Section 31.3: Understanding DIR, GER, and Network Economics

31.3.1 The “Why”: The Reimbursement You See Is Not the Reimbursement You Get

As a practicing pharmacist, you have likely encountered the frustrating reality of pharmacy reimbursement. You submit a claim, the computer adjudicates it, and it tells you the payer will reimburse you $X. You might grumble about the low amount, but you generally assume that $X is the amount you will ultimately receive. In the world of specialty pharmacy, and increasingly in retail, this assumption is dangerously naive. Welcome to the opaque, complex, and often punitive world of post-adjudication “clawbacks,” performance penalties, and complex rate calculations.

This section will introduce you to three of the most critical and least understood concepts in pharmacy economics: Direct and Indirect Remuneration (DIR) fees, Generic Effective Rate (GER), and performance-based network incentives and penalties. These are not academic footnotes; they are the hidden mechanisms that can claw back 5%, 10%, or even 15%+ of your adjudicated reimbursement, often months after you dispensed the drug. Failing to understand, model, and manage these factors is the single fastest way for a specialty pharmacy to go bankrupt, even if your prescription volume is high.

Think of your adjudicated reimbursement (the amount shown on the claim screen) as your gross revenue. DIR, GER adjustments, and performance penalties are your hidden costs of goods sold, taken directly off the top by the PBM. Your true net revenue is only revealed weeks or months later. This lag creates a massive cash flow crisis and makes financial planning incredibly difficult.

Why do PBMs and payers use these complex, non-transparent mechanisms? Ostensibly, they are designed to incentivize quality and lower overall costs. In practice, they often function as a way for PBMs to guarantee their own profit margins, regardless of the pharmacy’s performance or efficiency. Your job is not to change the system (though advocacy is important), but to master its rules. You must learn to predict these clawbacks, build them into your financial models, and develop strategies to mitigate their impact. Ignoring them is financial suicide.

This section is your masterclass in PBM economics. We will dissect these concepts piece by piece, providing practical examples and actionable strategies. Understanding DIR, GER, and network performance is no longer optional; it is the fundamental requirement for survival in the modern specialty pharmacy landscape.

31.3.2 DIR Fees Deep Dive: The Post-Adjudication Clawback Machine

Direct and Indirect Remuneration (DIR) fees are arguably the most controversial and financially devastating aspect of modern pharmacy reimbursement, particularly within the Medicare Part D program where they originated. While the technical definition is complex, you can think of DIR simply as: Money the PBM takes back from the pharmacy *after* the claim has already been paid, based on criteria that are often opaque and applied retroactively.

The Origin Story: Medicare Part D & The “Lowest Net Cost” Mandate

DIR fees were born from a specific provision in the Medicare Part D regulations. CMS (Centers for Medicare & Medicaid Services) requires Part D plan sponsors (and their PBMs) to report the “lowest possible net cost” they achieved for drugs. This net cost includes not only the price paid to the pharmacy but also any rebates received from manufacturers.

Initially, PBMs used “DIR” primarily to report these manufacturer rebates back to CMS. However, they soon realized they could use the same mechanism to extract additional concessions from pharmacies *after* the point of sale. They began tying these post-adjudication clawbacks to various performance metrics, network participation fees, or simply asserting flat percentage fees.

The core problem? These fees were not accounted for in the adjudicated price shown to the pharmacy (and the patient) at the point of sale. A pharmacy might think they were being paid $100 for a drug, only to have $8 clawed back 3-6 months later as a DIR fee. This created massive financial uncertainty and fundamentally broke traditional pharmacy business models.

Types of DIR Fees: Deconstructing the Clawback Mechanisms

DIR is not a single fee; it’s an umbrella term for various post-adjudication clawbacks. You must understand the different flavors:

