Recently we rolled the dice and moved our giant capsule token in the game of Pharmopoly. We landed on Community Chest and drew the infamous:

You have won second price in a beauty contest, collect $10

Community Chest

The actual prize was several thousand dollars paid back to our pharmacy from a True-Up done to correct DIR fees withheld from our remittance back in 2015. While this is good news for our pharmacy, not everyone was as fortunate. Some pharmacies landed on Luxury Tax, others drew hospital bills. In other words, the True-Up cut both ways, with some pharmacies hit very hard. Let us take a closer look at how this DIR fee was set up and why such a contract should not be allowed by Medicare.

There are two overlapping parts to the contract: a DIR and the GER (Generic Effective Rate). The DIR fee in question dictated that the pharmacy would repay the benefit manager 50% of the ingredient cost of the drug. The GER defines the average allowable ingredient cost the pharmacy will receive over the term of the contract.

The challenge arises because the PBM does not simply adjudicate each claim using the GER as the basis for ingredient cost. Instead, ingredient cost is determined by a Maximum Allowable Cost (MAC) for the drug. The MAC for a given drug can be very different from the contracted GER.  Periodically, the PBM then calculates and collects their DIR fee. This is based on the originally adjudicated ingredient cost.

Much later, the PBM will look at all claims the pharmacy has adjudicated over the course of the contract. It will then calculate the average discounted ingredient cost paid to the pharmacy and compare it to the contracted GER. From there, the PBM will either refund the difference to the pharmacy (winning 2nd place in the Beauty Contest) or collect (land on Pay Luxury Tax) the difference from the pharmacy. To better illustrate, I have adapted the following example:

Reimbursements and subsequent true-up details for two different generic drugs. These numbers are for illustrative purposes only. The contracted GER is the same for both pharmacies. The two different drugs being adjudicated have very different MAC price discounts.

Drug A:

Drug AWP = $100

Contracted GER
AWP – 90%

Drug B:

Drug AWP = $100

Contracted GER
AWP – 90%

Adjudicated MAC Price (ingredient cost) (A) (effectively
$ 60.00 (effectively AWP – 99%) $ 1.00
Amt of DIR collected (specified as 5% of ingredient cost) (B) DIR $ 3.00 DIR $ 0.05
Amount pharmacy has been paid after DIR (Amt paid to pharmacy less DIR collected from pharmacy) (C) Net Drug
$ 57.00 Net Drug
$ 0.95
Contracted GER (the ingredient cost pharmacy should have been paid) (D) AWP-90%
GER ingredient cost
$ 10.00 AWP-90% GER ingredient cost $ 10.00
Actual DIR Fee (5% of corrected ingredient cost) (E) Correct DIR $ 0.50 Correct DIR $ 0.50
Amount owed to or due from the pharmacy (True-Up) Phy owes PBM $  47.50  Phy refund from PBM $  (8.55)


So in the case of Drug A: The PBM overpaid the pharmacy at the point of sale by $50.00 (Row A – Row D). The DIR paid by the pharmacy was therefore overpaid by $2.50 (Row B – Row E) resulting in the pharmacy owing $47.50 back to the PBM.

In the case of Drug B: The PBM underpaid the pharmacy at the point of sale by $9.00. The DIR paid by the pharmacy was therefore underpaid by $0.45 resulting in the PBM owing the pharmacy $8.55.

The key point is that the MAC price during the course of the year does not have to mirror the contracted GER.

To this I would like to add two questions:

  1. Why not just adjust all MAC prices to the GER up front to eliminate the need for a True-Up?
  2. who gains from the added complexity and obscurity?

The answer to the first question is that there is no reason that the plan and PBM could not tie their adjudicated prices to the GER instead of using nonaligned MAC prices. By adding complexity where it is not required, the PBM must gain some financial advantage. The cost of the true-up is certainly measurable and the cost would have to be offset by some other revenue. This is yet another example of the deliberate non-transparency in this industry. This is supported by an audit on about 1,000,000 claims performed by our contracting organization that resulted in them contesting the true-up.

Medicare, the very organization that allowed the creation of the DIR fee, also explicitly states that DIR fees should, whenever possible, be calculated at the point of sale. This is not a technically challenging requirement. Despite this, many PBMs have continued to maintain that the complex calculations they use for DIR fees cannot be evaluated at the point of sale, propagating the non-transparent nature of their industry.

Congress, Medicare and the leaders of the pharmacy industry need to unite to demand more transparency in the PBM industry.