Recently, the National Community Pharmacists Association (NCPA) filed a lawsuit against the US Department of Health and Human Services (HHS), claiming that the pharmacy direct and indirect remuneration (DIR) fees in the Medicare Part D program are driving small, independently owned pharmacies out of business. In the lawsuit, the NCPA takes issue with HHS’s current definition of “negotiated prices” and its permission for pharmacy reimbursement to be adjusted months after a patient has paid cost sharing for drugs based on the list price (without taking into account the reimbursement adjustment after the point of sale).
Several congressional bills have been introduced to prohibit pharmacy benefit managers (PBMs) from collecting pharmacy DIR. These lawmakers proposed that pharmacy DIR be included in the calculation of Medicare Part D program patient cost sharing at the point of sale to lower the out-of-pocket cost to patients and preserve the financial viability of independent pharmacies. In this post, we discuss the implications of pharmacy DIR in the Medicare Part D program on outpatient pharmacies (including chain and independent pharmacies) and propose several policy alternatives that would mitigate concerns regarding the current pharmacy DIR practice.
What Is Pharmacy Direct And Indirect Remuneration?
In the Medicare Part D program, when a beneficiary fills his or her prescriptions in a pharmacy, several monetary transactions occur at the point of sale between multiple private entities. A PBM, on behalf of one of Medicare’s 996 stand-alone prescription drug plans (PDPs), pays the pharmacy based on a PBM-pharmacy contractually negotiated rate. The PBM receives the PBM–PDP contractually negotiated rate (at the point of sale) from the PDP. The patient pays the pharmacy her cost-sharing amount (that is, copayment plus coinsurance, if applicable) according to the PBM–PDP contractually determined rate and the benefit design implemented by the PBM and the PDP. At the beginning of the year, rates are determined through an annual bidding process in which PDPs estimate the revenue needed to provide beneficiaries with the full prescription drug benefit. Throughout the year, the PDP submits prescription drug event (PDE) records to the Centers for Medicare and Medicaid Services (CMS) and works with CMS to reconcile the payments based on its actual spending resulting in CMS reclaiming some funds or potentially making additional payments to the PDP.
After the point of sale, any fee or payment adjustment among the PBM/PDP/pharmacy that changes the cost of Part D-covered drugs are collectively referred to as direct and indirect remuneration (DIR). Given this broad definition, several types of adjustments are categorized as DIR, including discounts, rebates, coupons, grants, or other price concessions from manufacturers, pharmacies, or similar entities. In the case of DIR received from pharmacies (hereafter, pharmacy DIR), PBMs collect pharmacies post-sale fees several months after the point of sale, with the amount calculated according to performance metrics including items such as medication adherence, generic drug dispensing rates, high-risk medications in the elderly, formulary compliance rate, or other plan-specific quality metrics. CMS found that total amount of pharmacy DIR increased by 450 times from 2010 to 2017.
When coinsurance is applicable, patients’ cost sharing is based on the PBM-pharmacy contractually determined rate at the point of sale, excluding any post-sale adjustment. Pharmacy DIR is not considered in the calculation of patients cost sharing. Therefore, pharmacy DIR does not financially benefit patients.
Financial Implications of DIR for Pharmacies
Pharmacy DIR potentially reduces the revenue of pharmacies and adds financial uncertainty and risks on pharmacies. A major complaint from outpatient pharmacy organizations focuses on the performance-based metrics, claiming that the PDP/PBM communication regarding DIR fees owed lacks clarity, consistency, and transparency. If pharmacy DIR is collected after the point of sale at the end of the year in an aggregated fashion rather than at the claim level, the pharmacy may have little ability to review and correct its performance in the following year. Additionally, pharmacy performance typically involves a comparison to peer pharmacies’ performances, but pharmacies do not know the comparison group they are measured against. Information on pharmacy performance on these metrics are not publicly available, and PBMs do not disclose such information to pharmacies in their networks. Therefore, pharmacies do not know how they are ranked among their peers or how much DIR they should budget for at the end of the year.
In 2018, when the “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out-of-Pocket Expenses” regulatory framework was proposed, CMS provided a “lowest possible reimbursement example” that listed three scenarios of performance-based arrangements between PDP/PBM and network pharmacies. There were 1) recoup 5 percent of total Part D-related payments to the pharmacy at the end of the contract year; 2) recoup no payments for average performance; or 3) provide a bonus equal to 1 percent of total payments to the pharmacy for high performance. We applied these assumptions, respectively, to the total spending on PDEs available in the Medicare Part D Spending Dashboard and estimated total and per claim DIR nationwide from 2015 to 2019 (exhibit 1). During that time, Part D spending increased by nearly $50 billion (37 percent) while median per claim spending increased by $93 (52 percent). Notably, spending on drugs at the 90th percentile increased by $3,150 (137 percent), which may create some DIR sticker shock for pharmacies dispensing higher-price specialty pharmaceuticals. Claims from the NCPA that a single pharmacy pays back “$100,000 annually” in DIR are not hyperbole since this would be expected for a pharmacy with a high volume of Medicare Part D patients or Part D patients with very expensive drugs totaling at least $2,000,000 in annual Part D revenue.
