Lisa Faast, CEO and Owner of DiversifyRx, discusses ways that pharmacists can prepare their business for the cash crunch that is set to happen in the first several months of next year.
The upcoming direct and indirect remuneration (DIR) fee changes that are taking place in 2024 have independent pharmacists across the United States concerned about their cashflow. But while there is plenty of cause for concern, there are steps you can take to be prepared.
Drug Topics sat down with Lisa Faast, CEO and Owner of DiversifyRx, at the National Community Pharmacists Association (NCPA) 2023 Annual Convention and Expo to discuss ways that pharmacists can prepare their business for the cash crunch that is set to happen in the first several months of next year.
Drug Topics: The upcoming DIR fee changes in 2024 are a concern for many pharmacy owners. Could you share some insights into what the changes entail?
Lisa Faast, PharmD: There are big changes happening in 2024. And I think the most important thing to note that ultimately these changes are a very good thing. It will bring further transparency and increased real time knowledge to pharmacy owners so that they can make more intelligent choices about what prescriptions they want to fill or don't want to fill. However, there will be pain before you get to the green pastures. And that is what I've called the DIR fee apocalypse. Essentially what is happening is beginning in 2024, when a pharmacy adjudicates claims, so when you're sitting there in your pharmacy and you're at your computer and you get that paid claim, that DIR fee is going to be a part of that reimbursement. It's already going to be taken out, as opposed to what's been happening for the last many years, is you get your full reimbursement and at some point in the future, you have to pay that DIR fee back. And so that's the big change.
That in and of itself doesn't really sound very scary. But where it's going to be a problem for pharmacy owners is as we start to adjust to these lower reimbursements and lower payment amounts that we're going to be getting, you also are still going to have to pay your retroactive fees from 2023. This is going to create a cash crunch and it's going to be really, really a significant crunch for those first four to six months of 2024, kind of just depending on your PSAO and how you've been contracted for how long those retro fees might last. But really the big crunch time is those first four to six months of 2024 when you have lower reimbursements because that DIR fee is already being applied, and you're also having to back pay as well. That's really what is scaring a lot of pharmacy owners and rightfully so. This is a problem. This is a storm, but it's not one that you just have to sit idly by and take. Those are the big changes that are happening in DIR fees in 2024.
Drug Topics: Why is it important for pharmacy businesses to be prepared for the upcoming DIR fee changes?
Faast: Pharmacy owners need to be prepared for the upcoming DIR fee changes because of cash flow, cash is king. You can't pay your bills with profit. A lot of people conflate profits with cash, but it's really the cash once you convert your profit to cash once you receive that money inside your bank account. The reason it needs to be important is you have to be able to pay your wholesaler bill, you have to be able to pay your payroll, you have to be able to pay your own mortgage, and you have to have cash in order to do that. These DIR fee changes are going to suck the cash out of your pharmacy, between getting lower reimbursement rates and having to pay back DIR fees. Pharmacies are not going to have a whole lot of cash to run on. It's very important that you work now to improve your cash flow as much as possible before we actually hit 2024.
Drug Topics: Can you highlight one or two key strategies that you believe have been particularly effective in increasing pharmacy profits, and what other pharmacy owners can learn from these successes?
Faast: There's no shortage of strategies for improving cash flow or profits in a pharmacy. However, I think there's some significant ones that pharmacies need to really focus on in order to prepare for the DIR fee changes of 2024. The biggest cash suck in a pharmacy is purchasing your inventory. We all know that we have hundreds if not multiple hundreds of thousands of dollars of inventory on our shelf. So, changing the way you buy. Most pharmacies purchase through their primary vendor agreement. Those big wholesalers are not doing you any favors because they don't help you with cash flow. They have actually very short payment terms. You're having to pay for your inventory long before you ever receive your money for the payment to that inventory. That's what creates your cash crunch. When you switch to purchasing your products to some secondary wholesalers, whether it's a little or a lot, you can actually free up a ton of cash. Some of my favorite ones are RX Cherry Pick or Real Value Products or Trxade.
These are secondary wholesalers. They're perfectly legal. There's nothing you know, it's not only the primaries, you can purchase from secondaries, but they have much more forgiving payment terms, 30, 45 days and that will drastically change your cash flow and your pharmacy because cash flow is really a timing issue you want to be able to receive your payments before you have to pay for your drugs. Lengthening those payment terms without drastically increasing the cost of your products. Because if you go to your primary vendor, and you say “Hey, I want to lengthen my payment terms,” they're going to say “Great, we're also going to charge you more for your drugs.” That's not what you want. You want low cost net pricing where you're not having to wait on a rebate. That's another way that your primary vendor is kind of killing your cash flow because you have to wait for that rebate to come back. When you switch to a secondary, you get to pay lowest net upfront pricing. You don't have to wait on a rebate and you get long payment terms. That's going to have the biggest impact on cash flow.
The second area of cash flow that is most impacted for pharmacy owners is their payroll after inventory. Your biggest bill is generally your employees and pharmacy owners are nice people, they like to give raises every year. They don't like to fire people and a lot of times when I meet with the pharmacy owners, they have very bloated payroll. That's just because they never want to cut, they never want to take away, and that's fine. But we have to do something during this cash crunch. It's really important that you understand where your payroll is in relation to your revenue and that's called your payroll ratio. Getting that as close to normalized as possible. There's lots of different ways to do it. You don't just have to go around and fire a bunch of people. I don't want that; you don't like that. It's important that you take on some different strategies. That's one of the things that I love working with pharmacy owners with is helping to come up with something that works for them. Sometimes you do need to fire somebody, you know sometimes that person isn't really helping you. They're kind of an energy vampire and maybe it is time to finally let them go find somewhere else that they can work.
There's not just one way to help correct that. But between your purchases for your drugs and your payroll ratio, those are generally going to have the biggest impact on your cash flow. There's other things you can do. I love talking about the American Express plumb card, which is a great business card, 0% interest for 60 days. It can really help people through some bridge times of transitioning. We inside of our pharmacy, Badass University, we help our members with lots of different cash flow strategies that they can implement, whether it's just one or many.
Drug Topics: Are there any additional points you would like to talk about that we haven’t touched on?
Faast: I think it's important that pharmacy owners realize they need to do something. This is not a thing that you just sit idly by and just hope and pray that you get through it. We are a few months away from 2024. There is still time to make significant impacts and changes to your pharmacy and build up your war chest of cash. This is coming. This is one of those things we know the tsunami is coming. So, we don't want to just sit on the beach and wait for it. We want to actually take some action. I implore you, if you're a pharmacy owner and you haven't done a whole lot for the DIR fee changes in 2024, that you at least start doing some work and start figuring out what action you can take. Reach out to me. There's lots of other experts in this field that can really help you and decide maybe what's best for your pharmacy. But the most important thing is that you take action.