Recently, I was discussing DIR fees with a journalist writing a story about DIR fees for a national financial publication. Among the things we discussed was one PBM’s description of the reason DIR fees exist today: to pass a part of the rebate savings pharmacies receive back to the payor. This is not a quote, of course, but the implication is clear: pharmacies are making money on rebates and some of that should be shared with the payor.
While I disagree with the sentiment above, I understand the payor’s desire to lower its costs. With that said, I figured it was time to go back to some actual numbers and see how our DIR fees compare to our rebates.
Methodology
The rebates are available to pharmacy are product specific. For a given generic drug, there may or may not be a rebatable product available to the pharmacy. Sometimes, the rebatable product is actually more expensive (after rebates are accounted for) than another product. Rebates for the purposes of this analysis were calculated based on the actual rebate available for the product submitted to the PBM. If a cheaper, non-rebatable product was submitted, no rebate was calculated. Pharmacies do not generally receive rebates on brand name drugs.
There are two flavors of DIR fees currently being used by PBMs: Flat Fee DIRs and what I refer to as voodoo DIR fees. The former is specified as either a percent of a claim or is a flat fee known to both parties before the transaction takes place. The latter is calculated by the PBM using a variety of variables and the pharmacy generally has no way to know what the DIR fee being assessed for a prescription is until much later.
A two week period of claims assessed a Flat Fee DIR fees for our pharmacy was analyzed to compare the total DIR fees returned to the payor. For each claim, the estimated rebate (assuming the rebate requirements were fully met) was calculated using on the after-rebate NET price per unit (tablet / capsule etc). The sum of both the DIR fees and the per-claim matched rebates received by the pharmacy was calculated.
For the voodoo DIR fees, it was necessary to wait for a quarterly report compiled by our PSAO in order to match a DIR fee to each claim. This report represented DIR fees for 3 months. The sum of these DIR fees was then calculated along with the corresponding claim-matched rebates estimate.
Results: Flat Fee DIRs
There were 201 claims processed with Flat Fee DIR Fees in the most current remittance for our pharmacy. The total DIR fees withheld by the PBM to pass along to the payor was $546.51. After applying rebates to the products eligible for rebates, the total rebate the pharmacy will eventually see for these prescriptions was $545.39.
Where things get interesting is when one looks at brand name drugs. The pharmacy receives no rebates for these (though the PBM may actually receive a rebate from the manufacturer for having the medication on formulary). The pharmacy was still assessed a DIR fee on many brand name drugs. Of the 201 claims, 26 were brand name drugs without pharmacy rebates. 415.74 in DIR fees were assessed to the pharmacy on these non-rebatable claims.
I will let that sink in for a moment. For the period analyzed, all of the rebates that would eventually be received by the pharmacy for the drugs dispensed was wiped out by the DIR fees. Remember, the rebate won’t actually hit the pharmacy’s bank account for several months, so this is a real hit to the pharmacy’s cash flow.
As a point of reference, these 201 claims generated only $611.59 in profit for the pharmacy after DIR fees were subtracted and the rebate check was received. That is an anemic $3.04 per prescription.
Results: voodoo DIRs
Because this report represented a larger time span, there were 805 claims compiled. The total of the DIR fees withheld (which includes any negative DIR fees that are returned to the pharmacy because the MAC price was even more aggressive than the contract allows) was $12,512.23. The rebates that these sales will reap the pharmacy came in at $3985.88, It does not take a rocket scientist to figure out that the DIR fees not only have eliminated the rebates the pharmacy would eventually receive, but also have dragged the pharmacy’s bottom line significantly into the red. For reference, the 805 claims LOST the pharmacy $5741.55 (an average loss of $7.13 per prescription). Like the last DIR analysis done here, most of this was due to several drugs significantly underwater. Note that the PBM has not addressed these underwater claims despite 6 months worth of regular reporting done by our PSAO.
Like the Flat Fee DIR fees above, the voodoo DIR fees also assessed DIR fees on brand name drugs. Brand Name drug claims were limited to only 60 claims and represented only $450.99.
Conclusions
In order to be included in the preferred networks, pharmacies have had to agree to very aggressive terms. The MAC Pricing being used today leaves very little profit to be made by the pharmacy on the product. In recent years, the primary driver for profit for pharmacies has been rebates. With the advent of DIR fees, rebates are effectively being completely absorbed in DIR fees as “provider savings,” leaving pharmacies with little profit to cover overhead, salaries, and a reasonable profit on their investment.
I have no problem with rationalizing DIR fees existence on the existence of pharmacy rebates. Unfortunately, just like MAC price schedules, the PBM’s grasp on reality appears to be questionable. The PBMs severely underestimate real-world acquisition prices, and their MAC prices are too often below actual the pharmacy’s acquisition price. Likewise, the PBMs appear to be severely overestimating the rebates pharmacies generate.
Post Script
At the end of my conversation with the reporter, he asked me if there was anything that I would ask the PBM (that he was scheduled to talk to next) about DIR fees. That answer was simple: Pharmacy sacrificing their own profits to generate savings to the payor through the acceptance of contracts with DIR fees. What is the PBM industry (as one of the more profitable industries in all of health care) sacrificing to provide savings to the payor? I doubt that question will get a serious answer, though.