10/10/2017

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DIR: Trends, Issues, and Impending Impacts

Chris Smith, R.PhDirector, Pharmacy Business

Intelligence

Lari HardingVice President,

Product Marketing

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Disclosures

Lari Harding is the Vice President, Product Marketing with Inmar.  The conflict of interest was resolved by peer review of the slide content.

Chris Smith is the Director, Pharmacy Business Intelligence with Inmar. The conflict of interest was resolved by peer review of the slide content.

Learning Objectives

• Define how DIR fees are assessed, the current range of clawbacks, industry benchmarks, and mitigation strategies.

• Execute accounting best practices for predicting DIR and managing cash flow.

• Evaluate DIR technology tools and service solutions from PSAOs, Central Pay, and Reconciliation providers. 

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What are DIR fees?

• DIR is the abbreviation for “Direct and Indirect Remuneration”

• 11 types of DIR

• Any and all rebates, subsidies, or other price concessions that serve to decrease the costs incurred by the Part D Plan sponsor for a drug

• Includes discounts, chargebacks or rebates, cash discounts, free goods contingent of a purchase agreement, up-front payments, coupons, goods in kind, free or reduced price services or grants, or other price concessions from all stakeholders

What are DIR fees?

• PBM Rebates

• Rebates accrued

• All other*

• Rebate admin fees reported as DIR

• Price concessions for admin services

• Price concessions from manufacturers

Reported annually to CMS:

• Legal settlements

• Amounts Received from Pharmacies (New as of 6/23/17)

• Amounts Paid to Pharmacies (New as of 6/23/17)

• Risk sharing adjustments

• All other DIR*

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Pharmacies Have Dubbed Them “Clawbacks” and some other 4 letter words

• The money is generally recouped Weekly, Quarterly or in Trimesters as a takeback on the 835s in a non-standard way

• There is usually no reasonable chance to earn the whole fee back

• No standard set of measures

• The fee is sometimes charged against products where adherence isn’t an opportunity

• Fee sometimes exceeds dispensing fee, and in some cases the whole revenue collected

• There is no transparency at the point of sale – making it very difficult to run a business

Where did DIR come from?

Important to understand the process on how Medicare Part D (MPD) plans are “built”

Every year, a plan has to create a “bid” for a given plan for a particular geographic area

The bid contains all information that Center for Medicare and Medicaid Services (CMS)requests in order to award the bid. A bid can contain 2000 pages or more!

Certain aspects of the bid are due at different times:

Formulary by April 18 • Full bid by first Monday in June

The bid projects what premiums, copays, risk adjustments, rebates, and the monthly funding needed from the Federal government

Reconciliation with CMS by end of June of next calendar year

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Help from CMS???

Source: Final Medicare Part D DIR Reporting Requirements for 2015_1.pdf published May 31, 2016. 

Regular Pharmacy Plan vs MPD plan financials

IN

Employer Premium

Your Premium

Other

OUTOverhead

Providers

IN

Tax $

DIR

Premiums

OUT

CMS

Providers

Risk Corridor Risk Corridor

Overhead

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Gross DIR Impact

DIR STATS

Started in 2013 $50K-$100K/pharmacy at risk

Burst on the scene in 2015Complex formulas and changes every

year

Retrospective, non-standard assessment

Some intended to be Quality basedand often punitive

Average $250 brand claim could be assessed a fee of

$7.50 to $13.75

Average pharmacy Gross Profit per Brand

Rx is ~$15

DIR Fee is

50–90% of gross profit

What is at stake?

In an analysis of multiple clients across all industry segments, the average amount of sales subject to DIR was 39.4% of ALL Third Party sales.

Low was 31.5%. High was 47.66%

By PBM, Prime Therapeutics was the lowest at 5.32% of Sales subject to DIR, and Aetna was the highest at 73.47%.