Type of DIR Fee	How It Works	Common Examples & Metrics	Level of Transparency
Performance-Based DIR	Fees assessed based on the pharmacy’s performance against pre-defined quality or cost metrics. This is the most common type.	Medication Adherence Scores: PDC (Proportion of Days Covered) for chronic conditions (Statins, Diabetes, Hypertension – CMS Star Ratings). Formulary Compliance: Dispensing preferred vs. non-preferred drugs. Generic Dispensing Rate (GDR): Percentage of generic vs. brand claims. Patient Safety Metrics: High-risk medication use in the elderly. Audit Performance: Penalties for failing PBM audits.	Low to Moderate. PBMs provide *some* details on the metrics, but the exact calculation, weighting, peer group comparisons, and thresholds are often opaque.
Network Participation Fees	Flat fees charged simply for being allowed in the PBM’s network. Often calculated as a percentage of reimbursement or a flat fee per claim.	Flat % of WAC or AWP (e.g., 2% of WAC on all brand claims). Flat fee per Brand claim (e.g., $5 per brand Rx). “Administrative Fees” with little justification.	Very Low. Often buried deep in the contract language. Pharmacies may not even realize they are paying these until they reconcile payments.
Rebate-Based DIR (Less Common for Pharmacies)	Fees supposedly related to manufacturer rebates, though the connection is often tenuous.	PBMs might argue a portion of their negotiated rebate depends on network performance, justifying a clawback from pharmacies.	Extremely Low (Opaque). Pharmacies have zero visibility into PBM-manufacturer rebate contracts.

Masterclass Table: Common DIR Performance Metrics & How to Win

Your financial survival depends on actively managing the metrics that drive performance-based DIR. You cannot afford to ignore them.

Metric Category	Specific Metric Example (CMS Star Ratings Focused)	How It’s Calculated	Specialty Pharmacy Strategy to Excel
Medication Adherence	Statins Adherence (PDC)	Proportion of Days Covered (PDC) for patients on statins. Target: > 80% (Higher for better scores/lower DIR).	This is Pillar 1 (Clinical Excellence). Your high-touch clinical model is key. Implement proactive refill reminder calls (“sync calls”). Use Motivational Interviewing to address adherence barriers (cost, side effects, beliefs). Leverage technology (smart caps, apps) if possible. Document Everything: Your interventions are your proof during audits.
	Diabetes Adherence (Oral Agents – PDC)	PDC for patients on non-insulin diabetes meds. Target: > 80%.
	Hypertension Adherence (RAS Antagonists – PDC)	PDC for patients on ACE inhibitors or ARBs. Target: > 80%.
Patient Safety	Use of High-Risk Medications in the Elderly	Percentage of elderly patients receiving potentially inappropriate medications (Beers List). Target: Low %.	Requires strong clinical oversight during verification. Pharmacists must actively screen for these drugs and recommend alternatives to providers. Document your interventions to avoid being penalized for prescribing decisions.
Cost / Utilization	Generic Dispensing Rate (GDR)	Percentage of claims dispensed as generics when available. Target: High % (often > 90%).	Less relevant for specialty (fewer generics), but still tracked. Ensure systems default to generic. Have a clear process for documenting DAW-1 codes.
Operational	Formulary Compliance	Dispensing preferred vs. non-preferred drugs based on the patient’s plan. Target: High % compliance.	Requires accurate benefit verification software. Strong communication with providers to switch therapy when needed. Efficient Prior Authorization team is crucial.

31.3.3 GER Calculations Unmasked: The Generic Pricing Squeeze

While DIR fees primarily impact brand drugs and performance metrics, Generic Effective Rate (GER) is a mechanism specifically designed to control PBM costs on generic medications. Its purpose is to ensure that, across a pharmacy’s entire book of generic business with that PBM, the PBM achieves a certain *aggregate* discount level off a benchmark like Average Wholesale Price (AWP).

In simpler terms: The PBM guarantees its clients (employers, health plans) a certain overall discount on generics (e.g., “AWP – 85%”). GER is the mechanism they use to ensure the pharmacies in their network collectively deliver that discount, even if individual drug reimbursements vary. If the network *overperforms* (pharmacies get reimbursed slightly higher than the target rate), the PBM uses GER calculations to claw back the difference.

How GER is Calculated (The Concept)

The exact formulas are proprietary and vary by PBM, but the concept generally involves comparing the pharmacy’s total reimbursement for all generics dispensed for that PBM over a period to the total ingredient cost based on the PBM’s target benchmark discount.

$$ \text{Simplified GER %} = \frac{\text{Total PBM Reimbursement for Generics}}{\text{Total Ingredient Cost of Generics at Benchmark Price}} $$

The PBM sets a target GER (e.g., AWP – 85%, which translates to roughly 15% GER if AWP is the benchmark cost). If your pharmacy’s actual calculated GER over the period is higher than the target (e.g., 18%, meaning you were reimbursed slightly better than the target), the PBM will claw back the difference (3% in this example) across all your generic claims for that period.

