Tuesday, September 12, 2017

Why Manufacturers and PBMs Should Worry About the Growth of Hospital-Owned Specialty Pharmacies

The American Society of Hospital Pharmacists (ASHP) has just released its latest national survey of pharmacy practice in hospital settings. (Free download) I always enjoy this annual treasure trove of insights.

This year’s survey confirms the extent to which hospitals and health systems are pursuing specialty pharmacy dispensing revenues. In 2016, about 1 in 11 hospitals had a specialty pharmacy. However, nearly half of the largest hospitals operated a specialty pharmacy.

Below, I summarize these new data and review hospitals’ motivations for growth. Pharmaceutical manufacturers and pharmacy benefit managers (PBMs) should be wary of the expansion in hospital-owned specialty pharmacies.

EVERYBODY'S GOT A THING

Like physician practices, hospital systems are pursuing specialty pharmacy revenues. Factors motivating this expansion include hospitals’ and health systems’ desires to:
  • Provide more integrated, comprehensive care for patients with complex, chronic conditions that are typically treated with specialty medications. For example, many health systems tout their ability to provide superior care by accessing a patient’s complete electronic health record.
  • Integrate specialty pharmacy services with Accountable Care Organizations (ACOs), which coordinate care across different providers. Some health systems are engaging in risk-based contracting with third-party payers, thereby providing incentives for high levels of patient monitoring and adherence services.
In the following chart, the ASHP data show that many hospitals now have their own full-service specialty pharmacy. In 2016, 8.7% of hospitals had a specialty pharmacy operation. Larger hospitals were much more likely to have a specialty pharmacy than were smaller hospitals. Nearly half (47.1%) of the hospitals with more than 600 beds operated a specialty pharmacy.

[Click to Enlarge]

These figures are consistent with our analyses in The State of Specialty Pharmacy Accreditation in 2017. We found that pharmacy locations owned by healthcare providers—such as hospitals, health systems, physician practices, and providers’ group purchasing organizations—were the fastest-growing category of accredited specialty pharmacies. Providers now account for one in five accredited specialty pharmacy locations.

BUT SOME DON'T KNOW HOW TO HANDLE IT

Here are three predictions as to how the growth of hospital-owned specialty pharmacies could alter pharmacy benefit management and manufacturers’ channel strategies.

1) Hospitals will force manufacturers’ specialty networks to become larger and more inclusive.

For most of the recently-launched specialty drugs, manufacturers typically limit and manage the specialty pharmacies eligible to dispense these expensive medications. Manufacturers select pharmacies with the distinctive capabilities to serve patients, providers, and payers efficiently and effectively. These networks typically include 5 to 20 specialty pharmacies.

However, manufacturers will find it very difficult to say no whenever a hospital pharmacy asks to be part of the network. An increasing number of physicians work for hospitals. Between 2012 and 2015, the number of physician practices owned by hospitals grew by 86%, from 36,000 practices in 2012 to 67,000 practices in 2015. One in four practices in 2015 was owned by a hospital, and 38% of physicians were employed by hospitals. (See data in Physician Practice Acquisition Study: National and Regional Employment Changes from the Physicians Advocacy Institute.)

A hospital could direct its employed physicians not to prescribe a new specialty drug unless the manufacturer adds the hospital’s specialty pharmacy to its network. Few drug makers want to risk the wrath of a thought-leading prescriber who demands access for their institution’s specialty pharmacy.

2) Hospitals will charge higher prescription prices to third-party payers and PBMs.

Anyone familiar with health economics research knows the sobering reality: “Health care market consolidation significantly increases prices without offsetting improvements in quality or efficiency.” This quote appears in State Strategies to Address Rising Prices Caused by Health Care Consolidation, a good summary of the evidence.

Hospitals with dominant market share position in a regional market may be able to insist that patients fill prescriptions at the hospital’s pharmacy. Health plans and employers may force their PBMs to accept these mandates.

Here’s another little-noticed trend: Hospitals are trying to increase revenues and reduce internal benefit costs by steering hospital employees to in-house pharmacies. In a 2016 study of hospital benefit design, 29 of 58 (50%) hospital employee pharmacy benefit plans had patient copayments that were lower at the hospital’s internal pharmacy than at an external pharmacy.

Health plans accurately perceive hospitals as offering the least competitive pricing for specialty drugs. According to the latest EMD Serono Specialty Digest, more than half of payers perceive hospitals’ drug pricing to uncompetitive, while only 5% of payers perceive specialty pharmacies’ pricing as uncompetitive. Does anyone believe that hospitals will change their behavior with specialty pharmacies?

3) Hospitals will leverage 340B pricing to access commercial payers’ limited networks.

An exception to higher prescription prices may come from hospitals’ attempts to enter payer’s limited networks by further distorting the 340B Drug Pricing Program.

A hospital-owned specialty pharmacy must be part of a third-party payer’s pharmacy network to receive reimbursement for prescriptions dispensed under a patient’s pharmacy benefit. However, PBMs and health plans often limit the number of specialty pharmacies available to a beneficiary. Health plans and PBMs may require patients to use the specialty pharmacy that the plan or PBM owns and operates.

To gain network access, hospitals can offer to fill prescriptions for drugs subject to 340B pricing. The hospital can offer rates that a typical pharmacy can’t meet. For example, a hospital may be able to buy a specialty drug at a 50% discount from the manufacturer’s Wholesale Acquisition Cost (WAC) list price. The hospital could then agree to a prescription reimbursement rate of WAC-30%—a discount far below what any other specialty pharmacy could accept.

Such a structure effectively splits the value of the 340B Drug Pricing Program between a covered entity and a commercial health plan or a PBM. In my opinion, such arrangements are a blatant abuse of the 340B program. (See my related comments in What I Told HHS Secretary Tom Price About the 340B Drug Pricing Program.)

Perhaps you agree with Stevie Wonder, who says don't you worry 'bout a thing. Just don't get fooled by smiling faces.

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