Few Tools Available to Control Specialty Drug Spending

HSC Research Brief No. 22
April 2012
Ha T. Tu, Divya R. Samuel

Expenditures on specialty drugs -- generally high-cost biologic medications used to treat complex medical conditions -- are climbing at a steep rate and making up an ever-larger share of U.S. pharmaceutical and overall health spending. The absence of generic alternatives, or even brand-name therapeutic equivalents in many cases, gives drug manufacturers near-monopoly pricing leverage and renders conventional benefit design and utilization management tools less effective, according to a new qualitative study from the Center for Studying Health System Change (HSC). Despite the scarcity of substitutes, cost pressures have driven some employers to raise patient cost sharing for specialty medications. Some experts argue this approach is counterproductive, as it can expose patients to significant financial obligations and may reduce adherence, potentially leading to higher costs down the road. Utilization management has focused primarily on prior authorization and quantity limits, rather than step-therapy approaches -- where lower-cost options must be tried first -- that are prevalent for conventional drugs. Unlike conventional medications, a substantial portion of specialty drugs -- typically those administered by clinicians -- are covered under the medical benefit rather than the pharmacy benefit. The challenges of such coverage -- including elevated drug markups by physicians, limited utilization data, and less control for health plans and employers -- have prompted attempts to unify medical and pharmacy benefits, though such efforts remain in early stages. Health plans are testing various innovations to contain spending, but the most impactful, wide-reaching changes may not be feasible until substitutes, such as biosimilars, become widely available, which for many specialty drugs will not happen for many years.

Elevated and Growing Specialty Drug Expenditures

Specialty drugs -- typically expensive biologic therapies prescribed for a range of serious, complex conditions from cancer to rheumatoid arthritis to blood disorders -- are a mounting concern for employers and other purchasers. Although specialty medications are prescribed for only one in every 100 commercial health plan members, they represent an estimated 12 to 16 percent of commercial prescription drug spending. Spending on specialty drugs is projected to surge as medications currently in development reach the market over the coming decade and beyond.

Coverage decisions for specialty drugs involve difficult trade-offs for payers and purchasers, according to interviews with representatives from health plans, benefits consulting firms, pharmacy consulting firms, and other industry experts. The challenge of weighing extremely high per-patient costs against specialty drugs' capacity, in many cases, to extend lives and fundamentally alter disease trajectories -- rather than merely alleviating symptoms -- is considerable.

In contrast to conventional drugs, where spending trends have moderated thanks to patent expirations, generic substitution, and patient incentives to use preferred brand-name options, specialty drugs have shown persistently high cost growth, ranging from 14 to 20 percent annually in recent years for the three largest pharmacy benefit managers (PBMs). While both greater utilization and price increases fuel specialty drug spending, the latter typically plays the dominant role. This reflects the inability of payers to push prices down given the market power of sole-source drug manufacturers.

No universally accepted definition of specialty drugs exists. Health plans and PBMs, which frequently use or own specialty pharmacies, apply their own criteria, definitions, and drug lists. Most specialty drugs are biologic -- derived from living organisms -- as opposed to the majority of conventional drugs synthesized from chemical compounds. While specialty drugs have traditionally been administered by injection or infusion, they now also include oral and inhaled formulations. In fact, new-generation oral medications for conditions like cancer and multiple sclerosis frequently cost far more than their injectable and infusible predecessors. Some defining features of specialty drugs include:

High cost: Monthly per-patient spending on a specialty drug typically exceeds $1,200. Commercial health plans and PBMs factor cost into their determinations of whether a drug qualifies as a specialty product, although they generally do not set fixed-dollar thresholds as Medicare does.

Special handling and administration: Drugs produced through biologic processes typically require specific storage conditions and handling, such as refrigeration. Some specialty medications must be given by a healthcare provider.

Complex conditions and patient monitoring: Patients often require intensive education and ongoing follow-up to manage both their specialty drug use and their complex health conditions. Dosing, adherence, and side effects demand close monitoring to ensure efficacy and patient safety.

Specialty drugs do not fit as neatly as conventional medications into traditional benefit frameworks. While self-administered specialty drugs are nearly always covered under the pharmacy benefit, those administered by physicians or other clinicians in office settings -- known as office-administered agents -- have typically been covered under the medical benefit. Spending under the medical benefit is estimated to account for 55 percent of total commercial spending on specialty drugs. This division of benefit structures makes management of specialty medications more complex and challenging for payers.

This Research Brief explores three major approaches to specialty drug management -- benefit design, pricing, and utilization and care management. While some innovations show promise, each approach has key limitations, largely because the current shortage of substitutes -- both generic and brand name -- confers pricing power on sole-source manufacturers and diminishes the applicability of many tools commonly used to manage conventional drug spending.

