Realities of “Philmore Scripts”- Minimizing DIR Fees
DIR fees can be a complex and frustrating aspect of running a pharmacy, but moreso now with upcoming changes in fee collection and PBM contracts.
In this episode, our hosts speak with Ben Jolley, PharmD at Jolley’s Compounding Pharmacy in Utah. As a pharmacy consultant on DIR fee tracking and solutions, Ben helps other pharmacists understand why filling more scripts doesn’t always mean more profit due to DIR fees, PBM contracts and related inventory management issues.
Whether you’re a new or experienced pharmacy business owner, this video will provide you with valuable information to navigate the changing world of DIR fees and your pharmacy cash flow going into 2024.
The Bottom Line Pharmacy Podcast is your regular dose of pharmacy CPA advice to fuel your bottom line, featuring pharmacists, key vendors, and other innovators.
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DIR FEE PLANNING FOR 2024 - ASK A QUESTION
If you prefer to read this content, the video transcript is below.
Bonnie: Welcome to the Sykes, The Bottom Line Pharmacy podcast, your regular dose of pharmacy CPA advice to fuel your bottom line, featuring pharmacists, key vendors, and other innovators.
Scotty: Well, yeah, Ben, we appreciate you getting on again. You were talking about getting our mutual clients. A lot of them, we have those conversations with, and they have no idea what they’re doing at the point of sale in terms of DIR fees, and we say, ‘you need to get set up in your system. Here’s Ben’s contact information.’ They call you, you do your magic over there.
And the next thing I know, they’re like, ‘I had no idea I was losing $300 on that prescription,’ and they’re having to make those decisions on, ‘should I even be taking care of this patient? Do I need to send that patient elsewhere?’ So, you’re really seeing some positive, I think, effects overall coming out of that, what you’re doing for those pharmacies.
Walk us through, pharmacy calls you up, and then what happens?
Ben: So, I work on an appointment basis and I go sign in with a pharmacy, usually using a program called Quick Assist. But I can go control their computer for a little bit. We go in and configure their computer.
I most commonly use [PioneerRx], but I’ve used Computer Rx, RX 30 Digital, RX Speed Script, Best Rx, the whole kit and caboodle, Data Scan, the whole kit and caboodle of different pharmacy software.
Some of them are better than others, some of them are worse than others at doing this. The various software solutions almost all have at least some capacity to calculate a DIR fee based on rules that you put into the system.
Most folks, when I call them, they’re like, ‘I’ve never seen this screen before in my software,’ and I’m like, ‘okay, that makes sense.’ It’s not like the software folks tend to advertise this very much, but it’s a very important piece of the software. Then we go configure it so that, based on which contract group they’re with, if they’re based on the PSAO they use, we go punch in numbers that correspond.
Anytime I’m billing this BIN, this PCN, and this group number, I’m going to have a DIR fee of some percent of sales or percent of AWP, or a generic effective rate, or what have you. And that lets the pharmacy then, and then we just talk about how those numbers work, what they like, like where they’re coming from, so that the pharmacy can be confident in the numbers they’re seeing.
Because when you first see a prescription where it says that you’re losing $300, like you were saying, Scotty, you’re like, ‘this can’t be right. There’s no way.’ But if we talk through like, ‘okay, this is where these numbers are coming from, this is where you can go double check the numbers after the fact, after you’ve sold the prescription, after it goes out the door, then the pharmacies can be confident that the numbers that they are seeing are actually true, and that they can do what they, anyway, they can do something about it. There are lots of things you can do short of, as you were saying, discharging the patient. But it does come down to that fairly frequently, which is honestly a sad state of affairs for, I guess, our profession of pharmacy at large. If you want to be a pharmacy that has a modicum of profit, like every other industry wants to have, you have to be selective about your clientele, which is kind of weird. I remember going to the McKesson Pharmacy Ownership Workshop when I was in pharmacy school. A guy from Live Oak Bank came in and talked about, he put up example financials of an owner named Philmore. Philmore Scripts was his name.
Kendell: I like it. I like it.
