October 2017 Edition Vol.11, Issue 10

The Need for Transparency with DIR Fees

By Christina Bennett, MS

Pharmacy benefit managers (PBMs) have found a new way to manipulate pharmacies—specialty pharmacies in particular—for their gain with direct and indirect remuneration (DIR) fees.

The term “conflict of interest” has never really been more justly stated than when it describes the relationship between a PBM and a specialty pharmacy, said Jeff Vacirca, MD, Community Oncology Alliance, CEO, New York Cancer Specialists, in an interview with OBR. “It’s an atrocity,” he told us.


Legit DIR Fees Have Become Warped

Normally, after a drug is sold to a patient, PBMs and insurers receive additional compensation, such as manufacturer rebates, that produce a net drug price much lower than the list price. Under Medicare Part D plans, patient co-pays are calculated off the list price of a drug, not the lower net price.

Having co-pays calculated off the list price, which typically is inflated and not transparent, means neither Medicare beneficiaries nor CMS share in any cost-savings. CMS requires all transactions after the point of sale to be reported to CMS; these transactions are called DIR fees. CMS then uses the reported DIR fees to capture the true net price of the drug and calculate accurate payments to Medicare Part D insurers.

However, PBMs have misrepresented DIR fees to their benefit. Several months after a prescription has been dispensed, PBMs are charging fees to the specialty pharmacy that eliminate most, if not all, profit it may incur for dispensing the drug. Retail pharmacies are being hit by these fees as well, but mostly this practice is occurring within specialty pharmacy and with Medicare Part D plans.1,2

“A lot of PBMs own pharmacies, such as CVS Caremark that has its own specialty pharmacy, and they always keep saying, ‘well they’re paying DIR fees too’—but you’re paying them to yourself,” said Eric Dallara, RPh, pharmacist in charge of the dispensing pharmacy at New England Cancer Specialists.

Four national PBMs—Express Scripts, Inc., CVS/Caremark Corp., OptumRx, and Prime Therapeutics—control 80% of the prescription drug market and they each own a specialty pharmacy.1,3-6

Additionally, the four largest Medicare Part D plan sponsors—UnitedHealth Group, Humana, SilverScript (CVS Health), and Express Scripts—own or are affiliated with a PBM.2 Having PBMs and insurers so closely tied together is like taking money from one pocket and putting in another.2

Worse, PBMs do not always label fees as DIR fees; instead they use phrases like “network rebates” or “pharmacy performance payments.”1

When DIR fees are referred to as something other than what they are, there is little evidence that the funds are reported and returned to CMS, states a white paper by Community Oncology Alliance.1

By not reporting all so-called DIR fees collected from pharmacies, PBMs thwart CMS’s efforts to make drug pricing transparent. Less transparency means patients and the government (and taxpayers) pay more for Part D prescriptions while Part D insurers pay less.

Ted Okon, MBA, Executive Director of Community Oncology Alliance, suspects one reason PBMs are using DIR fees is because the manufacturer rebates they receive (and profit from) have attracted more attention. The plan sponsors want a larger share of those rebates, which becomes a losing source of revenue for PBMs, he said.

“PBMs basically had to supplement that with a new source of revenue, and that new source of revenue became these DIR fees,” said Mr. Okon.


DIR Fees: Fraught with Abuse

“DIR fees used to be 2 dollars here or 5 dollars there, and now it’s getting to where it’s hundreds and hundreds of dollars per prescription,” said Mr. Dallara. For several years, PBMs charged pharmacies DIR fees, but the fees were minimal, attributed to charges like administrative fees, and made known to the pharmacy within a few weeks after dispensing a drug. Starting around 2016, PBMs added a performance-based fee that is applied several months after a drug has been sold.2

“They’re retroactive DIR fees, so we don’t even know what we’re paying until after the claims have already been paid. [PBMs] pay us the money and then take the money back,” said Mr. Dallara.

