fees that have been implemented by payers. With all the buzz, we decided to take a closer look at DIR fees and why they pose a potential problem for pharmacy business.
Author: David J. Fong, PharmD
What is DIR?
The Centers for Medicare & Medicaid Services (CMS) created Direct and Indirect Remuneration, or DIR, fees as a way to track the annual amount from manufacturer rebates and price adjustments applied to prescription drug plans that are passed on to CMS to offset the cost for operating the Medicare Part D program. The issue is that any variance from the budget spend is retroactively charged by CMS back to health plans and PBMs … who then charge it back to the pharmacy, potentially impacting adversely on its financials.
The root cause for the stress on pharmacy over the retroactive DIR fee “clawback,” as it is known, is the lack of transparency on the accountability of the fees applied to pharmacies and how they ultimately help CMS stay on budget. In a recent op-ed criticizing DIR, the CEO of the National Community Pharmacists Association (NCPA) revealed that, according that a study performed by his organization, 67% of pharmacies said PBMs provided no information on the amount or timing of DIR fees and 87% said DIR fees were significantly affecting their pharmacy’s ability to provide care and stay in business.
Currently, there is substantial bipartisan support for bills in Congress to boost transparency in Medicare Part D spending and prohibit retroactive DIR fees being applied to pharmacy.
In the meantime, retroactive DIR fees are something with which all pharmacies have to cope. Here are some headlines and highlights from the many conversations between conference attendees and pharmacists on DIR:
- Contractually, a pharmacy agrees to the terms of its participation in a Medicare Part D plan for the following year and then incorporates the agreed financial terms into its planning process. This planning is critical, since the roadmap to financial success requires not varying significantly from The Plan due to budget spend implications. The assessment by health plans or PBMs of a retroactive DIR “true up” once a quarter and at end of the year has led to an accounting nightmare, since this activity is not routinely done in a timely manner. How can you explain getting paid for your pharmacy product and services based on contracts in place, and then having a portion of the revenue/profit retroactively paid back on an 835 remittance based on some nebulous explanation that has no supporting detail? To make it even more unpredictable and inconsistent, the “true up” criteria could vary by payer.
- The financial impact from the assessment of retroactive DIR fees on pharmacy is driven by:
- Preferred Pharmacy Networks Participation Fee Assessment per claim and collected as part of the retroactive DIR fee “true up”
- Continued changes in state Maximum Allowable Cost (MAC) laws that require payers to adjust for “bad” MAC on generic drugs. This adjustment to the new “cost” not budgeted or planned for by the health plan/PBM is then offset by passing the variance on to the pharmacy as a retroactive DIR fee “true up.”
- Inaccurate plan premiums influenced by the plan’s objective of driving up enrollment. Variance in program costs are reflected in the retroactive DIR fees that impact pharmacy. Variance could be influenced by patients who are high consumers of medications, thus affecting all the stakeholders in the supply chain, from pharma companies offering higher rebates based on higher utilization, to increased beneficiary co-insurance, since these patients move through their benefits more quickly.
- Plans contract with pharmacy at a higher reimbursement rate, and that is reflected at the Point of Sale, in accounting, and financial planning. But, it's only considered an “estimate” by the plan/PBMs since the introduction of retroactive DIR. Pharmacies have difficulty planning and accurately operating without knowing their actual reimbursement. Additionally, the “true up” is not timely, and thus doesn’t allow the pharmacy to adjust its financial planning to account for the variance.
- Traditional performance metrics now incorporated in retroactive DIR fees include some of the following:
- Generic vs brand effective fill rates
- Refill rates — extended supply dates
- Preferred drug dispensing rates
- Audit performance/error rates
- Retroactive DIR fee “true up” now based on value-based performance metrics:
- Pharmacies continue to capture and trend more data points and use tools to track the progress and performance of their value-based quality performance measures against targeted goals to avoid or mitigate retroactive DIR fees applied by the plans or PBMs.
- While retroactive DIR fees apply only to Medicare Part D, they are being considered as a financial strategy by health plans/PBMS for their commercial plans, too
- The retroactive DIR fee “true up” is reflected on pharmacy’s 835 remittance reports without specific line item detail, which makes it very difficult to reconcile and address corrective actions to avoid or mitigate instances where fees may assessed going forward, both financially as well as operationally.
Short-term opportunities for pharmacy to address DIR
With these challenges, there are some early actions pharmacies can take to seize more control of the accuracy of their financial accounting:
- Work with your plans/ PBMs to create a scorecards and report cards detailing all of the retroactive DIR fee criteria, respective financial sensitivity risk range, and its potential impact on pharmacy performance.
- Performance metrics: Work with your plans/PBMs to understand the criteria and report cards/scorecards for calculating performance and metrics for incremental financial bonus or reduction; trend the data and accrue based on trend.
- Provide a “reasonable estimate of reimbursement rate at POC based on trend.
- Push for more timely reporting and better line item detail on “true up” for reconciliation on the pharmacy’s 835 remittance reports, which can provide a roadmap for avoiding or mitigating specific areas where retroactive DIR are assessed
- Emphasize to health plans/PBMs that you require more accuracy and transparency in managing MAC rates — don’t settle for them setting rates exceptionally high and then correcting later.
Pharmacy positioned for success in the healthcare “Ecosystem”
Pharmacy has always been resilient addressing challenges that have impacted the business and profession. The pharmacy business and profession will find solutions to address and to resolve this retroactive DIR fee issue. Looking at the big picture, pharmacy is continually growing its presence and value in the healthcare ecosystem. It is positioned to play a key role as we move into more a value-based care model and reimbursement system that demands a higher level of care, advocates healthier living, and requires more cost-effective spending of healthcare dollars.
For more information on pharmacy DIR fees, consult NCPA’s DIR Fees Information Sheet.
David J. Fong, PharmD, is president of Dave Fong Rx Consulting, Inc. A former senior retail pharmacy executive for Fortune 100 and Fortune 500 companies, he is recognized as one of the U.S. and Canada’s business and professional healthcare leaders, leveraging his knowledge and experience working with pharmaceutical manufacturers, distributors, retailers, payers, and healthcare technology companies to bring value to the industry and the consumer.