Ben: Even that short distance removed in time from now, that was the business model that made sense. If you filled more prescriptions, you made more money. But in the system that the PBMs have built over the last five or 10 years, filling more prescriptions is generally a good idea, and you move more volume through your pharmacy. But if you don’t account for filling the right prescriptions, then you might be just filling more unprofitable scripts and driving your business into the ground. It’s a sad state of affairs, but it is the reality of the situation that the profession finds itself in. I, as a specific, for example, last year, I was filling a prescription for a patient. And so just for reference here, even I don’t believe the numbers that I put in at first.
Bonnie: No, you can’t be right. You can’t be right.
Ben: No, exactly. So, this was a prescription for Ondansetron, it’s an anti-nausea medicine, and the PBM came back with it. They were going to pay us $16, of which $10 was the patient’s copay. So PBM was going to cut us a check for $3, and the AWP on this item is really high, and the PBM takes a percentage of AWP.
The AWP is like $4,000 for a month supply or something, and they were going to take a percentage of that anyway, so it worked out to, we were going to owe the PBM $132 in DIR for this prescription where again, the total payment between them and the patient was $13. And I’m like, there’s no way this is right. I have to, if this is true, I have to get documentary evidence of it. So anyway, I decided to let the claim go and filled the prescription. And then, and then I watched my remittances from that PBM for the next month until that claim was paid. And sure enough, clear as day comes through a DIR fee for $132 on the nose. And so like, if that’s the kind of business that you’ve attracted. Right, like filling more of those prescriptions is not–
Bonnie: Not what you want to do.
Kendell: You don’t want to specialize in that.
Ben: You don’t want to specialize in filling prescriptions where you pay the PBM $132 for the privilege of handing out your inventory.
Bonnie: But Ben, I think it would, it, to me, it would almost be a balancing act too of trying, not just looking at one, because you may have a patient that you fill 10 things for a month, and maybe eight of those, maybe you kill it on. But these two you don’t, and if you let them go, they, I mean, I know I would, I don’t want to go to three different pharmacies to get my stuff done every month. So they leave and they take all of it with them. So you kind of have to look at the whole picture. I just don’t know how people can keep track of it.
Ben: Pharmacies: the concept of filling more scripts still makes sense because pharmacies, their chief revenue source, and basically only revenue source in most cases, is filling prescriptions. And so, you have to fill more prescriptions if you want to be in business. But if you’re not aware of what could be happening on the back end of your financials when you get these payments, then filling certain kinds of prescriptions more will lose your pharmacy money. This, to me, is mostly just evidence that our system is totally screwed up, and the PBMs need to have a structural breakup. You can’t have a pharmacy and a PBM in the same company or something.
Scotty: Yeah.
Ben: I don’t know how you solve this situation more broadly, but it’s screwed up.
Bonnie: At least you’re taking steps in the right direction to try to help people, at least see instead of just filling and praying, which we see so many people do. You’re at least finding out the information. Just out of curiosity, are there any systems that you do not work with? I know you mentioned a lot that you do.
Sounds like you’ve got them pretty much covered.
Ben: I don’t think Foundation Systems has a module. They’re a smaller one, mostly in California. They’re based here in Utah actually. We used to use them, but they don’t have a DIR module.
It’s hard to think of who I don’t work with. I know that there are a couple more that I haven’t worked with, but it’s probably 90 plus percent of the market now. And I will say, though, that a portion of the systems only have the capacity to calculate certain types of DIR fees and not others. In general, there are like four types, and some of the systems can only calculate one or two.
What’s interesting is that depending on the software, there are like these two, those two, and it doesn’t necessarily overlap. Like some can calculate based on AWP. Some can calculate based on an effective rate. Some can calculate based on a percentage of your revenue, but only a couple can do all of them.
It’s interesting seeing how our software development friends have variable results depending on who the software is.
Scotty: I’ve got so many questions. I don’t know where to start, really. I can sit here all day and talk about this.
Ben: We can talk about something other than DIR if you want.
Scotty: You are the DIR consultant.
Bonnie: He’s like, I’m tired of DIR fees. Can we talk about something else?
Ben: I mean, it’s fine. I’m just saying if you want to talk about something else.
Scotty: I know you guys have an impressive pharmacy there. I’ve talked with your dad a few times. You guys do some compounding, don’t you?
