Engineered to treat complex chronic conditions such as cancer, multiple sclerosis, rheumatoid arthritis, Parkinson’s disease, and hepatitis C, specialty prescription drugs represent less than 1% of all U.S. prescriptions yet are growing at an unsustainable rate—and employers are beginning to see their impact on healthcare costs. The Centers for Medicare and Medicaid Services estimates that prescription drug spending was 9.4% of all healthcare spending in 2012, and a large portion of that spending was on specialty drugs. In their 2013 Specialty Drug Trend Insights report, independent pharmacy benefit manager (PBM) Prime Therapeutics places that figure at 30% of total drug costs and predicts it will reach 50% by 2018. Express Scripts’ 2013 Drug Trend Report reveals that for the top traditional therapy classes, spending will likely climb 2% year-over-year for the next three years, whereas spending on specialty medications will increase 16.8% in 2014, 18.0% in 2015, and 18.2% by 2016. It’s no surprise that employers are looking for ways to manage the employee benefit costs of their specialty drug coverage. To help them get a handle on their specialty drugs spend and ensure their employees receive appropriate and effective care, employers—along with their health plans and other healthcare benefits partners—are exploring a combination of tactics: 1.  Integrated Pharmacy and Medical Benefits In their article, Employers Act to Control Prescription Drug Spending, the Society for Human Resource Management (SHRM) cites a 2013 survey by Buck Consultants finding that 71% of U.S. employers spent 16% or more of their total healthcare budget on pharmacy benefits. It can be challenging for employers to estimate their spending on specialty drugs because these drugs are sometimes billed through medical benefits—and other times billed through prescription drug benefits. The inconsistency makes it difficult to get an accurate picture of how much is being spent on specialty medications. When employers move the administration of specialty drugs from the medical plan to the pharmacy program, they can take advantage of better care coordination that’s easier to measure. For example, instead of a doctor ordering and dispensing a specialty drug in their office and billing it as a medical benefit, a prescription drug program can manage the drug’s cost and patient’s care. These tightly coordinated activities can lead to lower costs and easier reporting. 2.  Prior Authorizations Employers may require a prior authorization from a provider before a pharmacy can fill a specialty drug prescription. This added level of control helps making certain that patients are using the most cost-efficient and appropriate therapies. 3.  Cost-Effective Pharmacy Plan Design Many employers are adding a specialty drug tier to pass along at least some of the cost of more expensive drugs to employees and to help track the classes of drugs they’re utilizing. When benefits are tiered, different categories of drugs require different out-of-pocket costs, and categories may be broken up into preferred drugs and non-preferred drugs, generics, and specialty, depending on the needs of the plan sponsor or economics of the formulary. Additionally, plans may include refill policies or…

Notes: (1) Prices are based on a composite of several commonly prescribed brand-name drugs for a typical quantity of pills. For some cells in the table, the relative relationships have been calculated based upon our mail pharmacy and PBM operations and on other relationships widely reported by industry sources. (2) These prices are used for illustrative purposes only and do not represent any type of overall average. (3) Prices reported in this table include both amounts paid by third-party payers and amounts paid by the consumer as cost sharing. (4) Manufacturers generate up to 85% gross margins on brand pharmaceuticals. (5) The HMO column refers only to HMOs that buy directly from manufacturers.

