Top Trends for 2018 in Specialty

1. Rising Cost of Specialty Products

Specialty products can alter or eradicate diseases that have long plagued humanity, increasing both quality of life and length of life span overall. However, progress and innovation come with a high price tag. Drug approvals have shifted more toward the specialty market, as has the focus for investment from many pharmaceutical companies.

It often takes hundreds of millions of dollars to develop a new compound. Coupled with the low corresponding approval rate for novel specialty products, this creates tremendous financial risk throughout the industry. The typical size of the population for these diseases is relatively low; therefore, the development costs cannot be spread over a large enough base of treatments, resulting in a much higher cost per treatment. Other factors include whether a patient has insurance coverage for drugs, any rebates or discounts from the manufacturer, and patient deductibles and co-pays or any financial assistance patients might be eligible to receive from the government (Medicaid, Medicare), through discounting coupons, or from the manufacturer.

Prices are set by the manufacturer, and sticker shock will continue if society chooses to seek solutions to target previously untreated diseases. The annual cost of these products can exceed $500,000 per year. Examples of some high-cost disease areas include Pompe disease, T-cell lymphoma, hyperammonemia, and myasthenia gravis. Covering the cost of these products includes a combination of payer, manufacturer, and government programs. Larger patient populations, such as those with hepatitis C, and their treatments have had a large impact on budget, with the trade-off of offering a cure for a lifelong debilitating illness.

2. Value-Based Contracting

Although highly effective products often carry significant price tags, the marketplace has several mechanisms to assist with the challenges of balancing value and profits. For some specialty products, we are seeing more competition plus second- or third-generation products. One consequence of this evolution is that the buyers of products—payers—have a bit more leverage and more options. This leads to “contracting levers,” which include value-based contracting.

Payers must also see financial advantages in covering a drug or, at the very least, not suffer a financial loss. Providers or prescribers can also control drug cost and other health care expenditures based on which products they order for their patients. It is important that these providers have a feedback mechanism of sorts to enable them to make better decisions. Specialty pharmacy plays a critical role through the value it adds by that assuring patient care is optimized. There is also a potential trickle-down effect of patients receiving value that causes high-cost products to become more affordable down the line. Expect the trend of value-based contracting to continue to grow as payers increasingly hold both providers and pharmaceutical manufacturers accountable for choosing the right combination of drug regimens and treatment protocols to deliver the best possible outcomes at the lowest total cost of care.

3. New Specialty Products

Our industry grows on the back of new drug approvals. Unfortunately, our industry often gets vilified because of the increasing cost of drug therapy. Drugs are frequently viewed as a commodity because there is a defined cost. The bigger picture, however, illustrates that new products are the best hope we have to improve outcomes and extend life.

A look at the current pipeline shows that we should expect a flurry of drug approvals in key areas this year. If you are a specialty pharmacy, it is critical to get ahead of the curve and plan your operation around a new set of tools.

Alzheimer disease affects over 15 million lives, yet we have few options to treat this debilitating condition. Keep an eye out for new products such as Biogen’s aducanumab, CNP520 from Amgen and Novartis, and AbbVie’s ABBV-8E12.

Multiple sclerosis therapies continue to improve and have a long history of success, with Celgene’s ozanimod, Novartis’ siponimod, and Actelion’s ponesimod all looming on the horizon. For epilepsy, we have GW Pharmaceuticals’ Epidiolex and Zogenix’s ZX008 in the pipeline.

Oncology continues to be the lead disease treatment provider in new drug approvals. Several products in the chimeric antigen receptor T-cell category are anticipated this year—including Novartis’ Kymriah (tisagenlecleucel) and Kite’s Yescarta (axicabtagene ciloleucel)—along with Incyte’s combination of epacadostat with anti—programmed cell death-1 products, Amgen’s Imlygic, Janssen’s apalutamide, Verastem’s duvelisib, and Loxo Oncology’s larotrectinib.

4. Impact of Average Sales Price on the Specialty Channel

In the early 2000s, the federal government passed legislation that significantly changed the landscape of reimbursement for Medicare coverage of provider-administered injection products, which were administered primarily in the physician’s office or clinic. These drugs had been reimbursed using an average wholesale price—based system similar to that of the retail pharmacy. Often referred to as Medicare Part B products, this group of drugs switched to a system of reimbursement based on average sales price (ASP). The basis of ASP includes the wholesale acquisition price minus any discounts a manufacturer extends to the marketplace. Providers bill for a product based on the ASP, and depending on the setting, the markup can vary. Under “sequestration,” the markup to physician providers has been reduced, and as a result, the profitability of physician-administered products can be negatively affected. These physicians typically experience ASP markups between 4.3% and 10%.