Ben: We do. So I’m actually sitting in the pharmacy here. That’s the back door of the pharmacy; you can see behind me. Our pharmacy, we’re a traditional retail shop with a decent compounding practice.
We’ve got around 30 to 40 compound prescriptions a day. Which in that case, I can say that filling more prescriptions, it’s always a good thing because the more cash prescriptions you can fill, the better your pharmacy is.
Kendell: I have to jump, dive back into the DIR we gave you a little quick, give a break.
We’re going to have to have some planned breaks. So Bonnie, you plan the next one.
Bonnie: We can talk about ERTC at some point if you guys want to.
Kendell: Oh, no. Oh no. Listen.
Scotty: Talk about RD tax credit.
Kendell: I have a question for you. If you had to give an estimate, the average person you talk to about DIR fees is pharmacists, do most have no idea and they know, they have no idea of what’s going on when they fill a prescription? Or do they think they know when they really don’t, or do you find some people who actually have an idea of what’s going on at the point of filling the prescription?
Ben: That’s an interesting question. Basically, everyone I talk to has a sense of how much DIR they paid in the last year. That’s a number that every pharmacy knows. But I feel like knowing how much money you paid in the last year for DIR fees is like knowing how much you paid in payroll without knowing which employee makes how much money. There’s not much you can do about it, and it’s just a big number that, “Oh no, it’s just the way the world is.”
It’s just the way the world is. So, every pharmacy I talk to, they know a gross figure, and they say some outlandish number. I’m like, “That’s insane. Let’s get that down somehow.” I paid a quarter million or a half million in DIR fees last year. Okay, let’s figure this out and try and get you to a point where like, you’re paying less than that though.
I will say that, I think that pharmacies after they, when they talk to me, are focused on getting that number down. When the number that really matters is not how much DIR fees you pay, it’s what your profitability is after accounting for the DIR fees, right? It doesn’t matter if you can get your DIR fees to $0 by not contracting with any PBMs. That might not be a terrible idea for every pharmacy, but it’s probably a terrible idea for a lot of them.
Bonnie: Yeah, you may have paid $200 on a prescription for a DIR fee, which sounds terrible, but what if you made $800 on it? That one’s okay.
Ben: Right, exactly. So long as you know how much money you are paying out on a prescription level, you can then know how much money you’re making for that prescription after DIR. At that point, the DIR is a secondary focus, and the primary thing is whether you made money on this prescription or not. And if you didn’t, what can you do about that?
But I, I guess going back to your question though, everyone knows how much money they paid in DIR, and if they don’t, they can find out pretty quickly by asking their PSAO or looking at their reconciliation. There is a decent fraction of folks who have some sense of the DIR fees, especially for some of the PBMs where the numbers make more sense and are easier to figure out, and that they give you like a claim level detail on. OptumRx takes 10% of the ingredient cost paid. A lot of pharmacies will just say, “Oh yeah, 10%. Yep. Okay, I’m getting paid a hundred, I’m going to really get 90.” They may not know how to set up their software to show them that automatically, but a lot of the pharmacy owners have this in the back of their head and know it. Their staff doesn’t know and can’t do anything about it, but at least for some of the easier to calculate ones.
When we start talking about some of the other PBMs, it’s very confusing. They have no idea what’s going on.
So, it just depends on the owner whether they do reconciliation and how much attention they pay to this. But my goal when I talk to someone is that they can see every single one before they fill a script, not just one PBM where they can figure it out pretty easily.
Scotty: I will say that when we work with hundreds of pharmacies and track the DIR fees for all of them, we get them in the financials. We track them based on a percentage of revenue. And so, two years ago it was two and a half percent of revenue, DIR fee average, a year ago, two years ago, whatever, three and a half percent, and then it’s four and a half percent last year of revenue. So it’s creeping up every single year.
But you can see the difference for those pharmacies that are engaged in DIR fees, that are inquiring and wanting to know what’s happening with DIR fees in their pharmacy. Those pharmacy owners typically are below average in terms of DIR fees compared to what we typically see at other stores. So, I think that’s an important point for pharmacies out there.
If you are engaged or involved in what these DIR fees are and how they impact your pharmacy, you can see a difference between different pharmacies and a pharmacy that has no idea what they’re doing from a DIR fee perspective. They don’t have any information keyed into their system, point of sale system, and so on and so forth.