Low: 40.6%High: 91.6%Avg: 73.5%

Low: 32.1%High: 51.4%Avg: 39.2%

Low: 32.1%High: 51.4%Avg: 21.0%

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Industry Trend: 2015 to 2017

0.35%0.28% 0.31% 0.27% 0.27% 0.26%

0.42% 0.37%0.45%

0.37%

0.25%

0.60%0.62%

0.61%

0.27% 0.36%

0.58%0.60%

0.78% 0.94%

0.60%

0.88%0.93%

0.88%

0.55%

0.61%

1.00% 0.97%

1.23%

1.32%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017

Service Fees as % of Sales DIR Fees as a % of Sales

Let’s break it down further

According to Inmar data, the average pharmacy does ~60K Rx’s per year at $72/Rx.

This means the average pharmacy generates $4.32 MM in Sales and $864,000 in profit based on a 20% gross margin.

DIR of $43,200 is 1% of Total Sales, but 5% of Total Gross Profit

DIR is 2.82% of Part D sales, but 14.8% of Part D Gross Profit

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Performance Metrics are changing the pharmacy business model

• There are five flavors of value based/quality contracting– Pure Incentive

– Pay In and Earn Back

– DIR Penalty Scale

– Modifiers:

• HRMs are Heavily Weighted

• Weighted Averages Plus MTM

• Methods of DIR assessment– % of Ingredient Revenue

– % of AWP

– Per Rx $ fee (straight or scaled)

– Rate “True-up”

Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18

CAREMARK

Trimester 1 Claims

Trimester 1 Calculation Trimester 1 Collection

Trimester 2 Claims Trimester 2 Calculation Trimester 2 Collection

Trimester 3 Claims Caremark Trimester 3

CalculationCaremark Trimester 3

Collection

CIGNA

DIR fees collected per claim via 835 files2017 DIR Rebate

Payment

Q1 Performance

Reported

YTD Performance Reported (Q1-

Q2)

YTD Performance Reported (Q1-

Q3)

2017 Performance Reported (Q1-

Q4)

EnvisonRX

DIR fees collected per claim via 835 files

Q1 Performance

Reported

Q2 Performance

Reported

Q3 Performance

Reported

Q4 Performance

Reported

Optum RX

Contingent performance fees collected on a per claim basis, via 835 file

Contingent performance measurements, 2017 calendar year to date

Contingent performance fee calculationPerformance

Fee Reconciliation

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Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18

ESI

DIR fees collected per claim, via 835 file Calculation

and potential for either Rebate or Additional Collection

Q1 Performance

Reported

Q2 Performance

Reported

Q3 Performance

Reported

Magellan

CalculationLump Sum

DIR Fee Collection

Measurement CalculationLump Sum

DIR Fee Collection

Measurement CalculationLump Sum DIR Fee Collection

Measurement CalculationLump Sum

DIR Fee Collection

Prime Therapeutic

CalculationLump Sum

DIR Fee Collection

Measurement CalculationLump Sum

DIR Fee Collection

Measurement CalculationLump Sum DIR Fee Collection

Measurement CalculationLump Sum

DIR Fee Collection

DIR Contracts. Quality or $?

Type 2016 2017

Number of Plans with DIR 19 20

Number w Quality as “some” component

9 8 or 10*

Number with Mixed Quality and GDR

5 5 or 7*

Number with Quality Only 4 3

How have pharmacies reacted?

2016 2017

CVS 7 2

Walgreens 13 15

Walmart 17 12

Rite Aid 0 1

Kroger 13 9

*Depending on contract From Drug Channels blog.

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What is happening from a policy perspective?

• 2014 Medicare Part D Call letter and related follow up, finally settled in September of 2014, made effective for CY 2016 attempted to delineate what price concession needed to be reported at point of sale via the PDE and what needed to be reported via the DIR mechanisms.

• Established the rule that “Amounts that cannot be reasonably determined at the Point-of-Sale will be reported as DIR.”