Benefit Design Approaches

Formulary exclusions. Standard commercial insurance products rarely drop specialty drugs from their formularies. Once a new specialty drug receives FDA approval and clears the health plan's pharmacy and therapeutics (P&T) committee, formulary inclusion is essentially guaranteed. P&T review generally focuses on ensuring safe, appropriate use and preventing off-label prescribing, rather than restricting access. The rare exceptions to this pattern of broad formulary coverage are found in the few specialty drug classes where multiple close substitutes exist -- for example, growth hormone -- and in some niche insurance products aimed at individual and small-group purchasers that provide limited benefits to achieve significantly lower premiums.

Four-tier pharmacy benefit design. For specialty drugs covered under the pharmacy benefit, some employers choose to pass along a portion of the steep costs to patients by adding another, higher cost-sharing tier to the standard three-tier pharmacy benefit. While four-tier designs vary widely, it is common for the transition from flat-dollar copayments in the lowest three tiers to coinsurance -- where patients pay a percentage of total drug cost -- in the fourth tier. A typical structure might include a $15 generic copayment, a $30 preferred brand copayment, a $60 nonpreferred brand copayment, and specialty drug coinsurance in the 10 to 25 percent range. Within the fourth tier, some employers -- particularly large ones -- retain financial protection for patients via per-prescription out-of-pocket caps (e.g., $100 to $250) or annual maximums (e.g., $5,000).

Placement of specialty drugs across tiers varies considerably among plans. Under certain three-tier and four-tier structures, all specialty drugs are assigned to the highest cost-sharing tier. Other designs take a more nuanced approach: Where substitutes exist, preferred specialty drugs may be placed in a lower tier. Rheumatoid arthritis, multiple sclerosis, and growth deficiency are among the conditions for which preferred specialty drugs have become increasingly available. In some instances, drugs achieve preferred status based on demonstrated therapeutic superiority; in others, by being judged more cost-effective. In the latter scenario, there is often negotiation between manufacturer and health plan or PBM, with drug discounts or rebates granted in exchange for favorable tier placement.

The adoption of a fourth tier varies dramatically across health care markets. Four-tier designs are much less common in markets historically characterized by rich benefits. For instance, in Lansing and other Michigan communities with strong union influence, large employers' pharmacy benefits are still evolving from two-tier to three-tier designs. State regulatory policy can also play an important role in curbing four-tier adoption: In 2010, New York became the first state to enact legislation prohibiting four-tier pharmacy benefit designs in fully insured products. Additionally, four-tier adoption varies greatly by market segment -- smaller employers are more price-sensitive and therefore more likely to adopt such designs. Among national health plans, Aetna and WellPoint have been more active in offering four-tier designs; about half of their small-to-mid-sized group members were covered by such designs as of 2011. In contrast, Cigna -- citing concerns about affordability and patient adherence -- does not offer four-tier pharmacy benefits in its fully insured product line, though it does accommodate self-insured employer requests.

Using patient cost-sharing incentives to influence drug choice -- an effective method for moderating conventional drug spending -- works best in the few specialty drug classes where close substitutes do exist. For most specialty drugs, however, close alternatives are either nonexistent or scarce. In such cases, higher cost sharing tends to shift financial burden to patients without providing an opportunity to change behavior in cost-effective ways.

Multiple respondents objected to substantially increasing patient cost sharing on principle, noting that the conditions treated by most specialty drugs are typically rare, complex, expensive, and beyond patients' control -- precisely the situations for which insurance is designed to offer financial protection. "These are not lifestyle drugs. [Employers with four-tier designs] are almost punishing patients for having a disease state," one pharmacy consultant commented.

Some experts also challenged four-tier benefit designs on practical grounds, contending that higher cost sharing can be self-defeating by leading patients to stop adhering to drug regimens, which may then trigger complications necessitating hospitalizations and other costly interventions. Opinions were mixed on whether employers ultimately save or spend more in direct medical costs under benefit designs with higher out-of-pocket specialty drug costs. That cost-benefit analysis is complex and depends on variables such as employee turnover and the prevalence of health conditions within a particular employee and dependent population.

Experts noted that embracing four-tier pharmacy designs was not necessarily a permanent decision for employers. One benefits consultant observed, "A few years ago, we had tons of clients who did a fourth tier, and some rescinded it. Some went too high, and they backed down." Such reversals reportedly reflect not only lower-than-expected savings in direct medical costs in some cases, but also a reconsideration by some employers of the fairness of imposing high out-of-pocket costs on very sick employees.

