Kathy Blanchard

When looking at the profit and losses of many independent and community pharmacies, direct and indirect remuneration (DIR) fees are now the third largest expense to affect store cash flow and profitability. Although more and more third party reconciliation systems are reporting monthly DIR fees and related adjudication costs to the pharmacist, it may not be immediately evident what the data mean or what to do with it to manage those costs.

On average, most pharmacies can fall in the 2% to 4% range of total annual revenue for DIR fee and adjudication costs. If you can lower those total fees by increments, it can mean thousands of dollars in cash savings to the pharmacy each year. This is not a simple or short-term approach. It requires focus on monthly reports, increased STAR ratings and accurate, up-to-date financials to support any significant change. It may also involve investment in new processes and technology that improve the performance metrics of the store (eg refill rates, generic dispensing rates, preferred product rates, and other quality measures).

When investing in the future profitability of your pharmacy, here are 3 ways to help manage and mitigate the bottom line impacts of DIR fees.

Do you know what percentage of revenue your pharmacy is paying in DIR fees right now? This is an important number, and your third-party reconciliation software system should be capable of pulling that data for you each month. It’s one of the most important numbers to track, right behind your gross margins and payroll related benefits costs.

Remember, too, that third party reconciliation services can only report on what the insurance providers tell them, and DIR fees are just one component. Claims adjustments can be another component, as well as transaction service fees. So it’s not just the “true up” DIR fees that they’re deducting from your reimbursement, and you may only be getting a net amount of all fees under the general term “DIR.”​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 

Make sure you are recording everything you can get out of your third party reconciliation system (eg “grossing up” revenue for the charges and showing DIR fees and adjudication costs separately in the profit and loss statements) to provide a baseline for your average DIR fees. With a baseline, you can focus on reducing them.

Since DIR fees correlate to performance metrics and therefore STAR Ratings, then methods to improve prescription consistency and compliance can also positively impact your bottom line.

For example, many pharmacies have experienced success with adherence packaging or med sync services. It’s an effective investment for pharmacies with larger percentages of patients who take 7 or 8 regular prescriptions on average. However, other pharmacies have been successful with adherence packaging for patients with fewer regular medications who want to sync their OTC or nutritional supplements. 

Maximizing Adherence Packaging for Patient Health and Pharmacy Growth

Introducing new processes or technologies can help your pharmacy gain efficiencies and fee reductions that far outweigh the costs of the equipment and technology investments. 

We’ve seen pharmacies with STAR Ratings close to (or right at) “5” experience reductions in DIR fees to as low as 1.7% to 1.8% of revenues from the average of 2% to 4% stated earlier. Although there are a number of factors that determine a pharmacy’s STAR Rating, progress toward a higher rating can also be monitored through your third-party reconciliation system.

It all comes back to being aware of the data reported about your pharmacy, making sure that it’s accurate. A designated clerk or tech can be trained to log into your system, acknowledge payments and paper checks and work closely with the third-party adjudicator to minimize potential loss revenue. This daily and weekly reconciliation alone can support accurate monthly P&Ls and improve your bottom line.

What is this focus worth to your pharmacy? Peace of mind, improved patient care and potentially thousands of dollars in reduced fees. Start with your financial data and make it work harder for your pharmacy.

Ollin Sykes is founder of Sykes & Company, P.A., and Kathy Blanchard is a Senior Staff Accountant. Along with a knowledgeable team of advisors and counselors, they help independent and community pharmacies across the U.S. manage industry and business challenges — and thrive.

Author | Kathy Blanchard

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