A New World Order of Drastically Lower Pharmacy Reimbursement Series – Part 2: The Threatened Future of Independent Pharmacies

Recent CMS agency rulemaking has essentially eliminated pharmacy Direct and Indirect Remuneration (DIR) fees beginning in Plan Year 2024.  Providers “in the know,” however, are not cheering.  Our more technical article on the rulemaking is here.  

Providers have been suffering material declines in profit margin since Caremark actuaries invented pharmacy DIR in 2016 and the broadscale adoption of DIR by Express Scripts (ESI), OptumRx and Humana in subsequent years.  Pharmacy DIR fueled record profits for CVS Health (Caremark), Cigna (ESI) and UnitedHealthcare (OptumRx). According to estimates,[1] Pharmacy DIR reached more than $11 billion in 2021.[2]  These publicly traded companies do not report in their Securities and Exchange Commission (SEC) filings what PBMs and their Part D Plans do with the $11 billion in pharmacy DIR.  However, PBMs haven’t denied that $0.00 DIR fee dollars have been returned to CMS and that 100% of DIR fees contributed to PBMs’ net income.  The combined 2021 “net income” of CVS Health/Cigna/UnitedHealth (the Big Three) was approximately $30 billion. Pharmacy DIR contributed materially to the bottom lines of each.  With pharmacy DIR being eliminated as an element of profit, PBMs have only one choice to continue delivering profits to shareholders.  The Big Three will replace that $11 billion in profits. But how will they do so?  PBMs’ have no choice but to plummet net pharmacy reimbursement rates in order to capture alternative profits in the growing Medicare Part D segment of business, under Medicare’s “capitated” payment model.

The Medicare Part D economics are important to understand in evaluating incentives of the Big Three and predicting future reimbursement rates.  CMS pays Part D Plans like UnitedHealth/SilverScript/Aetna/Humana/Cigna on a “per member per month” basis, as opposed to “fee for service.”  In a capitated model, Part D Plans and PBMs profit mainly by driving pharmacies to accept lower and lower reimbursement rates. 

Frier Levitt’s prediction is bearing out.  The most recent round of PBM “network notices” to pharmacies indicates shocking 2023 reimbursement rates.  The impact is grim if pharmacies simply “sign off” on new reimbursement rates.  PBMs’ proposed reimbursement rates in the newly released Medicare Part D contracts for plan year 2023 are a threat to independent providers, except for 340B Covered Entities and Contract Pharmacies.  PBMs have predictably reacted to the elimination of pharmacy DIR by severely reducing the point-of-sale reimbursement rates to pharmacies to a level that is below the typical acquisition cost of nearly all providers (with the exception of entities that acquire discounted drugs as part of the 340B program). Pharmacies owned by PBMs may be offered this same low reimbursement rate, but are less impacted because PBMs leverage their size to acquire medications at extremely low rates and because profits from one business segment can support other less profitable segments. Frier Levitt warned that although the proposed Rule potentially eliminated pharmacy DIR, the proposed rule failed to address PBM reimbursement rates at or below the cost of acquisition.  The Final Rule, unfortunately, does nothing to address below cost reimbursement by PBMs which on its own violate the Federal Any Willing Provider Law (AWPL). Pharmacies now face a New World Order in reimbursement.

Post-DIR Fee Era Reimbursement Rates: Industry Crisis Predicted

If you are reimbursed $0.95 for a pill that you acquired for $1.00, you will suffer a $0.05 loss on a “cost of goods sold” (COGS) basis, even without regard to any overhead.  The elimination of pharmacy DIR has created a post-DIR fee era in which PBMs are setting reimbursement rates below COGS in Medicare Part D and possibly commercial networks.

A recent blog  posted ESI’s 2023 reimbursement rates, which are mathematically certain to eliminate independent pharmacy.  ESI’s network notice dictates that all pharmacies automatically join this network, unless the pharmacy sends an “opt-out” notice to ESI.  ESI’s new post-DIR fee net reimbursement terms are:

Source: BIG by Matt Stoller, The Red Wedding for Rural Pharmacies, March 28, 2022, https://mattstoller.substack.com/p/the-red-wedding-for-rural-pharmacies?s=r

Can pharmacies acquire brand drugs from distributors below ESI’s Average Wholesale Price (AWP) – 26.3% such that pharmacies can earn a “gross profit”?  No.  Our research shows that virtually no pharmacies, other than PBM-owned pharmacies or 340B Covered Entities are able to acquire brand drugs at rates at or lower than ESI’s new rate.  All pharmacies other than PBMs and 340B will lose money on every fill of a brand medication on a cost of goods sold basis. If ESI can get away with AWP – 26.30%, other PBMs are sure to follow, because they must. 

