For pharmacies, it’s becoming more challenging to provide optimal healthcare to their patients and offer drugs at reasonable costs. One of the primary reasons is that reimbursements and fees from insurance plans, particularly Medicare Part D plans, can be confusing, vague, and unclear. Understanding how fees are assessed usurps a pharmacist’s valuable time. One such fee that causes uncertainty for pharmacies is a direct pharmacy fee called “DIR.”
Despite the name, DIR (direct and indirect remuneration)fees are anything but direct. These are perhaps the most misunderstood and debated fees in the industry. Let’s take a closer look at what DIR fees are, how they impact prices, and how to manage them.
What are DIR Fees?
Before we get into the definition of DIR fees, it’s best to first discuss what the “DIR” part means. So, what is DIR?
“DIR fee” is a term coined by the Centers for Medicare and Medicaid Services (CMS). According to the CMS, DIR fees are explained the following way:
“Often, the Part D sponsor or its pharmacy benefits manager (PBM) receives additional compensation after the point-of-sale that serves to change the final cost of the drug for the payer, or the price paid to the pharmacy for the drug.”
An example of this would include a rebate extended to pharmacies by the drug manufacturers that lowers the contracted price of the product. This rebate is factored into CMS’s calculation of Medicare payments to Part D plans. The original intent of DIR fees was to have a way for CMS to account for and track the annual amount of these rebates or price adjustments.
Commonly, PBMs charge a pharmacy direct and indirect remuneration fee after the point of sale. This pharmacy fee schedule is for concessions that fall outside of the usual administration fees. This may encompass things like discounts, rebates, and coupons.
With the creation of Medicare Part D, DIR fees were implemented to track and trend price adjustments and rebates that Part D plan sponsors or PBMs may receive from manufacturers. However, the use of DIR fees has broadened over time. They have expanded to impose fees that lack transparency, are often retroactive in nature, and financially impact both pharmacies and their patients.
The Current State of DIR Fees
Now that you know what DIR fees are, let’s dive into how they impact pharmacies and pharmacy owners.
In a nutshell, DIR fees “claw back” money from pharmacies and, in some cases, raise the total cost of care extended to patients. We’ll get to why in a second. But for now, let’s explore the current state of DIR fees in the industry.
DIR fees were first developed as a way for pharmacies to report price concessions. Over time, the term has shifted into any fee that might be included in a contract between the pharmacy and the PBM. Indeed, any arbitrary fee may be called a DIR fee, even if it’s beyond the CMS’s original intention.
That’s precisely what’s happening right now. One of these fees is termed a “pay to play” fee. It is a fee pharmacies pay to participate in a preferred network.
Essentially, these “pay to play” fees are paid out based on a pharmacy’s plan performance on the preferred network. That performance is based on certain metrics, such as generic dispense rate (GDR) or the percentage of generic drugs sold. This even includes customer satisfaction in the form of a pharmacy’s net promoter score (NPS).
There are many more versions of DIR fees, and they all lead to the same problem: a lack of transparency, and this is affecting pharmacies in a major way.
How are DIR Fee Loopholes Impacting Drug Prices and Pharmacies?
Basically, PBMs can arbitrarily charge DIR fees, even if it doesn’t make sense or harms pharmacies’ bottom lines.
The performance metrics used to calculate the DIR fee are often unknown to pharmacies and change over time — a black box that doubles as a moving target. This can lead to pharmacies’ drug reimbursement to be lower *than the cost of acquiring the drug. If you include the inadequate dispensing fees to pharmacies, the problem is compounded. In other words, the pharmacies may, and often do, *lose money on their core business of dispensing prescriptions.
Another danger is that some DIR fees might be inappropriate for certain organizations, such as specialty pharmacies. Often, these establishments do not sell the typical generic drugs covered by PBMs, but their performance is measured by the same standards as retail and community pharmacies.
The result is that those businesses will generate lower GDRs (at no fault of their own), get penalized, and lose money in the process.
Even if this isn’t the case, DIR fees can still cause problems for the pharmacy. Often, these fees are collected months after the point of sale. This can lead to difficulty in reconciling the actual reimbursement rates and creates challenges in accounting that can lead to inconsistencies.
Ultimately, DIR fees can lead to increased drug prices. This artificial inflation of drug costs may push pharmacies to resort to contracting with Medicare Part D plans that require bigger out-of-pocket expenses for the patient.
How to Manage DIR Fees
DIR fees have been extraordinarily difficult to challenge on the policy level. Pharmacies have turned to other strategies to mitigate the negative impact of DIR fees, and it requires a great deal of due diligence.
The most critical part is to have a meticulous understanding of your PBM contracts, including the details that deal with DIR fees. Pharmacies should analyze if stipulations embedded in contracts are beneficial to you and your ability to sell drugs at an affordable price to your patients.
Pharmacies should also evaluate existing claims data and determine how DIR fees are affecting your bottom line. Surprise! They negatively impact your bottom line. By how much? That number will shock you. What now?
First, you can send your findings to CMS. The issue might not be rectified immediately, but it can serve as a “nudge” for them to do something about it. Talking with local lawmakers can also help them become aware of the issue. It may be an indirect relief, but it might have positive consequences down the line.
Second, check to see if your state has any laws that can help your situation. You can contact your state pharmacy association who is likely leading legislative efforts to combat DIR fees and pass other forms of PBM reform.
For example, Georgia Senate Bill 103 (SB 103) bans a PBM from prohibiting a pharmacist from providing a patient information on the amount of cost share for their prescription drug. Under the law, PBMs also can’t retaliate negatively against pharmacies for disclosing this information to patients.
Another state, North Dakota, also has laws that regulate what a PBM can define as DIR fees. They require an impartial third party to measure pharmacy performance concerning DIR fee payments.
On the federal level, CMS recently announced a rule to end DIR fees applied retroactively. As a result, pharmacies will know what they are responsible for paying at the point of sale. The optimistic view is pharmacies will be able to better assess and account for DIR fees. The pessimistic view is pharmacies will experience the full economic burden of the claw backs on the front end of the process. The rule also eliminates the authority for plans and PBMs to dictate pharmacy price concessions during the coverage gap with Medicare Part D. These changes go into effect on the first of January 2024.
Although originally instituted to improve the healthcare system, DIR fees are doing more harm than good. Pharmacies are now looking to diversify revenue streams and add value to the healthcare system through clinical services. It is in everyone’s interest to work together to achieve better outcomes and lower cost for patients.
Catchers, Michelle. “CMS eliminates retroactive DIR fees.” American Pharmacists Association, 3 May. 2022, https://www.pharmacist.com/Pharmacy-News/cms-eliminates-retroactive-dir-fees. Accessed May 16, 2022.
“Medicare Part D — Direct and Indirect Renumeration (DIR).” Centers for Medicare & Medicaid Services, 19 Jan. 2017, https://www.cms.gov/newsroom/fact-sheets/medicare-part-d-direct-and-indirect-remuneration-dir. Accessed May 16, 2022.
Gabay, Michael. “Direct and Indirect Remuneration Fees: The Controversy Continues.” Hospital pharmacy vol. 52,11 (2017): 740–741. doi:10.1177/0018578717739633.
Tuff, LaVita. “Trending Now: State Legislation that Bans Pharmacy Benefit Managers’ ‘Gag Clauses’.” National Academy For State Health Policy, January 30, 2018, https://www.nashp.org/trending-now-state-legislation-that-bans-pharmacy-benefit-managers-gag-clauses/. Accessed May 16, 2022.