Navigating the Complexities of Pharmacy Reimbursement: Will We Ever Reach Transparency?

Pharmacy Times, March 2016 Central Nervous System, Volume 82, Issue 3

Evolution in the pharmacy reimbursement system represents a crucial component toward stabilizing costs and providing fair margins for pharmacy sustainability, particularly in rural and underserved areas.

The Current State Imperative

Evolution in the pharmacy reimbursement system represents a crucial component toward stabilizing costs and providing fair margins for pharmacy sustainability, particularly in rural and underserved areas. Reduction in reimbursements continues to be a complex and multifactorial problem specifically with the inflation of generic drugs.

When drug manufacturers raise the price for generics, pharmacy benefit managers (PBMs) are slow at updating the maximum allowable cost (MAC). This often results in the pharmacies being reimbursed at less than the acquisition cost. The PBM can take several weeks or months to update listings for MAC prices. In comparison, when the cost of the drug goes down, PBMs act quickly to update the MAC list, often avoiding potentially over-reimbursing their pharmacies.1 (For more on the role of PBMs, see the online figure at public/resources/images/NA-AZ800_ PHARMA_NS_20090818210857.gif.)

Pharmacies are often not informed on how drug products are added or removed from a MAC list or what method is used to determine reimbursement. To add to the complexity of the MAC process, PBMs also pocket what is called the “Spread,” which occurs when PBMs contract with pharmacies at a lower price than was negotiated with drug plan sponsors.2

In addition to MAC issues, direct and indirect remuneration (DIR) fees from PBMs are causing financial privation for pharmacies across the country. DIR fees have been called “pay-to-play” fees, meaning pharmacies pay to participate in preferred networks and reimbursement reconciliations.3,4 According to the National Community Pharmacists Association, “Plans and PBMs have used the term ‘DIR fee’ to describe a ‘true-up’ between a target reimbursement rate in a participating pharmacy agreement and the aggregated effective rate actually realized by a pharmacy, as well as a ‘true up’ between the aggregate MAC/adjudicated rate and the aggregate contracted rate.”3 The DIR fee is also used to refer to a payment mechanism to pharmacies for the fulfillment of various quality measures or, alternatively, a fee assessed to pharmacies for noncompliance with quality measures.4

PBMs also are known to increase profits by establishing their own inhouse mail order pharmacies where they do not apply MAC pricing, but instead use the average wholesale price (AWP).4,5 By using the product with the highest AWP relative to drug acquisition cost, the plan sponsors pay significantly more for generic drugs for PBM-owned mail order pharmacies than through a community retail pharmacy. 5,6 The combination of preferred networks, use of mail order pharmacy, DIR fees, and control of MAC pricing greatly benefits the PBMs.

Lack of transparency enables PBMs to function discreetly by altering benchmarks within the MAC reimbursement formula. PBMs have no legal obligation to increase reimbursement and no legal time frame to update their MAC list.5 In addition, the calculation and capture of DIR fees at the point of sale lack transparency, often favoring the questionable practices of PBMs.4 The Centers for Medicare & Medicaid Services (CMS) requires the annual reporting of DIR fees, with the intent to capture rebates related to formulary positioning and other remuneration that is not passed through at the point of sale.4 The DIR fees themselves are legitimate, but the uncertainty about how fees are calculated or how fees are reported to contracting entities demands transparency. The details that currently surround the disclosure of DIR fees vary based on information provided by PBMs, which brings into question hidden calculations contained within the reimbursement practices of PBMs/plans. The call for more transparency surrounding DIR fees is not only warranted, but needed to establish a fair reimbursement structure.

Auditing practices by PBMs adds even more pressure on pharmacies. The PBM can audit a pharmacy on performance metrics where any involved factor could be tied to a fee, reimbursement reduction, or decrease in bonus payment to the pharmacy. Failure to pay fees or fines could remove the selected pharmacy from the preferred network, decreasing patient access to care. With little transparency, auditing practices by PBMs continues to be a topic in the reimbursement conversation.

The lack of transparency in general is causing hardship in pharmacies across the United States.3 Pharmacies are struggling to maintain profits at the cost of the PBMs’ unknown practices and the unknown calculation of fees.3 This reduction in pharmacy profits has led to decreases in staff, which, in turn, forces pharmacists to work shorthand and thus increases the likelihood of medication errors. The lack of transparency creates a dysfunctional marketplace that focuses on profitability over patient outcomes. Decreases in pharmacy profit will directly affect a patient’s access to care and indirectly affect patient safety, as it relates to a decrease in pharmacy staff.

Sunshine Will Cure

Although not a simple answer, I believe transparency law is the first step toward a fair reimbursement design. The introduction of MAC transparency law will allow for timely updates in MAC pricing, monitoring of PBMs’ auditing practices, and elimination of the spread benefit. DIR fees are often considered hidden revenue streams and should be thoroughly examined, as they are difficult to calculate.4 In the end, the cost imposed by PBMs on pharmacies is not necessarily disclosed to Medicare officials. The calculation of pharmacy reimbursement should be reflected in drug costs that are reported to CMS.3 This will allow for increases in pricing transparency and will alleviate the complexity that comes with tracking reimbursement.

The introduction of transparency surrounding MAC pricing and DIR fees will help stabilize the overall cost of the Medicare program. Other organizations (eg, the American Pharmacists Association [APhA]) have also written about the rise in DIR fees. The APhA encourages CMS to work with PBMs and plans to set reasonable thresholds for DIR fees in order to preserve patient access to care and prevent pharmacies from falling out of preferred networks.3 The call for transparency is simply a stepping stone in a long, complicated path toward a fair reimbursement strategy for all parties involved.

Charting the Future Course

Pharmacists today are looking to expand their knowledge to cope with profit losses by specializing in expanded clinical services, such as immunizations, point-of-care testing, and medication therapy management. Today, pharmacists have the unique opportunity to grow their clinical expertise, thereby expanding their role to increase patient access to care. Decreases in staff and low reimbursements, however, continue to challenge growth within our pharmacies. Policymakers need to establish fair reimbursement in order to stabilize prescription growth, increase access to care, make sure that strong incentives remain for pharmacist to dispense generics, and create a more fair reimbursement environment for everyone involved.

The bottom line: reimbursement needs to be fair, but not at the cost of our patients.

Michael Matalavage, PharmD, RPh, is pharmacy clinical services manager at Wal-Mart Market Office in Somerdale, New Jersey.


  • Roth B. Why some large retail pharmacy chains are struggling with reimbursement and generic price inflation. Published October 9, 2014. Accessed January 21, 2016.
  • Maximum Allowable Cost Information Center. PBM Watch website. Accessed January 21, 2016.
  • Ross M. Pharmacies face financial hardships with rising DIR fees. Published November 2, 2015. Accessed January 21, 2016.
  • Frequently asked questions about pharmacy DIR fees. NCPA website. Accessed January 21, 2016.
  • The need for model language regarding PBM maximum Allowable cost (MAC) reimbursement. NCPA website. Accessed January 21, 2016.
  • Garis R, Bartholomew C, Siracuse M. Shinning the Light on Non-Transparent PBM Cash flows. NCPA website. Nov 2004. Accessed January 21, 2016.