PBMs impose performance-based DIR fees on retail and specialty pharmacies. Retail pharmacies pay flat rates per prescription whereas specialty pharmacies pay 3% to 5% of the drug list price, but as high as 11% has been seen.2

When list prices are thousands of dollars, PBMs can extract massive amounts of money from specialty pharmacies. Specialty pharmacies have narrow margins, generally between 2% and 5%, so DIR fees at those rates eliminate most—if not all or more—of a specialty pharmacy’s profits.2

The other problem with performance-based DIR fees is the quality metrics used are a “rigged system” and do not reflect a specialty pharmacy’s true performance.2 CMS created the Star Rating System to encourage insurers (and by association PBMs) to provide higher quality services. In turn, PBMs have created similar quality metrics to rate specialty pharmacies.

The problem is most of the quality metrics apply only to retail, not specialty, pharmacies, wrote Rebecca Shanahan, JD, CEO of Avella, a national independent specialty pharmacy.7 For example, specialty pharmacies are graded on their patient adherence to several medications common in retail, but are rare in specialty pharmacies. “PBMs should acknowledge the inapplicability of these metrics to specialty pharmacies and create performance metrics that are applicable, and then calculate DIR fees accordingly,” she wrote.7

Being assigned an accurate performance score is critical since it dictates DIR fees: Pharmacies with higher performance scores are rewarded with lower DIR fees. Equally critical is having appropriate quality metric categories, because if a specialty pharmacy does not provide the services in a category then their score is the average score of other pharmacies in the network.1,2

Also, PBMs extract a percentage of the list price on costly medications that they do not factor into a performance score, but typically make up most of the drugs dispensed by a specialty pharmacy, such as with oral oncolytics.

When a specialty pharmacy receives invoices for DIR fees, Mr. Okon describes the fees as “lump sum figures” that are “impossible to interpret.” The invoices are not itemized, making it difficult to know what specialty pharmacies are being charged for.

Mr. Dallara echoed this sentiment and said that the PBMs “don’t tell us what prescriptions they’re using to calculate a DIR fee.” He often reverses claims, and his concern is that because he does not receive an itemized list, he could be paying fees for prescriptions that were never actually filed as a claim through Medicare Part D.

“The problem is the PBM market is so consolidated and PBMs are so large that there’s nowhere else to go,” said Mr. Okon. “You either pay it or you’re out of their network. These DIR fees are a nice way of basically calling what is really extortion from the PBMs.”


Patients Hit Too

A specialty pharmacy’s bottom-line is not the only casualty in PBM-imposed DIR fees. Patients with cancer are impacted as well, because pharmacies are either going out of business or they’re put in the position of losing hundreds, if not thousands, of dollars, said Douglas Hoey, RPh, MBA, Chief Executive Officer of the National Community Pharmacists Association.

According to Nancy Egerton, PharmD, BCOP, Vice President of National Community Oncology Dispensing Association, Inc., if a practice has a dispensing unit and can’t keep their pharmacy in business because they’re underwater on prescriptions, then those prescriptions are going to be forced to mail order—”which is [PBMs] intent.” Dr. Egerton is Area Manager of Pharmacy Services for New York Oncology Hematology.

“It’s just not good for patient care,” she said. Patients who obtain oral oncolytics from mail order may often wait one to two weeks for delivery, which delays their start of treatment.8 Dr. Egerton explained that in a physician dispensing practice, the patient receives their medication at the point of care and the pharmacist is able to educate the patient face-to-face about how to take their medication and handle side effects.

“That’s the ideal way to take care of patients when you’re dealing with these kinds of drugs. We’re not talking about aspirin. We’re not even talking about Lipitor. We’re talking about drugs that have very toxic side effects as well as very complex schedules that need to be adhered to,” said Dr. Egerton.

