Ollin Sykes, CPA, CITP

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.

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Focus on DIR Fees: 3 Ways to Manage Them

Coming out of the sudden, severe lockdowns from the coronavirus disease 2019 (COVID-19), pharmacies are adjusting to a new way of serving patients and providing services. To build some positive momentum, here are 5 ways that current pharmacy owners are adapting their businesses to serve people. 

During a crisis, helping your patients and community can also lead to new services. Out of COVID-19, pharmacies have the opportunity to provide items like hand sanitizer, cleaners, safety garments, infrared thermometers, and more. By packaging and pricing a variety of products for the size of company or organization, you help customers quickly get the supplies they need from a local source.

Direct and indirect remuneration (DIR) fees are typically the third largest expense in a pharmacy behind inventory and payroll costs. You can mitigate higher DIR fees by monitoring your Star Ratings, but also by exploring med syncing and compliance packaging. If you can reduce DIR fees by 1 to 2 percentage points through this investment, it’s easy to calculate how such technologies can pay for themselves and more — plus result in happier patients and families.

As for generic effective rate (GER) challenges and potential clawbacks, which are not influenced by performance measures, make sure that you know which contracts, if any, include GERs or “effective rate guarantees” in the contract language. You can work with your PSAO on contract terms, and also consider a separate inventory for plans with GERs. The separate inventory could be sourced differently with a higher average wholesale price to lessen a potential clawback.

This is a pioneering area where pharmacists can identify ways to keep their patients healthier and prevent or manage larger health problems. It may include phlebotomy and clinical testing to identify and consult on the root cause of ailments that can be treated prior to or beyond medications. Whether that results in non-interactive private label nutritional supplements or food sensitivity solutions, you should explore cash clinical services that make sense for your pharmacy.

Explore a few private label providers before you move forward with patient testing and consulting. Build relationships with a few trusted vendors, and educate your team first so that you feel confident promoting probiotics or other supplements to patients.

Who are your target patients and customers? Take a look at who they are, the prescriptions they use, their family members, and common health care services. How can your pharmacy add value to their treatment experience and act as a resource?

For example, Nicolette Mathey, PharmD, a Florida-based pharmacist and a consultant to pharmacists through her company, Atrium24, identified elective surgeries as a trend in her community. So she developed a branded surgical treatment kit for cosmetic surgery clinics. The kits inform patients about surgery preparation and after-care. Often, the patients end up working with Mathey’s pharmacy on any medications or products related to their surgeries.

Another idea is to join — or have one of your team members join — public social media groups in the community. Interact with parents, coaches, or seniors on healthy living topics. Provide guidance if community members express a need that your pharmacy can solve.

What happens when your pharmacy becomes a resource in your community during challenging times? You are viewed as a health care provider and a friend, building a network of healthier, informed community members and patients who rely on your business. As a trusted resource, you gradually diversify your services and revenues, which improves your bottom line margins, profits and quality of life.

Coming out of COVID, make sure that your pharmacy is a part of the larger community and health care conversation. You matter.

Ollin Sykes is founder of Sykes & Company, P.A., and Scotty Sykes is a partner in the firm. Along with a knowledgeable team of counselors and advisors, they help independent and community pharmacies across the U.S. manage industry and business challenges — and thrive.

Ollin Sykes, CPA, CITP, and Scotty Sykes, CPA, CFP, discuss the business landscape after COVID within pharmacies and 5 objectives for focusing on growth again.

Coming out of COVID: 5 Objectives for Boosting Rx Business and Cash Clinical Services

Independent and community pharmacists can now invest in technologies that result in more efficient practices, improved quality of care, and increased margins. The environment may be right for your pharmacy. In the last few years, competitors in e-commerce have entered the health care market by offering clinical and non-clinical products and services, including medication adherence packaging and free delivery.

Despite the increasing competition, there are bigger reasons to invest in adherence packaging from reputable vendors. Patients and health care providers alike are attracted to the convenience and safety of adherence packaging to support accurate and consistent dosing as well as more peace of mind for their families.

Is adherence packaging technology a big investment for a community or independent pharmacy? It depends. There are ways to manage and recover upfront costs in the following ways.

Reputable adherence packaging vendors such as RxSafe or Parata provide options to pharmacies for either a cash purchase or a capital lease to buy (use) the necessary equipment.

With a capital lease, the pharmacy maintains cash flow while building up a patient base to pay for the new service. A cash purchase and a capital lease option both provide the pharmacy 100% depreciation options in the tax year that the technology is placed in service.

Typically, community pharmacists can market adherence packaging services to a broad customer base such as senior living and nursing homes, group homes, mental health care facilities and even correctional facilities in their market. These customers recognize the advantages of packaged meds with a time and date stamp specific to each patient. The style of packaging or dispensing can also be tailored to the patient’s needs, such as blister packs for patients with arthritis.

Such contracts, even when paired with free delivery services, can quickly cover upfront equipment costs while serving a broader community. The pharmacy can serve hundreds of patients in just one facility.

According to adherence packaging vendors, patients who take 7 or 8 regular prescriptions will provide a more immediate return for the investment than patients who only take one or two medications regularly.

However, patients with fewer medications could choose from recommended nutritional supplements or OTC medications, such as low-dose aspirin, in their packaging. This approach helps pharmacies introduce patient preventative care and wellness as part of the service.

Right-size your staffing with automation.

Automated, adherence packaging is also recommended for increasing pharmacy efficiency. A robotic process can reduce staffing and related benefits expenses, or it can allow existing staff allocation to top-line cash clinical and non-clinical services.

When determining your pharmacy’s ability to invest in new equipment and technologies, take time to calculate the cost savings on staffing or the ability to launch new services with the same number of staff. This is a good discussion to have with a CPA knowledgeable in pharmacy accounting and operations.

Improve STAR Ratings and reduce DIR fees.

The intended outcome of regular fills and adherence is high quality patient care. By directly providing adherence packaging, the pharmacy maintains a vital, direct link to patients for confidential and knowledgeable consultations. 

On the business side, a pharmacy can also improve Star Ratings, reduce potential DIR fees and, therefore, improve pharmacy bottom-line revenue. This is a long game, to be sure, so it will be important to seek guidance from your knowledgeable CPA to determine when and how to bring an adherence packaging service in-house.

For example, if your pharmacy business has more than one location, your advisor may suggest purchasing equipment for one store as the central fill for adherence packaging — but offering this service at all locations.

Adherence packaging is a clear technology disruptor, but consumer awareness is still fairly low. They will be attracted to the convenience and ease, but pharmacies can help them realize the long-term health care benefits through local access and attention.

Ollin Sykes is founder of Sykes & Company, P.A., and Bonnie Bond, CPA, is a partner in the firm. 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.

Is adherence packaging technology a big investment for a community or independent pharmacy? 