Narrow Network DIR Fees (Analysis)

I have heard a lot different angles (mostly negative) about certain narrow network Medicare Part D plans. These plans are somewhat exclusive, and many chains and independents were not offered, or declined contracts due to the very aggressive reimbursement offered. Some aspects of the overly complicated DIR (Direct and Indirect Renumeration) fees this plan leverages have been previously discussed on this blog here.

This specific plan is so polarizing in pharmacy circles that some pharmaceutical wholesalers even have come into our store bragging that their member pharmacies (represented by their PSAO  – Pharmacy Services Administrative Organization) declined these contracts, essentially implying that stores participating in the narrow “Preferred” network were worse off having access to these lives. This is completely opposite of our feelings that access to lives is very important.

This specific plan reports DIR fees in a way that makes it very difficult to see  bottom line reimbursement; the plan reports DIR fees retroactively, attaching last months DIR fees to unrelated claims on the current pharmacy remittance information. Up until recently, when our PSAO, AccessHealth, began matching the DIR fees associated with each prescription for us, analysis of profit and loss was almost impossible. With this report, pharmacies can take a closer look at how this contract impacts their bottom line.

Analysis

AccessHealth (and presumably other PSAOs that did not sign this contract) analyzed the potential profitability of this contract before deciding to sign (or not sign). The fact that AccessHealth did sign the contract indicated that it was their belief that member pharmacies would benefit overall from this contract, fully understanding the “aggressive” reimbursement and DIR fees would make it important that pharmacies maximize this access to lives by leveraging other revenue streams to make up for the lower prescription revenue. Using the data recently provided to our pharmacy, 872 claims (January thru March) for this plan were analyzed for their impact on our pharmacy. The question being addressed is this: is participation in this narrow network sustainable for a medium to large independent pharmacy.

General Statistics:

  • This plan represented 872 claims (Jan-March), each with an associated DIR fee
  • The total adjudicated amount for these claims was $66,855 before DIR fees
  • DIR fees were withheld from 568 of these claims totaling $14,694
  • “Negative” DIR fees (money returned to the pharmacy) were paid for 317 claims, totaling $2,020

Looking at these numbers, it is interesting to note that there were over 300 generic drug claims that were reimbursed at a MAC (Maximum Allowable Cost) that was BELOW the DIR’s contracted rate. This effectively gave money back to the pharmacy in the form of a NEGATIVE DIR. This “feature” of the DIR actually may help protect the pharmacy from some overly aggressive MAC prices for certain drugs. That being said, the withheld DIRs dominated these returned DIRs. The net DIR total for this plan in our pharmacy bottom line is about $4,000 per month returned to the plans in exchange for participation in the network.

Watching the Bottom Line (Profit or Loss)

Calculating profit or loss on a prescription is normally not that difficult, and it can be usually be done at the point of sale before the prescription leaves the pharmacy. The addition of DIR fees complicates this tremendously, because these DIR fees are unknown to the pharmacy until well after remittance arrives. The pharmacy may also receive a rebate on some generic products (based on the pharmacy’s purchase volume), though the pharmacy can usually estimate the rebate before it is actually received. Not every generic product, however, may be rebatable.

Once the pharmacy knows both the DIR and the rebate, a profit or loss can be calculated for each prescription. When a prescription is reimbursed by the PBM for less than it costs the pharmacy to purchase the product, is often described as “underwater.” For the 872 claims above, more than 90% of the prescriptions were generic. Other descriptive statistics for the claims include:

  • 72 claims (8%) were “underwater” before DIR fees were applied to the claims
  • 304 claims (35%) were “underwater” after DIR fees were applied
  • DIR fees averaged an additional 19% discount from the adjudicated claim amount

To a pharmacy owner, any underwater claims are unacceptable, and the large number of underwater claims for this plan is very discouraging finding. The more important statistic, however, is the gross profit or loss for these prescriptions, and applying the rebates should offset losses and have a positive impact the pharmacy bottom line. If the estimations done by the PSAO before signing the contract adequately reflected actual claims finding, the total profit for these claims should be positive.

Before generic rebates were applied to the above claims (but after the DIR fees were withheld), the pharmacy lost $6,552 on these 872 prescriptions. The amount pharmacy receives in generic rebates is variable (dependent both on the pharmacy’s purchase volume and the other contractual obligations), and for this reason, a range of rebate rates for generic drugs was calculated. For our buying group, rebates are calculated as a percentage of invoice price for qualifying items. This type of rebate application may not be representative for other buying groups outside the one which our pharmacies maintain membership.

For the purposes of this analysis, generic rebate rates of 20%, 25%, 30% and 35% were used. These calculations assume that every generic drug dispensed was eligible for a rebate. There are cases, however, where the least expensive drug (after accounting for rebates) is not a rebatable product. The assumption that all generic drugs were subject to a rebate may, thereby, overstate the effects of rebates on the pharmacy’s bottom line. The calculations below are then only estimates that should be representative of ballpark profit or loss on these prescriptions.

In the table below, the first line (Rebate Total) represents to total rebates (based on the generic rebate rate in each column) that the generic drugs included in the 872 claims should have garnered the pharmacy. The second row is the Net Profit or Loss for the 872 prescriptions based on the rebates received, and the last row represents the average profit or loss per prescription for each of the 872 claims.

Rebate Effect
Impact of rebates on the profitability of narrow network prescriptions

Several observations can be made from the table above. The most important, however, is that significant rebates are necessary in order to even break even on these prescriptions. While the disclosure of our generic rate is restricted by contractual agreement, I will state our pharmacy did not profit from these 873 prescriptions. I will further state that few if any independent pharmacies are likely to receive rebates that exceed 25-30%.