So, I think you just kind of reiterated that point that we see.
Ben: Yeah, I mean, I think I also want to go on a little soapbox here for a second about adherence measures. Because a lot of pharmacy owners think that DIR fees are about adherence measures and think that if they can just work on their MedSync better and get all their patients to take their medicines on time, my DIR fees will go to zero.
That’s not how it works. DIR fees are not about adherence. Adherence is justification for money laundering. DIR fees are about money laundering and using pharmacies as drug mules to launder that money. That’s what it really is. And when you start seeing these fees in your system, it becomes a lot more obvious what’s going on.
And if you start diving into what the contracts say, it becomes even more obvious. There’s one Part D plan this year that charges four and a half percent of revenue, and I’m like, “Well, I’m glad those pharmacies have such a diversified business model,” because if they were completely dependent on this one Part D plan for all their business, their DIR fees would be at least 20% of sales.
There’s one Part D plan that charges a DIR fee of between 15% and 17% of ingredient cost paid for brand name drugs and between 39% and 41% for generics. So, what that means is that even if the pharmacy has perfect adherence measures, they’re still going to pay 39% on every generic drug they sell through that plan.
For brand name drugs, they’re, regardless of whatever else they do, they’re going to pay 15% of their sales for brand name drugs that are sold through that plant. The adherence measures do matter because we still have 2% of sales there that we can move by paying attention, but 2% is a heck of a lot less than 41%.
I think that the PSAOs and our industry at large are focused far too much on “you have to go build an adherence program and make sure all your patients are taking them on time and focusing on that 2% of sales, not on that 40% of sales that is really the bigger picture.
Anyway, that’s a bugbear for me when people say, “How do I get my adherence measures up?” Adherence measures matter, but not as much as you would think.
Scotty: So, knowing what you’re being paid, who’s paying it and knowing what you’re feeling is, is just part of that process.
Bonnie: That makes a lot of sense. I mean, I haven’t really thought about it like that. You can’t just look at your fees, which we’ve known. That’s what we do for our clients. But that’s as far as we can take it – showing them how much they paid. Because we’re number people, but beyond that, they’ve got to look beyond the numbers then and figure out what makes up that number.
Like you said, even if they paid half a million dollars that year, they could have made money on every script they did, and made a lot of it. That just could have been there, what they did. But they have to know beyond that, each specific one.
So, Ben, I have a question. How are you handling those scenarios with patients when you can see that I’m losing money big time on this, I can’t fill this script?
Ben: So that’s when I put on my pharmacy school hat and start thinking about, is there anything I can do to change this outcome? Because there isn’t always. If you’re filling a prescription that’s brand only and that’s the only drug in the therapeutic category, there’s not much you can do therapeutically to change the picture so that you can turn a loss into a profit. But that’s very few prescriptions that meet that.
There are a lot of situations where very simple and stupid things can change that picture entirely for the pharmacy.
As for an example here, one of the more common types of so-called DIR, which is one that will continue for commercial plans next year. A lot of commercial plans use generic effective rates to pay pharmacies. So do a couple of Part D plans. Part D Medicare has changed the rules, so DIR fees won’t be a thing in 2024, but generic effective rates and commercial plans aren’t subject to Medicare rules. They can keep paying you in that same way. Anyway, a generic effective rate, it sounds scary and we talk about it in a scary way, but what it really means is that what your software says at the point of sale, when you bill a claim and the PBM says, “I’m going to pay you this much for it,” that’s just garbage information. It doesn’t really mean anything.
The pharmacy will really get paid at the end of the day some percentage of the AWP of the drug. It’s actually a situation that makes a lot of sense for big chain pharmacy accounting. They can figure out exactly what their financials should be if they know about what volume of product they’re going to move, they know the AWP of the products they’re going to move, and they know what the contract rate is, because then it’s a simple math problem of, “Okay, this AWP times this contract rate minus this cost of goods equals we’re going to make this much money this year.” And so where a generic effective rate though, it means that, yeah, again, whatever they say they’re going to pay at the point of sale, whatever the patient’s copay is even is only meaningful to the patient and not really meaningful to the pharmacy’s bottom line.
