DIR fees in pharmacy have grown from an annoyance a few years ago to six-figure annual bills now for many pharmacy owners. If your pharmacy accepts Medicare Part D insurances, then you are paying DIR fees whether you realize it or not. There is a tremendous amount of uncertainty regarding calculating DIR fees, understanding who is charging DIR fees, and how pharmacies can avoid DIR fees.
Proper Financial Accounting of DIR Fees
RxAdvisors highly recommends that you do everything you can to mitigate these fees and their impact on your pharmacy. Pharmacy owners frequently ask us if DIR fees are tax-deductible and how a pharmacy's books should account for them. As pharmacy-specific accountants, this is our area of expertise. We are going to dive into the most frequently asked questions we get on DIR fees. Here is the list of questions:
Are DIR fees tax deductible?
Should I put DIR fees in my COGS?
How do I calculate DIR fees?
Am I paying more DIR fees than other pharmacy owners?
Are DIR Fees Tax Deductible?
The short answer is yes. Any fee that you must pay as a part of your everyday business operations is a valid business expense. Some pharmacy owners get confused as they look for a specific deduction type for DIR fees. There is no designated deduction type by the IRS for DIR fees. Your accountant should have a line item in your profit and loss statement (P&L) to account for DIR fees. This line item should be in the revenue portion of your P&L, and since the number is negative, it will reduce your total revenues.
Should I Put DIR Fees in my COGS?
No. Your DIR fees do not belong in your cost of goods (COGS) expenses. Your COGS is strictly to document the amount of money you paid for the inventory that you sold. If you mistakenly put your DIR fees in your COGS, then your calculations for gross margin, inventory turns, and your financial ratios will all be wrong. Even though the bottom line won't change with this error, it can negatively impact you in other ways.
For example, some state and local jurisdictions charge fees for licensing, registration, and other taxes based on your gross revenues. By putting your DIR fees in your COGS, you are inflating revenue and may be paying more because of this. Ensure your accountant puts DIR fees at the top of your P&L as a negative to your revenue.
How Do I Calculate My DIR Fees?
Unfortunately, there isn't a one size fits all answer. Where to find your DIR fees depends on if you are with a PSAO or not. If you have a PSAO, you should contact them and access online reports that show your DIR fees. Another option is to comb through your remittance advices for the chargebacks. Each payer can call DIR fees by whatever name they choose. We have often seen ambiguous terms as if they are trying to conceal what the fees are for. Performance fee, network fee, and contingent performance fee are just a few of them. Ideally, once you have gathered your reports from your PSAO or your remittance documents, then you can total up the amount of DIR fees that you have paid.
Am I Paying More DIR Fees Than Other Pharmacy Owners?
To best answer this question, you shouldn't compare your dollar number to other pharmacies. Instead, you want to look at DIR fees as a percentage of revenue. You can then compare your number against benchmarks and other pharmacies. The standard for this metric can be a bit varied. A pharmacy in a young, new part of town will inevitably have fewer Medicare patients and thus less DIR fees than a well-established pharmacy with an older population. You want to aim for DIR fees to be less than 5% of your total revenue. Some of our best-performing pharmacy owners can keep theirs at less than 3%.
Navigating the Complicated World of Pharmacy Accounting
We hear it frequently, accounting is accounting; there's nothing special about doing accounting for pharmacies. Here at RxAdvisors, we couldn't disagree more! There are so many intricacies and little-known tax benefits that a well-versed pharmacy accountant knows that a generalist doesn't. Even something as seemingly simple as where to account for DIR fees can be the difference in thousands of dollars in unnecessary taxes and fees. If you have specific questions about handling DIR fees at your pharmacy contact us a call at 855-877-9807 or visit our website at www.rx-advisors.com.