Thursday, April 22, 2010

Specialty Drugs: The Medical vs. Pharmacy Benefit Muddle

The 6th edition of the EMD Serono Specialty Digest™ was just released. The EMD Digest is the most timely and useful report on the specialty market that I have come across recently. (The report is free, but the required registration process uses an irritating Web 0.5 interface.)

Download the report so you can start thinking about the critical future strategic battleground facing manufacturers, payers, and drug channels: Who will win the “Medical Benefit versus Pharmacy Benefit” battle?

Unlike traditional oral drugs, a specialty drug can be covered under a medical benefit, a pharmacy benefit, or both. This diversity of payment and dispensing options makes it hard for payers to get full visibility on specialty drug spending or manage drug utilization effectively. Specialty drug trend is growing at 15% to 20% to year, so this complexity is a large and growing pain point for payers.

The topics I highlight below would be great discussion starters for:
  • Managed markets strategy development at a pharma manufacturer
  • Market positioning by a Pharmacy Benefit Manager (PBM) or specialty pharmacy
  • Benefit design decisions at a payer


The report is based on responses from 85 health plans representing more than 120 million covered lives across a spectrum of plan types:
  • 88.5 million commercial lives (healthcare maintenance organization or preferred provider organization)
  • 10.3 million Medicare Advantage prescription drug plan lives
  • 13.2 million managed Medicaid lives
  • 8 million other (unspecified) lives
Full demographics are on page 14.

Some words of warning before you interpret the results:
  • Each plan has equal weight in the results. In other words, a national plan with 2 million lives has the same weight in the results as a regional plan with 200,000 lives. Keep this computation issue in mind before overgeneralizing the results. I would have liked to see the results weighted by number of covered lives.
  • Be skeptical of the time trends (2008 versus 2009) since the sample base has changed. The 2008 data are based on responses from 69 health plans with only 83 million covered lives. There was also a much higher percentage of commercial lives in the 2008 data.

Despite the data limitations, there are many interesting and thought-provoking findings in the report.

Coverage for specialty drugs is all over the place (page 19).
  • 76% of the plans cover self-administered agents (oral and injected medications) under the pharmacy benefit only.
  • 73% of the plans cover office administered agents (infused or healthcare practitioner-administered medications) are covered under the medical benefit only.
  • Home health administered agents are covered under either the medical benefit exclusively or under both pharmacy and medical benefits.
A patient’s out-of-pocket costs can vary dramatically between medical and pharmacy benefit (page 24).
  • For specialty drugs covered under the pharmacy benefit, 95% of commercial plans and 93% of MA-PD plans require cost share.
  • In contrast, only 34% of commercial plans and 47% of MA-PD plans apply a cost share for specialty drugs covered under the medical benefit.
Reimbursement models are radically different, too (Page 25).
  • Specialty and retail pharmacies are reimbursed using List Minus formulas computed as a discount off of Average Wholesale Price (AWP).
  • In contrast, a growing share of medical benefit providers are reimbursed for specialty drugs based on Average Sales Price (ASP) plus a mark-up. (See pages 33-41 of my pharmacy industry report for details on ASP and cost-plus models.)
I can keep going, but you get the idea. The same drug is treated very differently depending where it is dispensed.


The dollars involved portend a competitive battle for control to manage specialty drugs for payers. Key stakeholders include:
  • Manufacturers of specialty drugs
  • Pharmacy Benefit Managers (PBMs)
  • Health Plans
  • Specialty Pharmacies
  • Retail Pharmacies
  • Home Health Care Providers
  • Specialty distributors
  • Independent service companies
Who will have primary responsibility for managing specialty drugs? What is your organization doing to get ready to market to, compete with, or collaborate with these players?


  1. Adam,
    Thanks for posting this and great overview thoughts.

  2. Good topic Adam! I've ordered the report.

  3. Nice analysis of the irregularities and highlights in the report. I think this market will see tremendous changes if pricing calculations would have a more meaningful starting point. I feel that the starting point for the plus/minus calculations is a false point.

  4. This "specialty" concept was the brainchild of the PBM's, with some help from a biotech industry looking for sales optimization via a unique channel. The resulting carve-out has been swallowed hook, line, and sinker by health plans convinced of the cost management potential. Patients quickly learned to shop around for the lowest co-payment site of service, which leads to some unusual (or is it "special"?) arrangements between the various parties involved. Tiffany has its little blue boxes and Pharma has it "specialty" appellation.

  5. I like the information presented on specialty drugs. It is indeed true that the market is growing at a fast rate, though 15-20% may be a bit under-quoted. The way how payers manage specialty drug spending is going to be a key from here on, as these drugs can get covered under a medical or pharmacy benefit. Must be said though - Nice information presented here.

  6. Here's a news story from Kaiser Health News and the Washington Post that highlights the problems with the medical vs. specialty coverage split: Cancer Patients' Dilemma: Expensive Pills Vs. Invasive Chemo Treatment.