• CMS Final Rule Fails to Implement DIR Fee Reform
  • May 20, 2019
  • Law Firm: - Office
  • On May 16, 2019, the Centers for Medicare and Medicaid Services (CMS), a division of the United States Department of Health and Human Services, issued a long-anticipated final rule entitled “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out-of-Pocket Expenses.” This rule was designed to amend current Medicare Advantage (Medicare Part C) and Prescription Drug Benefit (Part D) program regulations “to support health and drug plans’ negotiation for lower drug prices and reduce out-of-pocket costs for Part C and D enrollees.” The amendments take effect on January 1, 2020.

    According to CMS, the amendments contained in the final rule “will improve the regulatory framework to facilitate development of Part C and Part D products that better meet the individual beneficiary’s healthcare needs and reduce out-of-pocket spending for enrollees at the pharmacy and other sites of care.”

    While a laudable goal, major pharmacy advocacy groups are crying foul over the exclusion of amendments to a little-known regulatory loophole called direct and indirect remuneration (DIR), which pharmacy benefit managers (PBMs) and prescription drug plan sponsors (PDPs) have exploited to increase drug costs for Medicare beneficiaries at the expense of pharmacies.

    Among the major pharmacy groups advocating for DIR reform are the National Association of Chain Drug Stores, the National Community Pharmacists Association and the National Association of Specialty Pharmacy (NASP). These associations represent every major sector of the pharmacy market.

    CMS originally created DIR as a means of tracking the annual amount of price adjustments, including drug manufacturer rebates, provided to PBMs and PDPs, and impacting the total cost of Medicare Part D medications. The savings from the price concessions received by the PBM or PDP should be passed on to CMS in order to lower Part D beneficiaries’ cost-share (out-of-pocket costs) against their Part D deductible. However, since at least 2010, DIR fees have transformed into a catchall for numerous price concessions to the PBMs and PDPs, including costs that pharmacies pay to participate in a PBM’s network and the fees charged to a pharmacy for failing to meet certain quality measures. All of which are retroactively clawed back from the pharmacy months or years later.

    CMS’ proposed rule, which was issued for public comment in November 2018, found that pharmacy price concessions (fees PBMs charge to pharmacies) grew more than 45,000 percent between 2010 and 2017, with no savings passed on to Medicare beneficiaries. Absent the savings passed onto Medicare beneficiaries, seniors are paying higher out-of-pocket costs as opposed to a lower adjusted price, which should be inclusive of price concessions provided to the PBMs and which serve to lower the costs of drugs to the PBMs.

    CMS’ proposed rule also found that the current DIR fee structure that has developed over the past few years is devoid of transparency and creates disincentives for market competition among participating pharmacies. Accordingly, CMS proposed an overhaul of the DIR fee system.

    CMS’ proposed rule contemplated a fix of such DIR fees by: (1) eliminating retroactive pharmacy DIR fees; (2) developing a standard set of quality and performance metrics for pharmacies to receive incentive payments; and (3) requiring that PBMs not charge network access fees and administrative fees not classified as DIR fees to pharmacies.

    CMS’ final rule, however, did not finalize any of the contemplated proposed DIR fee reforms― without explanation from CMS and despite its earlier findings of the harm of DIR fees to Medicare beneficiaries, participating pharmacies and market competition.

    Each of the above-named pharmacy organizations have issued strong responses. Among those responses are charges that “continued collection of these [DIR] fees threatens quality, affordable medication access for seniors while giving the largest PBMs leeway to continue anticompetitive market practices and keep more Medicare dollars for themselves.” NASP press release (May 17, 2019). The organizations continue to call on congress to issue reforms on DIR fees.

    Duane Morris attorneys will continue to monitor developments in this area and other related issues, and report on the key details for our clients and others in the industry.