• Final Medicare Part D DIR Reporting Requirements for 2015 published May 31, 2016 established:

‒ What was and was not considered DIR (table published earlier)

‒ What category the DIR associated with pharmacy needed to be reported to

The DIR Storm

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White Papers

The Response was Overwhelming…

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Legislation

H.R. 1038"Improving Transparency and Accuracy in Medicare

Part D Spending Act"

H.R. 1316"Prescription Drug Transparency Act"

S. 637"Creating Transparency to

Have Drug Rebates Unlocked Act of 2017"

• Seeks to prohibit post adjudication DIR Fees.

• Currently referred to the House Energy and Commerce Subcommittee on Health.

• Limits PBM power by disallowing PBMs to use PHI to a pharmacy owned by a PBM without the enrollee's permission or incentivizing an enrollee to use pharmacy owned by PBM.

• Currently referred to the House Energy and Commerce Subcommittee on Health.

• Makes public all rebates, discounts, and price concessions enjoyed by PBMs.

• Currently referred to the Senate Finance Committee on Health.

NCPDPThe DIR Task Group under Work Group 45 has:

Defined our objective and purpose statement forthe DIR task group

Defined Types of DIR's seen in the industry today

Outlined initial recommendations for Script Level DIR assessments

Working on DIR at PLB and PLB with Script ties

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Mitigation Strategies

Four ways to gain some control over DIR:

Understand your contracts

Understand how assessed and when

Determine if it is “worth it” to intervene with patients or on metrics, ID the opportunities, then act!

Know your market

70% PDC 90% PDC

80% PDC

82%

70% PDC 90% PDC

80% PDC

82%

The Problem with Percent(ile)

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From an Accounting Perspective

• They are a sales adjustment because the pharmacy agreed to accept a lower reimbursement or revenue amount based on the contract

• Accruals are important so that you are not surprised by the 3-4 times a year when the takeback surges occur

• Forecasting is challenging because the comparison points of your peers is not clear, visible and transparent

• There are tools available to help you plan your finances to appropriately protect yourself – from your PSAO, central pay provider, software vendor, and reconciliation providers

What You Can Do in Contracting

Using a PSAO

• Have your PSAO share the expected takeback based on contracts

• Use the data to understand the drugs and the patients so that you can improve

• Assess your pharmacy impact with your PSAO

Self Contracting

• Make financial projections based on your anticipated performance and your contract terms

• Reconcile DIR claims to your contracts & assess your pharmacy impact

• Understand the plans, drugs, patients and opportunities for better performance

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What You Can Do Financially

Outsourced Reconciliation

• Participate in Central Pay escrow programs and/or accrue monthly for the sales adjustment

• Report DIR as a sales adjustment, not a business expense or bad debt

• Work with your reconciliation provider to continuously improve the toolset available to get insights

• Evolve to prescriptive and predictive analytics

In-House Reconciliation

• Accrue monthly for the sales adjustments so that you are not overstating sales and profits

• Report DIR as a sales adjustment, not a business expense or bad debt

• Build tools to analyze DIR, profitability and ways to improve results

What You Can Do Financially

What You Can Do Operationally

• Participate in pharma and plan funded programs that can improve performance

• Aggregate and de-identify your data to share your data with CMS

• Leverage 90 Day Fills, easier to go 4 for 4, than 10 for 12

• Med Sync

• Auto-refill programs

• Engage on MTM cases & look for vendor support

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What if:

DIR grew to all Part D plans and MA-PD Plans? $57K More DIR per Pharmacy

DIR Expanded to Commercial?At 4% of Ing Rev*=3.9% of Sales or $170K per Pharmacy

At 4% of AWP=9.8% of Sales or $423K per Pharmacy

At 20% margin, the average pharmacy=$864K in gross profit annually.With the above metrics, DIR would mean an INCREMENTAL

$227 to $480K less in gross profit.

Future Implications

*Ingredient Revenue = Total Reimbursement minus dispensing fee

Questions?