Innovations. Some experts advocated extending value-based benefit design (VBBD) to specialty drugs. Under this approach -- the opposite of adding a fourth tier -- patient cost barriers are reduced or removed to encourage adherence with treatments deemed high value. Over the past decade, many large employers have used VBBD to lower cost sharing for conventional drugs used to manage diabetes, hypertension, and other common chronic conditions. While some large employers have expressed interest in extending VBBD to specialty drugs, the high upfront costs have reportedly made them reluctant to implement it. Two conditions mentioned as particularly relevant for working-age people's productivity are multiple sclerosis and hepatitis C, making drugs for these conditions prime candidates for VBBD. Another approach, income-based benefit design, adjusts cost-sharing levels based on patients' earnings. This strategy has been adopted by a relatively small number of innovative employers. Another innovation -- the integration of medical and pharmacy benefits -- has attracted strong interest, seeking to equalize patient cost sharing between the two benefits so that patients do not have skewed incentives to use one over the other.

Pricing

Obtaining lowest unit price. For specialty drugs covered under the pharmacy benefit, health plans employ different strategies to obtain discounted prices from manufacturers. Smaller health plans commonly rely on one of the major PBMs -- which have all acquired or developed their own specialty pharmacy divisions -- to negotiate unit prices, since the largest PBMs can leverage high volumes for the steepest discounts. Plans with large overall volumes or dominant regional market shares often find it more advantageous to negotiate directly with manufacturers. Regardless of the negotiation approach, most health plans contract with specialty pharmacies for drug distribution, since these entities have expertise in special drug handling and patient education.

Some specialty drugs are eligible for rebates on top of the discounted prices, typically negotiated by whichever entity -- PBM or health plan -- is responsible for formulary management. Manufacturers are considerably more likely to offer rebates in drug classes where alternatives are available -- for example, rheumatoid arthritis, multiple sclerosis, and growth hormone deficiency. Even after discounts and rebates, specialty drug prices remain very high because, within most therapeutic categories, there tend to be at most a handful of drugs, typically imperfect substitutes for each other, each made by a single manufacturer. Consequently, payers have little or no leverage to press prices downward.

Changing provider payment. For specialty drugs covered under the medical benefit, the standard practice involves providers purchasing the drug, administering it, and then billing the health plan at a markup. This "buy and bill" approach has been particularly prevalent among oncologists administering cancer drugs. To eliminate high buy-and-bill markups, plans have attempted to shift office-administered specialty drugs from the medical benefit to the pharmacy benefit. Plans pursuing this transition have encountered strong pushback from many providers -- notably oncologists -- who depend on buy-and-bill markups for a significant share of their revenues. Providers sometimes threaten to leave health plan networks, a particular concern when the provider accounts for a large share of a given specialty in the market. Instead of eliminating buy-and-bill practices entirely, some health plans have kept specialty drugs under the medical benefit while reducing markups through various approaches, such as requiring providers to purchase specialty drugs from the plan's contracted specialty pharmacy or implementing a fee schedule for prescribed specialty drugs.

Utilization and Care Management

Utilization management. Specialty drugs covered under the pharmacy benefit are subject to more pervasive and rigorous utilization management (UM) than those under the medical benefit. Prior authorization, for example, is broadly applied -- "nearly universal," according to one respondent -- under the pharmacy benefit but far less common under the medical benefit, where retrospective review remains more typical. One benefits consultant estimated that specialty drugs under the medical benefit are subject to prior authorization only about 5 percent of the time.

A key reason is that most contracts between health plans and providers contain no provisions for prior authorization or other UM protocols for specialty drugs under the medical benefit. Health plans worry that pushing to include a prior-authorization requirement will generate provider resistance and possibly prompt provider exits from networks. Information technology presents another important barrier, as many plans lack the real-time data capability needed to process authorization requests without causing delays in drug regimen implementation or changes -- a serious issue for extremely ill patients with complex conditions.

The types of UM tools used for specialty drugs tend to differ from those applied to conventional medications. Step therapy, which requires lower-cost options to be tried first, is commonly used for conventional drugs but plays a much smaller role for specialty drugs because of the scarcity of substitutes and the lack of comparative effectiveness research evidence. However, quantity limits -- often in the form of 15- or 30-day supply limits -- are nearly universal for specialty drugs under the pharmacy benefit, to ensure dosage safety and minimize waste of expensive medications in case drug regimens must be changed.

Care management. Experts viewed strong clinical care management as critical for promoting both positive health outcomes and cost containment. Key challenges include very ill patients with complex chronic conditions who require complicated drug regimens, the need to adjust medications or fine-tune dosages, and strong side effects that lead patients to abandon drug regimens. Several respondents emphasized the importance of a "high-touch" approach to care management, in which staff possesses not only clinical expertise but also the ability to form personal connections with patients and motivate them to stick with demanding drug regimens. As with utilization management, the fragmentation between medical and pharmacy benefits creates barriers to effective, coordinated care management.

Key Takeaways

Among the recurring themes that emerged from interviews with industry experts, the following stand out:

Drug management strategies that work well for conventional medications are often less applicable to specialty drugs. The absence of close substitutes for most specialty drugs significantly diminishes or entirely eliminates the ability of tools like cost-sharing tiers and step therapy to steer patients and providers toward cost-effective alternatives. It also sharply limits manufacturer incentives to offer meaningful price concessions.

