Latest news and updates about the Medicare and pharmacy industries.

The Dangerous Link Between DIR Fees and Catastrophic Coverage—and How It’s Hurting Patients and Pharmacies

Posted on in Industry Updates by admin

On the surface, catastrophic healthcare coverage is a great thing. For the 44.5 million Medicare beneficiaries1 enrolled in the Part D program for self-administered prescription drugs, this coverage phase is designed to make out-of-pocket costs manageable, once drug spending crosses a certain threshold. Without it, many patients with chronic health conditions would not be able to access their medication. 

But something has gone horribly wrong. While catastrophic coverage offers a helpful cushion for the patients with the most dire needs (relatively few), beneficiaries compelled into catastrophic coverage have risen sharply2 in recent years—going from 515,000 to more than 800,000 between 2013 and 2016. 

And this isn’t happening because the population is getting sicker. Instead, it’s because pharmacy benefit managers (PBMs) and the insurers that bring them on board are exploiting direct and indirect remuneration (DIR) fees to increase profits—pushing patients into the coverage gap and subsequently into catastrophic coverage, much faster than the system intended. 

This isn’t good for patients, pharmacies, or the taxpayer. But without more transparency surrounding DIR fees and tighter regulations on PBMs, nothing is going to change—and PBMs will continue reaping unfair gains, at society’s expense.

On the brink of catastrophe 

For 2018, Medicare patients enrolled in the Part D program hit a temporary limit on their coverage3 after the total cost of their drugs reaches $3,750. At this point, they enter the coverage gap—otherwise known as the donut hole. Once in the donut hole, the patient’s out-of-pocket costs skyrocket, until the patient enters catastrophic coverage.

Once the patient’s total out-of-pocket4 costs reach $5,000, they enter the catastrophic coverage5 phase. At that point, the government steps in to saddle 80% of costs, with patients rounding up the difference (5%). That means the insurer is left covering just 15%, versus the 75% they cover during the initial coverage phase. 

And therein lies the incentive. 

DIR fees and the donut hole

In theory, DIR fees are intended to bring Medicare costs down and improve pharmacy services. In reality, they force pharmacies to spend more on the medications they stock and dispense, increasing out-of-pocket costs for patients and ultimately driving Medicare costs up over time. Nobody wins—except PBMs and insurers. 

The problem stems from the fact that DIR fees are almost always applied after the point-of-sale. For pharmacies, it’s common for weeks or even months to go by before they know what percentage of the prescription costs the PBM will claim. The retroactive nature of DIR fees—and the nearly unmitigated discretion with which PBMs are empowered to apply them—make them unpredictable, leaving pharmacies across the county struggling to plan budgets and forecast margins and cash flow.  

Since PBMs pocket the rebate after point-of-sale, patients don’t benefit from discounted drug prices, either—their copay percentage is based on point-of-sale cost (vs. adjusted cost). And even though DIR fees translate into lower payments for insurers, it’s the non-discounted drug price that counts toward the patient reaching their coverage limit. 

This pushes patients toward their coverage limits faster, causing them to enter first the donut hole and then catastrophic coverage sooner. Ultimately, this cycle hikes up costs for patients and taxpayers alike—and causes each of these groups to essentially subsidize the unforeseen enrichment of PBMs and insurers. 

Gaming the system  

DIR fees don’t reduce Medicare costs. They also don’t improve patient care. 

Since these fees are based on performance, PBMs can claim that pharmacies which offer the highest standard of care are rewarded with lower fees. But the criteria for performance isn’t clear. Unsure how to meet this murky criteria, pharmacies run the risk of scoring low, resulting in higher DIR fees—and lower reimbursement. 

Of course, PBMs and insurers are incentivized to penalize pharmacies, not reward them. Once they do, they can begin to enjoy the added return of what is essentially a federally furnished subsidy to their profit margins. 

As a result, rather than encouraging pharmacies to provide better services to patients, DIR fees drive many pharmacies—particularly smaller independent pharmacies—toward bankruptcy. With a smaller pool of pharmacies, the pharmacy category shrinks, leaving patients with even less access to the services and life-saving medications they need. So patients lose doubly. 

Encouraging transparency. Improving outcomes. 

Increasing transparency around DIR fees and strengthening PBM regulations at the federal level is the best way help pharmacies stay in business and protect patients from unbalanced out-of-pocket costs. Right now, three bills pending in Congress aim to do just that: S.4136, H.R.13167, and H.R.19398. Support these bills today by contacting your local Member of Congress. 

At Amplicare, we’re dedicated to helping pharmacies navigate Medicare Part D efficiently and effectively to provide the best care to your patients. To learn more about how we can help, visit or contact us today.

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