If a pharmacy benefits manager promises a group health plan that there will be no administrative fee for drugs, it actually could be a red flag and not a cause for celebration. It could mean the PBM is “gaming the spread” or not passing rebates through to the plan. Plans can prevent this kind of leakage and contain costs much better if they take more active roles in managing drug benefits, according to Susan Hayes, who founded Pharmacy Outcomes Specialists of Lake Zurich, Ill. If a health plan abdicates all authority, it may end up losing influence and its ability to duck unreasonable price spikes, Hayes told attendees at the International Foundation of Employee Benefit Plans’ Annual Employee Benefits Conference in Boston on Oct. 14. Contracting out drug benefit administration can make it difficult for plans to act in the sole interest of plan participants in certain ways, she said. PBM Rebate Shifts Can Hurt Plans Rebates and discounts between PBMs and  drug makers can reduce drug prices for plans. Several kinds of rebates exist: (1) the drug maker rewards the PBM for putting its product on formulary; (2) the drug maker rewards the PBM for allotting a certain percentage of market share to the product in relation to comparable agents produced by competing manufacturers; and (3) the drug maker pays the PBM for market intelligence on prescribing patterns, Hayes said. But when rebates disappear trouble can start. PBMs might say the sole reasons they rescind preferred status is because: (1) a drug has become a source of wasteful spending; or (2) clinically appropriate alternatives exist. But a drug’s removal from preferred status may be just because the manufacturer stopped paying the PBM rebates, leaving plans wondering what happened, she said. The Spread Is No Game A big source of potential plan waste is “spread pricing.” The “spread” is the difference in what PBMs charge plan sponsors for prescriptions and what they in turn pay pharmacies to dispense those prescriptions. This difference often leads to greater profits for the PBM at the expense of employers. The spread is a prime contributor to why one pharmacy may charge your plan very little and another may charge very much for the same generic medication. According to reporting by Fortune magazine reporter Katherine Eban, Meridian Health System audited its spending on employee medications to learn the scope of spread pricing. For the antibiotic amoxicillin, Meridian was billed $92.53 when an employee filled the prescription, but its PBM paid only $26.91 to the pharmacy to fill the same prescription. That amounted to a spread of $65.62 for only one prescription. In another instance, Meridian was billed $26.87 for a prescription of azithromycin. The PBM paid the pharmacy $5.19 to dispense the prescription, creating a spread of $21.68. While the PBM continually promised savings, Meridian paid $1.3 million in unnecessary prescription benefits costs to this vendor due to the spread, Eban alleged. Dramatic Generic Price Increases But bigger drug cost problems may not be the…

The economics principle “The more you concentrate your buying power, the better your pricing” applies in health care, too. That’s why health insurance companies can offer customers lower premiums by restricting the size of provider networks. They send more patients to fewer hospitals — and get a better deal per patient, passing on at least some of the savings to you. Next up for restrictions: specialty drugs. These expensive medicines treat diseases, such as specific cancers or multiple sclerosis, that affect relatively small populations. That means you may not get the drug your doctor wants to prescribe — or if you do, it will cost you a lot more money. Theoretically, there’s nothing wrong with this. If the choices are medically appropriate, the savings to the system should justify the restrictions. But that’s a big “if.” We don’t know how a payer decides to give one specialty medicine preference over another. The drug formulary is a giant black box. If this opaque process yielded good decisions, you could stop reading now. But it doesn’t. Brian Bresnahan and colleagues have found that pharmacy and therapeutics (P&T) committees sometimes favor the wrong drugs. In effect, more cost-effective medicines may be ranked lower in a formulary while less cost-effective drugs earn better slots. Somewhere between 600 and 1,000 P&T committees are making these kinds of decisions today. The Current Process To understand how all of this works, you first have to see the payer’s point of view. The fastest-growing costs in health care today are for specialty drugs. Take Sovaldi, launched by Gilead Sciences in late 2013 as a treatment for hepatitis C virus (HCV) infection and recently superseded by Gilead’s newest drug, Harvoni. Sovaldi represented a true medical breakthrough relative to previous HCV treatments — much shorter duration of therapy, dramatically reduced side effects, and very often a cure. But Sovaldi, Harvoni, and a raft of coming competitors also represent a staggering new economic reality. Sovaldi itself costs about $84,000. Harvoni costs $95,000 for 12 weeks of therapy (roughly equivalent to the cost of Sovaldi and the other drugs that must be taken with it), although Harvoni will cost $63,000 for patients who need only eight weeks of treatment. In a July 2014 JAMA article, Troyen Brennan and William Shrank, respectively the chief medical and scientific officers at CVS Caremark, a major pharmacy benefit manager (PBM), estimated that with as many as 3 million eligible HCV patients in the U.S., “treatment of patients with HCV could add $200 to $300 per year to every insured American’s health insurance premium for each of the next 5 years.” Meanwhile, analysts’ predictions of total 2018 U.S. sales for Sovaldi, Harvoni, and their competitors cluster between $11 billion and $13 billion. Sovaldi and Harvoni are just two examples of the explosion in spending on specialty drugs — 20% a year, according to the PBM Express Scripts. That is roughly four times the percentage rise in the cost of health care overall. Given current trends, specialty drugs will account for about half of the U.S.…