The four PBMs who control the market each own specialty pharmacies—all of which are mail-order only.3-6 (CVS Specialty pharmacy offers in-person pickup at CVS stores, but patients’ in-person interaction is with only retail, not specialty, pharmacists, and prescriptions are not available right away; the prescriptions must be shipped there.6)

With the approval of oral cancer therapies increasing, the specialty pharmacy market is ripe for growth; this year 12 cancer drugs have been approved so far, 7 of which are oral therapies.9


Keeping Drug Prices High and Insurer Liability Low

In a report earlier this year, CMS stated that retroactive DIR fees, such as the ones PBMs are imposing, keep patient out-of-pocket (OOP) costs high because they widen the gap between the list and true price of a drug—and that gap has been widening significantly; in fact, since 2010, DIR growth has outpaced the growth of Part D drug costs.10

“When the net cost of a drug from a manufacturer turns out to be less than what the fees that a PBM applies to the cost of a drug, and then a patient must pay a co-pay based on those fees, to me that’s completely criminal,” said Dr. Vacirca.

Medicare patients being forced to pay more than they should comes at a time when cancer drug prices are already causing financial distress among patients and poorer outcomes.2,11 With about half of individuals diagnosed with cancer being older than 65, misconduct within Medicare Part D harm a large portion of the cancer patient population.12

High list prices not only keep OOP costs high for patients, but also cause Medicare beneficiaries to enter the coverage gap (donut hole) quicker.1 Mr. Dallara explained that an oral cancer therapy can be $10,000 per month, and patients often reach the catastrophic stage in just one fill. CMS notes that high list prices shift Part D spending to the catastrophic stage, where Medicare pays about 80% of drug costs and Part D insurers only 15%.10

DIR fees are fueling drug prices, said Mr. Okon. “PBMs have all the vested interest in the world to having the list drug price as high as possible because DIR fees are computed off the list price, not the net price.”

Insurer’s also benefit from high drug prices because retroactive DIR fees shift costs away from them and onto Medicare patients and the government, keeping insurer liability down.


Congressional Action, PBM Pushback

National Community Pharmacists Association and other associations have turned to Congress to stop this abuse. In February 2017, the bill Improving Transparency and Accuracy in Medicare Part D Spending Act (S.413/H.R.1038) was introduced in the House and Senate and aims, not to eliminate DIR fees, but to prohibit applying them retroactively on clean claims submitted by pharmacies.13.14 That means DIR fees would have to be disclosed to pharmacies at the point of sale. Similar bills (S.3308/H.R.5951) were introduced in September 2016, but have since expired.1

“It is not a cure all; it is a step in the right direction,” said Mr. Hoey regarding the legislation. “There would at least be transparency into the transaction.”

Knowing DIR fees at the point of sale would lower the list price of a drug and allow both patients and CMS to benefit by having lower co-pays. Lower list prices would in turn slow the pace at which patients advance to catastrophic coverage, thereby reducing Medicare Part D spending. Also, specialty pharmacies would know at the point of sale if they were dispensing a drug below reimbursement, giving them a chance to adjust their business and determine the cause for dispensing below reimbursement.

Dr. Egerton explains specialty pharmacies could enter a discussion with PBMs about their contract rate or examine their acquisition contracts and see if acquisition drug cost or manufacturer pricing is an issue. Dr. Egerton said, if a pharmacy is going to be underwater on a specific prescription, they could also decide whether they should stop filling that medication.

PBMs fervently oppose this legislation.2 In a statement to OBR, Prime Therapeutics, a PBM, argued against disclosing DIR fees at the point of sale, writing, that doing so “would not diminish the original cost of the drug to that consumer. In fact, it would increase consumer costs via premium increases.”

While it is true that PBMs’ DIR fees applied after the point of sale keeps Medicare beneficiaries’ premiums low, it is not the whole truth. Insurers determine Medicare beneficiaries’ premiums based on the insurer’s liability: If an insurer’s liability is low, then beneficiary premiums are kept low.

