Many pharmacies and pharmacists have been dreading 2024 due to the arriving DIR Cliff (tsunami, hangover etc). The new year brings a two very dramatic changes to the pharmacy landscape:
- DIR fees will no longer be retroactive but will instead be reflected at the point of sale in the form of a reduction in the adjudicated amount.
- GER (Generic Effective Rate) contract language is being eliminated in many different plans.
DIR changes
DIR fees are essentially discounts built into the pharmacy contract with the PBM. The discounts were supposed to be based on pharmacy performance; therefore, they were calculated after the close of a period (e.g. a quarter). The discount was therefore collected up to several months after claim adjudication.
These DIR fees often represented up to 10% or more of the adjudicated drug cost — what the plan paid for the drug product, excluding any dispensing fee. These fees added up quickly, representing hundreds of thousands of dollars (about 3% of gross sales) for our pharmacies paid back to the PBM months after the product was sold.
DIR collection at the point of sale means that we are expecting to see a reduction in what we are paid for any given item in 2024 compared to 2023. This will be most noticeable for brand name drugs.
By collecting the DIR fees at the time of adjudication, we remove the uncertainty we had before. This is a good thing. We will now know before selling the product what we are making. This is a net positive change. If we are losing money on a product in 2024, we will know immediately (not in 3 months) and can pursue the appropriate course of action.
GER, MAC and the Implications
The GER model was created, in part, by the industry to address criticisms of the PBM’s Maximum Allowable Cost (MAC) pricing methodology. MAC pricing is proprietary–how the PBM established the price is a company secret.
MAC pricing was added to the traditional reimbursement language as an addition. Contracts originally were written as Average Wholesale Price (AWP) – a percentage. The PBMs added the “or MAC price” later. Early on, there were a few MAC prices. Ultimately, most every drug had a MAC price.
The problem was that pharmacy may not be able to purchase the product anywhere near MAC price. While we could complain that it was too low, there was no guarantee it would ever change. MAC prices are frustrating: they are shrouded in secrecy, can and do change unexpectedly, and rarely do they reflect what pharmacies would consider a fair price.
The GER model, instead, created an aggregate reimbursement level for a group of pharmacies. This group might comprise pharmacies in region, or a chain of pharmacies, or even a PSAO’s member pharmacies. On the surface, GER contracts were promising. You knew what you were going to get paid. The price was once again based on AWP, just like before.
The GER model usually defined the group’s reimbursement as AWP minus a percentage. While this formula is familiar, don’t get too comfortable. There is a subtle but important difference here. The GER contract does not mean that every prescription adjudicated was paid at that rate. No, the PBM might pay some items well above or below that rate, and the reimbursement might change throughout the year. The GER contract language was written to look at the whole group’s reimbursement across all prescriptions during the period.
Using this model, thee PBM would pay you whatever it paid you. That might be a loss, or a nice profit for any given claim at any given pharmacy. At the end of the period (typically a year), the PBM would calculate all payouts across the group and compare it to the GER in the contract. If the PBM missed the aggregate target (high or low) it would “true-up” by either paying the network what it was due or collecting any overpayment.
GER contracts created significant potential for inequity amongst pharmacies within the group. This isn’t an issue if the group is a national chain, as the pharmacies maintain common ownership. The chain is guaranteed to be paid accurately across all its stores per the contract.
Where GER is problematic is the independent space. Independent pharmacies do not share common ownership. Here, one pharmacy might end up on the very short end, with its own average claims paid well below the GER rate, while another might do exceptionally well. Where you landed depended on the blend of products that was dispensed to your patients.
For this reason, transition of contracts away from GER is a positive for independent pharmacy. Well, sort of a positive. GER is being replaced by MAC language in the contracts. What’s old is new again!
2024
So, we enter 2024 with two significant changes. Both share one advantage: a pharmacy will know where it stands with any given claim. Immediately. The pharmacy is now able to decide what changes it needs to make to maintain its viability as a business. On the flip side, the industry has created the potential for further reductions in reimbursement to pharmacies. This race to the bottom has only hurt the public’s access to pharmacies and pharmacists.
Next time we will look at actual numbers coming from claims in the new year and compare them to last year. We will see where the rubber meets the road. Until then, don’t forget to Make Every Encounter Count!