The distribution of the profitability of the claims is also enlightening. The chart below shows profit / loss ranges in $5 increments for all 873 prescriptions after subtracting the DIR fees but before rebates were applied. There are 78 prescriptions showing a loss of more than $25. On the other side of the histogram, only 48 prescriptions profited more than $25.

Histogram
Profit Distribution of Claims before applying rebates.

After applying rebates, the histogram shifts to the right somewhat, but a large number of severely underwater claims remain. The histogram below represents a 25% rebate level (one that is assumed to be fairly representative for most independent pharmacies). The loss for these 78 prescriptions was between $8,500 (using a 20% generic rebate) to $6412 (using a 35% generic rebate). That is an average of more than a$95 loss per prescription. These prescriptions are not underwater, they reside at the bottom of the Mariana Trench. The total profit for the “highly profitable” prescriptions (netting more than $25) was between $2,698 (using a 20% generic rebate) and $2,720 (using a 35% generic rebate). The discrepancy between the heavily underwater prescriptions and the highly profitable prescriptions represents most of the losses recognized by the pharmacy. 

After Rebates
Pharmacy Profit after applying rebates (25% rebate level).

The number if “highly profitable” prescriptions do not change much after rebates, with the $20-25 bin increasing only by 1 prescription. The most noticeable change is the number of marginally underwater claims (those $10 to $15 underwater). The number of claims losing more than $25 does not change significantly because these claims are obscenely negative. The group of claims losing more than $25 deserves further examination. The graphic below further describes the left-most column in the two histograms above. This one column is broken into 6 groups: losing $25-50, losing $50-75, losing $75-100, losing $100 to 200, losing $200-500 and losing more than $500. A seventh group (the far right columns below) entitled losing less than $25 was added to house any prescriptions moving OUT of the trench. Blue bars represent losses before applying generic rebates, and the green bars represent losses after applying generic rebates.

Effects of rebates on the
Effect of Rebates on Claims losing more than $25

The effect of rebates on these severely negative claims is small. The number claims losing more than $500 does not change after applying generic rebates. There is a small shift overall to the right in the other columns (indicating the positive effects of the rebates on these prescriptions), but only one prescription losing more than $25 before rebates actually “graduated” to a loss of less than $25. In other words, these claims are so far underwater based both on MAC and the DIR fee that even a very high 35% generic rebates cannot rescue them.

Looking closer at the drugs residing at the bottom of the Mariana Trench, several high dollar generic drugs appear to be the culprits. Looking at just one example, chlorpromazine, we see a claim for 186 tablets reimbursed at $595.18 minus a DIR fee of $336.67. Based on purchase price, the prescription started out underwater by over $1200. Because the purchase price is large, the rebate is proportional, resulting in $280 to $500 being returned to the pharmacy in the form of rebates. This still leaves the pharmacy between $650 and $900 underwater on ONE prescription. In fact, removing only 15 high priced generic medications from the analysis removes most of the 73 claims residing in “the trench”. If these claims were adjudicated in a fairly, the total of the claims would graduate from a net loss of $1791.65 to a net profit of $5161.23 (using a 25% generic rebate rate), which is a net profit of more than $6 per prescription. It would seem that the MAC and DIR calculations being used by this plan break down when generic drugs are very expensive.

Closing Remarks

It should be reiterated that the across the board application of rebates to all generics is an assumption, and that this will overestimate the effects rebates actually have on the bottom line of a pharmacy. That the bottom line is still red with this over-correction only emphasizes the need for reform.

Just breaking even on a prescription by the calculations above is not enough, either. No overhead costs were taken into consideration, and these are a significant part of a pharmacy’s expenses. It has been estimated that a pharmacy has to make an average of $9 to $12 per prescription to cover expenses (including a reasonable profit). The best case scenario (using a 35% rebate level) in the analysis above falls significantly short. This means that pharmacies need to find a way to make  and additional $10-$12 for each prescription filled under this plan from OTHER services. Giving the patient a flu shot once a year, or selling the a bottle or two of over the counter vitamins 12 times a year is unlikely be enough to offset the significant losses these prescriptions currently bring to the pharmacy. I have always been a proponent of access to lives, but the above analysis shows that the pharmacy is paying the benefit manager a king’s ransom for the “privilege” of servicing these patients.

On a positive note, if the BPM were to correct their processing of a small number of medications (generic medications with very high acquisition costs) by correcting the MAC and /or and DIR components, the plan would draw considerably less ire from pharmacies and pharmacists. The concepts of MAC pricing and DIRs, if applied in a fair manner for all medications, might even be considered reasonable. The draconian manner in which it is currently being applied, however, creates significant problems. Pharmacies could address this problem by refusing to stock a small number of medications that are responsible for a majority of the losses being seen. It would be unfortunate if a shortsighted PBM’s policies resulted in a widespread loss of accessibility of certain medications to patients.

The ball is now back in the contracting organization (PSAO) to work with the PBM to address the problems outlined above. The current MAC and DIR calculation formulas appear to be broken for certain high cost generics, and this needs to be addressed immediately. Even if a pharmacy is not contracted with this specific plan, these tactics are becoming commonplace in the industry. Pharmacies need to be working closely with their contracting organizations to reform these tactics now. Normally I end each blog post by telling pharmacists everywhere to make every encounter with their patients count (a phrase so important that we even registered it as a trademark). Today I am asking every pharmacist to have an “encounter” with their PSAO. Make it count. Pharmacy is a great profession. Pharmacists bring significant value to healthcare. Reimbursement reform should be a goal every pharmacist works toward.

Published by

Michael Deninger

Mike graduated from the University of Iowa with a BS in Pharmacy in 1991 and completed his Ph.D. in 1998. He has over 20 years of practice experience, over half of which is as a pharmacy owner. Areas of expertise also include technology in practice, including integration with data sources.

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