The Changing Specialty Drug Reimbursement Landscape

Contributor : Indu V. Pillai : Senior Analyst

Publish date: 17 Jun, 2019

Advancements in medicine have led to the development of new specialty drugs treating a greater number of rare conditions. In the early 1990s, specialty drugs were limited to a small number of populations, with only 30 drugs available in the market. Presently, more than 400 specialty drugs are available and the developing drug pipelines indicate by 2020 most of the top-selling drugs will be under specialty category. Although these drugs in many cases offer the most effective treatment option for chronic conditions, they often require proper clinical management and support services.

Specialty drugs continue to grow in number and utilization, a surge expected to persist in the future. In the world of value-based arrangements, it becomes critical for providers, payers, PBMs, and other stakeholders to understand the challenges ahead, and devise better cost-management strategies. Here we discuss a few emerging trends that will have a significant impact on the specialty pharmacy landscape.

Consolidation increases payer/PBM bargaining clout

Over the past few years, the specialty pharmacy sector has consolidated significantly. Most of the standalone specialty pharmacies have been taken over by PBMs, payers, or larger retail chains. In 2018, CVS acquired five specialty pharmacies (Apothecary By Design, Central Drugs, EncompassRx, EntrustRx, and SimplicityRx). Such consolidations provide the combined entities more bargaining clout for negotiating drug prices with pharma manufacturers. Even payers are purchasing specialty pharmacies in order to offer their members one-stop solutions for their healthcare needs. Notably, in 2017, UnitedHealth Group’s OptumRx acquired Phoenix-based Avella Specialty Pharmacy. In 2018, Cardinal Health, one of the largest wholesalers in the nation, sold its specialty pharmacy business to Biomatrix (Drug Channels, November, 2018).

Smaller independent pharmacies often struggle to manage profitability. Merging with financially stable larger entities seems to be the most plausible reason for these cash-strapped firms to open new revenue channels. Given the high costs associated with procuring and managing specialty drugs, expect to see more consolidations in the coming years.

PBMs/payers apply stricter controls to manage rising specialty drug costs

Specialty drugs account for 41 percent of plans’ total pharmacy spending (Express Scripts, November 2018). As specialty drug spending continues to rise, the health plans and PBMs are increasingly applying stricter approaches toward managing drug utilization, including formulary exclusions.

Moreover, the number of specialty drug approvals has been on the rise. In 2018, the Food and Drug Administration approved 39 specialty drugs. These include treatments for cancer, rare conditions, HIV, thrombocytopenia (platelet deficiency), biologics for psoriasis, and rheumatoid arthritis. The current pipeline for specialty drugs is also promising with drugs being developed for cancer, multiple sclerosis, and orphan drugs, among others. The addition of new specialty drugs in the market will increase specialty drug spending as well.

State and federal policies introduced to control specialty drug costs

The Congressional office budget reported the money spent on specialty drugs in Medicare’s Part D prescription plan rose to nearly $33 billion in 2015 from $8.7 billion in 2010. Part D enrollees are facing more out-of-pocket cost for specialty drugs in 2019 as well.

At the federal level, the Trump administration released a blueprint of proposals to improve transparency in drug pricing. Some of the notable changes include doing-away with the drug rebate system, using international comparisons for pricing Medicare drugs, and requiring drug companies to include prices in advertising to increase competition. The administration’s blueprint, if taken effect, is expected to keep the drug prices in line with the lowest price paid in other countries. At the state level, bills impacting drug transparency and other issues were introduced and in some circumstances, became law.

Time to burst the rebate bubble

A recent policy from the Trump administration could significantly alter drug rebates or eliminate them to curb prescription drug costs in Medicare. The proposed rule would disrupt the current rebate system under which manufacturers negotiate with PBMs and payers for favorable placement on formularies, coverage policies, and pharmacy networks. Although the major PBMs claim to return most of the rebates to clients, there is a huge difference in the list price of the drug that beneficiaries pay compared to the net cost of the drug after rebates. This phenomenon is called the rebate bubble. The elimination of rebates will burst the bubble thus forcing PBMs to look for new revenue channels. This will result in drugs with low net costs on the formulary instead of heavily rebated high-cost drugs linked with incentives. This will increase competition among specialty drugs in the same therapeutic category.

Limited distribution facilities gain traction

Specialty drugs that fall under FDA Risk Evaluation and Mitigation Strategies require manufacturers to use limited distribution of these drugs to ensure the drug benefits outweigh the risk. For this purpose, drug manufacturers contract with one or more specialty pharmacies to dispense these specialty drugs.

Manufacturers identify pharmacies with a high standard of clinical expertise, patient education, and other treatment support services. They are now providing half of the specialty drugs on a limited-distribution basis. It becomes imperative for specialty pharmacies to expand patient access to these drugs and associated clinical support in order to manage drug costs. One such strategy includes forming partnerships to help reduce readmissions, which is crucial as drug reimbursements are increasingly being tied to quality outcomes. Walgreens and Prime Therapeutics combined their specialty and home delivery pharmacy to increase their limited distribution of drugs for their patients. Going forward, manufacturers will include payer-owned specialty pharmacies in their networks to expand access of their products to payer members. Already, large payers such as United Health Group, Aetna, and Cigna own some of the largest specialty pharmacies.

Conclusion

The ever-expanding pipeline of specialty drugs will drive drug spending in 2020 and beyond. As new therapies in specialty segments get approval, health plans and providers will be adopting new strategies for controlling costs. This includes new payment models, improved coordination and adherence programs, and higher utilization of data analytic capabilities.

If rebates go away, expect several changes to Part D programs, such as increased premiums for members, reduction in list-price of drugs, lower out-of-pocket costs for multiple specialty drugs, and point-of-sale discounts in lieu of rebates. Stakeholders must realign their business models and adopt strategies to meet the challenges presented by new therapies. Formularies will change to include drugs based on cost and efficacy, and not based on volume of drug consumption like it was before.

Indu V. Pillai is a senior analyst with Decision Resources Group’s Market Access Team.

 

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