The Part D Shell Game

Top of mind when we are talking about Medicare compliance should be that the ultimate customer is the taxpayer who funds this program. That’s why the Centers for Medicare & Medicaid Services (CMS) has to attempt to account for every nickel that comes into or goes out of the programs. One of the murkiest finance areas is in Medicare Part D – that is Direct and Indirect Remuneration (DIR). CMS published a memo on January 19, 2017, with this very title.¹ DIR is the additional compensation – besides a partially capitated payment from CMS – received by a plan sponsor or Pharmacy Benefit Manager (PBM) after the pharmacy point of sale (POS) transaction. This changes the final cost of the drug for the plan sponsor or the price of the drug paid to the pharmacy. DIR has grown significantly in the past few years in large part because of the growth of preferred network pharmacies. CMS states they have observed “a growing disparity between gross Part D drug costs, calculated based on costs of drugs at the POS, and net Part D drug costs, which account for all DIR.”

CMS defines it thusly: “DIR results from payment arrangements, negotiated independent of CMS, between Part D sponsors, PBMs, network pharmacies, drug manufacturers, and other parties involved in the administration of the Part D benefit. Manufacturer rebates comprise a significant share of all DIR reported to CMS.”¹

CMS lists the implications for Part D:

  • Beneficiary cost-sharing is calculated based on the drug price at the pharmacy or mail order without including any rebates or other price concessions received after that initial calculation. So although DIR holds down or decreases total program expenses and beneficiary premiums, it doesn’t reduce the member cost share at POS.
  • Medicare pays the beneficiary cost share for low-income Medicare members. As rebates and other price concessions grow, it places a higher burden on member cost share. Higher member cost shares lead to a faster progression through the benefit phases and potentially higher costs in the catastrophic phase where Medicare pays about 80%.
  • High-priced drugs, which often come with high rebates, shift more of the drug spend into the catastrophic phase where the plan responsibility is only about 15% of the cost. The way the current Part D rules work, the largest share of all DIR (rebates and price concessions) is used to decrease plan liability. That means Part D sponsors who control Medicare drug spend are actually only responsible for an increasingly smaller share of Part D spending. This is why Part D premiums, which are based on plan liability, have only increased in small increments compared to gross drug costs.

The CMS publication is a report on the “Current State of DIR” and contains no new requirements or requests for comments. Plan sponsors should be scrupulous in the accuracy of their DIR reporting and understand CMS is peering into the murky water and doesn’t like what it sees.


1. Medicare Part D – Direct and Indirect Remuneration (DIR)


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