Here at NOVA, the challenges independent pharmacies face are front and center to our mission to improve lives and support independent pharmacies. One of these challenges is direct and indirect remuneration (DIR) fees, which have become a major financial strain on small pharmacies. What are DIR fees, and how have they changed in 2024?
What are DIR Fees?
Prescription drugs that Medicare and Medicaid cover are set at negotiated prices. When a pharmacy sells these drugs at a price lower than the negotiated price, they are forced to pay fees that cover the difference between the sales price and the negotiated price. These fees are called direct and indirect remuneration (DIR) fees.
DIR fees were originally designed to reconcile the costs of drugs sold under Medicare. Unfortunately, lack of oversight in the healthcare industry has resulted in DIR fees being abused, and this has significantly harmed independent pharmacies and patients.
To better understand how DIR fees work and how they’re harming small pharmacies, it’s helpful to understand how money flows in America’s healthcare system.
Why DIR Fees Exist and How They’re Abused
Prescription drugs are very expensive, and most people in the United States would not be able to afford them. That’s why health insurance plans exist.
Every year, millions of people pay premiums for a health insurance plan; the health insurance plan will cover most or all of the cost of a drug. Most people who pay for these plans will not need costly healthcare services or prescriptions, so the insurance providers are able to stay profitable while covering healthcare expenses for the small percentage of people who need them.
Pharmacy benefit managers (PBMs) are companies that act as middlemen between health insurance providers, drug manufacturers, and pharmacies. There are dozens of PBMs in the United States, but the three largest PBMs—Express Scripts, CVS Caremark, and OptumRx—currently account for 70% of all prescriptions in America.
PBMs are tasked with negotiating drug prices for healthcare plans. They create formularies and a list of drugs the health plan will cover. The formulary has several tiers of drugs, the lowest tier having the cheapest drugs and the highest tier having the more expensive drugs.
Most drug manufacturers prefer to have their drugs featured on the lower tier because they will get purchased by more people, so they’ll offer the PBM a rebate on a particular drug to make it cheaper for the insurance plan.
When PBMs create contractual agreements with drug manufacturers, there’s a lack of transparency over how much the drug rebates actually are. These agreements are often kept secret, or they feature complex or vague language and hidden clauses.
For that reason, pharmacies are often kept in the dark over how much it costs to actually acquire a drug. They price the drug based on what they acquired it for.
The pharmacy might not know that the drug price was higher than what they bought it for because the hidden agreements between PBMs and drugmakers make it difficult to gauge the true cost of acquisition.
Therefore, it’s difficult for pharmacies to set accurate prices or prepare their budgets to handle these unexpected fees. Until 2024, PBMs could charge DIR fees weeks or months after the sale of a prescription drug, presenting the pharmacy with unexpected expenses and budgetary challenges.
Related Blog: 4 Factors That Impact Your Pharmacy Profit Margins
DIR Performance Standards
Sometimes, DIR fees are based on “performance standards” that are tied to whether or not a pharmacy is delivering successful treatment or providing certain services. These include:
- Providing screenings, tests and vaccines
- Managing long-term conditions
- Member satisfaction
- Member complaints
- Health plan customer service
Pharmacies with higher performance scores receive lower DIR fees, while pharmacies with lower scores receive higher DIR fees.
These quality factors are extremely disadvantageous to smaller pharmacies because they’re based on services that smaller pharmacies are unlikely to provide, or they’re based on factors that pharmacies have little to no control over. So, smaller pharmacies will naturally receive lower performance scores and be forced to pay higher DIR fees.
Basically, the three largest PBMs, which are large corporate pharmacies, have enforced a system that mostly benefits big pharmacy brands while placing a greater financial burden on smaller pharmacies.
There’s another way that PBMs can abuse the system.
When a drug manufacturer offers a rebate on a particular drug, the PBM can pocket some of the rebate instead of passing it along to consumers. When the PBM takes a portion of the rebate, the drugmaker compensates by raising the price of the drug.
Critics argue that PBMs and drugmakers are basically colluding to raise their revenues by inflating drug prices.
These business practices have an incredibly harmful impact on the healthcare economy by creating higher drug prices and taking revenue away from independent pharmacies.
Consider this:
- Between 2010 and 2020, DIR fees increased by over 100,000%.
- As of 2024, nearly a third of independent pharmacies in the United States are at risk of closure.
- Meanwhile, pharmacy benefit managers and drug manufacturers are making record profits.
Related Blog: Is Owning a Pharmacy Still Profitable?
How Have DIR Fees Changed in 2024?
Independent pharmacies, healthcare professionals, and economists have been sounding the alarm about PBM business practices for years, and political pressure has been steadily growing. There has been considerable talk about reforming the system, but as of 2024, no major legislation has been passed.
However, some new changes were enacted in 2024. The Center for Medicare and Medicaid Services (CMS) issued a “final rule” that eliminates retroactive DIR fees. PBMs can no longer charge DIR fees weeks or months after the sale of a drug, and this rule is effective starting as of 2024.
The rule can help independent pharmacies better manage their accounting, but there are still major problems:
- DIR fees are not eliminated, and there’s still a lack of transparency over contracts between PBMs and drugmakers.
- Because pharmacies will pay the DIR fees at the point of sale, their cash flow can be greatly harmed, and this may cause many independent pharmacies to close their doors in 2024.
- Independent pharmacies are still subject to negative reimbursements but continue to have little to no influence over the reimbursement rates that are negotiated between PBMs and health insurance providers.
- Performance-based metrics have not been eliminated.
Clearly, major reform is needed, and major challenges still exist for independent pharmacies.
Related Blog: Transforming Pharmacies: A Conversation with Atlantic Pharmacy
How Can Pharmacies Protect Their Cash Flow?
So, what can independent pharmacies do to overcome DIR fees and improve their cash flow?
Here are three ways:
- Sell in-demand, high-margin products at your pharmacy, such as mobility aids, home medical equipment, essential and therapeutic oils, and vitamins.
- Create a unique in-store experience with compassionate and expert staff and superb customer service
- Offer warranties and servicing on select products to build customer loyalty
- Develop a relationship with your customers and understand their immediate and long term health care needs
At NOVA, it’s our passion and heartfelt mission to help independent pharmacies battle the injustice and overcome the Goliath-size obstacles and grow their revenue! Here are three blogs we created that can help local pharmacies and HME stores reach their full potential.
We also have a Renovate Your Revenue Series that gives you the steps to transform your front end pharmacy.
Need a new Podcast for your walk or commute? Check out the HME180 Podcast and hear the stories and experiences of independent pharmacies and HME stores and their journey to becoming successful Home Medical Equipment retailers.
Want to connect your customers with the products they need most? Join the NOVA Network today!
