Centers premiums. The CMS acknowledges that rebates have helped

Centers for Medicare and
Medicaid services (CMS) provide the pharmacy services to the beneficiaries
through Part D plan sponsors. These plans in turn contract with the Pharmacy
benefit managers (PBM’s) to administer the drug benefits. Medicare makes
partially capitated payments to these plan sponsors for delivering drug
benefits to beneficiaries. They completely rely on the transaction data
reported by these plans to make accurate payments. PBM’s or Plan sponsors often
receive rebates from drug manufacturers which are not reported to CMS. To
resolve this issue, as part of Medicare Part D, Direct and Indirect
remuneration fees was administered to transfer these benefits to federal
reserves and in turn to beneficiaries from Pharmacy Benefit Managers or plan
sponsors. This concept was first documented in Medicare Modernization act of
2003 (MMA).

The primary objective of
initiating DIR fees was to increase transparency of Medicare Part D costs. As
per 42 C.F.R. § 423.308, Direct and indirect remuneration includes discounts,
chargebacks or rebates, cash discounts, free goods contingent on a purchase
agreement, up-front payments, coupons, goods in kind, free or reduced-price
services, grants, or other price concessions or similar benefits from
manufacturers, pharmacies or similar entities obtained by an intermediary
contracting organization with which the Part D plan sponsor has contracted,
regardless of whether the intermediary contracting organization retains all or
a portion of the direct and indirect remuneration or passes the entire direct
and indirect remuneration to the Part D plan sponsor and regardless of the
terms of the contract between the plan sponsor and the intermediary contracting

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Pros of DIR fees

According to the article
published in American Journal of Pharmacy Benefits by Joshua Pirestani, the benefits of
implementing DIR fees are

Reduce overall program expenses: Part D sponsors and PBMs negotiate rebates
from drug manufacturers, as well as from pharmacies, and pass on these rebates
to the CMS. This can help reduce government expenses on healthcare and lower
individual beneficiary premiums. The CMS acknowledges that rebates have helped
keep member premiums low, even when drug prices have increased in general.

Improve pharmacy performance: Private insurers insist that charging DIR
to pharmacies based on their performance helps improve the services provided by
these businesses. These, in turn, ensure that patients receive the best possible
care from their local pharmacists and have professional guidance on how to
properly take their medication.

Implications of DIR for Medicare Part D

CMS has observed a growing
disparity between gross Part D drug costs, calculated based on costs of drugs at
the point-of-sale, and net Part D drug costs, which account for all DIR. These
have some implications on Part D program.

Beneficiary cost sharing: Beneficiary’s cost-sharing is calculated
based on the drug price at the point-of-sale, without regard to rebates and
other price concessions received after the point-of-sale.

Medicare Subsidy payments: The growth of rebates and other price
concessions places more of the burden on beneficiary cost-sharing, Medicare’s
costs for these beneficiaries also grow. Higher beneficiary cost-sharing also
results in the quicker progression of Part D enrollees through the Part D drug
benefit phases and potentially leads to higher costs in the catastrophic phase,
where Medicare liability is generally around 80 percent.


Implications of DIR for community pharmacies

PBM’s often receive the
rebates from manufacturers after the point of sale (POS). Hence there is a
provision to change the final cost of drug and in turn change the reimbursement
of the drug to the pharmacies. The overall point is to reduce the spending of
CMS for drug benefits to beneficiaries. But during recent times Total DIR
reported by Part D sponsors has been growing significantly. Part D sponsors and
PBMs are engaging to a greater extent in arrangements that feature compensation
after the point-of-sale, and the value of such compensation is also generally
increasing. These lead to increase in copays for the patients and ambiguity
about the reimbursement for community pharmacies. This led to lot of pharmacies
dispensing the drugs for lower prices than the acquisition costs. The rebates
provided by the manufacturers to the giant PBM’s does not necessarily bring
down the drug pricing of wholesalers. This strategy leaves the small
independent pharmacies uprooted due to the disparity in acquisition costs and
reimbursements. Many pharmacies have noted a lack of transparency over these
fees and have claimed that this practice threatens their businesses and the
patients they serve.

Also PBM’s imparted performed
based DIR fees which was initiated by CMS originally to track the performance
of PBM’s. This is in turn transferred onto the community pharmacies which (star
rating) is used to rate the pharmacies and determine the extent of DIR fees
being charged.  The performance based
charge for pharmacies can be found in a presentation given by Melanie Maxwell,
MHP (Link provided in the references). Perhaps most critically, DIR Fees are
calculated retrospectively, and are assessed against the Pharmacy Provider many
months after they have been reimbursed on claims submitted to the PBM. Indeed,
many PBMs utilize a four-month window to measure performance and thereafter
assess DIR Fees against the Pharmacy Provider.

