Expect Explosive Growth in Specialty Pharmacy and the Neo-Pareto Rule of 80/2

Without a solid categorical definition, specialty pharmacy’s generally accepted criterion is that drugs are expensive.

Some medications require special handling; some special knowledge about administration, adverse effects, conditions, and contraindications; and others are just pills to be taken twice daily, no differently from most small-molecule pharmaceuticals.

“Specialty” medications have no generally accepted definition for categorization, largely because the insurers and their contracted pharmacy benefit managers want to separate them by their most meaningful difference from other therapeutics: cost. Specialty products can be treated differently with respect to data collection, networks, provider reimbursement, and rebates. It is all too tempting to use pricing as the principal criterion for categorizing a medication as “specialty.”

2% of Fills Were Greater Than 50% of the Cost in 2020, Soon to Become 80%
If categorization is based on expense, perhaps it is no surprise that specialty pharmacy represents more than half of all drug spending in the United States, projected to be more than $500 billion within 2 years.¹ By 2025, 2% of all prescription fills will represent at least 80% of the total cost of medications. That eventuality is staggering and has tectonic implications for the pharmacy sector.

Specialty Pharmacy Locations Are Growing, but They Are Not Your Parents’ Community Pharmacies
Between 2015 and 2019, the number of accredited specialty pharmacy locations in the United States grew to 1069, from 381.² However, a disproportionate number of these pharmacies were not remote call centers with dispensing by mail, but rather a mix of courier, local, and mail, resulting from an influx of health systems seeking 340B margins and an increasing need for near-site or on-site services for specialty prescribers. All the while, the average community pharmacy was getting squeezed out of the marketplace by carry costs, limited distribution, and narrow networks. Specialty pharmacies are largely call center–based care delivery, with specialized knowledge of disease states but also complex coverage circumstances and rules, spending much of their personnel’s time on approval and revenue cycle management.

Vertical Integrations Prompted by the Ability to Capture Specialty Utilization and Manage Internally
The past decade brought about inevitable vertical integrations among insurers, pharmacies, pharmacy benefit managers (PBMs), and third-party administration functions. The advantages are obvious. If a pharmacy needs only to channel 2% of prescriptions to itself and capture 80% of the market, it can have a “market” without an actual marketplace or market dynamics. And the pharmacy can play both sides of the channel: the consumer, through positioning of out-of-pocket costs, and the manufacturer, through demanding more rebates.

Doubling Down on Certain Specialty Drugs: Cigna’s “Shared Savings” Program for Patients Cigna recently announced a “shared savings” program for generic biologicals, in which patients can be given a $500 debit card by choosing the biosimilar.³ This consumer incentive becomes an even more powerful negotiating chip when asking competing brand manufacturers for additional rebates, some of which are passed along to the plan and some kept by the pharmacy benefit manager. Playing both sides of the table has positioned the middlemen to control nearly all the drug spending because specialty makes up the majority and is managed under a different set of rules than nonspecialty, which means tighter control of providers.

Health Systems Buckle Down on 340B and Specialty; New Lexicon Develops on “Bag Color”
It is no secret that 340B programs have started to replace disproportionate share hospital (DSH) proceeds as the most important revenue generator to backfill the coffers of health systems that provide care to low-income and uninsured patients. DSH dollars are allocated through the states from the federal government via Medicaid to the tune of $19.7 billion in 2019,⁴ with a large number of hospitals receiving tens of millions of dollars in the program. The Affordable Care Act contained provisions to reduce the program size because Medicaid expansion was meant to reduce uncompensated care, but legislation over the years has chipped away at the reductions. Regardless, for some health systems, 340B proceeds now exceed DSH payments.

The importance of keeping 340B prescriptions in-house to the bottom line of health systems cannot be overstated. Simply put, 340B is now the “opioid epidemic” of health systems, which are completely dependent on the program to protect against layoffs and reduced service delivery systemwide, not just with pharmacy divisions. Between manufacturers attempting to reign in contract pharmacies and “white bagging”—wherein the payer is the dispenser to the site of care, leaving the latter to administer the drug to patients but not receive the buy-sell margin—health systems are on high alert regarding specialty pharmacy distribution and reimbursement channels. Specialty medications have become the payer-policymaker-provider battleground of the future.

Will the Bifurcation of Pharmacy Practice and Cost Structures Lead to a Different Payment Model for Community Pharmacy?
Netting out mail order and specialty pharmacy, community pharmacies likely represent approximately 75% of the prescription fills but between 10% and 15% of the total spending within a few years. So why the pressure to reduce reimbursement to communities if their dispensing will represent such a small part of the overall cost of drug spending?

It begs the question: Should there be separate reimbursement models for nonspecialty and specialty pharmacy, with nonspecialty pharmacy reimbursed solely on services rather than product?

There are more than 300 medications on the market that cost essentially nothing per pill. Why spend so much energy and administrative money on maximum allowable cost and state maximum allowable cost, direct and indirect renumeration fees, and all the other spreadsheet nonsense? Why not simply pay only for the services provided? A fair day’s reimbursement for a fair day’s care of patients: pay for services, not for medications that cost next to nothing. No nonsense needed.

REFERENCES

2017 new drug therapy approvals. FDA. Accessed July 30, 2021. https://www. fda.gov/media/110526/download

The state of specialty pharmacy 2020: market data and trends. Drug Channels. September 9, 2020. Accessed July 30, 2021. https://www.drugchannels. net/2020/09/the-state-of-specialty-pharmacy-2020.html

Bank C. Cigna offers $500 incentive for switching to biosimilars. Managed Healthcare Executive®.. July 8, 2021. Accessed July 30, 2021. https:// www.managedhealthcareexecutive.com/view/cigna-offers-500-incentive-for-switching-to-biosimilars

Disproportionate hospital share payments. Medicaid and CHIP Payment and Access Commission. Accessed July 30, 2021. https://www.macpac.gov/ subtopic/disproportionate-share-hospital-payments/