However, pharmacies focused on specialty products may be reimbursed by commercial payers based on a negotiated rate that may be more efficient than that of physicians. The result of this shift is that we are seeing strong trends of Part B products moving into the pharmacy realm, as patients obtain them from a specialty pharmacy and have them administered in the physician’s office (known as white bagging). The dispensing could also shift to a hospital’s outpatient pharmacy.

5. Will 340B Survive?

The 340B program has been notorious for providing higher profits through contractually driven discounts for qualified pharmacy facilities. These discounts lower the cost of obtaining pharmaceutical products, but the savings are not necessarily passed through to the entities that pay for the products. This gap can result in exponentially higher profits for pharmacies. Because of 340B pricing, we have seen tremendous growth in these pharmacies; however, CMS recently finalized a handful of reimbursement policies. Effective January 1, 2018, CMS is reducing this payment rate to ASP minus 22.5% for nonpass-through separately payable drugs and biologics acquired with a 340B discount. This change will cause pharmacies to reassess the degree of participation in this program. Keep an eye out for this significant trend.

6. Will Direct and Indirect Remuneration Fees Remain Status Quo?

Direct and indirect remuneration (DIR) fees have been the most newsworthy topic in specialty the past few years. As our federal government continues to attempt to rein in Medicare Part D spending and drug prices, expect to see more changes this year. Because DIR adjustments can significantly affect the profits of participating pharmacies, whether retail or specialty, the pharmacies argue that discounts are not passed on to patients.

Furthermore, DIR fees may contribute to an acceleration into the Medicare “doughnut hole,” in addition to reducing pharmacy margins. Part D programs are administered by commercial payers, who argue that through the negotiation of lower drug costs, DIR fees significantly help patients save on both out-of-pocket costs and plan premiums. These fees will continue to come under scrutiny in 2018 as the public and government regulators become more aware of this practice. Expect changes.

7. Growth of Hospital Specialty Pharmacy and Accreditation

Accreditation has become the new norm in specialty pharmacy, and the largest growth in accreditation is in the hospital setting. All the major group purchasing organizations have developed solutions to assist their members in this space. Much of the shift has been a result of the trends around decreasing reimbursement for Part B products in the physician’s office setting and 340B pricing often availed in hospital-based outpatient specialty pharmacies. These pharmacies are in a strong position to provide continuity of care through integrated systems, data sharing, and coordinating care with accountable care organizations that may participate in risk-based contracting. Keeping patients in a closed ecosystem provides more control and accountability. In the traditional inpatient hospital model, patients are discharged only to receive their outpatient drug services from traditional entities, such as a retail or specialty pharmacy. The shift to hospital specialty facilitates a setting in which orders are kept in house, resulting in increased revenues and potential profitability.

8. Closed Payer Networks and Any Willing Provider Laws

Market dynamics have resulted in payers and pharmacy benefit managers (PBMs) establishing their own specialty pharmacies or relying on a network of contracted specialty pharmacies on behalf of their members. Typically, payers establish a set of criteria to permit specialty pharmacies to participate in their network. Criteria may include the need to obtain accreditation from bodies such as the Accreditation Commission for Health Care and URAC, whose standards include improved patient adherence and clinical outcomes, reduced inappropriate utilization, and lower unit costs through effective formulary management.

It is the goal of specialty pharmacies to have broad access to payer networks in order to obtain patient coverage or to establish Any Willing Provider (AWP) guidelines when dispensing limited distribution products. AWP rules assume that all pharmacy services are the same, no matter who provides them or how they are organized. This is creating a debate, as specialty pharmacy is based on a coordinated care model and requires greater organization, care management, and clinical knowledge regarding rare disorders and biologic products than what is often available in retail pharmacy. With the continuing expansion of AWP rules, expect a lot of noise.

9. Limited Distribution Networks and Wholesalers

With more products being approved for smaller patient populations, look for even greater competition to access these products. Manufacturers are continually assessing their mix of specialty pharmacies granted access to their products and raising the bar as specialty gets even better. Major distributors are experiencing margin compression that results in increased service fees to manufacturers. This trend is further accelerating the process of pharma moving to limited distribution.

10. Amazon and More Big Brother Consolidation

In November, the wires were buzzing with speculation that Amazon will enter the pharmacy space, including specialty. The higher probability will be strategic partnerships, with companies such as Express Scripts, for example, or a series of acquisitions of retail and specialty pharmacy providers, similar to Amazon’s purchase of Whole Foods. Don’t be surprised if there is a large business-to-business play direct with manufacturers in the specialty distribution space as traditional drug distributors continue to see margin erosion and new models emerge. We are seeing PBMs being bought by specialty pharmacies in an effort to expand their access and we’ll see more consolidation between PBMs and payers, as in the case of Aetna and CVS/Caremark.