How to get out from the suffocating miasma of DIR fees

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The direct and indirect remuneration (DIR) component of Medicare Part D programs today is very complicated and has been implemented in a variety of ways. The lack of clarity, fairness and transparency to all parties has created business challenges for pharmacies.

Lari Harding

The National Association of Chain Drug Stores is working on behalf of pharmacies to eliminate price concessions after the point of sale, include quality-based incentives for pharmacies, and require that claim-level data be provided to pharmacies. The Medicare Part D bid process, risk corridors and the corresponding role of DIR are negatively impacting our collective mission to provide better care at lower costs. Pharmacies need to provide to legislators the complete picture, beyond the bids and the plans.

Patients choose their doctors and their pharmacies/pharmacists. In many cases, patients often do not choose their insurance plan, their pharmacy benefits manager or even the drugs they are taking. Medicare Part D patients focus on the premiums when selecting a plan upon entry and then rarely change their plan.

Pharmacists engage with patients many more times a year than doctors do; it is they who are in the best position to work directly with patients to improve access to health care, lower health care costs and improve patient outcomes.

Pharmacies operate on the lowest margins of all entities in the health care system. There are more than 60,000 pharmacies in the U.S., with ownership of these pharmacies spread across approximately 21,000 different entities. In comparison, the top three PBMs and plans manage 70% of the prescription volume while the top seven PBMs and plans manage 92% of the volume. Due to their size and scale, PBMs and plans have more commercial market power and leverage in the relationship — creating a business environment that makes it very difficult for pharmacies to negotiate equitable business practices and transparency.

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PBMs and health plans primarily take one of two approaches to DIR: penalty assessments, whereby DIR is charged based on a tiered performance scale; and a “pay in and fined less” approach, whereby the PBMs and plans deduct a certain amount from each prescription, with the possibility that pharmacies can mitigate the amount of the fine depending on their performance against contract criteria. Those deductions range, on average, from $2 to $7 per traditional prescription based on a percentage of the average wholesale price (AWP), a percentage of the ingredient cost paid or a flat fee. This deduction can be considerably more significant for specialty medications. Despite what form DIR takes, the result is mostly the same — loss of revenue for pharmacies.

Here are the top things you need to know about DIR:

• Pharmacies are facing a two-part squeeze on margins, as DIR fees now equate to an average of 1.42% of total pharmacy sales while reimbursement rates have declined over the last 16 quarters (see figure).

• DIR fees amount to more than 6% of Medicare Part D sales.

• The criteria for DIR calculations include such quality measures as medication adherence; generic dispensing rates (GDRs); medication therapy management; generic effective rates (GERs), also known as network variable rates; and formulary compliance. Some of the metrics employed are either out of the direct control of the pharmacy or simply unattainable.

For instance, some PBMs and plans use formulary compliance as a factor in determining the amount of DIR. Often, pharmacists are not alerted to the non-compliance and, while they have the ability to call a prescriber to make a recommendation to switch a prescription to the preferred formulary drug, they are ultimately subject to the prescriber-patient treatment decision.

• GDR is a DIR measure used by four of the seven PBMs and plans that assess DIR fees, but it is another example of a largely unattainable metric. To qualify for the lowest DIR fee with one PBM, a pharmacy must achieve a GDR of greater than 95%. Recent research by Inmar found that only 4% of pharmacies achieved a GDR of 95% or higher, and these were pharmacies operating with a unique business model dispensing a limited formulary that mostly comprised generic drugs.

GDR measurements vary by payer, with tiers that range from 84% to 95%. The overall average performance is 85.79%. Thirty-two percent of pharmacies fall below 85% GDR and, as a result, pay higher DIR fees. Some of these are specialty pharmacies with business models that automatically preclude them from reaching the threshold. These services are an essential part of the health care delivery system and need to be encouraged, not ­penalized.

• The GER/network variable rate is also contributing to the ambiguity in the system — at the expense of pharmacies and patients. This is a difficult metric to monitor, as different PBMs and plans use varying brand/generic definitions and set different targets that pharmacies must reach. If they pay the pharmacy better than the GER rate during the period, then the pharmacies get a clawback.

• Proportion of days covered (PDC) measures have been validated and tested at the health plan level for medication adherence but have not been validated at the pharmacy level, with much smaller patient counts. Still, this is used to assess DIR. The PDC measures allow for the comparison of pharmacy results between and among stores and chains. Further complicating the issue around PDC is patient attribution, that is, “who counts” for “which pharmacy.” Because patients can use multiple pharmacies, it becomes more complex to determine which pharmacy is responsible for a particular patient’s adherence to their medication regimen.

• Even pharmacies with very strong performance have high DIR take-backs. Contracts and reporting of results are often vague as to which pharmacies are in the reference group used for comparison. There is no clear definition of peer groups or contract participants, so pharmacies typically do not know whom they are being compared against.

• The complexity of managing DIR fees is compounded by the fact that pharmacies are expected to manage a different accrual calendar for seven different PBMs and plans. The practice of DIR performance occurring in one period with recoupment of fees happening in a different period creates cash flow problems for pharmacies. This time line discrepancy is especially difficult for small chains and independent pharmacies that do not have access to larger credit lines.

• In most instances, due to a lack of transparency pharmacies are powerless to perform standard business reconciliations between DIR fees and prescription transactions. This business anomaly occurs in part because very few PBMs and plans provide claim-level reporting to pharmacies as to what amount of money is being withheld from each ­prescription.

Only 25% of plans provide claim-level detail in the 835 remittance. Most DIR is collected via a lump sum in the remittance advice. Lump sum fee assessment does not provide claim-level details — making it impossible for pharmacies to determine what money is being taken back for which claim and why. While some PBMs will provide supplemental claim-level data upon request, this is not standard or guaranteed. This inhibits pharmacies from having control over their financial status and addressing any incorrect fees.

Inmar’s full white paper on DIR is available to anyone and can be downloaded from We enable pharmacies to better understand and forecast DIR, properly accrue for DIR, and develop approaches to address all the challenges associated with DIR.

Lari Harding is vice president of strategy and marketing for ­Inmar.



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