The Hidden Fee That Affects Accurate Revenue
Direct and Indirect Remuneration (DIR) fees are only recently being recognized by script management systems and it’s critical that pharmacy owners engage with a pharmacy specific accountant. In this video, Ollin Sykes of Sykes & Company, P.A. discusses why it’s important to work with a pharmacy advisory consultant that understands accounting for DIR fees – how to recognize these fees and adjust your revenue at month-end. Not all accountants recognize this hidden fee and if your revenue is not adjusted each month, your numbers will be way off.
If you prefer to read this content, the video transcript is below.
DIR fees today is a major item. It represents anywhere from 1½ to 3½ percent of total accrued revenues from most pharmacies. The issue is, most pharmacies don’t realize what those numbers are. They don’t track it, they don’t look at the reports that are available. And, frankly, only the last year, year and a half have most of the pharmacies’ script systems provided data that provides what those DIR fees are. And the DIR fees typically are subtracted from the third-party PVM payments so the monies that you have coming into your pharmacy electronically are coming in net of DIR fees as well as adjudication costs, and unless you go back and adjust your revenue, for those net amounts that are being taken out as fees, then your revenue is understated, your gross profit is understated, your gross margin is also understated.
And so what we like to do is to pull the reports that are available from the third-party reconciliation systems, like FDS, using that as an example. And making these adjustments at month-end so that gross margin DIR fees, expense, as well as gross revenues are correct, so we know exactly what those are and then we can track it, versus prior-year trends. And obviously, any tracking that anybody’s doing, you’ll be able to see that those fees are up dramatically over last year.
I know the industry, the NCPA is working very hard with the CMS group, the government group in DC, to have some resolve on DIR fees. In fact, I was just reading this morning there was something that just came out this past weekend where they thought there was going to be some adjustments in 2020 for that, but they were not mentioned in the regulation, and they’re still working hard so that those fees can be adjusted pretty dramatically.
But DIR fee accounting and DIR fee reporting is a very misunderstood, very mishandled process with pharmacies in today’s environment that we see, without question.
If a pharmacy owner can’t identify those numbers in a script system, are there other ways to identify them?
Not easily. Not easily at all. So again, most of these systems are coming out through the script, through the third-party reconciliation systems, where the third-parties are reporting that information that they get from the insurance carriers. Again, two or three years ago we got very little of that, and it’s ever-increasing the information that the insurance companies are providing the pharmacy benefit managers, and in turn, the third-party reconciliation systems. But there really isn’t a better way to do that.
There are some script management systems that are giving you an estimation of what they are at the time the script is filled, but that’s just an estimation. But it’s, there’s a lot of confusion in the industry about not only the fact that these are substantial amounts but also the accounting for these fees in today’s environment.
How can that affect your bottom line profits or revenue?
Well, again, it mostly is affecting your gross profit and your revenues the most. Because, if you’re not reporting your revenue as it grows, in other words, if you adjudicate $1,000 of claims and you only get back $850, and you’re only showing $850 as your revenue, your cost of goods sold isn’t gonna change. Your gross margin is gonna be down. And what’s happened in that scenario is you’ve got $150, either a DIR fees or adjudication costs, and we would add back that to income and then show the DIR fees and costs down below the gross profit line, which increases the gross profit to give you a more accurate reading in which your gross profit is in the pharmacy. And again, that’s the most important number in metric that we can look at in a pharmacy, is when that gross margin number is.
Number two most important KPI there is, is what your salaries are as a percentage of total revenue. But it all starts with having the right revenue reported. So if you’re not reporting the correct revenue, because it’s being deducted out and you’re just picking up the net checks that you’re getting, you’re not, you don’t have an accurate accounting system. Again, most of these fees are the 1½ to 3½, sometimes four percent of total revenue. So it can be off that much. And when you’re looking at bottom-line numbers being from three, to four, to seven percent pretax debt income, that’s a substantial amount.
Make sure that the accounting folks that you’re dealing with understand what we just talked about. If they don’t, you probably have the right people, you have the wrong people involved in working through your system. If they don’t know what a PVM is, a DIR fee is, what we just talked about with respect to how to get this data and information through your third-party reporting system, you need to reassess who you’re dealing with. Otherwise, what you’re looking at on your numbers is totally inaccurate.