The Impact of DIR Fees on 340B Relationships Between Contract Pharmacies and Covered Entities

The impact of Direct and Indirect Remuneration (“DIR”) fees on the specialty pharmacy industry cannot be overstated and has been widely reported in White Papers and industry news reports. However, the impact of DIR fees on the 340B sector is only now being realized. In the first of a series of articles, Frier Levitt explores the basics of DIR Fees as applied to 340B.

The 340B Drug Discount Program (“340B”) is a U.S. federal government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible healthcare organizations known as “Covered Entities” at significantly reduced prices. Revenue captured by Covered Entities as a result of the 340B program are utilized to provide health services to low income and uninsured patients. As part of the 340B program, many Covered Entities enter into contracts with pharmacies, commonly known as “Contract Pharmacies,” to provide necessary pharmacy services on their behalf. Under the terms of the contract, the Contract Pharmacy will often receive a flat fee or percentage based fee from the Covered Entity in exchange for providing the pharmacy services. The Contract Pharmacy bills the Pharmacy Benefit Manager (PBM) for the Part D drug and the PBM in turn pays the Contract Pharmacy. The Contract Pharmacy then remits funds to the Covered Entity minus any fees it is entitled to under the contract with the Covered Entity. Payments are due from the Contract Pharmacy to the Covered Entity typically on a monthly basis. While at first glance this appears to be a straightforward and mutually beneficial relationship, many Contract Pharmacies may not be taking into account the financial impact that DIR Fees have on their 340B contractual relationships.   

PBMs charge the Contract Pharmacy DIR Fees on drugs dispensed to Medicare patients, including 340B patients. DIR Fees taken by PBMs on 340B claims ultimately limit the funds available to Covered Entities to provide services to the poor and uninsured. Because of the delays in PBMs’ collection of DIR Fees, Contract Pharmacies may not immediately account for DIR fees when determining the contractual payout to the Covered Entity.

When applying DIR Fees to Medicare claims processed by Contract Pharmacies for 340B patients, many pharmacies may be unknowingly incurring a significant reduction in revenue, even a significant loss. In many circumstances, the Contract Pharmacies’ net revenue after factoring in DIR Fees will result in a “net loss” to the Contract Pharmacy. Outlined below are three examples where a Contract Pharmacy could experience a mere reduction in reimbursement or even a large loss depending the total DIR Fees attributable to a drug dispensed to a 340B patient.

Assumption as to Scenarios 1-3 below:

The Contract Pharmacy is contracted with a Covered Entity to provide pharmacy services. Under the terms of the contract, the Contract Pharmacy bills 340B claims to the PBM, receives payment, and keeps a $25.00 dispensing fee in exchange for filling the prescription and retuning the remaining reimbursement amount to the covered entity (net of the $25.00 dispensing fee, which is retained by Contract Pharmacy).

Scenario 1:
If the drug is reimbursable at $250.00, then a 4.5% DIR Fee of $11.25 is collected from the Contract Pharmacy by the PBM months after the above transaction is consummated. The DIR Fee results in a reduction in the net revenue collected by the Contract Pharmacy. The net result is the Contract Pharmacy receives only $13.75, instead of $25.00 dispensing fee contemplated under the 340B contract. DIR Fee: $250.00 X 4.5% = $11.25; Net Dispensing revenue: $25.00 – $11.25 = $13.75.

Scenario 2:
If the drug is reimbursable at $900.00, then a 4.5% DIR Fee results in a loss of $15.50. DIR Fee: $900.00 X 4.5% = $40.50; Net Dispensing revenue: $25.00 – $40.50 = -$15.50.

Scenario 3:  

If the drug is reimbursable at $7,500.00, then a 4.5% DIR Fee results in a loss of $312.50. DIR Fee: $7,500 X 4.5% = $337.50; Net Dispensing revenue: $25.00 – $337.50 = -$312.50.

Healthcare Attorneys must account for DIR Fees when negotiating and interpreting contracts between Contract Pharmacies and Covered Entities. To the extent DIR Fees are not accounted for in these contracts, it may be possible to restructure the contract to account for DIR Fees. Additionally, Contract Pharmacies and Covered Entities should challenge DIR Fees applied to 340B drugs through litigation/arbitration. Subsequent articles in this series will discuss the impact of DIR Fees on Federally Qualified Health Centers and other Covered Entities. For additional information on the 340B Program or to have an attorney review your current 340B Contract, contact Frier Levitt to speak to an attorney today.