CMS Considers Point-of-Sale Pharmacy DIR: Another Prelude to a World Without Rebates?

Last week, the Centers for Medicare & Medicaid Services (CMS) released a new rule for Medicare Parts B and D. It proposes changes to protected classes, e-prescribing, and other issues. Links and background below.

Notably for the Drug Channels audience, CMS also announced that it is considering—but not yet formally proposing—changes to how pharmacy price concessions are handled within Medicare Part D. These payments currently function like pharmacy rebates to Part D plans. They are therefore considered to be direct and indirect remuneration (DIR) and often called “DIR fees.”

Thanks to new CMS disclosures, we can now see why pharmacy owners hate these payments. Pharmacy DIR was $4 billion in 2017—about 1.5% of the retail pharmacy industry’s prescription revenues.

As I explain below, pharmacy DIR negatively affects the Medicare program and its beneficiaries in a manner similar to the impact of the rebates that manufacturers pay to plans. CMS wants the pharmacy DIR passed through to beneficiaries at the point of sale, i.e., when a prescription is dispensed.

Below, I explain this proposal, provide DCI's new analysis of DIR, and review the financial impact on drug channel participants. Keep in mind that the CMS proposal would *not* eliminate DIR fees or alter the financial impact of these payments on pharmacy profits. However, it’s clear that CMS wants plans and PBMs to change how these fees are computed and levied.

Pharmacy DIR is an important issue, because CMS is sharing some its views for a world without Part D rebates. The tough political question: Should taxpayers spend more to fix this problem?

DIRECT TO YOU

The CMS material on pharmacy price concessions appears in its Federal Register notice: “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out of Pocket Expenses” (2018-25945).

• Section E starts on page 82. Click here to go directly to this page.

• Click here to read the summary fact sheet. The pharmacy material is at the bottom.

The following material provides some Drug Channels context for understanding CMS’s arguments:

• Will CMS Pop the Gross-to-Net Bubble in Medicare Part D With Point-of-Sale Rebates? (This November 2017 article delves into the impact of DIR on the Medicare program and its beneficiaries and outlines CMS’s first major proposal for point-of-sale DIR.)

• Diplomat Sees Declining DIR Fee Impact—and Perhaps Readies a PBM Strategy (Until last week, Diplomat had provided our only publicly available data about DIR fees.)

• DIR Fees in Medicare Part D Networks (Section 10.4. of our 2018 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.)

A GROWTH DIRECTION

As Drug Channels readers know, preferred cost sharing networks now dominate the Medicare Part D program. See Humana Triggers a Small Pullback for Preferred Pharmacy Networks in 2019 Medicare Part D . To implement these networks, Part D plans use post-point-of-sale (POS) price concessions paid by pharmacies to the plan sponsor.

These price concessions, which are collected from pharmacies after claim adjudication, are considered direct and indirect remuneration (DIR) under federal requirements. Pharmacies therefore refer to these amounts as DIR fees. However, DIR is a much broader term that encompasses various types of payments made to a Part D sponsor. See the list in DIR Fees, Rebates, Pharmacy Economics, and the Future of Medicare Part D.

The chart below provides our latest estimates of DIR and its major components. Note that in last week’s proposed rule, CMS for the first time disclosed the value of pharmacy price concessions.

[Click to Enlarge]

Here are three key highlights:

• We estimate that over the past four years, total DIR in Part D has grown substantially, from $13.4 billion in 2013 to $35.1 billion in 2017.

• Manufacturers’ rebate payments to Part D plans are the largest component of DIR. We estimate that over the four-year period, rebates have increased by 142%, from $12.2 billion in 2013 to $29.5 billion in 2017.

• For 2017, the net value of pharmacy price concessions totaled $4 billion, up from only $229 million in 2013. Pharmacy DIR fees have also increased as a share of total DIR, from 1.7% in 2013 to 11.4% in 2017.
  
  Pharmacy DIR fees were about 1.5% of retail prescription revenues and about $63,000 per retail pharmacy location. Whether these figures are large or small depends on your role in the drug channel.

CMS criticized the rapid growth of pharmacy price concessions, based partly on how plans and PBMs measure pharmacy performance to generate price concessions.

Briefly, Part D plans base pharmacy DIR on quantitative performance criteria applied to pharmacies. The pharmacy earns less reimbursement—and pays a higher price concession—when it achieves lower levels of performance on quantitative metrics of quality. Conversely, the pharmacy would earn an incentive payment for better performance. The specific criteria and thresholds are different for every plan and not publicly available.

CMS criticized the design of these fee models, writing that plan sponsors and PBMs “have been recouping increasing sums from network pharmacies after the point of sale (pharmacy price concessions) for ‘poor performance,’ sums that are far greater than those paid to network pharmacies after the point of sale (pharmacy incentive payments) for ‘high performance.’” Hence, pharmacy price concessions have grown to account for a much larger share of total DIR.

CMS is also concerned that “…the one-sided nature of the pharmacy payment arrangements that currently exist also creates competition concerns by discouraging independent pharmacies from participating in a plan’s network and thereby increasing market share for the sponsors’ or PBMs’ own pharmacies.”

Put another way: CMS is implicitly accusing plans of “heads I win, tails you lose” performance plans. CMS is even “considering an option to develop a standard set of metrics from which plans and pharmacies would base their contractual agreements.” That’s one key reason that pharmacy groups have praised the potential policy.

DIRE IMPLICATIONS

CMS believes that pharmacy DIR fees distort the Medicare program and disadvantage beneficiaries. It’s worth understanding this reasoning, because it also undergirds CMS’s thinking about rebates.