It’s a “monkey see monkey do” industry because Medicare Part D is a “capitated” model.  Cigna/Aetna/SilverScript/UnitedHealthcare compete for Medicare business by submitting “bids” to CMS.  ESI, in lowering reimbursement rates by a magnitude never seen before, allows ESI’s actuaries to create and submit a Medicare bid requesting lower “per member per month” payments from CMS, giving it an advantage over other PBMs.

Predictably, other PBM contracts for Plan Year 2023 also offer predatory reimbursement rates, often approximately 3% lower than the previous year’s rates. This year-over-year change is meaningful and could swing a profitable pharmacy or business segment into a significant loss. Providers must compare the PBM’s offered AWP discounts on the reimbursement rates with their drug acquisition costs to determine the mathematical impact.  Below is an example of a conversion of AWP referenced in PBM contracts to the Wholesale Acquisition Cost (WAC) rates that form the basis for provider acquisition costs. 

This chart demonstrates that reimbursement at AWP-26.30% would prove to be a significant loss to even pharmacies that acquire at an average of WAC-2%.  In fact, a pharmacy would need to be acquiring medication at WAC-11.56% to break even based on a COGS basis if it is being reimbursed at the predatory rate of AWP-26.30%.  The loss of a single pill acquired for $1.00 at WAC-2% yet reimbursed at AWP-26.3% is 9.56 cents.  If this same percentage applied across a pharmacy buying $100 million in inventory per year, the loss would be a staggering $9,560,000 before even accounting for the general and administrative overhead costs of running the pharmacy operation that could easily run another $5,000,000 or more of a pharmacy this size.  The clear economic result is that this predatory pricing could put even the most efficiently run pharmacy out of business.

What Must Pharmacies Do When Facing Predatory Rates?

First, understand that the governmental agencies have done nothing to help you.  Second, many of the national associations, national conferences and pharmacy organizations fear PBMs and will not challenge predatory reimbursement rates.  You may be on your own to evaluate rates and take action.

Providers must carefully review PBM contract amendments, networks notices and all channels of PBM communication.  PBMs routinely unilaterally amend provider contracts without requiring signatures from providers.  Most notices are provided on an “opt out” basis for new contract terms and conditions, including rate changes.  Providers contracted through a Pharmacy Administrative Organization (PSAO) should consider reaching out to their PSAO representative to discuss the impact of contract amendments. 

Here are some suggestions for provider action:

  • Do the critical math on your “buy side” “cost of goods sold” (WAC discount), reimbursement rates (AWP discount), gross margin and net margin to understand your individual financial economic outlook;
  • Individually consider whether opting out of PBM and plan sponsor networks with unreasonable reimbursement rates is the best business decision. PBMs may reconsider their predatory pricing practices if they face significant industry response;
  • Compare your 2021, 2022 year to date and 2023 projected financial outlook;
  • Aggressively push back against PBMs and plan sponsors on the new predatory rates that imperil the survival of independent providers;
  • Consider filing an arbitration or litigation against the PBM, seeking to enforce the protections you are afforded in the Any Willing Provider Laws outlined above;
  • Consider reporting PBM conduct to state and federal agencies, such as New York State’s newly formed Pharmacy Benefits Bureau;
  • Ask your national associations what they are doing about predatory PBM pricing and whether your association has PBMs on the Board of Directors;
  • Write, email, and call your state and federal elected representatives to urge them to take legislative action to curb PBM abuses; and
  • Urge your PSAOs to reject predatory pricing and not sign onto these network schedules.

How Frier Levitt can Help

Frier Levitt’s attorneys are experienced in disputes between independent pharmacies and PBMs and have fought for 22 years to assist pharmacies in arbitration/litigation predatory pricing and auditing by PBMs.  In only the last eight months, Frier Levitt has been able to recover over $45 million dollars in damages from PBMs to benefit pharmacies as well as improving our clients’ prospective reimbursement rates.  Additionally, Frier Levitt drafts stated and federal legislation, industry white papers and agency comments provided to regulators.  Call Frier Levitt today to learn more.

[1] https://drugchannelsinstitute.com/products/industry_report/pharmacy/

[2] https://www.dispatch.com/story/news/healthcare/2022/04/14/prescription-drugs-pharmacy-benefit-managers-dir-fee-medicare-changes/7282353001/