In a webinar hosted by the National Community Pharmacists Association, experts from accounting agency Sykes & Company, PA discussed how pharmacies can navigate the upcoming changes.
Direct and indirect remuneration (DIR) fees have created plenty of business challenges for community pharmacies across the United States due to a lack of clarity, transparency, and fairness from pharmacy benefit managers (PBMs). The fees were originally implemented in 2003 under the Medicare Part D program as a way for the Centers for Medicare & Medicaid Services (CMS) to know the true cost of dispensed drugs and manufacturer rebates.
However, payers have since begun charging pharmacies DIR fees over what they call “quality measures.” These measures, which have put significant financial strain on many community pharmacies, are often inconsistent, unpredictable, or completely out of a pharmacy’s control.1 DIR fees have since skyrocketed, increasing by 107,400% between 2010 and 2020, according to data from CMS.2
In response to calls for relief from DIR fees, CMS issued a final rule in 2022 that eliminates the application of retroactive DIR fees. The ruling requires that the fees be reflected in the price the patient pays at the pharmacy counter, and it is set to begin in 2024. However, many are worried that the change will lead to cash flow issues and more financial strain for pharmacies due to higher up-front fees.
In a webinar titled “Advocacy Updates: Financial Tips to Treat the DIR Hangover,” hosted by the National Community Pharmacists Association, Ollin and Scotty Sykes from the certified public accounting agency Sykes & Company, PA, discussed how independent pharmacies can navigate and be prepared for the upcoming DIR fee changes.
“DIR fees are a reality—complaining is only going to get you so far,” said Scotty Sykes, CPA, CFP, vice president at Sykes & Company. “We want to accept this reality and be able to prepare for what we’re dealing with.”
One of the most important things that community pharmacies can do to best prepare for the upcoming DIR changes is to have fundamental accounting in place. This is important to rely on because it helps pharmacists understand and manage the inherent cash flow issues involved in the pharmacy business model. Accounting fundamentals allows pharmacists to have a better understanding of how their cash flow works, as well as a better understanding of their key performance indicators.
The main aspect of accounting fundamentals is making sure you have your balance sheet under control. This means ensuring your assets, fixed assets, payables, receivables, and inventory are all up to date.
“You have to have that fundamental accounting in place to be able to manage and understand the cash flow issue that’s built into pharmacy,” Scotty Sykes said. “You need to be able to rely on your fundamentals, not only for cash flow but [also] to…prepare for 2024.”
Another way to help with the upcoming DIR fee changes is for pharmacies to diversify their revenue with cash-based streams. This allows pharmacies to expand gross margins and bottom lines while increasing cash flow without having to rely on uncertain revenue streams from PBMs. One way to diversify revenue is by adding different products to your store, such as nutraceuticals and functional medicines. Other ways this can be done is by running a pharmacy 50% cash-based, as well as adding long-term care or medical at-home services.
“It’s not just about filling scripts. It’s about diversifying revenue and creating higher margins without DIR fees,” said Ollin Sykes, CPA, CITP, CMA, president at Sykes & Company. “That’s the future of this business and that’s what we see with the big-box stores.”
A pharmacy must also know its key expenses in order to prepare for the DIR fee changes coming in 2024. Key expenses a pharmacy needs to have an understanding of include things such as cost of goods sold and inventory management, gross wages paid to staff, owner distributions and draws, and debt services.
Ollin Sykes also said pharmacies should be using different forms of technology to help lower expenses. Cloud-based software systems are a great way to assist pharmacists with inventory management. Many new artificial intelligence systems are also coming onto the market that can help pharmacies maximize purchasing. It’s important for pharmacists to explore these options to increase revenue turns and reduce overall inventory.
Optimizing tax planning is crucial in order to be prepared for the upcoming DIR fee changes, as well. A pharmacy needs to know how it can plan and strategize to mitigate any surprises with taxes, and what strategies it can implement and plan with to deal with any possible negative hits to cashflow.
The last important thing that pharmacists need to have in order to deal with the 2024 DIR fee changes is the right mindset. Pharmacists need to make sure they are cognizant of the DIR fee changes and are doing whatever they can to mitigate them.
“It’s about getting your mindset right—that you can go out there and do this…and come out on the other side,” Scotty Sykes said. “Getting engaged with the DIR fees, not being passive with the DIR fees, and understanding and learning what you can about the DIR fees… is what it’s going to take…. There are a lot of resources out there to help you get through this.”