The Impact of MAC Pricing & AWP Deflation

GER becomes particularly painful due to two other factors:

• Maximum Allowable Cost (MAC) Pricing: For multi-source generics, PBMs don’t reimburse based on AWP. They create their own internal price lists (MAC lists) that set the maximum reimbursement for a given generic drug, often far below AWP and sometimes even below the pharmacy’s acquisition cost. These MAC lists change frequently and without notice.
• AWP Deflation: The “sticker price” (AWP) for many generics has been decreasing over time. However, PBM contracts often lock in reimbursement rates based on older, higher AWPs for calculation purposes, while simultaneously using aggressive MAC lists for actual payment.

The Squeeze: You might be reimbursed based on a low MAC price at adjudication, but the GER calculation might still compare your reimbursement to a higher, older benchmark price. This makes it almost impossible to “beat” the target GER, leading to inevitable clawbacks.

Masterclass Table: Decoding Pharmacy Pricing Benchmarks

Understanding these acronyms is crucial for deciphering contracts and reimbursements.

Benchmark	Full Name	Definition	How It’s Used	Pharmacist’s Reality Check
AWP	Average Wholesale Price	A published “list price” for drugs, reported by manufacturers. Often called the “sticker price.”	Historically used as the basis for reimbursement contracts (e.g., “AWP – 18%”). Still used for many Brand drugs and as a benchmark in GER calculations.	Inflated & Unreliable. AWP bears little relation to actual market prices. It’s a starting point for discounts, not a real cost.
WAC	Wholesaler Acquisition Cost	The manufacturer’s list price to wholesalers. Does not include discounts or rebates.	Sometimes used in reimbursement formulas, especially for specialty drugs (e.g., “WAC + 4%”). Also used in some DIR fee calculations.	Closer to a real price than AWP, but still doesn’t reflect your actual purchase price after GPO discounts.
MAC	Maximum Allowable Cost	A PBM-created price ceiling for multi-source generic drugs. Specific to each PBM.	The primary determinant of generic reimbursement. This is what you are actually paid at adjudication for most generics.	Opaque & Aggressive. MAC lists change constantly, are not transparent, and are often set below your acquisition cost, forcing you to dispense generics at a loss. Fighting MAC pricing is a constant battle.
NADAC	National Average Drug Acquisition Cost	A CMS survey-based benchmark representing the average acquisition cost paid by *retail* pharmacies. Updated weekly.	Used primarily by state Medicaid programs for reimbursement. Sometimes used as a “floor” or reference point in commercial contracts.	More Realistic, but Still Imperfect. NADAC is a better reflection of actual cost than AWP/WAC, but it’s an average and may not reflect *your* GPO pricing or specialty wholesaler costs.

31.3.4 Performance Networks: Incentives vs. Penalties

Beyond the direct clawbacks of DIR and GER, payers increasingly use the structure of their networks themselves to drive pharmacy behavior. They create tiered networks where pharmacies are ranked based on performance, with significant financial consequences tied to their tier.

The Rise of Tiered Networks

Historically, most pharmacy networks were “open”—if you met the basic credentialing criteria, you were in. Today, especially in specialty, networks are often:

• Limited: Only a select number of pharmacies are allowed in, often restricted by geography or specialty (e.g., only 3 pharmacies in the state can dispense a specific oncology drug).
• Tiered: Pharmacies within the network are stratified into performance tiers.

