To Be Direct Or Not To Be Direct

Direct Contracting DiversifyRx
Direct Contracting DiversifyRx

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Have you considered having a pharmacy direct contract with PBMs?

Getting a pharmacy direct contract is a hot topic because pharmacies are continuously getting squeezed with no end in sight. Should you change your PSAO affiliation? Would your pharmacy be better off with a direct contract? Only you can answer these questions. To help you decide, let’s examine all angles.

The Alleged Benefits of a PSAO

Being a part of a PSAO made your pharmacy a part of the cool club. Your pharmacy is a preferred pharmacy that is supposed to drive a hoard of patients into your store. This strategy is the volume strategy often touted as access to lives by the PSAOs and plans. The concept is you are happy to make less profit on individual prescriptions because you are filling so many that you will make an acceptable cumulative profit. There are a few flaws with this theory, the main one being math.

The volume game might work if there was even a decent amount of profit for each script. I think PBMs and PSAOs spell profit L-O-S-S. When you take a negative number and multiply it by a large number, you don’t magically get a large positive number. You get a larger negative number. This math is what happens with your profit every day. You get many prescriptions because you are preferred, and instead of ending up with a profit, you have a significant loss in your bank account.

The goal is to work smarter, not harder. Filling a ton of prescriptions costs a lot. You need more employees, more technology, more inventory, more supplies, a bigger footprint, longer hours, and you get a lot more headaches. Many pharmacy owners have decided the volume game is out, and filling fewer prescriptions for more profit is in.

The Other Benefits

A PSAO is also supposed to help you run your pharmacy better. In addition to contract negotiations, they can also provide central pay, reconciliation, reimbursement oversight, membership discount programs, and education on industry topics. While many administer these services, they are often not the best in class for these services, and you can get them on the open market for very affordable costs. You are giving up a lot of control and money in exchange for mediocre operational support.

The Apparent Downsides to a PSAO

You wouldn’t be reading this blog if there weren’t downsides to being a part of a PSAO. The biggest downside, in my opinion, is the application of GER. What is GER? It stands for generic effective rate. A GER is applied to the entire network, limiting the amount of profit earned on generic drugs. These rates cap profits as a mathematical equation of AWP. Some examples are AWP minus 87%. This equation means that the most you can make from your entire generic drug book of business is 13% of the cumulative AWP, regardless of what you are reimbursed at the point of sale.

Having a GER causes these issues:
  • Massive clawback potential to “true-up” to the stated GER
  • Confusion on what any single prescription’s actual reimbursement will be
  • Inability to make a living from generic drugs
  • Cash flow instability
  • Inaccurate financials
  • Lowest cost drugs are not the best option

So are you sick of GER yet? The only way to get away from it is to go independent and direct contract with a payor outside of a PSAO. Before you take the plunge, it isn’t all rainbows and daisies. Just as there are benefits and downsides to being a part of a PSAO, having direct pharmacy contracts also has its pluses and minuses.

Here are some points to consider:
  • Leaving your PSAO may cause a cash flow crisis. They will probably hold onto a good portion of funds to ensure you can cover latent DIR fees and GER true-ups. Also, your central pay and electronic deposits will stop for many months. You will receive paper checks, which are slow and can get lost.
  • You will need to find a new reconciliation service.
  • There is no guarantee that a PBM will contract independently with you at all or for all of their networks.
  • Your dispensing fees and brand rates will be different. I have seen a wide range from better, almost the same, and much worse. Depending on what you dispense will determine the impact of this on your pharmacy.
  • Before you make the change, I suggest you have a line of credit or cash reserves available until you get through the rocky transition period.
Ready To Direct Contract Your Pharmacy?

Here’s an overview of the steps you will need to do. If you are a new pharmacy, your list is much shorter as you don’t have to worry about terminating with a current PSAO.

  1. Update your NCPDP profile with accurate information and documentation.
  2. Inform your PSAO of your intent to leave and be clear on the date of separation. Don’t do this over the phone; fill out their official paperwork so there is a trail. FYI: some PSAOs will terminate you immediately upon hearing you want to leave. We recommend doing as much as you can on the NCPDP website and getting applications in before notifying yours.
  3. Ensure your PSAO uploads the separation date into NCPDP. Warning – you might have to remind them annoyingly.
  4. Contact each of your PBMs (run a report from your software) to obtain an individual contract, or sometimes it is called a credentialing application. These applications are time-consuming. Create a folder on your desktop with copies of all licenses, insurances, leases, and anything else you are asked for, as you will need these documents several times.
  5. Evaluate each contract; most are take it or leave it. If you are a rural pharmacy, ensure that you get rural rates.
  6. Once you have an account, make sure to fill out the EFT forms so you can get direct deposits instead of paper checks.

While this appears to be straightforward, it is complicated and chaotic, to say the least. If you are looking for someone to handhold you through this process, we highly recommend Alicia. She is a technician who specializes in direct contracting for pharmacies. Her email is  For a listing of common PBMs’ websites, head over to the DiversifyRx Facebook Group and download a copy. Hopefully, you are now more informed and ready to determine if direct contracting for your pharmacy is the right thing to do.

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