What matters to the pharmacy’s bottom line is what is the AWP of the drug? And what’s the contract rate that they’re getting paid off of that AWP? And so some things that feel incredibly stupid and the fact that we, that as an industry this matters can be used to change that picture.
For example, generic metformin immediate-release tablets are a product that pharmacies typically move hundreds of tablets, if not thousands of tablets every month. It’s a very commonly taken medication for diabetes, it’s like the first-line therapy. There is a manufacturer of that who sets an AWP of 40 cents for every tablet for the 500 milligram tablets, and there’s a manufacturer who sets an AWP of 70 cents a tablet.
If you have a contract that says that you get paid 10% of the AWP for that drug, for any drug, that means that for the one NDC, you make 0.40 cents for every tablet and for the other, you make 7 cents for every tablet. Given how much volume pharmacies move of this, just switching which product you’re stocking in the pharmacy makes an enormous difference in the pharmacy’s bottom line.
And this is part of what being able to see these DIR as a general concept at your point of sale lets you see, lets you do, is in part just say, “the AWP of the product I dispense matters a lot more than I thought it did.” And so then when you’re doing your procurement, and you’re going and ordering your products, most pharmacies have been trained by the way that Mac prices work over the last 20, 30 years to just always buy whatever’s the cheapest product on the market. They see 20 different NDCs for metformin from their wholesaler, and they say, okay, this one costs 2 cents a tablet, I’ll buy that one.
But that 2 cents a tablet, one might be the one where they get 0.40 cents in revenue end of day, where if they spent 3 cents a tablet, they’d be getting more money, they’d actually be making a profit on it. This is, it’s incredibly frustrating to me that this is how we pay pharmacies, but this is how we pay pharmacies.
Scotty: Wow, it’s crazy!
So, this is exactly what I mean by being engaged in your pharmacy with these DIR fees, exactly what you just said. Now, with that being said, what about some pharmacy listening out there right now, and they’re busy running their pharmacy, taking care of their patients?
What would you suggest, Ben, for a pharmacy to get their foot in the door to start approaching their DIR fee or their DIR fee in this way, that hasn’t ever done it before like this?
Ben: Yeah, so I guess I would start by making sure that your system has an estimate, whether that means you hire me or whether that means you go and you download a guide from your PSAO and you go find your contract from all your direct contracts, and then you read through them and put the numbers in.
I’m obviously making a case for why you should hire me here.
Bonnie: I was about to say, just call Ben.
Scotty: Just plug it.
Bonnie: Next question.
Kendell: For a couple of weeks and get that appointment.
Scotty: We have no conflicts of interest with Ben as a vendor. So he doesn’t pay us anything. He does come on our podcast and talk about it though.
Ben: So, you can set it up yourself if you want to take the time to do that. But again, you’re busy running your pharmacy, and it doesn’t really make sense in most cases. But get the numbers in your system to start with. If you’re using [PioneerRx], which I know a lot of y’all’s clients are, there’s an option to have the system put an extra workflow step in place anytime the pharmacy’s losing money on a prescription.
And whether that’s because of DIR or not, you should have that function turned on to where if you’re losing money that needs someone to review it and make sure that, yeah, we actually do want to send this out the door, or maybe we should do something about it, change the NDC we buy, figure out if we can substitute something else, talk to the person about getting that medicine in another pharmacy or whatever.
But cutting back on the losses that a pharmacy can have by just adding a workflow step to say, okay, anytime I’m losing money, I want it to require manual review, that makes a huge difference.
Bonnie: And that sounds like a no-brainer.
Ben: Yeah. I mean it becomes overwhelming for a lot of pharmacies.
Scotty: And the computers doing all the work.
It’s just saying, Hey, here you go.
Ben: Here’s your list of prescriptions you need to go look at. It can actually be kind of overwhelming for pharmacies at first. So because there’s just so many prescriptions that they lose money on, like especially if we’re talking a high volume pharmacy that’s doing 800 prescriptions a day, they might, in a given day have like 80 or 90 prescriptions where they’re losing money.
So, that’s a lot of work to look at every single one of those every day. That starts to build up really quickly.