Biosimilars are expected to yield key advances in specialty drug management, but their impact remains many years away. The introduction of generic substitutes should enable payers to broaden the use of preferred drug tiers and step therapy, thereby exerting downward pressure on prices. However, achieving therapeutic equivalence for biosimilar manufacturers and confirming it for regulators are likely to be difficult given the complex nature of biologics. It will also be an uncertain number of years before biosimilars can meaningfully affect competition and costs, as innovator products are granted 12 years of market exclusivity and often hold patents lasting even longer.

Integrating medical and pharmacy benefits is a worthwhile goal, but the path to achieving it is unclear. Efforts to overhaul the currently fragmented benefit structure -- which can create misaligned incentives for patients and providers and result in uncoordinated patient management -- are in early stages with uneven results. Equalizing patient cost sharing for specialty drugs regardless of benefit coverage is probably the most straightforward dimension of integration. Other aspects present harder challenges, including limited ability to track utilization under the medical benefit and barriers to real-time data integration.

Patient adherence is essential to achieving good health outcomes. Both financial factors -- high out-of-pocket costs -- and nonfinancial factors -- strong side effects -- present formidable barriers to patient adherence and positive health outcomes. A combination of non-punitive cost sharing and robust care management may help reduce these barriers.

Employers should ensure their specialty drug strategies align with their overall benefits and business strategies. Decisions on specialty drug coverage require tough trade-offs between cost and access. Short-term cost containment can have unintended consequences -- for example, increased cost sharing leading to reduced drug regimen adherence, which in turn triggers costly complications.

PBM interests may not align with employer interests. Some employers may rely heavily on their PBMs to set specialty drug policies, determine drug lists, and pass through manufacturer discounts, without independently verifying whether their own needs are best served. Employers should recognize that PBMs' interests can diverge significantly from their own, as PBMs lack the same incentives to limit drug volume and prices.

Policy Implications

Spending on specialty drugs is anticipated to skyrocket over the next decade and beyond, as some of the hundreds of biologics currently in the development pipeline gain approval and enter the market. The number of conditions treatable with specialty drugs -- and thus the number of patients eligible for these high-cost medications -- are both expected to soar. These developments will intensify the cost-access trade-offs already confronting payers and purchasers.

Individuals who enroll in coverage through health insurance exchanges beginning in 2014 will find specialty drug access varying substantially across states, depending on each state's decisions regarding benchmarks for essential health benefits. Another important question for specialty drug users will be their out-of-pocket exposure. What already seems evident is that specialty drug users will be among the sickest enrollees most likely to choose plans with the most generous coverage -- the platinum and gold plans. As the sickest enrollees sort themselves into the most generous plans, it could trigger a so-called death spiral, where premiums for those plans increase unsustainably over time.

Payers are looking to biosimilars to offer some relief from soaring specialty drug costs in the future. However, that relief may take many years to materialize, as federal law grants original brand-name biologics 12 years of market exclusivity, and many biologics are protected by patents for years beyond that. Some observers and stakeholders, including the Federal Trade Commission, believe that a period significantly shorter than 12 years would be sufficient to promote innovation; the Obama administration proposed reducing the exclusivity period to seven years. It may be worthwhile for policy makers to revisit this issue, weighing the need to promote drug innovation against the priority of making relatively affordable substitutes available in a timely manner.

Data Source and Funding Acknowledgement

This Research Brief presents findings from a qualitative study conducted by the Center for Studying Health System Change (HSC). The study involved semi-structured interviews with 30 representatives from health plans, pharmacy benefit managers, benefits consulting firms, pharmacy consulting firms, specialty pharmacies, and other industry experts. Interviews were conducted from August through October 2011. The research was funded by the National Institute for Health Care Reform.

Sources and Further Reading

Health Affairs — Prescription Drug Costs Research — Peer-reviewed research on pharmaceutical spending trends, biosimilar policy, and specialty drug cost management strategies.

Centers for Medicare & Medicaid Services — Prescription Drug Coverage — CMS resources on Medicare drug benefit structure, specialty tier classifications, and cost-sharing standards referenced in this analysis.

Kaiser Family Foundation — Specialty Drug Spending Trends — KFF data and analysis on the growing role of specialty drugs in overall health spending and their impact on insurance benefit design.

National Institutes of Health — Understanding Biosimilars — NIH overview of biosimilar drugs, their regulatory pathway, and how they compare to original biologic medications discussed in this research.

Commonwealth Fund — Specialty Drug Pricing and Policy Options — Analysis of policy approaches to address the high cost of specialty pharmaceuticals, including benefit design reforms and biosimilar competition.