Here’s the crucial issue: Performance-based DIR fees are not generally incorporated into the “negotiated price” between a pharmacy and plan sponsor. This price is formally defined in regulation (CFR 423.100) as follows:

Negotiated prices means prices for covered Part D drugs that meet all of the following:
(1) The Part D sponsor (or other intermediary contracting organization) and the network dispensing pharmacy or other network dispensing provider have negotiated as the amount such network entity will receive, in total, for a particular drug.
(2) Are inclusive of all price concessions from network pharmacies except those contingent price concessions that cannot reasonably be determined at the point-of-sale; and
(3) Include any dispensing fees; but
(4) Excludes additional contingent amounts, such as incentive fees, if these amounts increase prices and cannot reasonably be determined at the point-of-sale.
(5) Must not be rebated back to the Part D sponsor (or other intermediary contracting organization) in full or in part.

The phrase “cannot reasonably be determined at the point-of-sale” is crucial. As currently structured, performance-based pharmacy payments are computed retroactively. (Recall Diplomat Pharmacy’s problems in 2016.) Hence, plans argue that the pharmacy payments can’t be determined when a prescription is dispensed or reimbursed.

CMS highlights four major reasons it wants to reconsider the “reasonably determined” exception regarding pharmacy DIR:

• Medicare beneficiaries face higher out-of-pocket costs. DIRs create a gap between list and net prices. A Medicare beneficiary’s cost-sharing is based on the negotiated point-of-sale price, excluding DIR. If a pharmacy’s reimbursement is later reduced by a significant pharmacy price concession, then a beneficiary with coinsurance would have ended up paying a greater share of the prescription’s cost. Those paying copayments also would have overpaid. As CMS notes: “Part D rules require that the copayment amount be at least actuarially equivalent to the coinsurance required under the defined standard benefit design.”
  
  This situation should be familiar to Drug Channels readers. It is a variant of the gross-to-net bubble issues that arise when manufacturers pay rebates to PBMs and plans. In this case, the pharmacy is paying a rebate to PBMs and plans.

• Part D plans have weak or no incentives to share DIR with patients at the point of sale. Plans can market lower premiums and earn higher profits when DIR is applied after the point-of-sale. I explain the mechanics in Will CMS Pop the Gross-to-Net Bubble in Medicare Part D With Point-of-Sale Rebates?.

• Government liabilities grow, plan liabilities shrink, and beneficiary costs are higher. When DIRs are not applied to the negotiated price, beneficiaries will progress more quickly through the phases of the Part D benefit. Beneficiaries can find themselves in the catastrophic coverage limit. Medicare covers 80% of the cost in the catastrophic phase, while plans pay 15% and the beneficiary pays 5% coinsurance. Medicare beneficiaries, unlike those in most private insurance plans, can therefore face unlimited out-of-pocket prescription drug costs if they reach the catastrophic coverage limit.

• Patients lack transparency to make good decisions. As CMS writes: “Given the significant growth in pharmacy price concessions in recent years, when such amounts are not reflected in the negotiated price, it has become increasingly difficult for consumers to know at the point of sale what share, or approximate share, they are paying of the costs of their prescription drugs to the plan; nor are negotiated costs reflected on the Medicare Prescription Drug Plan Finder (Plan Finder) tool.”
  
  CMS also notes that all plans do not treat pharmacy price concessions comparably. Some plans incorporate these concessions into negotiated prices, while others include them in DIR. Therefore, plans’ bids may not be comparable.

These four reasons echo CMS’s previous comments how rebates affect the Part D program. These effects, however, are much smaller for pharmacy price concessions than they are for manufacturer rebates.

DIRTY POLITICS

To address these issues, CMS is considering a policy by which the lowest expected reimbursement be incorporated into the negotiated price, i.e., passed through at point-of-sale. CMS believes that it can make this change by regulation, without further rulemaking. As I understand the situation, that’s not true for any changes to way in which plans and PBMs handle rebates.

In practice, CMS suggests that the negotiated price would reflect the reimbursement received by the worst-performing pharmacy—the one paying the greatest price concession to a plan. CMS refers to this approach as the “lowest possible reimbursement” approach. You can review its logic and the mechanics, starting on page 92 of the proposed rule.

CMS has projected that the 10-year impact on beneficiaries, manufacturers, and the government if all pharmacy DIR were passed-through. Here’s a look at Table 10, which appears on page 150 of the document:

[Click to Enlarge]

My summary of the mechanics behind the estimates:

• Medicare beneficiaries’ total cost-sharing (out-of-pocket expenses) goes down, because these costs are based on the lower negotiated price. Monthly premiums rise, because the pharmacy DIR would no longer be used to offset bids.

• Government costs increase due to higher direct subsidy (monthly premium) payments to the plans. These costs are partially offset by reduced reinsurance (catastrophic) and low-income cost-sharing subsidy payments.

• Manufacturer payments decrease, because fewer beneficiaries progress through to higher Part D benefit phases (coverage gap).

These outcomes—higher government costs and lower manufacturer payments—create political challenges for point-of-sale pharmacy DIR. Pharmacies will cheer the change, while plans will criticize it. Meanwhile, the patient impact is mixed. An unknown number of patients will benefit from lower out-of-pocket costs, but a possibly larger number of patients will see slightly higher monthly premiums.

A move to point-of-sale pharmacy DIR takes us one small step closer to drug channel sanity—and possibly a system without rebates.