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Direct and indirect remuneration was initiated with best intentions. DIR was originally introduced to create a pharmacy reimbursement model wherein payers would reimburse pharmacies based on patient outcomes, a pay-for-performance model. It included adherence measures and the use of generic drugs so that pharmacies would focus on better outcomes and lower costs — otherwise known as “value.”
Lauri Harding
This intention has since mutated into a punitive and complex matrix of rebates and risk models that have decimated pharmacy profit margins. Since the inception of DIR fees, these assessments have grown from less than 0.5% of total prescription sales in 2015 to 3.7% of total prescription sales in 2023, while reimbursement rates have declined over the same time period.
There’s been a change in DIR but it’s not going away
After years of aggressive lobbying by the pharmacy industry, Centers for Medicare and Medicaid Services (CMS) issued a final rule in 2022 eliminating retroactive DIR Fees. Prior to the issuance of this rule, pharmacy benefit managers were allowed to assess fees any time after a medication was dispensed. This would sometimes occur months after the prescription was filled, with pharmacies having little or no visibility into any retroactive assessment. As a result, pharmacies were seriously challenged to forecast financial performance and budget accordingly.
Per the final rule, starting January 1, 2024, DIR fees — now being described as “performance fees,” “performance payments” or “performance adjustments” — are assessed at the point of adjudication and known with the price the patient pays at the counter. In theory, pharmacies may have the opportunity to earn back or receive performance payments. The demonstration of these earn-backs has not occurred yet, only the reduced reimbursement rates at the point of adjudication.
DIR fee administration change delivered a sting to profits
This newest change to the administration of DIR fees is not helping alleviate the overall financial stress in pharmacy. In fact, in the first half of 2024, the change is creating cash flow challenges, as 2023 DIR clawbacks are happening at the same time that 2024 DIR is now assessed at the point of sale, essentially compounding the financial impact in the short term. Pharmacies are still dealing with a 2023 DIR hangover, and in January that amounted to 1.91% of sales.
While the new regulation eliminates clawbacks, it is creating additional complexity that is reducing the transparency needed by pharmacies to operate with financial confidence. The amount of DIR is now included in the contracted reimbursement rate formula (e.g., Average Wholesale Price (AWP) minus an agreed-upon percentage). Overall reimbursement rates for all lines of business (commercial, medicaid, cash and Medicare Part D) are down measurably from the January 2023 time frame to the January 2024 time frame as demonstrated in this chart click link. DIR Reform in 2024
Lack of transparency will make the DIR measurement challenging
Looking back, it’s clear that pharmacies struggled for visibility into the financial impact of DIR. This forced them to establish complex processes for estimating DIR amounts and to set aside accruals for properly managing their accounting. Now, while the financial impact of DIR is known up front, and accruals may no longer be necessary, visibility to the specific transactions impacted by DIR — and what amount DIR represents in those transactions — has not improved.
In order to measure the financial impact of DIR in 2024, pharmacies will need to employ information (that is not currently available!) as part of the claims submission process. Therefore, should payers begin including the data elements necessary to identify claims with DIR in the claim submission and response process, pharmacies will need to make new, additional system changes to capture data specific to DIR.
Burden of DIR is driving pharmacies to grow their scope of work
The pharmacy industry has, over the last few years, described retail pharmacy as a “break-even business.” The inability of pharmacies to remain profitable is evidenced by the fact that there were approximately 1,800 fewer retail pharmacies in the U.S. in November 2023 than there were in December 2020. At the same time, the three largest PBMs control 80% of the market — leaving even the largest pharmacy chains with little negotiating power. The result has been an aggressive effort by the industry to grow the pharmacy scope of practice.
This sought-after expansion is in keeping with the important role that retail pharmacies play in the U.S. health care system. And the successful administration of COVID-19 vaccinations through pharmacies is a clear demonstration of pharmacies being able to effectively deliver expanded care. It should also be noted that, in rural communities across the U.S., the retail pharmacy is often the first touchpoint for many to the health care system.
Expansion of pharmacy services is not guaranteed
Achieving provider status for pharmacists has been slow even as the retail health care market grows and is estimated to capture 30% of the $260 billion primary care market by 2030, according to a Bain & Co. report. And there are those in the health care industry who are decidedly opposed to pharmacies expanding their offerings.
In early February the American Medical Association published an article on the difference between pharmacists and physicians in an effort to fight the expansion of pharmacists’ scope of practice. They argue that education matters more than convenience and that pharmacists are trained to be medication experts but are not trained to deliver primary care.
Hospitals and payers are also vying for a share of retail health care. Hospital systems need primary care to drive patients into their systems for more complex care. Payers and risk-bearers focused on value-based care want to improve both financial and health outcomes through care coordination. And virtual providers will continue to emerge, consuming the areas best suited for a virtual experience.
Reimbursement reform will continue to be an uphill battle
While there have been many successes in payment reform legislation, with one or more aspects of the NACDS principles for PBM reform being adopted in every state, enforcement of these reforms is proving challenging. Due to the lack of new DIR fee data at the point of adjudication, enforcement will be even more complex, as the data that pharmacies need to successfully appeal contract rate discrepancies is now more difficult to assemble.
Changes to DIR that took effect in January 2024 have exacerbated the financial strain on pharmacies and have made it more challenging for pharmacies to use PBM reform and expanded scope of practice as opportunities to grow profitability and thrive. We took one step forward eliminating DIR clawbacks, but took two steps backward with the creation of cash flow challenges and the reduction in transparency. This is counterintuitive to our mission to create value through lowering costs, improving outcomes and enabling access to care. DIR at the point of sale is not demonstrating value, yet.
Lari Harding is senior vice president of health care marketing and sales enablement for Inmar Intelligence.
