A New World Order of Drastically Lower Pharmacy Reimbursement Series – Part 1: Lower Net Pharmacy Reimbursement Following CMS Final Rule on DIR Fees

On May 9, 2022, the Centers for Medicare and Medicaid Services (CMS) released a Final Rule (Final Rule) entitled, “Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs.”  Frier Levitt earlier warned in an article dated January 12, 2022 that the Proposed Rule failed to address the number one issue affecting pharmacies nationally—below-cost reimbursement rates.  We do acknowledge of course that eliminating pharmacy Direct and Indirect Remuneration (DIR) fees is very positive for Medicare beneficiaries that have been harmed by PBMs in the context of higher copayments.   However, the Final Rule does nothing to protect independent providers from predatory reimbursement for Part D drugs.  Frier Levitt explores the Final Rule and its impact in this three-part article series.

Pharmacies now face a New World Order in reimbursement for Part D drugs. Pharmacies should anticipate reduced reimbursement.  DIR fees from 2016 through 2022 fueled massive profitability to PBMs.  The Final Rule essentially eliminates the profitability that PBMs enjoyed arising from DIR.  To make up for that lost DIR profit, Part D Plans and PBMs will likely now reimburse pharmacies below pharmacy acquisition cost.  The Final Rule is far from a victory for pharmacies and other stakeholders.  Pharmacies must be prepared to scrutinize and challenge every proposed Part D contract going forward.

The Final Rule

The Final Rule does not depart substantially from the January 12, 2022 Proposed Rule, except that CMS has stayed instituting the Rule until January 2024, ostensibly based upon complaints from payors that they would not have sufficient time to properly develop their bids for 2023 under this timeline.   This article focuses only on the portion of the Final Rule relevant to DIR fees, which comprises Section H of the Final Rule, entitled “Pharmacy Price Concessions in the Negotiated Price (§ 423.100).”

CMS states it received 6,179 pieces of correspondence within the comment period from many different stakeholders; however, CMS did not consider all stakeholders comments.  CMS summarized what it considered “out-of-scope” comments, which were not addressed in the Final Rule due to falling outside the scope of the Proposed Rule.  These “out-of-scope” comments related to Section H included; (1) comments asking CMS to address PBM formularies; (2) the “reasonable and relevant” contracting terms between plan sponsors and pharmacies; (3) vertical integration of PBMs and pharmacies; (4) comments discussing the “root cause” of high drug prices; (5) comments calling for a pharmacy bill of rights; and (6) comments stating PBMs cannot engage in sub-capitation arrangements that require pharmacies to bear risk.  CMS did not address these important issues in the Final Rule, notwithstanding the fact that these are central to pharmacies’ ability to continue providing services to Part D beneficiaries.  Instead, CMS focused very narrowly on its decision to redefine “Negotiated Price” at 42 CFR § 423.100.

Within Section H’s definition of “Negotiated Price” at 42 CFR § 423.100, CMS adopted the Proposed Rule with limited changes.  CMS reversed course on the proposal to allow PBMs/Plans to treat price concessions differently in the “coverage gap” phase of beneficiary coverage than in other phases.  Ultimately, CMS agreed with commenters that having two different approaches to coverage gap and non-coverage gap drugs would be unworkable and discarded the proposal.  

The Final Rule ends the reign of enormous PBM profits from DIR fees.  Under most DIR Programs, PBMs reimburse pharmacies for Part D drugs at one base rate.  PBMs recoup DIR fees at some future date, thus reducing earlier compensation paid to the pharmacy. Prior to the Final Rule (before January 2023), Plans’ bids to CMS were based on the pre-DIR reimbursement rate, currently defined as the “negotiated prices” of drugs. Plans are currently permitted to apply DIR Fees after the point of sale, thus changing the Prescription Drug Event price the Part D Plan has paid to pharmacies.  Part D Plans are currently permitted to retain the excess as DIR fee profits, up to 5% above their bid. The Final Rule ends DIR fee profiteering by redefining “negotiated prices.”

The Final Rule deletes the existing definition of the term “negotiated prices” at 42 CFR § 423.100 and adds a definition of the term “negotiated price” at 42 CFR § 423.100 to mean “the lowest amount a pharmacy could receive as reimbursement for a covered Part D drug under its contract with the Part D sponsor or the sponsor’s.” This means that if Plans continue to use DIR Programs, they must report the entire possible amount of DIR fees they might collect in the future as the “negotiated price.” This makes DIR less profitable for Plans. Under the Final Rule, Plans will no longer be incentivized to underreport the price of drugs in their Part D bids, because they cannot keep any profits derived from DIR fees.  As will be discussed below, this does not mean that PBMs’ “net reimbursement” to pharmacies will improve.  Unfortunately, CMS has not heeded comments from pharmacies urging it to fix pharmacy reimbursement, thus making it possible for Plans and PBMs to continue undermining independent pharmacies.

