All payment mechanisms in health care start out simple and invariably become complex—and costly to administer. Direct and Indirect Remuneration (DIR) fees paid by independent pharmacies to health plans and pharmacy benefit managers (PBMs) are no different.

McKesson asked Valerie Fortin, senior director of PBM relations at McKesson AccessHealth, to explain why DIR fees have become a significant pain point for independent pharmacies and to recommend ways pharmacies can take control of a payment mechanism that has taken on a life of its own.

How would you define DIR fees to a pharmacy that has yet to pay them?

Fortin: The short answer is DIR fees are discounts to pharmacy reimbursement not captured at the point of sale. The long answer is the definition from the Centers for Medicare & Medicaid Services. The CMS says DIR fees include discounts, chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, upfront payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits offered to some or all purchasers from any source, including manufacturers, pharmacies, enrollees, or any other person, that would serve to decrease the costs incurred by the Part D sponsor for the drug.

How Independent Pharmacies Can Manage Their DIR FeesCan you trace the origin of DIR fees?

Fortin: In the early days of Medicare Part D, which began in 2006, DIR fees were mostly limited to manufacturer rebates. The DIR fees as they are in pharmacies today had not made their way into the pharmacy world.  DIR fees first appeared in contracts for independent pharmacies and small to medium sized chains for the 2013 Medicare plan year. From then and through the 2015 plan year, DIR fees were collected from pharmacies on the remittance files each week, and accruing funds was not necessary.

What changed to make DIR fees a significant business challenge for independent pharmacies?

Fortin: Things changed beginning in the 2016 plan year. The CMS provided guidance to Medicare plan sponsors in 2014 for the 2016 plan year that basically stated that DIR fees can only be used for pharmacies if they can’t be reasonably determined at the point of sale. The guidance resulted in Medicare plan sponsors creating variable DIR fees based on some type of retrospective criteria.

What are some examples of the variable criteria plans are using?

Fortin: Some of the criteria are clinical performance measures, some are operational performance measures and some are a combination of both. These types of DIR fees are retrospective based on a set time period like quarterly or every four months. For the 2016 plan year and beyond, it became extremely important for pharmacies to accrue—or set aside—funds in order to have them available at the time of the DIR fee collection. Otherwise, a pharmacy could be caught in a financial bind.

How should independent pharmacies account for the fees in their daily business operations?

Fortin: Not all health plan sponsors handle DIR fees in the same way. Some measure at the pharmacy level and others measure at the PSAO (pharmacy services administration organizations) or network level.  It’s important for a pharmacy to know the details and timing of the DIR collection periods. The pharmacy should have a budgeting system that sets aside the money not to be used for anything other than paying DIR fees when they’re due.

How do independent pharmacies know how much they have to pay or set aside for payment later?

Fortin: Pharmacies should know what measurement criteria each plan and PBM is using to set their respective DIR fees. They should know whether the fees are based on a percentage of ingredient costs or a flat fee per prescription. They need to estimate the range of fee amounts due over a specific time period for each plan and PBM. DIR fee estimator tools or calculators are available to pharmacies through most PSAOs, which offer health plan contracting assistance to pharmacies.

Can a pharmacy calculate its fees on its own?

Fortin: Yes, but it can be complicated. To calculate the accrual amounts on its own, the pharmacy needs the following information: the applicable claims that have a DIR fee and the data on monthly ingredient costs (the reimbursement amount without the dispensing fee) for percentage-based DIR fees and monthly claims count for flat dollar amount DIR fees. With this information, a pharmacy can calculate their monthly accrual amounts to set aside.

How do independent pharmacies know how health plans and PBMs are setting their DIR fees?

Fortin: Measurement criteria that plans and PBMs use to set their DIR fees are spelled out in their contracts with pharmacies. But the quantity of contracts and lengthy details in each contract make that information difficult to find. It’s easier for pharmacies to obtain that information from their PSAO. Most PSAOs have a summary of all the contracts that identifies the criteria used by each plan and PBM to set its fees. Without a PSAO, I’m not sure how an independent pharmacy could effectively know and manage the DIR fee terms in all their payer contracts.

How can independent pharmacies positively impact how much in fees they owe?

Fortin: Pharmacies can impact their DIR fees—and ultimately increase their overall reimbursement—by improved performance. By excelling at clinical services like medication therapy management or medication synchronization, a pharmacy can improve its adherence scores and reduce its DIR fees. Ideally, a plan is submitting its data to EQuIPP, or Electronic Quality Improvement Platform for Plans & Pharmacies. A pharmacy can access EQuIPP and see exactly where it stands on its star ratings measures. If operational criteria are used, pharmacies should try to increase their generic dispensing rates, increase their percentage of 90-day supply claims and/or maximize formulary compliance.

Can independent pharmacies do anything to determine where those performance bars are set?

Fortin: Yes but it’s difficult by themselves. It’s usually the PSAO that negotiates with plans and PBMs on behalf of their pharmacy members. The PSAO will try to negotiate as favorable reimbursement terms as possible. A PSAO may push for lower bars and lower DIR fees. It may seek a higher share of a bonus payment to be paid to pharmacies after the end of the plan year. Some terms are more negotiable than others. It depends on the plan or PBM and what it’s trying to accomplish. DIR fees are one component of the overall reimbursement. It is important to put them into perspective by looking at a plan’s overall reimbursement and profitability. Maximizing performance can decrease DIR fees, which ultimately increases reimbursement.

Related: Learn more about McKesson’s Managed Care Solutions for independent pharmacies.

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