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.

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Sovaldi, launched by Gilead Sciences in late 2013 as a treatment for hepatitis C virus (HCV) infection and recently superseded by Gilead’s newest drug, Harvoni.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. total drug bill within a few years.

That’s precisely why insurance companies and PBMs, largely at the behest of their employer customers, are narrowing their specialty-drug formularies. This practice encourages patients and physicians to choose from a more restricted list of options. And not all the choices are easy — a plan may no longer pay for, say, a rheumatoid arthritis medicine on which a patient is doing well, forcing her to self-experiment with the plan’s other (cheaper) preferred agents.

Arguing that payers should not restrict drug formularies would be naive. As costs rise, there’s no other choice. But we contend that, as the stakes of these decisions grow, the transparency and the rigor of the decision-making process must increase proportionately.

To illustrate the problem, let’s start with an example from October 2013, when Express Scripts decided to exclude 46 drugs from its formulary. Several press reports noted that the PBM wouldn’t disclose its rationale, other than to say that its independent P&T committee had found that the excluded drugs offered no additional value over that of existing, lower-cost drugs. To continue reading click here.