Pharmacy Benefits 101: Specialty Drugs
Specialty drugs, the class of higher-cost medications used to treat more complex and chronic medical conditions, have been in the spotlight recently due to rising utilization1, their large price tags, and “specialty capture” by facilities owned by larger, traditional pharmacy benefit managers (PBMs). These forces combine to boost profits for PBMs but can cause problems for a payer (an employer, labor union, municipality, health system, health plan, or even the federal government) or individuals struggling to manage their out-of-pocket pharmacy costs.
Why is there a problem with specialty drugs?
Unfortunately, when a payer is trying to manage specialty drug spend there are a few issues. The first is that the definition of specialty drugs is not universally agreed upon. We’ll dive into some of the common characteristics of these medications below, but it’s important to be aware that there may be inconsistencies in how PBMs define them.
Second, on average, the specialty drugs prescribed to treat conditions like cancer, multiple sclerosis, rheumatoid arthritis, HIV/AIDS, and hepatitis C, among others, represent around 1% - 1.5% of an average payer’s pharmacy claims. That may not seem like a big deal because it’s a small portion of the plan’s membership, but when we consider that the total cost of these claims can be 50% of the overall pharmacy program’s costs, the problem becomes apparent.
The cost problem wasn’t quite as extreme for Capital Rx’s clients in 2022. Still, less than 1% of claims drove nearly 40% of the gross spend across our book of business. And as Capital Rx Chief Growth Officer Kristin Begley, PharmD, explained at The Conference Board, plan sponsors have a fiduciary responsibility to understand how their selected vendors impact drug mix, as well as how drug mix can drive spend.
Third, I asked Josh Golden, SVP of Strategy at Capital Rx, about the specialty capture issue. He said, “The largest PBMs in the industry all own specialty pharmacies. At the same time, these PBMs advise their clients on the coverage and dispensing of specialty drugs, often encouraging their clients to exclusively use the PBM’s owned assets for dispensing.” So, not only are costs and utilization rising for specialty drugs, but a payer’s PBM partner likely makes more money when as the use of these expensive medications increases. “This PBM-owned dispensing profit model represents one of the biggest conflicts of interest in the healthcare industry today.”
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Before we get into some of the gritty details of how PBMs profit from specialty drugs and what plan sponsors need to know, let’s review a few of the basics.
What are the characteristics of specialty drugs?
Specialty drugs often require special handling (e.g., refrigeration) or monitoring by a healthcare professional and are likely:
- Injectables (e.g., click pens) or administered by clinicians
- Expensive (generally defined as >$1,000 per month)
- Based on a biological, not chemical, manufacturing process
- Being used to treat a rare, orphan, or chronic condition
There are several exceptions to the above. For example, many expensive oral cancer medications are considered specialty drugs.
Also, due to their high cost, specialty drugs often require prior authorization (PA) or step therapy before they can be used. And financial assistance programs (e.g., copay cards) are typically available for these medications for patients that either cannot afford their copay or don’t have prescription drug coverage.
Does the prescription benefit always cover specialty drugs?
No. Josh explained that “a mix of specialty drugs are quietly being processed and paid for under the medical plan because they are being dispensed or administered by a physician at the hospital or in an infusion center, for example.” The cost of the drug and the administration may be bundled together and subject to different cost-sharing requirements.
How are specialty drugs classified?
Three main classes, or categories, generally account for ~75% of specialty drug costs: anti-inflammatory agents (46% of the total gross cost) top the list, antineoplastics commonly used to treat cancer are next (15%), followed by dermatological agents (13%). The remaining ~25% of gross specialty drug cost is spread across several other classes/conditions, including neurological agents, cystic fibrosis, and endocrine/metabolic agents, among others.
How do PBMs profit from specialty/high-cost drugs?
With specialty drugs, there are at least seven ways PBMs can profit on a single claim, and it can add up to thousands of dollars.
- There’s an administration fee when the prescription is submitted and sent to the specialty pharmacy.
- If the drug requires prior authorization (PA), there’s a fee (generally $45-$65 per review, regardless of the outcome).
- If a copay card is used to help the member afford the drug, there’s another fee (usually a percentage of “shared savings”).
- Then, there’s the specialty drug dispensing fee, which can be thousands of dollars for high-cost medications.
- After the specialty drug is dispensed, a clinical program is likely initiated to help manage patient adherence, and the fee for that is funded by the pharmaceutical manufacturer.
- Pharma rebates are generally collected 6 – 9 months later, and in most cases, the PBM or rebate aggregator retains a portion of the fee.
- Finally, PBMs may also sell data back to pharma.
What can be done to manage specialty drug costs?
At Capital Rx, our formularies balance access and value to ensure that plan members can get the medication they need at the lowest possible cost. Additionally, the clinical team maintains a list of “wasteful drugs” to help spot and avoid the use of unnecessarily expensive drugs when there are equally effective, less costly options available.
For payers, and this is critically important: payers must ensure that their procurement process includes an analysis of PBMs’ preferred specialty products on the formulary along with the prior authorization approval rates of these medications by therapeutic class. PA approval rates for specialty products can vary wildly by PBM, and approval rates are typically much higher among PBMs that own specialty dispensing assets – so it’s crucial for plan sponsors to understand how these patterns of approval can impact their bottom line.
If you have questions or want to learn more about our clinical programs and full-service PBM solution, please get in touch!
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1 State of Specialty Spend and Trend Report. Pharmaceutical Strategies Group. (August 2022)