EDITOR’S NOTE: Specialty pharmaceuticals hold great promise for patients with chronic, serious or life-threatening illnesses. At the same time, they can cost thousands of dollars a month—and are key drivers of rising healthcare costs. Manatt Health examines both sides of the debate around specialty pharmaceuticals in a new paper, available in the Health Policy Briefs section of the “Health Affairs” web site. Below is a summary of the key issues. Click here to read the full brief.  

What’s the Issue?

Specialty pharmaceuticals are a rapidly growing share of total drug expenditures by public and private health plans. These drugs--typically used to treat chronic, serious, or life-threatening conditions, such as cancer, rheumatoid arthritis, growth hormone deficiency and multiple sclerosis--are often priced much higher than traditional drugs. Total costs can be in the thousands of dollars a month and can exceed $100,000 a year for some products. There are usually few if any low-cost generic equivalents.

Research into specialty drugs is attractive to biopharmaceutical companies from both a medical innovation and a business perspective. The ability for the market to sustain the relatively high cost of these products creates substantial incentives for companies to research and develop products that address serious, unmet health needs. Also, in some cases, companion diagnostic tests are used to identify patient subpopulations in which the specialty product generates a differential response, either negative or positive. As a result, specialty products have stimulated diagnostic research. Given the level of investment, this means that patients and payers can expect continued innovation and research to develop specialty products and companion diagnostics in the future.

Payers are interested in steps they can take to control the contribution that specialty pharmaceuticals make to the growth in premium costs while ensuring that patients can access the drugs that will improve their health, as well as their quality and length of life. Biopharmaceutical manufacturers and patient advocates are concerned that restrictions on specialty pharmaceuticals could discourage research and harm patient care. Pharmacists also are concerned that some plans to control the use and cost of specialty pharmaceuticals will limit their opportunities to serve patients.

What’s the Background?

Specialty pharmaceuticals are generally defined as drugs and biologics (medicines derived from living cells cultured in a laboratory) that are complex to manufacture, difficult to administer, may require special patient monitoring, and sometimes have Food and Drug Administration (FDA)-mandated strategies to control and monitor their use. Increasingly, they also are defined by exceeding a certain cost threshold, such as $600 a month, that may place them on higher cost-sharing tiers.

From a distribution perspective, specialty pharmaceuticals may require specialized shipping and temperature-controlled storage and handling. To meet these special needs, a class of providers, known as specialty pharmacies, exists to distribute and dispense these products. Specialty pharmacies can be owned by stand-alone companies, pharmacy benefit managers (PBMs) or large pharmacy chains.

Because they may include oral, self-injectable or physician-administered infusions, specialty pharmaceuticals may be covered under either the pharmaceutical or the medical benefit of health plans. Although estimates vary depending on data sources, Express Scripts’ drug trend report claims that in 2010 approximately 47% of U.S. specialty drug spending occurred in the medical benefit.

Experts expect that share will continue to rise as specialty pharmaceuticals represent a critical pharmaceutical growth segment in drug development. Two of the largest PBMs, CVS Caremark and Express Scripts, report specialty pharmaceuticals are the fastest-growing segment of their drug spending. By 2019, they expect specialty products to account for half of their plan sponsors’ drug spending. IMS data reflects the same rapid growth, showing that 65% of new drug spending in 2012 was on specialty pharmaceuticals. That trend is continuing. In 2013, 60% of the new drugs the FDA is expected to approve will be specialty pharmaceuticals.

Because specialty pharmaceuticals treat chronic, serious, or life-threatening conditions, physicians try to initiate treatment sooner. As a result, costs accruing to the health plan occur earlier and last longer, particularly for products used to treat chronic diseases. From a patient perspective, however, these new therapies represent a more effective way to treat diseases in categories that offer few options.

What’s the Debate?

  1. Cost Controls 

Payers are seeking ways to manage the growing cost of specialty pharmaceuticals appropriately. One common tool for specialty medicines covered through the outpatient pharmaceutical benefit is to charge high cost sharing in the form of copayments (fixed amounts) or coinsurance (percentage amounts) by placing specialty drugs in their own formulary tier. According to the Kaiser Family Foundation, the percentage of employer-sponsored plans using specialty tiers increased from 14% in 2012 to 23% in 2013. The new health insurance Marketplaces formed under the Affordable Care Act (ACA) also will have specialty tiers, but their effect may be mitigated by the ACA’s out-of-pocket maximum.

Critics contend that high cost sharing discourages appropriate use of medicines. To mitigate the cost to patients and encourage treatment, many pharmaceutical manufacturers offer assistance programs. These programs provide coupons to patients for some, or all, of the amount of cost sharing. In the case of Medicare, where such assistance is not allowed under federal law, some manufacturers provide grants to independent non-profit organizations, which are able to reimburse patients a portion of their share of the costs of medicines.