However, it is important to
note that the Star Rating System was designed by CMS to apply to Part D plan
sponsors, not to Pharmacy Providers. Most
significantly, highly performing plans are entitled to quality bonus payments
based on the Star Rating system. For
example, UnitedHealth care is due for an approximate $1.4 billion bonus, while
Humana expects to receive a bonus upwards of $1.5 billion in 2017. Because PBMs
and Part D plan sponsors are directly impacted financially by the CMS Star
Rating System, PBMs have in turn sought to artificially pass along performance requirements
to Pharmacy Providers. The accurate flow of money from PBM’s to CMS acquired
through DIR is not clearly established in reports.

Thus some important problems
associated with DIR fees are  

Misapplication of CMS based star rating system

No accurate reporting of DIR fees and repayments to CMS

Shift costs from Part D while increasing cost to Medicare for payments

PBM’s and manufacturers misusing DIR legislation to determine all drug
costs after POS

No transparency in enacting “MAC” along with DIR, whole process is

DIR fees create Financial incentive for PBM’s to increase drug prices


To get a better sense of the
DIR fees on independent pharmacies, NCPA surveyed 640 community pharmacists in
their article by Christine Blank

v  87% of pharmacists said DIR
fees significantly affect their pharmacy’s ability to provide patient care and
remain in business.

v  67% said that no information
is given as to how much and when DIR fees will be collected or assessed, while
53% said they are assessed quarterly. Many noted this lag time makes it
impossible to determine at the time of dispensing whether the net reimbursement
will cover their costs.

v  While DIR fees started in the
Medicare Part D program, 57% said they now appear in some commercial plans as

According to an
analysis by RUPRI center for Rural Health Policy analysis of 2016, DIR fees and
MAC payments comprise of major problems challenging their survival. Some respondents
responded with some data that almost 10% of their prescriptions paid by PBM’s
are under their actual cost to buy and 80% are under their cost to dispense. With
looming closure of these pharmacies, an estimated 3 million rural residents are
at risk of losing the only pharmacy in their community. For many of these
individuals, the nearest pharmacy is over 10 miles away. Closures of rural
independent pharmacies would significantly limit access to services for rural
residents, especially those most vulnerable and likely to need the services.


Corrective Measures

v  Based on the increasing
impact of DIR Fees on consumers and providers, on September 8, 2016, the United
States House of Representatives introduced the “Improving Transparency and
Accuracy in Medicare Part D Spending Act” (H.R. 5951) and a companion bill in
the Senate (S. 3308), which aim to prohibit the use of retroactive DIR Fees by
Medicare Part D plan sponsors and PBMs. It is evident that H.R. 5951 and S.
3308 would have a significant effect on PBM-imposed DIR Fees; however, both
bills expired with the end of the 114th Congress in 2016.

v  CMS Issues Report on Impact
of Legitimate DIR on Medicare and Beneficiary Spending. With the national
debate continuing regarding not just DIR Fees clawed back from Pharmacy
Providers, but also the sharply rising costs of prescription drugs, on January
19, 2017, CMS released a Fact Sheet entitled “Medicare Part D – Direct and Indirect
Remuneration (DIR).”


According to
Frier Levitt law firm in their white paper on DIR fees , PBM imposed DIR fees have no proper basis
in law. Other Federal laws also act
as safeguards to a Pharmacy Provider’s access to, and participation in, Federal
health care programs. These laws help curtail PBMs from wielding limitless
power. The Social Security Act includes the “Any Willing Provider” law
(“AWPL”), which relates directly to provider access and reimbursement in the
Medicare program. The AWPL applies to all Part D plan sponsors and their
downstream entities, such as PBM’s. CMS acknowledges the importance of the AWPL
in ensuring Medicare Part D beneficiaries with convenient access to life-saving
medications. As a result, CMS has vigorously enforced the requirements set
forth in the AWPL and has harshly punished Part D plan sponsors who have
enacted policies and procedures in violation of its requirements. For example,
CMS previously issued a $1 million civil monetary penalty against Aetna, a plan
sponsor, and required it to submit a corrective action plan after determining
that “Aetna’s contracting process for CY 2015 did not comply with Part D
program requirements because Aetna did not permit the participation of any
pharmacy that met the terms and conditions under the plan…”

Thus, PBMs are
not only compelled by Federal law to allow access to providers that are willing
to meet the network’s terms and conditions, but the reimbursement terms for
providers in the networks must be reasonable and relevant. DIR Fees often
result in Pharmacy Providers being reimbursed at rates at or below their
acquisition cost, sometimes causing them to lose money by dispensing
medications to Medicare enrollees. As a result, DIR Fees may oftentimes be in
violation of the Federal AWPL, as they undoubtedly render many Pharmacy
Providers’ reimbursement rates unreasonable low.

According to Joshua in Dirt on DIR, the
problem with DIR on the pharmacy level is that Part D sponsors use it not to
reward high performers, but to penalize pharmacies. Even worse, many quality
metrics used to grade pharmacies are murky, so owners and staff don’t even know
what they’re aiming for. Some private
insurers, for example, use claims data as the sole basis of evaluating
adherence without even looking at medical records. Specifically, they cause
pharmacies to spend more on stocking and dispensing medications, so some
businesses barely break even and others end up losing money. Since the fees are
charged retroactively, they make it difficult for pharmacies to budget their
resources and project their future growth