One major problem, particularly for specialty pharmacies, is that DIR fees were based on irrelevant performance metrics. Although CMS recognized the overwhelming comments from pharmacies urging CMS to address performance metrics that are inapplicable or otherwise unfair, CMS noted this was not the subject of the rulemaking. Instead, CMS encouraged industry actors to “continue to work together on developing a set of pharmacy performance measures through a consensus process and Part D sponsors to adopt such measures to ensure standardization, transparency and fairness.”  This again demonstrates CMS’ ignorance of the actual process by which Plans and PBMs implement these Programs—not through collaboration, but through unilateral and uninformed fiat.

Finally, while CMS conceded that “[m]any commenters requested that CMS establish safeguards to guarantee that pharmacies participating in Medicare Part D receive a reasonable rate of reimbursement,” it merely thanked the commenters for those suggestions, stating, “CMS will consider these suggestions for future rulemaking.”  Unfortunately, these suggestions were the ones that would give the Rule the most effective protections.  Many commentors requested that CMS exercise its power to ensure a competitive marketplace; suggestions which, if followed, would ensure that independent pharmacies earn a “living wage”—compensation in Part D that would ensure their ability to continue caring for Part D beneficiaries. While it is encouraging that CMS may consider these suggestions in the future, pharmacies are going to suffer under the New World Order post-DIR fees.

The New World Order of Reimbursement Rates under Medicare Part D

The New World Order for post-DIR fees is one of ultra-low reimbursement for pharmacies based on the unaddressed disparity in bargaining power.  As was posted publicly on a recent blog by an industry insider, without guardrails to establish reasonable reimbursement to pharmacies, PBMs will simply decrease overall reimbursement to pharmacies.  Facing the Proposed Rule, ESI, for example, dispatched to network pharmacies an “opt-out” contract with the following predatory reimbursement terms:

Reimbursement rates like AWP – 26.30% have the potential to become the new normal if pharmacies do not protest.  Vertically integrated PBMs have no guardrails to keep reimbursement reasonable.  Moreover, despite CMS’ failure to recognize the fact, PBMs do not negotiate with the vast majority of pharmacies.  Rather, PBMs dictate terms.  CMS’ failure to recognize this fact permeates both the Proposed and Final Rules, as CMS consistently refers to “negotiations” between pharmacies and PBMs/Plans as though CMS believes such negotiations actually occur.  CMS’ lack of accurate data regarding “negotiation” is dangerous for stakeholders across the industry as a provider would need to acquire Part D drugs at the equivalent of WAC-11.56% to simply break even.

Specialty Pharmacies

Specialty pharmacies are particularly susceptible to the dangers of this New World Order.  Specialty pharmacies have consistently seen the margins on Part D drugs decrease and have seen PBMs continually erode their patient base through predatory pricing and steering patients to the PBMs’ wholly owned specialty pharmacies.  In the ESI 2023 network shown above, most specialty pharmacies will not even receive sufficient reimbursement to cover the drug acquisition costs.  PBMs will price independent pharmacies out of network and steer patients to PBM-owned pharmacies which, under the same corporate umbrella as the PBMs, are able to sustain these low rates.

Dispensing Physician Practices

Oncology, rheumatology, and other physician practices that dispense medications will similarly be harmed under the New World Order.  Because these providers dispense a limited set of specialty drugs to a limited set of patients (improving health outcomes for those patients).  Those practices are especially susceptible to predatory reimbursement practices and will likely see their patients forced to use PBM-owned specialty pharmacies, even though the physicians themselves are in the best position to dispense to their own patients.

PSAOs

PSAOs are responsible for entering into contracts on behalf of their networks of independent pharmacies.  These new prices are challenging to PSAOs.  Pharmacies will need to examine whether it is in their best interests for PSAOs to enter into Part D network contracts with such low reimbursement, and PSAOs will need to make tough decisions regarding whether to enter into these networks.

Wholesalers

The vertical integration of PBMs with Part D Plans and PBM-owned specialty pharmacies has provided unprecedented PBM leverage against wholesalers.  PBMs, which also control drug formularies, are able to extract from wholesalers drug acquisition prices that provide wholesalers with minimal margin.  The higher the percentage of PBM purchased drugs, the lower the margins to wholesalers.  Accordingly, wholesalers may be forced to turn to independent pharmacies to make up the margin shortfall.  The result is that pharmacies may be unable to secure competitive drug acquisition costs from wholesalers.

What Can the Industry Do?

Through the Final Rule, CMS has demonstrated that it will not offer stakeholders any aid to reverse low reimbursement.  Unless providers and PSAOs begin disputing the PBM contracted reimbursement rates, reimbursement will continue to plummet.  Stakeholders must begin examining every contract offered by every PBM and examine their rights under the law to benefit from reasonable reimbursement.  Additionally, stakeholders should monitor the Federal Trade Commission’s (FTC) recent announcement of a probe of PBMs.

How Frier Levitt Can Help

Frier Levitt’s attorneys are experienced in disputes between independent pharmacies and PBMs and have fought for years to assist pharmacies in contract negotiations, as well as in litigation over contract terms that violate state and federal law.  In only the last eight months, Frier Levitt has been able to recover over $45 million dollars in damages from PBMs to benefit pharmacies.  Additionally, Frier Levitt has years of experience in drafting comments and other communications with regulators on behalf of pharmacies to fully articulate the manner in which PBMs are harming the pharmaceutical marketplace and competition.  Call Frier Levitt today to learn more.