The looming DIR Hangover, a consequence of direct and indirect remuneration (DIR) fee changes set to take effect in January 2024, is a cause of concern among pharmacy professionals. In a bid to mitigate financial strain and ensure the continued success of their businesses, pharmacists are proactively seeking ways to prepare for the impending changes.
The Center for Medicare and Medicaid Services (CMS) has issued a final rule that will alter the way DIR fees are applied. Under the new rule, pharmacy benefit managers (PBMs) will no longer be able to retroactively impose DIR fees. Instead, these fees will need to be incorporated into the negotiated price patients pay at the pharmacy counter. While the CMS believes this change will enhance transparency for both patients and pharmacies, it has generated mixed reactions within the industry. The impending shift has been dubbed the DIR Hangover.
So, how can independent pharmacists best prepare for the financial challenges that lie ahead in 2024? You need to start planning now and implement strategies that will protect your pharmacy’s financial health. Here are five tips to help you navigate the DIR Hangover and mitigate the potential financial strain.
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Master Your Cash Flow
Understanding your pharmacy’s cash flow is fundamental to financial stability in the wake of the DIR Hangover. Consider key performance indicators like the Current Ratio, which measures current assets against current liabilities. A Current Ratio of 3 to 3.5 to 1 can provide a buffer against the uncertainties of DIR fees, offering a cash flow cushion that will prove invaluable during this transitional period.
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Boost Your Gross Margin
Increasing your gross margin can substantially improve your pharmacy’s cash flow. The industry average for pharmacy gross margins hovers around 23-24%. Exploring niche markets, such as women's health, travel vaccines, pet medications, or nutritional supplements, can help diversify your revenue streams and raise your gross margin. Offering unique services that cater to your community's healthcare needs can also contribute to financial stability.
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Benchmark DIR Fees
To anticipate the DIR fees that PBMs may collect in the first quarter of 2024, analyze the fees collected during the same period in 2023. Your third-party reconciliation platform should facilitate this process. Setting this figure as your savings benchmark will guide you in setting aside the necessary cash reserves to offset the impact of the DIR Hangover.
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Manage Expenses Wisely
Cost control is pivotal for optimizing cash flow and maintaining a healthy bottom line. Pay special attention to your cost of goods sold and wage expenses. Consider maximizing your purchasing power through AAPA’s GPO agreement to increase your margin percentage. Additionally, explore technological solutions and automation to streamline payroll processes, reducing wage-related expenses.
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Establish a Business Line of Credit
While it's essential to maintain healthy cash flow, having a business line of credit can serve as a valuable safety net for short-term cash flow challenges. This financial tool allows you to draw funds when needed, typically through a business checking account or credit card. However, it's important to exercise caution, as lines of credit often come with higher interest rates. They should be reserved for short-term financial needs, not as a long-term solution. Remember, these lines of credit should always come with a clear plan for repayment. Long-term financial challenges within your pharmacy should not rely on short-term debt solutions like a line of credit.
The 2024 DIR Hangover will present financial challenges, but with a proactive approach, you’ll be well-equipped to navigate the changing healthcare landscape and continue serving your community. Independent pharmacists are no strangers to innovation. The ability to adapt and prepare now will position your pharmacy for success in 2024 and beyond.
Join AAPA today and gain exclusive access to member-only programs, discounts, training, resources, and more. As an AAPA member, you’ll have the support you need to boost profitability, stay competitive, and expand your business. Apply now.
