PHARMACY ALERT: CMS Proposes Rule That May End DIR Fees, But Whether Pharmacies Will Benefit is Questionable; Comments on New Rule Due By March 7, 2022

On January 12, 2022, the Centers for Medicare and Medicaid Services (“CMS”) issued a proposed new rule (the “Rule”) which, among other things, may fundamentally change controversial Direct and Indirect Remuneration (“DIR”) fees about which pharmacies have complained for years.  Frier Levitt discussed this in detail in a  white paper published in 2017.  The proposed rule neither bans the fees outright nor forces PBMs to pay reasonable reimbursement. Pharmacies should submit comments to CMS on this Rule, seeking for CMS to issue a stronger rule that not only protects pharmacies from DIR but also ensures competition among pharmacies by requiring reasonable reimbursement from Plan Sponsors and their PBMs. Frier Levitt is urging clients and pharmacy associations to make their voices heard through the comment period, which ends March 7, 2022.

Beneficiary Access to “Negotiated Prices”

The way CMS addresses DIR fees through the Rule is simple on its surface.  CMS will reinterpret the term “negotiated prices” as used in the Medicare Modernization Act (“MMA”) and current regulations at 42 CFR § 423.100.  The MMA requires Part D Plan Sponsors (“Plans”) to offer Part D beneficiaries access to “negotiated prices” for Part D drugs.  Medicare beneficiaries’ coinsurance is determined based upon these reported negotiated prices.  Because beneficiaries typically pay a percentage of the negotiated price as coinsurance, the lower the negotiated price is at the point of sale, the less coinsurance beneficiaries pay. 

History of “Negotiated Prices”

In a May 2014 final rule (79 FR 29844), CMS amended the definition of “negotiated prices” at 42 CFR § 423.100 to require Part D sponsors to include in the negotiated price at the point-of-sale all pharmacy price concessions and incentive payments to pharmacies—with an exception, intended to be narrow, that allowed the exclusion of contingent pharmacy payment adjustments that cannot reasonably be determined at the point-of-sale (the reasonably determined exception). This redefinition allowed DIR fees to grow as we know them today.

The Current State of DIR Fees

What we refer to as “DIR Fees” in the pharmacy industry are more technically known as “pharmacy price concessions,” which are a form of DIR.  Because of the 2014 redefinition of “negotiated prices,” Plans—typically through PBMs—began implementing programs ostensibly intended to incentivize pharmacies to meet certain performance metrics.  But these programs—either by design or default—merely became another method by which Plans and PBMs could extract additional profits at pharmacies’ expense. 

Many of these fees are mandatory—that is, pharmacies are forced to pay some portion of these performance fees regardless of how well they perform.  Moreover, as pharmacies are aware, most PBMs make it impossible to know the total fees they will be assessed, which often makes DIR fees a surprise to the pharmacy. Additionally, PBMs are so opaque in their reporting of DIR and description of how fees will be assessed that pharmacies often cannot know how to improve their scores and cannot accurately project their ultimate reimbursement, which is often below the cost of acquisition.  Thus, PBMs and Plans have been able to extract billions of dollars from DIR fees, with one estimate of $9.1 billion in 2019 alone (as compared to $1.6 billion in 2015), indicating that about 18% of total Medicare Part D rebates were paid by pharmacies. 

How the Rule May Fundamentally Change DIR Fees

The Rule will redefine “negotiated prices” to remove the exception for contingent fees; thus, Plans must report, at the point of sale, the lowest possible price for all Part D drugs, including potential DIR fees.  Under the current structure, a Plan must report the negotiated price as the price that can be reasonably determined at the point of sale.  Thus, if a Plan/PBM offers reimbursement at AWP -13.65, but puts a DIR Program in place that carries an additional 2-4% of mandatory DIR and another 3-6% of DIR contingent on “performance,” the Plan/PBM may report AWP -13.65% at the point of sale, even though the actual reimbursement (the amount the pharmacy puts at risk) will be at least AWP -15.65%, and may be as much as AWP -23.65% after all fees are extracted from the pharmacy months after the sale. The Plan must then report the additional 10% of AWP of DIR to CMS through a reconciliation process. Under current CMS “risk corridor” rules, this additional revenue may be retained by the Plan in whole, if the excess is no more than 5% above the Plan’s bid to CMS.  Even if the excess is above 5%, the Plan shares a portion of the excess with CMS.

Under the new Rule, following the above example, a Plan would now have to report AWP -23.65% as the “negotiated price,” thus providing the Medicare beneficiary with the lowest possible price against which the coinsurance will be assessed.  This is clearly good for beneficiaries that pay a coinsurance based on the negotiated price.  However, CMS has made clear that the Rule does not eliminate contingent fees—Plans and PBMs may continue to institute DIR Programs and assess fees retroactively.  However, they will not be able to profit from DIR fees as they do under the current structure.  Thus, Plans and PBMs will lack a profit incentive to charge DIR fees.

How the Rule Will Affect Pharmacies

The Rule may not help pharmacies much, if at all, because almost all PBMs currently charging DIR fees already have contractual provisions in place that revert reimbursement to an unfavorable amount to pharmacies in the event this kind of Rule is implemented.  Nothing in the Rule itself prevents a PBM from setting reimbursement below the cost of acquisition, or at any other rate PBMs and Plans believe they can force upon pharmacies, nor does the Rule address abuses like lack of transparency, impossible and unfair metrics, and below-cost reimbursement that pharmacies have suffered over the past near decade of DIR. 

Indeed, CMS assumes plan sponsors engage in meaningful negotiations over price concessions with pharmacies, stating, for example, “price concessions are negotiated between pharmacies and sponsors or their PBMs, independent of CMS, and are often tied to the pharmacy’s performance on various measures defined by the sponsor or its PBM.” In reality, pharmacies do not negotiate, or even communicate with Plans—indeed, most PBMs are in a such dominant market position that they are able to (and do) threaten termination to any pharmacy that seeks to communicate with a Plan.  Pharmacies don’t even negotiate with PBMs—the contracts are “take-it-or-leave-it.” CMS has done nothing to address this issue, despite stating one of its goals in issuing this Rule was to improve competition.  Nothing in the Rule addresses the disparity in negotiating power between pharmacies and PBMs or the incipient vertical integration among the largest Plans/PBMs/pharmacies that continues to stifle competition.

Pharmacies and Pharmacy Associations Should File Comments Requesting a Rule Better Tailored to Address Competition

Pharmacies and Pharmacy Associations should file comments with CMS as it considers implementing this Final Rule.  CMS must be informed about the threat to competition and, ultimately, independent pharmacies’ survival presented by PBMs when CMS continues to permit PBMs to grossly underpay pharmacies, thus excluding them from Part D networks.  Interested parties have until March 7, 2022 to file comments with CMS before the comment period ends.

How Frier Levitt Can Help

Frier Levitt attorneys are very experienced in handling issues with pharmacy DIR fees.  Aside from authoring a White Paper which, five years ago, pointed out the same problematic issues with DIR fees that CMS discusses in its proposed Rule, Frier Levitt attorneys are on the front lines of litigation regarding DIR fees, working with pharmacies to fight these abusive fees and other PBM malfeasance.  If your pharmacy or association is interested in submitting a comment to CMS, call Frier Levitt today to learn how we can best tailor your comment to garner the most attention and impact from CMS.