Payers and PBMs criticize assistance programs, concerned they reduce incentives embedded in traditional benefit designs and may lead to overuse. Manufacturers and patient advocates defend these discount programs, arguing that the cost-reduction incentives of traditional benefit design should not be applied to specialty products because of the small patient populations involved and the seriousness of the diseases they treat. They also contend that making these high-cost payments available to patients can help reduce non-adherence and its consequences, such as emergency department visits and hospitalizations.

In addition to high cost sharing, some payers are requiring diagnostic testing as a condition of coverage to identify individuals who demonstrate a propensity to respond to a particular specialty product. There also is support for treatments that patients can administer at home rather than at more expensive sites of care such as outpatient facilities or physicians’ offices.

  1. Medical Benefit vs. Pharmacy Benefit 

Because specialty drugs are often reimbursed under the medical benefit and their costs may be bundled in with other services, payers have less direct influence over pricing. Therefore, payers and PBMs are exploring ways to move specialty products from the medical benefit to the more transparent pharmacy benefit in order to better influence pricing, as well as gain information on use and outcomes.

Critics of this trend are concerned that it could harm care by reducing physicians’ role in helping patients use their medicines properly. In many cases, time is of the essence in starting a patient on a specialty drug treatment regimen. As a result, the amount of time and effort required for physicians, office staff, patients and caregivers to navigate pharmacy benefits’ utilization restrictions can be onerous. Administering specialty products is often a driver of physician office revenue. Critics contend that new administrative burdens imposed as part of a pharmacy benefit may undermine office practice efficiency and profit.

Distribution channels also offer an area for managing cost. For some products, payers are seeking to limit the type and number of pharmacies that can distribute a specialty pharmaceutical to patients in order to gain economies of scale and concentrate purchasing power. These limited networks may also be able to improve the ability of health plans to implement care protocols, improve adherence, avoid product waste, and implement FDA-required use plans. These efforts to limit who can distribute specialty pharmaceuticals often clash with the interests of retail pharmacist and physician business models built, in part, on the revenue from administering specialty drugs.

  1. Biosimilars 

The Affordable Care Act directed the FDA to create a new approval pathway to allow the sale of clinically-equivalent versions of biologically-derived therapies known as biologics. Patient advocates and payers hope that the introduction of these follow-on versions of biologics – known as biosimilars – will force prices down in the same way that generic drugs compete with traditional brand-name drugs. In the United States to date, there have been no medicines approved under this new authority, and many experts believe that, even once approved, biosimilars will offer cost savings but not of the magnitude seen with generics. Nevertheless, some are concerned that patients will be switched to biosimilars, with or without their knowledge, which may not achieve the same results as the original drugs.

  1. Comparative Effectiveness 

The growth in the use of comparative effectiveness review has created another tool to control the growth of specialty pharmaceutical costs. Proponents believe that comparative effectiveness review can provide information that will allow payers to deny coverage appropriately for products that cost more than alternatives but do not provide any additional clinical value. Opponents question whether such reviews, especially those conducted by payers, can be unbiased and whether these population-based analyses take into account that how individual patients respond to treatment varies.

Pressure from individual patients and patient advocates, as well as limited resources, has restricted the ability of comparative effectiveness review to alter coverage significantly for specialty pharmaceuticals. Such review is not currently allowed in Medicare Part B but may be considered by Medicare Part D drug plans and private health plans.

What’s Next?

Given that the growth of the specialty pharmaceutical market is expected to continue for many years, discussions about the right balance between cost containment and patient access will continue. These discussions will play out in private forums among payers and specialty pharmaceutical manufacturers. They also will spill over into public debates over the role of government in encouraging policies that will impact specialty pharmaceutical access and cost.

The Patient-Centered Outcomes Research Institute, created by the Affordable Care Act, could be a significant new source of funding for research on the effectiveness of specialty pharmaceuticals, although such studies are often costly and difficult. In addition, the Independent Payment Advisory Board (IPAB), also created by the ACA, has the potential to authorize changes in the Medicare program to reduce payments for specialty medicines. However, as of now, the law has not triggered IPAB’s authority to act.

Attention will focus on the ACA’s Marketplaces and the access to specialty pharmaceuticals in Marketplace health plans. Debates also will continue on questions that may impact the uptake of biosimilar products, once the FDA begins to approve them. Already state legislatures have begun to consider and enact laws to regulate biosimilars.

Finally, questions about the ability of specialty pharmaceutical manufacturers to assist patients in paying cost sharing through the use of coupons and other means will continue in private and public forums. Manatt Health will continue to monitor the debate and share the latest developments, as well as their implications.