Bonnie: I’m going to ask a dumb question here. On the front end, to me that makes it’s going to be more work because you haven’t done it yet, right?
Ben: Right.
Bonnie: Once you get some of these kind of figured out, then it starts to become less.
Ben: It should drop off.
Bonnie: But does a lot, is there any situation where you get one figured out, let’s say a particular drug, but it changes, so it could completely change? Or does it pretty much stay?
Ben: Well, in pharmacy, you can always have your profitability change at any given point on a generic drug, especially because PBMs use so-called “lesser of” logic to pay pharmacies. They pay you if they don’t have a MAC price, they pay you AWP minus some percentage, but then the next day they might come up with a maximal liable cost on it, and then suddenly your profitability goes from whatever your cost of goods is compared to that AWP minus like 20-30% to basically your cost of goods is what they’re paying you.
And so that can happen anytime, especially if you’re trying to play this balancing game of “okay, we make money on this one, we lose money on this one.” That one where you’re making money, it may have it may drop off. If you’ve gotten a prescription where you’re losing money and you’ve gone and said, “okay, we’re going, we’re going to change the medication we’re dispensing, we’re going to change which product we’re ordering for this.”
That shouldn’t change, at least not very quickly. It certainly can, but it doesn’t usually change that quickly. And so, a lot of pharmacies that I talk to will set up that profit block function because it can be so overwhelming. And if you look at a prescription, you’re like, “I’m losing 5 cents. What’s the big deal?”
Well, you’re losing 5 cents on that prescription, that’s no good. Or “I’m losing $5. What’s the big deal?” Well, you’re probably going to fill that 12 times this year. You’re not really losing $5, you’re probably losing like $60.
So, a lot of pharmacies will start, though, by putting that profit block to say that losing money means not that they have a gross profit of below $0, but they have a gross profit below $20, for example, so that when they fill the prescription, they can say, “oh, okay, this one I’m losing $20 on. This one is worth spending my time on.”
Where if it was one where I was losing 5 cents, I—
Bonnie: Kind of, have to prioritize where you spend your time.
Ben: Exactly, so, they start with the $20 ones and then as they’ve worked through all of those, then the next month they might tighten it up a little bit until they get down to the point where every time they lose money it needs extra review.
But just working it into your workflow that anytime you lose money, you need to look at those prescriptions and do something about it. It’s a surprisingly big difference to the pharmacy’s bottom line.
Scotty: What about, where does contracting PSAOs fit in all this, in your opinion? Because that’s a key piece and I want to just get your thoughts on that.
Ben: Yeah, that’s a good question. So, I’m sort of famous among pharmacies for being a pharmacy that does not have a PSAO. We made that decision at the end of 2019, starting January 2020. We haven’t had a PSAO and I am our PSAO, I guess. I do all of the contracting for the pharmacy. PSAOs, as a general rule, have a selling point that by aggregating a bunch of pharmacies, they will get additional leverage to contract with PBMs, which is a fair point. There are situations where they do, in fact, have a better contract than I’m able to obtain as a single pharmacy entity, specifically a single pharmacy entity in a very crowded market. There is a pharmacy a quarter mile down that road, there’s a pharmacy about a half mile that way, and another pharmacy about a mile that way, and another one about a mile that way. So, we are in a very crowded pharmacy market here in Salt Lake City, and so I don’t really have any leverage against any PBM to be able to say, “Hey, give me better contract rates.” So basically, I just take whatever they’re willing to offer.
Now, pharmacies that are in a situation where they’re the only pharmacy in 20 miles have a very different position in contracting than I do.
Scotty: A stronger position, I guess.
Ben: A much better position than mine. But even then, doing contracting in our pharmacy by ourselves has sort of given the lie to how much benefit contracting as a group is to a PSAO versus to our pharmacy. What I’ve found is that it’s worth about 25 basis points of AWP and about 10 cents a prescription, depending on the PBM, but it’s not nearly as much money as I originally thought it was, first of all.
And second of all, it comes at a cost, both of membership fees that some other folks that have done the same thing as me have focused on. You have to pay this two or three hundred dollar a month fee to your PSAO to be part of them, so they can run their operations, which is totally justified, makes sense. But also, that is a cost that the pharmacy does incur, but that’s not the most important part to me about what you give up when you join a PSAO.