Moreover, PBM’s retroactive DIR fees shift costs away from insurers and onto Medicare patients and Medicare Part D plans. This is one way insurers have kept premiums constant.10 CMS notes that Part D insurers’ liability has been shrinking each year and cited that Part D premiums have not grown much.10

In a statement to OBR, Express Scripts argued that “the legislation subtlety restricts oversight efforts to prevent fraud, waste, and abuse, which remains a significant concern in pharmacy.”

The problem with this argument is two-fold. First, as Mr. Hoey explains, “the language of the bill would only prohibit retroactive payment reductions on ‘clean claims’, which are only those without defect, fraud, etc.” Second, the quality metrics PBMs use to hold specialty pharmacies accountable are irrelevant and do not actually distinguish between high performing and low performing specialty pharmacies.

“I don’t see Congress allowing this to continue the way it is,” said Dr. Egerton. “[PBMs] have a lot of lobbying power and they’re very large companies with a lot of power, but when you really look at what’s going on, it’s just kind of unseemly—and really the patient is the one that ends up paying the price at the end.”



  1. Frier Levitt. PBM DIR Fees Costing Medicare and Beneficiaries: Investigative White Paper on Background, Cost Impact, and Legal Issues. January 2017.
  2. Frier Levitt. “Performance” Based DIR Fees: A Rigged System with Disparate Effect on Specialty Pharmacies, Medicare Part D Beneficiaries and the U.S. Healthcare System. March 2017.
  3. Express Scripts: Accredo – Express Scripts’ specialty pharmacy. http://www.accredo.com/Express-Scripts. Accessed September 22, 2017.
  4. Prime Therapeutics: Price Specialty Pharmacy. https://www.myprime.com/en/specialty.html. Accessed September 22, 2017.
  5. https://www.briovarx.com/about.html. Accessed September 22, 2017.
  6. CVS Specialty. https://www.cvsspecialty.com/wps/portal/specialty/. Accessed September 22, 2017.
  7. Avella CEO Letter Regarding Direct and Indirect Remuneration (DIR) Fees. https://www.avella.com/news/dir-fee-letter. March 29, 2017. Accessed September 19, 2017.
  8. Egerton NJ. In-office dispensing of oral oncolytics: a continuity of care and cost mitigation model for cancer patients. Am J Manag Care. 2016;22(4 Suppl):S99-S103.
  9. FDA Approved Drugs for Oncology. https://www.centerwatch.com/drug-information/fda-approved-drugs/therapeutic-area/12/oncology. Accessed September 22, 2017.
  10. Medicare Part D – Direct and Indirect Remuneration (DIR). https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2017-Fact-Sheet-items/2017-01-19-2.html. Accessed September 19, 2017.
  11. Ramsey SD, Bansal A, Fedorenko CR, et al. Financial Insolvency as a Risk Factor for Early Mortality Among Patients With Cancer. J Clin Oncol. 2016;34(9):980-986.
  12. Lifeline: Why Cancer Patients Depend on Medicare for Critical Coverage. https://www.acscan.org/sites/default/files/2013-Medicare-Chartbook-Online-Version.pdf. Accessed September 22, 2017.
  13. 413 – Improving Transparency and Accuracy in Medicare Part D Spending Act. https://www.congress.gov/bill/115th-congress/senate-bill/413. Accessed September 19, 2017.
  14. R.1038 – Improving Transparency and Accuracy in Medicare Part D Spending Act. https://www.congress.gov/bill/115th-congress/house-bill/1038. Accessed September 19, 2017.

Article Comments

Robert D Orzechowski

quotes Thanks, Don, for publicizing this despicable behavior by the upstream entities involved in the drug value chain for cancer patients. While about 90% of all SP prescriptions are for generics, only about 10% of private oncology practice's dispensing is for generics. Compounding this situation are the delays for drugs and approvals by SPs, which compromise patient care. It is not hard to quantify the significant waste and cost avoidance the community oncology dispensary or pharmacy can capture and thus reduce the cost of care while ensuring high quality, timely, care. Employers who purchase these group health and Rx benefits are unaware of the cost impact they subsidize with the plan designs they buy for employees. quotes

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