Beginning in January 2024 direct and indirect remuneration (DIR) fees will no longer be collected retroactively. Instead, they will be collected up front, and deducted from reimbursements paid to pharmacies. But during the first few months of 2024, when the new process takes effect, pharmacies face the very serious situation of what can only be seen as a “double whammy” — 2024 DIR fee assessments withheld at the same time that 2023 fees are retroactively assessed.
It’s a worst possible scenario for pharmacies, and likely to result in serious cash flows. The National Community Pharmacist Association calls the situation a “DIR Hangover,” while others use terms including “apocalyptic,” and “cliffhanger.”
Whatever term you use, the coming changes are very serious, and may result in cashflow and operational challenges for the nation’s pharmacists, many of whom already operate on extremely tight margins. Which is why pharmacists should act now, if they have not already done so, to try and get ahead of the situation by gaining full visibility into their financial situation and having a plan in place to address the expected challenges.
What exactly is happening?
In May 2022, the Centers for Medicare & Medicaid Services (CMS) announced changes to the Medicare Part D (drug plan) with regard to pharmacy price concessions. Specifically, CMS has announced a new policy that, beginning January 1, 2024, requires “Part D plans to apply all price concessions they receive from network pharmacies to the negotiated price at the point of sale so that the beneficiary can also share in the savings.” Further, the new rule states, “CMS is redefining the negotiated price as the baseline, or lowest possible, payment to a pharmacy, effective January 1, 2024.”
In other words, according to Pharmacy Times, “CMS plans to remove retroactive DIR fees, which are often billed more than six months after a purchase.” Instead, fees will be collected at point-of-sale. In doing so, CMS is seeking to reduce out-of-pocket costs for Part D beneficiaries, who will presumably benefit from manufacturer price concessions at point of sale.
While the change will ultimately benefit pharmacies by removing the uncertainty associated with retroactive, arbitrary DIR fee assessments, it is likely to result in short-term consequences.
What can pharmacies expect?
In a February 2023 Independent Rx Forum podcast, offered by Pharmacy Times, Ronna Hauser of the National Community Pharmacists Association (NCPA) explained how the changes are likely to affect pharmacies. “What we are anticipating is that come January 1, pharmacy payments will be reduced, with DIR fees being taken up front at the same time that pharmacies will face outstanding bills for previous 2023 DIR fees, she explained.”
The result, Hauser noted, will likely be “a period within the first quarter of 2024 that we are dubbing ‘the DIR hangover,’ a period in which pharmacies could be paying double DIR fees and this could really wreak havoc with a pharmacy’s cash flow.”
How can pharmacies prepare?
Pharmacies can brace themselves for the coming upheaval by (a) being aware of the situation and (b) having a good understanding of their economic situation.
“You have to make sure you know how cash flow works in your pharmacy,” Scotty Sykes of Sykes & Company accounting firm explained in a discussion with members of the Kentucky Pharmacists Association. “You need to understand all incoming and outgoing revenues and understand the impact DIR fees have on your pharmacy.”
This includes a deep dive into all aspects of pharmacy operations.
Speaking in the Independent Rx Forum podcast, Missouri pharmacy owner Tripp Logan expressed “extreme nervousness” about cash flow. “We’re trying to prepare by looking under every rock, trying to become as efficient as humanly possible.” Best practices implemented in his pharmacy include:
- Review of all contracts.
- Review of all outstanding accounts payable/receivable.
- Reconciliation of all accounts.
- Search for any uncashed checks.
- Review inventory for possible opportunities to reduce costs.
- Review price coding.
- Review payroll.
- Optimize current workflows to potentially add more services.
Another suggestion, offered by Little Rock, AR multiple-pharmacy owner Scott Pace, is to review each Part D plan. “We’re looking at it on a plan-by-plan basis with regard to what the cash flow impact will be, and it’s different from plan to plan.” Pace cited Caremark CVS as an example of a payer that collects fees in a different amount and frequency than other plans.
By understanding each plan’s treatment of DIR fees, a pharmacy can estimate its additional cash flow needs. CPA Sykes noted that for the typical pharmacy, DIR fees are the third largest expense, behind inventory and payroll. Further, he noted, DIR fees have accounted for an increased share of pharmacy gross revenue. During 2020, DIR fees averaged 2.5% of gross revenue. That amount increased to 3.5% during 2021 and 4.5% during 2022. Sykes estimates the impact of DIR fees to climb further to 5.5% during 2023.
He suggested that pharmacies can anticipate additional cash flow needs by reviewing previous DIR fee expenditures. Specifically, he suggests reviewing DIR fees for the January 2022 – May 2022 period and multiplying by 2.5. “That’s probably going to give you a good idea of the additional cash flow you’re going to need,” he added.
As the good advice offered by these pharmacy professionals makes clear, pharmacists should not ignore the coming changes. Pharmacies face a significant threat to their bottom lines. And to make matters worse, the Centers for Medicare & Medicaid was alerted to this adverse impact but chose not to offer any relief. According to Pharmacist.com, “the final rule acknowledges the ‘possibility that changes in cash flow may cause some already struggling pharmacies to decrease services or medication availability, and/or be unable to remain in business, which may impact pharmacy networks.’ However, CMS fails to address the transition period for pharmacies from calendar year 2023 to 2024.”
Which means it’s up to each pharmacy to plan ahead. For PrimeRx users, this means relying on the pharmacy management system for comprehensive reports on all aspects of pharmacy operations. PrimeRx maintains meticulous, comprehensive records of all transactions – including DIR Fees assessed by plan – which can be helpful in anticipating upcoming fee assessments.
In addition, pharmacy managers can use PrimeRx to generate reports on just about any aspect of pharmacy operations. This will help identify potential areas for savings, and opportunities to reduce costs.
The 2024 changes in Part D program administration will have an unavoidable impact on pharmacies. But hopefully that impact will be short-term, and with proper planning, amount to a manageable bump in the road.