The more important thing is the ability to say “no.” If you’re part of a PSAO, the PSAO has the ability to say no to a contract, which then you have the ability to say yes to. But if the PSAO says yes to a contract, you don’t have the ability to say no. The PSAOs operate in a business where they have to please their membership, and some of the membership does not care what the contract says, does not care if it looks profitable on paper, they just want to be in the network with every single plan. Some of the membership is more like I am, that says you don’t need to be part of every single plan’s network. You need to be making money on every network that you’re part of.
That’s a conflict inherent to just being a PSAO, is that they have to choose, on any given contract, which of those two subsets of their membership to please. When they make the choice to decline the contract, like MedlineRx declined a major Part D contract, I have heard that they’ve lost some membership as a result. Some of their membership is extremely pleased, but some of their membership has decided to leave because of it. So, when a pharmacy chooses, when a PSAO chooses to decline a contract, that has impacts on the pharmacy.
But when I’m doing my own contracting, I know what my pharmacy needs. I know the situation in my pharmacy, and I’m able to make the determination whether this contract makes sense for our pharmacy to take or decline. And that to me is a pretty significant thing because, so long as your pharmacy takes some Part D plans, any given patient can use your pharmacy using their insurance.
So, in Part D, folks can change plans. They may not be able to change plans today, but during open enrollment, they can change plans to one that you do accept. And if you find that of your Part D business, you make money on these five plans and you lose money on these five plans, and you do your own contracting, the solution to that problem is pretty obvious; you stop taking these five plans, you don’t contract with them anymore.
You only contract with these five plans. And then the patients that were previously on those plans where you lose money can either change plans and continue to use your pharmacy, not change plans and pay out of pocket, or change pharmacies.
But I think that too few pharmacies take into account the fact that by joining PSAO, they’re giving up the right to say no.
Scotty: So, I often see pharmacies sign up for whatever PSAO, but they’re not, their patient mix may not be a fit, or what that PSAO offers, I guess is the way to put that.
And they may be getting, the performance is not where it should be because they’re with the PSAO that’s not meeting that patient mix. That’s pretty common, I mean, I just see where pharmacies don’t even have a clue that the PSAO and their patient mix kind of make a difference.
Is that a true statement, you think?
Ben: Oh, absolutely. Yeah. I mean, I’ve heard it said that demographics is destiny and what I mean by that is like what mix of patients you have, whether they’re part B or commercial. Whether they pay out of pocket or use insurance, what mix of medications they get, determines a lot of the pharmacy’s bottom line, at least, is determined by those factors. And so, you can be in an like, just as a small, for example here, pharmacies can generate revenue outside of prescription dispensing through something like diabetes self-management education. But it’s a lot easier to do diabetes, self-management education when the demographics of your pharmacy’s geography is that 20% of people have diabetes or pre-diabetes.
If you’re in an area that’s healthier where only 5% of people have diabetes, it’s still possible to make money but the available market for you to make money on, in that program is smaller.
So, it’s harder to find the folks that are going to utilize your service because there’s just fewer of them in your area because of, as a percentage of people in your area.
So, yeah it, what PSAO you have, what contracts you have, which PBMs the local businesses around you use is a big determining factor of whether a pharmacy will make money on a given group of patients and prescriptions.
Scotty: Well, I want to definitely touch on just your thoughts on 2024, the changes. We’re calling it, the big unknown. I mean, you don’t really know what’s going to happen. Nobody really knows. So, obviously, no one at the point of sale is going to be a good thing, I think.
What do you foresee, what’s your kind of thoughts on what 2024 is going to be like, Ben?
Ben: Okay, so, my primary prediction is that the financials for pharmacies in March and April of 2024 are going to look very, very bad. January and February probably look pretty normal. After April, they probably look pretty normal again, but March and April, I think you’re going to see a substantial drop.
The reason for that is that there’s only one PBM that takes DIR fees after they pay you for the claims. Most of the PBMs will, at the time they cut you a check for a claim, they will also take the DIR out. So, the DIR fee is really funny money; you never actually see it hit your bank account.
For one particular PBM though, they pay the full amount that they said they were going to pay, and then several months later, they take the money out of your check.
