As you will see below, pharmacies—via white and brown bagging—have displaced buy-and-bill distribution channels for about one-quarter of oncology products. For the remaining purchases, community oncologists still rely on traditional buy-and-bill wholesale distribution channels. Hospital-based practices, however, are more likely to source products from the hospital’s pharmacy.
This shift has important implications for manufacturers’ channel strategies, specialty pharmacies’ business growth, distributors’ share of channel volume, and the expansion of 340B pricing to non-340B providers. When you eliminate the impossible, whatever remains, however improbable, must be the truth.
TO EXPLORE STRANGE NEW CHANNELS
In the buy-and-bill process, a healthcare provider purchases a drug from a pharmaceutical wholesaler or specialty distributor. After administering the drug, the provider submits a claim for reimbursement for the drug and any other medical services. Over the past 10 years, buy-and-bill has shifted dramatically from lower-cost physician offices to higher-cost hospital outpatient settings. See The Decline and Fall of Physician Buy-and-Bill For Specialty Drugs.
In recent years, however, third-party payers have become dissatisfied with the buy-and-bill approach for specialty pharmaceuticals covered under a patient’s medical benefit. Consequently, they have permitted or encouraged a role for pharmacies in managing and distributing provider-administered specialty pharmaceuticals. There are two alternative approaches:
- White bagging: A specialty pharmacy ships a patient’s prescription directly to the provider, such as a physician office or an outpatient clinic. The provider holds the product until the patient arrives for treatment.
- Brown bagging: The patient picks up a prescription at a pharmacy and then takes the drug to the provider's office for administration. I’m guessing that many people transport the medications in paper lunch bags, hence the name.
The chart below is derived from the 2016 Genentech Oncology Trend Report (free download). This report, which is packed with useful information, surveyed oncology practice managers working in three different settings: Community-based; Hospital-based; and Academic/Medical center-based.
For about one-quarter of provider-administered oncology drugs, pharmacies have displaced the buy-and-bill system. A pharmacy channel typically corresponds with pharmacy benefit coverage rather than medical benefit coverage. The pharmacy channels are represented by the green and light blue segments in the chart below.
[Click to Enlarge]
Insufficient facts always invite danger. Payer surveys, however, provide roughly comparable figures for the prevalence of pharmacy channels for provider-administered drugs:
- Magellan Rx Management’s 2015 Medical Pharmacy Trend Report, which includes data from 59 health plans, representing 129.7 million covered lives, found that 28% of medical benefit drug volume was distributed to physician offices by specialty pharmacies or patient brown bagging.
- The 2016 Genentech Oncology Trend Report also provides data from managed care organizations, which reported that 28% of oncology drugs were distributed to practices by retail, mail, and specialty pharmacies.
- A Zitter Health survey of managed care executives reported that 31% of provider-administered infusible oncology therapies were fulfilled by either specialty pharmacies or patient brown bagging. See my 2013 write-up in Payers Want Specialty Drug Distribution to Change.
[Thought experiment: What happens to distribution channels once transporter technology is perfected?]
TO SEEK OUT NEW PROFITS AND NEW REIMBURSEMENT
Some healthcare providers prefer the specialty pharmacy white bagging model. In an earlier edition of the Genentech Oncology Trend Report, oncologists cited various benefits of white bagging, including: (1) Reduced oncology practice costs by better drug inventory management, and (2) Lower patient costs via patient assistance program coordination. One in five oncologists even agreed that white bagging has a “positive impact on practice costs and revenue.”
Other providers strongly oppose white bagging. That’s because the provider cannot earn a profit margin on the drug and must absorb any additional costs of handling and storage. For example, the provider must maintain separate, patient-specific inventory of product and ensure that a patient’s designated product is in stock when the patient arrives for treatment. Hospitals earn huge profits on provider-administered specialty drugs, so they typically prohibit white bagging in payer contracts. Put another way: The needs of the many outweigh the needs of the few, or the one.
Product waste also challenges the growth of white bagging. A 2012 Magellan study found that 20% of drugs shipped to a provider’s office were not used due to changes in dose, therapy, duration of therapy, benefit changes, or enrollment in palliative care programs.
TO BOLDLY GO WHERE NO BLOG HAS GONE BEFORE
Here are some key points to consider about the channel shift:
Manufacturers’ channel strategy: Before launching a provider-administered specialty drug, the pharmaceutical manufacturer must ensure that a viable white bagging option is available. The manufacturer should establish specialty pharmacies that can dispense products and ship to providers. It is no longer sufficient to launch provider-administered products with only a wholesale distribution channel strategy. In my experience, newly-launched provider administered drugs can expect lower levels of white bagging than those shown in the chart above.
340B diversion risk: The federal 340B Drug Pricing Program allows covered entities to rely on external, contract pharmacies to extend 340B pricing to a broad set of patients. (See Challenges for Managed Care from 340B Contract Pharmacies.) Many of the largest specialty pharmacies already operate as contract pharmacies for hundreds of covered entities. Through white and brown bagging, 340B pricing could theoretically be used for drugs administered by providers that are not 340B covered entities. Technically, only facilities that are part of the hospital or noted as being a “child” (provider-based facilities) of a 340B covered entity can accept outpatient drug from a 340B contract pharmacy. Manufacturer and covered entity policies can try to ensure that such white-bagged products are not diverted, but it could be difficult to stop brown bagged drugs.
Distributors’ role: White bagging diminishes the distributors’ channel role in managing and distributing provider-administered specialty pharmaceuticals. If the specialty pharmacy supplying a practice buys directly from manufacturers, product volume leaves the wholesale distribution channel and moves to the pharmacy channel. If the specialty pharmacy purchases drugs from a full-line wholesaler or specialty distributor, the volume will remain in the channel. However, the distributor is likely to earn lower profits from supplying a specialty pharmacy than from supplying a physician office/clinic. Just ask McKesson about its profits from CVS Health's specialty pharmacy.
Specialty pharmacy market opportunity: About half of all specialty drug spending occurs under patients’ medical benefit coverage. (See point #2 in Health Plans Are Confused about Specialty Drug Management.) Specialty pharmacies—particularly the ones owned by PBMs—see a market expansion opportunity from medical benefit management. In theory, using a specialty pharmacy to manage and dispense medical benefit drug claims could allow a payer to employ established utilization management tools for provider-administered drugs. It would also further concentrate specialty drug dispensing.
Logically, I must note that this is all quite…fascinating.
P.S. Yes, I saw the new Star Trek Beyond movie over the weekend. It’s an B+ movie for fans, but probably a gentleman’s C for everyone else.