Do New DIR Rules Increase Transparency or Accelerate Patient-Member Channeling?

Pharmacy TimesJune 2022
Volume 88
Issue 6

Fees are now so large that "hiding the cheese" will be harder to accomplish in a year and a half.

“CMS is finalizing a policy that requires Part D plans to apply all price concessions they receive from network pharmacies to the negotiated price at the point of sale, so that the beneficiary can also share in the savings. Specifically, CMS is redefining the negotiated price as the baseline, or lowest payment, to a pharmacy, effective January 1, 2024.”1

That is an excerpt from the Centers for Medicare & Medicaid Services (CMS) website that describes via a fact sheet the new rule(s) recently released regarding direct and indirect remuneration (DIR) fees.

Only in America could we conceive of a system so byzantine and so creatively dysfunctional that a term of financing art must be created called “direct and indirect remuneration.”

And we are supposed to be the standard bearer of consumer-driven capitalism and free markets? Yeah, no.

Get the popcorn out because this will have potential implications across more payers than just Medicare and it may lead to entirely new ways to obfuscate pricing and reimbursement. The stakes are very high for a singularly important reason. If the federal government goes through with it, consumer-enrollee patients, government employees, judges, legislators, pharmacies, and even other countries will find out what only the pharmacy benefit managers (PBMs) now know: what the PBM paid the pharmacy for the product for a given prescription fill.

Back to the Beginning

About 2 decades ago, the federal government wanted to ensure that it was getting a good deal from newly legislated Medicare coverage with Part D plans, so it required plans to account for all money in and out of the plan, so that the CMS could know what was actually paid after transactions traveled through the various spreadsheet washing machines. The result was 11 categories of DIR. The hoped-for result was to avoid CMS and member overpayment related to an arbitrage of sorts where the PBM or the plan could take parts and pieces of each transaction with various actors for themselves. #epicfail

In 2006, when Part D plans adjudicated their first pharmacy claims, the generic dispensing rate hovered around 53%.2 Manufacturers were enduring the era of the “patent cliff” and grasping attempts to circumvent it by sending hundreds of “me too” drugs to the marketplace.

PBMs and health care purchasers were aligned with what they wanted to do by managing the drug benefit(s), namely, to prior authorize branded drugs without due value as determined by the pharmacy and therapeutics committee, or automatically prior authorize or otherwise disincentivize the purchase of brands when a generic is available.

But then generic dispensing rates (GDRs) skyrocketed between 2006 and 2016, with GDR reaching nearly 90% and a subsequent rise in new-generation specialty products and innovative non–specialty brand products coming to market in substantial numbers.

The business model for PBMs flipped during this period, from value produced by keeping drug costs down to a “pay-to-play” system.

How can a noncommoditized, nontransactional (tollbooth) profit be made when alignment, or drug cost savings, with customers is taken away by generics flooding the marketplace? When 90% of transactions have no or very little benefit to the purchaser, it is time to figure out another way to make money.

Simultaneously, manufacturers were reeling from the era of brand to generic shifts and the petering out of the product’s ability to maintain, in effect, blockbuster patent extensions.

Thus, a marriage was made. Manufacturers needed formulary coverage of newer and more expensive products that applied to fewer and fewer patients and PBMs needed to figure out a way to generate nontransactional margins, because the buy-sell savings from brand-to-generic switches had largely gone away and along with it, alignment with employer, government, and health plan purchasers. The solution was to raise list prices and provide substantial rebates to the PBM in return for formulary coverage, no matter how nonsensical that coverage might be to the purchaser. Keep part of the rebate and pass on most of the remainder to carriers under the medical-loss ratio. Everyone now benefits from the drug-cost pie getting bigger, not smaller. Except, of course, the pharmacies’ and purchasers’ reimbursement as a percentage of list price has been reduced, not increased, over the same period. Rebate strategies along with self-channeling specialty dispensing became the new PBM business model.

Do not hate the player; hate the game. The federal government spawned the rebate game in a concession with manufacturers to avoid direct price negotiations when it passed the Omnibus Budget Reconciliation Act of 1990 to ensure that Medicaid programs received the best price through the Medicaid Drug Rebate Program,3 thus “hiding the cheese” on a massive scale was born.

The size of the 11-category DIR effect for PBMs was relatively small in 2006, with 53% GDR in Part D, but as GDR grew, so did the dependency on indirect remuneration through all sorts of hidden clawbacks and share-backs and, of course, pocketing of a portion of manufacturer rebates to make quarterly earnings numbers on Wall Street for manufacturers, PBMs, and plans alike.

This dependency on rebate schemas metastasized across all payer types and entering the second decade of the century, it became the primary driver for procurement, coverage, reimbursement, provider of “choice” and even quality “performance” across the entire drug supply and provider chain.

Squeezing the Proverbial Balloon

In this new rebate era, DIRs increased by some accounts 107,400% from 2010 to 2020.4 As list-to-net spread grew, so did the pesky problem of passing all those rebates and other indirect remunerations to the PBM and the plan on to CMS or patients, and to maintain margins in Medicare that matched those experienced in commercial and other coverage populations, DIR fees to the pharmacy after the fact, or post–point of sale, grew commensurately.

The net effect became CMS getting its DIR savings from the pharmacies instead of the Medicare Advantage plan and PBM, a classic “squeezing of the balloon” in the direction of the downstream actors.

Potential Consequences of the New Rule

As with the conception of DIR and now the new rules of “lowest price to the pharmacy,” there are usually expected and unexpected, or unintended, effects. Plans have 18 months to prepare for their 2024 benefit year and infrastructure, payment schema(s), regulatory submissions, and bids. The net effect could be:

  • doubling down on “performance” and a high-stakes game of outcomes measurement politics, calculation, and implementation resulting in spirited debate about what metrics are most favorable to the government, patient-members, pharmacies, and plans;
  • doubling down on “preferred” networks and new types of network concepts;
  • new schemes to “hide the cheese” and avoid point-ofsale transparency;
  • new types of fees not associated with a given prescription fill, such as “network access fees;”
  • pharmacy awareness of net reimbursement for a given fill at the point of sale (lowest possible reimbursement); and
  • reduction in out-of-pocket costs to patient members.

Thanks to Ben Jolley, pharmacist at Jolley's Compounding Pharmacy in Salt Lake City, Utah, for reviewing this article for accuracy and presentation.


Troy Trygstad, PharmD, PhD, MBA, is the executive director of Community Pharmacy Enhanced Services Network (CPESN) USA, a clinically integrated network of more than 3500 participating pharmacies.


1. CY 2023 Medicare Advantage and Part D Final Rule (CMS-4192-F). April 29, 2022. Accessed June 2, 2022.

2. Variation in generic dispensing rates in Medicare Part B. Buttorff C, Xu Y, Joyce G. Am J Manag Care. 2020;26(11):e355-e361. doi:10.37765/ajmc.2020.88530

3. Summary of 1990 Medicaid drug rebate legislation. ASHP Government Affairs Division. Am J Hosp Pharm. 1991;48(1):114-117

4. Medicare program; contract year 2023 policy and technical changes to the Medicare Advantage and Medicare Prescription Drug Benefit programs; policy and regulatory revisions in response to the COVID-19 public health emergency; additional policy and regulatory revisions in response to the COVID-19 public health emergency. April 9, 2022. Accessed June 2, 2022.

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