27 July 2017

Rising Fees Pinch Some Pharmacies

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A sharp rise in fees associated with a popular type of drug plan is chipping away at pharmacies’ profits across the U.S. Michael Deninger, owner of three pharmacies in Iowa, initially pocketed a profit of $9.49 after he sold a 5-milliliter bottle of Bausch & Lomb’s prescription eye drop Lotemax—which came at an initial cost $145.53. At the time of sale, Mr. Deninger said he received $7.75 from the patient in the form of a copay, and $147.27 from the patient’s pharmacy benefit manager. But Mr. Deninger says that weeks after the sale, he gets hit with an additional charge of $8.09 for the prescription, cutting his profit by 85% to $1.40. He said he didn’t know how the fee was calculated.

These fees, known as DIR for direct and indirect remuneration, are a small piece of the tangle of contracts, rebates and reimbursements involved in the sale of prescription drugs in the U.S., which totaled $374 billion in 2014, according to the IMS Institute for Healthcare Informatics, a research group.

Their growth comes with the rise of preferred networks, a drug plan offered by insurers and pharmacy-benefit managers like CVS Health Corp.’s Caremark and Express Scripts Holding Co. that pharmacies join to get access to more patients. The advantage in these networks is volume, especially for those that participate in Medicare Part D—the prescription-drug component of the federal insurance program for the elderly and disabled.

DIRs originated as a way for pharmacy-benefit managers and Medicare to share in rebates the insurers received from drug manufacturers in Medicare Part D coverage. But they have now morphed into a catchall term for many discounts and charges traded between the pharmacy-benefit managers and pharmacies.

Fred’s Inc., a Southern discount chain where pharmacy sales account for half its nearly $2 billion in annual revenue, says mounting costs from these fees were part of the reason it recently reduced its profit outlook by $30 million. The fees now account for 1% of pharmacy sales. Fred’s Chief Executive Jerry Shore said in an interview that these fees had been “extremely negligible” up until this year. Mr. Shore said he was hit hard by the fact that the charges come weeks after the initial sale.

Because preferred-network plans carry lower premiums, they are increasingly popular among consumers. In 2015, 81% of seniors picked these such plans, according to research firm Pembroke Consulting Inc., up from 32% in 2012. But there are tradeoffs for pharmacies. Reimbursement rates are lower, and pharmacies agree to prescribe a certain percentage of generic drugs and monitor whether patients adhere to their prescription drug regimens. Failing to meet these conditions can trigger penalties for the drugstores.

Pharmacy-benefit managers, which run drug plans for health-insurance companies like Aetna Inc. and Cigna Corp., say the fees help lower costs for the payers because they encourage money-saving measures and have performance hurdles. But pharmacists see the fees differently. They say the math behind them is murky and the fact that they are charged retroactively makes it difficult to run their business.

Not all pharmacies are being hit by these fees. A spokesman for Express Scripts said some pharmacies in its network have paid no DIR fees in the past year, while others have seen an increase.

The Centers for Medicare and Medicaid Services—the federal agency that runs Medicare—has said the fees distort the true cost of prescriptions in the Medicare Part D plan it sponsors, since the fees retroactively raise the costs. The National Association of Chain Drug Stores, whose members include large chains like CVS, Walgreen and Wal-Mart, and other industry groups have pushed for a new rule—which will go into effect next year—requiring drug plans to estimate the fees at the time of the reimbursement to eliminate the retroactive charges.

Click here to access the full article on The Wall Street Journal.

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