What are DIRs?

Prescription drug pricing and reimbursement are complicated and confusing as it is.  DIRs have only made them more so.  And much more painful for community pharmacies.

What are DIRs?

DIR stands for Direct and Indirect Remuneration.  The term was initially used by the Centers for Medicare and Medicaid Services (CMS) to refer to all price concessions which PBMs and plan sponsors (insurance companies, HMOs, chains and PBMs offering Medicare Part D plans) receive for Part D prescription drugs that were not included in the point of sale transaction (i.e., when the drug was dispensed to the patient and the charge sent to the plan sponsor or PBM).  CMS reconciles payments to plan sponsors at the end of each year and one of the reconciliation involves reducing plan reimbursements by the amount of the DIRs received by plan sponsors.

Initially, the major price concession was rebate payments from drug manufacturers to PBMs and plan sponsors for formulary placement of their products.  More recently, PBMs and plan sponsors have begun to collect fees from retail pharmacies and refer to these fees as DIR.  These DIRs include a number of types of fees, most of which result from pharmacies’ participation in preferred pharmacy networks. Pharmacies agree to participate in preferred networks because patients pay lower pharmacy copays at pharmacies that are part of the network than in out-of-network pharmacies and premiums may be lower.  Thus, participation in preferred networks can increase patient and prescription volume.

However, pharmacies have to pay fees and / or accept lower reimbursements to gain access to preferred networks.  And, they are frequently required to meet performance standards in areas such as percentage of generic drugs dispensed, patient adherence to drug therapy, and target reimbursement rates.  If pharmacies don’t meet the standards, they pay penalties.  These penalties fall under the PBMs’ and sponsors’ definitions of DIR as do the reductions in reimbursement rates.

An Example

A pharmacy dispenses a prescription that costs $100 and the prescription adjudicates at $110 at the time of dispensing.  This gives the pharmacy a $10 gross profit.  A month later, the pharmacy is charged an $8 DIR on the same prescription because it did not dispense enough generic drugs to meet its target for the quarter.  The gross profit is now only $2.  Pharmacists have reported that the DIRs on a substantial number of generic drugs are high enough that their gross margins on these prescriptions are negative.


Why do pharmacists care about DIRs?

The most obvious reason is that it reduces their reimbursements and profits.  A recent NCPA Survey indicated that DIR fees could total thousands of dollars per month for an independent pharmacy.  The Wall Street Journal suggested that DIR fees have contributed to lower pharmacy profits at Walmart.

Another reason is that there can be a long time lag between when a prescription is dispensed and when the DIR is assessed.  The NCPA Survey results indicated that many pharmacists “complained that this lag time makes it difficult to operate a small business and impossible to determine at the time of dispensing whether the net reimbursement will cover their costs.” Michael Denninger, a pharmacy owner, states in his Thriving Pharmacist blog that:

“Some plans document retroactive DIR payments by attaching the DIR to a different prescription and fill date in the current remittance document for the DIR being charged for another prescription filled during the previous remittance period. Think about this for a moment. There is no way for the pharmacy to double check the DIR calculation because the prescription it is attached to is not actually the prescription that the DIR fee represents.”

In some cases, it makes sense that DIR fees are assessed after the fact.  If they are based on failure to hit contracted reimbursement, generic dispensing or adherence targets, then they cannot be assessed until the pharmacy’s performance for the quarter has been measured.  So they have to be assessed after the dispensing.  But, DIRs charged for participation in a preferred network are frequently charged on a per-prescription basis or a flat percentage basis.  There is no reason these could not be assessed at the point-of-sale.  Further, CMS  and NCPA believe most DIR fees could be accurately estimated at the point-of-sale.


Are DIRs only charged in Medicare Part D plans?

NCPA states that DIR fees started in Medicare Part D plans but are now being used in commercial plans, although often under different names.


What are pharmacists doing about DIR fees

Pharmacy organizations are focusing on the transparency of DIR fees.  CMS has indicated that it believes that most of the charges associated with DIR fees could be reasonably estimated at the point-of-sale.  CMS has published guidance documents indicating that it would like to require PBMs and plan sponsors to do so.  This would result in point-of-sale prices more accurately reflecting true prescription costs to CMS and true prescription reimbursements to pharmacies.  The practical impact of this would be that CMS would pay less for prescriptions during the plan year (and have less to reconcile at plan year) and pharmacists would be better able to manage their pharmacies because they had a truer and more timely measure of prescription profitability.  To date, CMS has not made this a requirement and most community pharmacy organizations are advocating that they do so.