Exhibit 1: Medicare Part D direct and indirect remuneration from outpatient pharmacies from 2015 to 2019 as a percentage of total revenue
Source: Centers for Medicare and Medicaid Services Medicare Part D Drug Spending Dashboard and Data. Note: Pharmacy DIR estimated at 1 percent and 5 percent based on 2018 CMS report entitled “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out-of-Pocket Expenses.”
If DIR is here to stay, then the real question becomes whether pharmacies can offset their DIR payments to some extent and remain financially viable. What types of discounts are they able to secure from wholesalers to reduce costs of goods sold? How do they control or reduce all other operating costs (for example, labor, utilities, rent, supplies) associated with dispensing medications? The answers to these questions likely favor larger chain pharmacy operations with greater economies of scale compared to small, independently owned businesses. This explains why groups such as the NCPA that represent independent pharmacies are outspoken against pharmacy DIR. The National Association of Chain Drug Stores and the American Pharmacists Association (APhA) have also voiced opposition to pharmacy DIR, with APhA going further to join as a plaintiff on the NCPA’s lawsuit.
Policy Recommendations
Pharmacy DIR does not reduce patients’ out-of-pocket cost at the point of sale, and its downward revenue pressure on pharmacies may potentially reduce competition as small and independent pharmacies leave the market. We proposed several policy solutions that have the potential to mitigate these concerns without major changes on the current DIR arrangement in the Medicare Part D Program.
1. Prospective communication of performance-based methodology used to determine DIR
Advocates for maintaining pharmacy DIR argue that it encourages network pharmacies to meet contractual pay-for-performance standards. Pharmacists agree, in principle, with a value-based health system that rewards providers on performance but have argued for transparent, evidence-based quality measures combined with prospective notification of the measures that will be used by a payer. If the rationale for pharmacy DIR is primarily focused on network quality, then it is important that the pharmacy providers in the network clearly know where the “goal posts” are.
2. Require reporting of claim-level adjustments after point of sale
Currently, most pharmacies are provided a lump sum DIR fee assessment by the PBM rather than claim-level detail to allow for additional auditing or reconciliation. Since CMS, the PDP, and PBM all have the claim-level PDE information, providing this same information to the pharmacy provider in a transparent, user-friendly format would enable pharmacies to conduct more thorough self-assessments and confirm contracted rates are being applied.
3. Efficient arbitration for pharmacy DIR disputes
Since the Medicare Part D program is implemented through a series of private-entity transactions in the pharmaceutical supply chain (exhibit 2), private contracts among these entities may vary substantially. As such, disputes that occur may or may not end up in litigation and power imbalances may also influence whether a single independent pharmacy decides to challenge a multi-billion-dollar corporation. Several states have begun implementing policies related to process requirements for common disputes between PBMs and pharmacies regarding operational audits and maximum allowable cost lists. Similar policy that streamlines arbitration for drug pricing issues among all parties within the pharmaceutical supply chain could improve fairness and equity for small businesses.
Exhibit 2: Overview of supply chain transactions involving direct and indirect remuneration
Source: Image created by authors. Source material comes from the Centers Medicare and Medicaid Services Medicare Part D—Direct and Indirect Remuneration Fact Sheet. Notes: DIR is direct and indirect remuneration. PBM is pharmacy benefits manager. CMS is Centers for Medicare and Medicaid Services.
4. Allow pharmacies to opt-out of DIR obligation by providing the lowest possible price at the point of sale
Finally, the retrospective implementation of DIR seems to have a greater impact on the sustainability of small independently owned pharmacies with less overhead to invest in teams of accountants or data analysts who can help predict the cash flow impact from these price adjustments occurring months after the point of sale. A recent NCPA survey of independent pharmacists presented a very pessimistic outlook, with 58 percent of respondents reporting either somewhat likely or very likely to close operations in the next two years citing retrospective DIR more problematic than declining reimbursement. Allowing pharmacies to opt-out for a lower payment at the point of sale based on the estimated lowest possible price (for example, 5 percent of total revenue), with a possibility to receive a performance-based bonus after the point of sale, would enable pharmacy owners willing and able to assume the financial risk at the point of sale to meet performance metrics while creating an exit option for more risk-averse owners. In either case, the net change to Medicare Part D would be minimal and could potentially be less with some pharmacies accepting lower total reimbursement in exchange for less uncertainty.
Outpatient pharmacies relying on fee-for-service revenue for dispensing to Medicare Part D beneficiaries have raised concerns regarding the implementation of pharmacy DIR fees. The current methods for determining pharmacy DIR, retrospective application of fees, and the inability to dispute fee amounts are potentially more challenging for independently owned pharmacies that lack the resources to manage the financial risks of pharmacy DIR. The policy recommendations we proposed are meant to address the operational concerns of these pharmacies without requiring major changes to the current DIR arrangement in the Medicare Part D program.
Authors’ Note
Joseph Mattingly and Ge Bai received support from Arnold Ventures. Mattingly provided consulting services to PhRMA unrelated to this submission. Bai provided consulting services to Frier Levitt LLC and White & Case LLP. The authors thank Gerard F. Anderson for his valuable comments and suggestions.
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