Scotty: On a trimester basis.
Ben: Correct.
And so what that means is that your claims from the end of this year, from September through December for that PBM, will accrue a DIR liability, but you won’t pay that liability until March and April of next year.
From what I have understood of what things look like, and from the few contracts that I’ve seen so far, the primary approach that PBMs are taking is they won’t be taking DIR anymore because they can’t. Medicare changed the rules, and no more money laundering is allowed.
So instead, you have to just pay the pharmacy. Like basically, in the past, there have been some PBMs that will pay you AWP minus 20, for example, and some PBMs that’ll pay you AWP minus 10 and then take 10% DIR. So, it works out to about the same number at the end of the day but by them playing this game of paying you more upfront then taking it back, they’re able to gain an advantage against other Part D plans.
But that won’t be available anymore. So, I think most PBMs will just start paying substantially less upfront. And so instead of needing to hire me to see that your prescription you’re breaking even, or slightly losing money on, you’ll just see that you’re losing money on those prescriptions.
Which I saw one PBM’s contract the other day for next year, and it’s a doozy. If that’s what all the contracts are going to look like for next year, and pharmacies keep filling brand-name drugs, they’re going to be out of business. This PBM seems to think that they can pay between 6% and 11% below the national average drug acquisition cost for brand-name drugs, just across the board for Part D next year, which is a lot.
So, I don’t know that all the contracts will look like that, but that’s at least what that one does.
So anyway, for 2024, I think that we will see much lower upfront revenues, but I think that honestly, we’ll see only a slight decline in net revenue after DIR fees.
So, like if right now you’re doing $4 million in sales and you’re paying $500,000 in DIR fees, I think next year you’ll just see three and a half million in sales, or maybe $3.4 million in sales. That’s my main prediction. But in March and April, you’re going to see a crunch in cash flow because of you were getting paid more during this year, and they’re going to collect on that amount in March and April at the same time that they’ll be paying the lower amount upfront.
So, if you can make it through April cash-wise, and your business still makes sense in April, I think you’re going to be fine.
If you’re still making money on prescriptions April at the end of April next year, I think you’ll be fine.
Scotty: Well, it’s going to be interesting for sure, and a lot of the things we’ve been doing here are how to prepare for that cash crunch. Our four-point plan we’ve put together is to get those financials in order. You have to know your cash flow and your pharmacy. Understand your cash flow, improve that revenue line as best you can with some cash-based areas, maybe as cash compounding or whatever it is you’re doing, and then control those expenses, and of course, the mindset and just being engaged in this whole process because it makes a difference.
Ben: I’ll throw a fifth point in there, which is if your patients qualify for any reason to change plans during the year and not just during open enrollment, if you engage with them now in March or April or May or June, and you convince them to change from that plan to another one where the DIR fees are collected now instead of later, or to a plan that doesn’t have any DIR fees at all, then you’ll spread out that crunch and cash flow over the next several months rather than just seeing all of it hit all at once.
Bonnie: Yeah, that makes sense.
Ben: And there’s a good fraction of any given pharmacy’s patient base who, for one reason or another, can change plans during the year. If you go to medicare.gov/plan, compare, pretend you’re a patient, try to enroll in a plan, you’ll see reasons why they’ve got like 25 different reasons. But if you can get your patients to change plans now, rather than just waiting till open enrollment, that’ll reduce that impact.
Scotty: Get you ahead of the game.
We’re going to let you go. We appreciate your time, Ben, and appreciate certainly all you do for our clients, for the industry as a whole, and we hope to see you out on the road this year.
Bonnie: Hey, Ben, really quick, will you give listeners your contact information, how they can get up with you for your help?
Ben: Yeah, so my name’s Benjamin Jolley. My email for DIR stuff is [email protected]. That’s when I started doing the consulting. And then you can find me also at, if you just wanted to book an appointment with me, it’s calendly.com/dir-fees, all lowercase. So, Calendly is like calendar but with ‘ly’ at the end. That’s where my schedule’s at.
Bonnie: Perfect.
Kendell: Thank you so much.
Scotty: Yeah, thanks again Benjamin.
We certainly appreciate it. Take care. Bye-bye.
