Direct and indirect remuneration (DIR) is one component of the complex Medicare Part D payment system. In the past several months, the issue of DIR increasingly has become a source of contention between various players in the Part D program.

Pharmacies, the Centers for Medicare and Medicaid Services (CMS), and members of Congress have expressed concerns regarding the impact of DIR fees on pharmacies and the Part D program.

Shannon Cox and Stephen Cummings, King & Spalding

Medicare Part D compensation and DIR

The Part D program is structured differently from other federal health care programs. CMS selects private entities, called plan sponsors, to administer Part D plans. Most plan sponsors subcontract with other private entities, called pharmacy benefit managers (PBMs), to administer the claims submission and payment process. PBMs contract with retail and specialty pharmacies to provide prescription services to plan members.

Due to the structure of the Part D program, pharmacies do not submit Part D pharmacy claims directly to any government agency, but rather submit them to private PBMs. A PBM pays participating pharmacies according to the terms of its contract with each pharmacy, and then the PBM is reimbursed by the plan sponsor under the terms of the contract between the PBM and plan sponsor. The plan sponsor receives capitated payments from Medicare.

These payments are largely determined through an annual bidding process in which a plan sponsor must estimate the revenue it will need to provide beneficiaries with prescription drug benefits. Following the close of the payment year, CMS reconciles each plan’s bid-based prospective payments based on its actual experience, either reclaiming some funds or making additional payments.

The Part D reconciliation process is dependent on transaction data summarized on prescription drug event (PDE) records.

The Part D sponsor submits a PDE record to CMS for each transaction in which a beneficiary obtains a prescription drug. The PDE includes a price, which is supposed to reflect the actual price paid by the Part D plan sponsor, including all DIR. DIR was originally intended to help the Medicare program factor the savings derived from drug rebates paid out by drug manufacturers to PBMs into the actual “net” cost of drugs under Part D.

However, the concept of DIR has expanded to include a variety of different fees, including “pay to play” concession fees assessed for allowing a pharmacy to participate in a preferred network, payment reconciliations, and fees based on a pharmacy’s performance with regard to metrics such as refill rates, generic dispensing rates, audit performance and error rates.

Recently, concerns have been raised that DIR fees, particularly post-point-of-sale pharmacy payment adjustments, have a negative impact on pharmacies and the Part D program.

Increased DIR fees: Impact on pharmacies

DIR costs have increased significantly in recent years. In 2015, DIR fees totaled $50 per Part D member per month and accounted for more than 17% of gross Part D drug costs. The increase in DIR fees is further reducing an already shrinking margin for dispensing prescriptions.

Moreover, DIR fees can be collected from pharmacies after adjudication, often weeks or even months later. The retroactive application of DIR fees adversely impacts pharmacies because they cannot accurately determine the amount of reimbursement they will receive based on point-of-sale ­information.

For example, Diplomat Pharmacy, the nation’s largest independent specialty pharmacy, saw its shares fall more than 50% in November 2016, after $8 million in DIR fees adversely impacted the company’s quarterly financial results, resulting in a shareholder lawsuit based in large part on allegations that the company failed to accurately calculate DIR.

Additionally, the National Community Pharmacists Association (NCPA) has called for increased transparency for DIR fees because under the current model it is often “extremely difficult for pharmacies [to] assess what their actual reimbursement rate is at the outset of the contract.” In a 2016 survey conducted by NCPA, 67% of respondents indicated that PBMs provide “no information as to how much and when DIR fees will be collected or assessed,” and 87% of pharmacies indicated that DIR fees “significantly affect their pharmacy’s ability to provide patient care and remain in business.”

Impact of DIR fees on Part D

CMS has also raised concerns that the increase in DIR fees is adversely impacting the Part D program. On January 19, 2017, CMS issued a Fact Sheet titled “Medicare Part D — Direct and Indirect Remuneration,” which identified “a growing disparity between gross Part D drug costs, calculated based on costs of drugs at the point of sale, and net Part D drug costs, which account for all DIR.”

In the fact sheet, CMS said the growing disparity has several “significant implications” including:

• Impact on Part D beneficiaries: DIR is factored into the calculation of beneficiary premiums, so higher DIR fees place downward pressure on Part D premiums, which benefits beneficiaries. Part D plan premiums remained relatively flat from 2010 to 2015. However, because beneficiaries’ cost sharing is calculated based on the drug price at the point of sale, without regard to rebates and other price concessions received after the point of sale, higher DIR results in beneficiaries paying a higher price at the point of sale. The higher point-of-sale cost results in higher beneficiary cost-sharing obligations, which in turn pushes beneficiaries into the Part D “donut hole” coverage gap more quickly.

• Increased Medicare costs: The higher point-of-sale price also increases the cost to Medicare because Medicare pays the cost-sharing obligations for millions of low-income Part D beneficiaries. Higher beneficiary cost sharing also results in the quicker progression of Part D enrollees through the Part D drug benefit phases and into the catastrophic coverage phase, where Medicare’s share of the liability is generally around 80%. Therefore, while rebates and other post-point-of-sale price concessions may reduce the government’s expenditures on premium subsidies, it increases Medicare program’s low-income cost sharing costs and the costs incurred in the catastrophic coverage phase.

• Reduction in plan sponsor liability: Moving beneficiaries into the catastrophic phase more quickly reduces the liability of plan sponsors. In the catastrophic phase, plan sponsors are responsible for only 15% of costs. Moreover, under current Part D rules, the largest share of all rebates and other price concessions is allocated to reduce plan liability, and, therefore, the trend toward high point-of-sale prices and high DIR has a disproportionate impact on plan liability. As a result, the proportion of Part D costs that fall on plan sponsors is shrinking each year. Between 2010 and 2015, annual plan sponsor liability per beneficiary declined by approximately 5% per year.

The CMS fact sheet has sparked a variety of responses within the pharmacy industry. The National Association of Specialty Pharmacies and the NCPA have both praised the fact sheet as demonstrating the problems with DIR fees, while the Pharmaceutical Care Management Association (PCMA) has issued a statement pointing out that the fact sheet “highlights how DIR reduces premiums for Medicare Part D beneficiaries, which leads to lower costs for the federal government.”

Congressional action

The controversy over DIR fees may be resolved by Congress. In February, the Improving Transparency and Accuracy in Medicare Part D Drug Spending Act (H.R. 1038) was introduced. A companion bill is pending in the Senate (S. 413). This legislation would prohibit the imposition of DIR fees after pharmacies fill prescriptions and are reimbursed in Part D.

As with the CMS fact sheet, the legislation has drawn mixed reactions. NCPA has endorsed both bills, characterizing DIR fees as “poisoned darts aimed at pharmacies.” Meanwhile, PCMA has opposed the legislation, stating that “while this bill might increase drug store profits, it would raise premiums for beneficiaries and increase costs for taxpayers.”

Although it remains to be seen how the current industry dispute over DIR fees will be resolved, it appears clear that the issue will continue to be a point of dispute among various industry players.

Shannon Cox and Stephen Cummings are counsel in the Atlanta office of international law firm King & Spalding. They regularly represent clients in connection with pharmacy regulatory issues and related internal investigations, government investigations and enforcement actions. They can be contacted at [email protected] and at [email protected].