Masterclass Table: Understanding Network Tiers & Financial Impact

Network Tier	Typical Characteristics	Performance Metrics Used	Financial Consequences	Strategic Implication for Pharmacy
Preferred / Tier 1	Smallest group (often < 10% of network). Highest performers. May get exclusive access to certain drugs or patients.	Top scores across all metrics: Adherence (PDC > 90%), TAT (< 24hr), Patient Satisfaction (> 95%), Lowest Cost (aggressive GER/DIR management).	Incentives: Highest reimbursement rates. Lower DIR fees. Access to limited distribution drugs (LDDs). Higher patient volume steered their way.	The Goal. All your clinical and operational efforts should be focused on achieving and maintaining preferred status.
Standard / Tier 2	The majority of the network. Meets minimum performance standards but is not exceptional.	Meets baseline targets: Adherence (PDC > 80%), TAT (< 72hr), Patient Satisfaction (> 85%).	Baseline: Standard reimbursement rates. Standard DIR fees. Access to most drugs (except exclusive LDDs).	Survival, but Risky. You can operate here, but you are vulnerable. A slight dip in performance could drop you to Tier 3. Margins are tight.
Non-Preferred / Tier 3 / “Probation”	Pharmacies falling below minimum standards. At risk of termination.	Fails to meet targets: Adherence (< 80%), TAT (> 72hr), high error rates, failed audits.	Penalties: Lowest reimbursement rates (often below cost). Highest DIR fees. Loss of access to certain drugs. Requirement to submit Corrective Action Plans (CAPs). Potential network termination.	Code Red. If you fall into this tier, fixing the underlying performance issues becomes your pharmacy’s #1 priority.
Out-of-Network (OON)	Pharmacies not credentialed or terminated.	N/A	Cannot service the payer’s members (claim rejects).	Must go through the entire credentialing & value prop process (Sections 31.1 & 31.2).

Beyond DIR: Other Performance Metrics

While the CMS Star Ratings adherence metrics often drive DIR fees, payers incorporate a much broader range of clinical and operational metrics into their overall network performance evaluations and tiering decisions. Your ability to track and report on these is crucial (Pillar 4).

• Clinical Metrics (Beyond Adherence):
  • Therapy completion rates (e.g., for Hepatitis C).
  • Time to therapy initiation.
  • Patient-Reported Outcomes (PROs) improvement scores.
  • Rate of pharmacist interventions documented.
• Operational Metrics (Beyond TAT):
  • Dispensing accuracy rate.
  • Call center performance (ASA, abandon rate).
  • Patient satisfaction scores (NPS).
  • Provider satisfaction scores.
• Cost Metrics (Beyond GER):
  • Rate of generic substitution.
  • Success rate in securing financial assistance.
  • Demonstrated reduction in ER/hospital visits (requires linking data).

31.3.5 Impact on Profitability & The Need for Financial Mastery

The cumulative effect of DIR fees, GER adjustments, and performance penalties is a relentless downward pressure on specialty pharmacy margins. What looks like a profitable prescription on day 1 can easily become a net loss by day 180. This environment demands a level of financial sophistication far beyond traditional community pharmacy.

The New Financial Reality: Accrual Accounting is Mandatory

You cannot operate a specialty pharmacy using simple cash accounting (tracking money only when it comes in or goes out). You must use accrual accounting. This means:

• Recognizing Revenue When Earned: You book the revenue when you dispense the drug, based on the adjudicated amount.
• Estimating and Accruing for Clawbacks: At the same time you book the revenue, you must book an *estimated expense* for the DIR and GER fees you anticipate will be clawed back later (as per the tutorial in 31.3.2). This gives you a much more realistic picture of your true profitability in real-time.
• Meticulous Reconciliation: When the PBM actually takes the money back months later, you must reconcile the actual clawback amount against your accrued estimate. This reconciliation process is complex and requires sophisticated reporting and dedicated staff time.

Failing to accrue for these fees means your financial statements will show wildly inflated profits for the first few months, followed by a sudden, catastrophic collapse when the clawbacks hit. This has bankrupted many pharmacies.

Strategic Implications: Value is Your Only Leverage

Ultimately, the brutal economics of DIR, GER, and performance networks reinforce the central theme of this module: Your clinical and operational value (Section 31.2) is your only real leverage.

You cannot compete on price. You cannot force PBMs to be transparent. You can become so indispensable to their key providers, so effective at managing their highest-risk members, and so superior in your operational execution that:

• They are forced to grant you network access even when the network is “closed.”
• You can negotiate slightly better terms (e.g., lower DIR rates, exclusion from GER) during contract renewals (Section 31.4) because they cannot afford to lose you.
• You achieve “Preferred” status, unlocking better reimbursement and insulating you somewhat from the harshest penalties.

Mastering the complex, often predatory economics described in this section is not about finding loopholes. It’s about understanding the battlefield so you can build a pharmacy operation so clinically excellent and operationally efficient that you can not only survive but thrive despite the inherent challenges. Your financial acumen must become as sharp as your clinical judgment.