January 26, 2017 — Earlier this month, the U.S. Centers for Medicare & Medicaid Services (CMS) issued an analysis of direct and indirect remuneration (DIR) fees. The data presented in the report makes clear that despite the claims of pharmacy benefit managers (PBMs) to the contrary, DIR fees do not reduce the costs of drugs for beneficiaries at the point of sale, but in fact rapidly push Medicaid recipients into the infamous “donut hole” or catastrophic phase of the Part D benefit—causing higher beneficiary cost-sharing and Medicare subsidy payments.

The DIR model was initially conceived by CMS as a way to help both plan sponsors and the Medicare program share in the savings from drug rebates paid out to PBMs. In practice, however, and as demonstrated by the data provided in the report, the ever-increasing rate of DIR has had a deleterious effect on consumers, many pharmacies, and the Medicare program.

The report shows a growing disparity between gross Part D drug costs at the point of sale and net Part D drug costs (which account for the DIR and DIR fees). The total of DIR revenue grew nearly 22 percent per year and per member per month (PMPM) revenue went up almost 14 percent between 2010 and 2015 (the last full year of data collected). Per the report, during the same period, “total Part D gross drug costs only grew about 12 percent per year and PMPM Part D gross drug costs only grew nearly 5 percent per year.”

The impact of this trend of ever-increasing DIR has been to shift costs to beneficiaries and the Medicare program (in the form of higher out-of-pocket expenses and catastrophic phase payments), while financially benefitting Part D sponsors and PBMs.

The DIR analysis conveniently dovetails with a recent OIG report that documented a sharp increase in government spending on catastrophic coverage under Part D, with costs rising from $10 billion in 2010 to $33 billion in 2015. The OIG report notes that, “the dramatic growth in Federal payments for catastrophic coverage and the underlying issue of high drug prices must be analyzed and addressed to secure the future of the Part D program. The issue of high-price drugs is not exclusive to catastrophic coverage; it affects the entire Part D benefit and can lead to higher costs for all beneficiaries.”

Given the data in the two reports, it seems readily apparent that rising drug prices (and the many mechanisms that are driving those rises, including opaque rebate programs and other PBM price manipulations) are costing taxpayers billions of dollars. What remains to be seen is how Congress and the new administration seek to address the problem.

The FisherBroyles Pharmacy and Health Care Law team will continue to follow these issues and others that affect our pharmacy clients. We welcome your questions. Please contact any of the following attorneys:


Amy Butler, FisherBroyles Partner
Amy Butler
Cleveland (Toledo Branch), Chicago, Detroit Offices

Anthony Calamunci, FisherBroyles Partner
Anthony Calamunci
Cleveland (Toledo Branch), Chicago, Detroit and New York Offices

Brian Dickerson, FisherBroyles Partner
Brian E. Dickerson
Naples and Washington D.C. Offices

Nicole Waid, FisherBroyles Partner
Nicole Hughes Waid
Naples and Washington D.C. Offices

Katy Wane, FisherBroyles Partner
Katy Wane
Cincinnati Office