Specialty drug costs: What strategies have the most impact in reducing plan sponsors' costs? Specialty drug costs: What strategies have the most impact in reducing plan sponsors' costs?

A Q&A with Terrance Killilea, Pharm.D, senior vice president, Wells Fargo Pharmacy Consulting, Wells Fargo Insurance

May 2017
Pharmacy cost trend has risen sharply over the last couple of years, and rising costs are on the minds of many employers, consumers, and politicians. While there are multiple reasons, one major factor is the growth and cost of specialty drugs — which are used to treat conditions such as chronic inflammatory diseases, multiple sclerosis, cancer, HIV, and Hepatitis C.
While specialty drugs comprises 1% – 2% of total prescriptions, they account for more than 30% or more of the total dollars spent.1 With more specialty drugs entering the pipeline for approval, many employers fear that percentage could continue to grow higher.
According to Wells Fargo Insurance's latest research, most employers plan to devote additional time toward both utilization and coverage, particularly with specialty pharmacy. To help plan sponsors address the challenge of balancing the best quality of care for their employees and members with their plans' ability to afford it, we share the following interview with Wells Fargo Insurance's senior vice president of pharmacy consulting, Terrance Killilea, Pharm.D.

Q. What's your experience in this topic?

Killilea: I’ve served as an officer on the clinical and formulary side of a large pharmacy benefit manager, as well as served as a vice president for a health plan and a clinical director in a 500-bed hospital. Over the past 20 years, I’ve developed, operated, and expanded cost management and evidence-based clinical programs for a large pharmacy benefit manager and a national multistate insurance plan. I’ve been deeply involved in analyzing and managing biotech specialty risk since 1994.

Q. What does the current pharmacy cost trend look like?

Killilea: According to our National Healthcare Claims Trend Survey, pharmacy has been trending at nearly 13%, which is significantly higher than general medical trend of 7.7% – 8.6%. Medical trend includes factors such as inpatient hospitalization stays, outpatient visits, labs, ER visits, etc. In pharmacy trend, which includes both traditional and specialty drugs, we’ve seen a huge spike in just the last four years, up from just over 8% in 2013. For 2018, we expect prescription claim trend to decrease slightly, but concern remains centered on the growth of specialty drugs.2

Q. How much of the recent spike do you attribute to specialty drugs?

Killilea: Specialty drugs have a high cost, generally exceeding $600 a month. It's not uncommon for just one prescription to cost $6,000 to $8,000. By 2018, specialty drug costs are expected to represent 50% of all pharmacy spend.3

Q. What are the challenges for plan sponsors in projecting the impact of specialty drugs on their health plan finance?

Killilea: Many plan sponsors, especially those with self-funded plans, pay close attention to annually forecasting their budget for medical and pharmacy spend. Due to the extremely high volatility in specialty pharmacy market, from price inflation to member utilization, projecting costs can be a real challenge. Almost half of 150 specialty drugs studied cost more than $100,000 per patient per year.1 This includes not only the cost of the medication but also costs for administering it via injection or infusion. One prescription can cost as much as 10% of a plan sponsor's total prescription plan cost.

Q. What's the best approach for plan sponsors looking to rein in specialty drug costs?

Killilea: Cost containment for specialty drugs is a complicated problem that requires a multifaceted approach. There are several strategies to consider and some are more effective in reducing costs than others. It's important for plan sponsors to work with a qualified consultant or broker who has the expertise, experience, and resources to model the impact of whatever strategy is being proposed. Although many strategies sound good on the surface, the details and specifics reveal whether or not a plan sponsor will realize fiscal benefits, as well as ensure the best access to care and quality of care.
Independent data mining can prove valuable in providing objective methods to measure the effectiveness of therapies in relation to costs. It can also identify potential upcoming specialty drug utilization by analyzing conditions within a population. Data warehousing can also assist in accurately tracking costs, because about half of the specialty drugs are funded through the pharmacy benefit, with the other half funded through medical. Integrating medical management is a customized solution that self-funded employers may wish to consider.

Q. Which strategies have the potential to make the most significant impact on a plan sponsors' fiscal burden as it relates to specialty drug costs?

In a nutshell, the five most common strategies and their expected impact on a plan sponsor's cost are:
  1. Aggressive contracting on price: Estimated 1% – 4% cost reduction
  2. Increasing member copays: Estimated 2% – 10% cost reduction
  3. Mandating specialty pharmacy: Estimated 3% cost reduction
  4. Maximizing formulary rebates: Estimated 10% cost reduction
  5. Implementing effective, evidence-based prior authorizations: Estimated 25% cost reduction
Impact of various strategies on specialty drug spend (percentage of original cost)
If a plan sponsor were to implement some combination of these five strategies in a limited way, the average cost reduction opportunity is approximately 10% – 15% of the specialty drug cost, which amounts to approximately 3% – 8% of a plan's total cost. However, by implementing all five of these strategies to their maximum extent, plan sponsors could achieve an average cost reduction of up to as much 40% of their specialty drug costs. Recognizing that every employers' situation is unique, the following pages provide more in-depth discussion about each of those strategies and their respective benefits and drawbacks to consider.

1. Aggressive price contracting

Impact on cost reduction: Minimal

Because most all specialty drugs are brand-name drugs priced at average wholesale price (AWP) minus a certain X percentage, price improvements are established through a higher percentage discount. The most these prices are improved in aggressive contracting is 1% – 4%. Unfortunately, AWP increases 10% or more annually, which promptly negates any improved discounts benefit for the plan sponsor.
The bottom line: Although consultants or brokers commonly recommend this approach, improving specialty drug pricing (either through mandating a specialty pharmacy or retail discount improvement) provides a low amount of cost relief, which is often negated by the first year of the AWP increase.

2. Increasing member copays and coinsurance

Impact on cost reduction: Minimal

This strategy involves increasing the member's cost share by utilizing a percentage as coinsurance, often with a maximum amount per prescription. The main benefit of this strategy is that it creates a small amount of plan cost offset while increasing the potential for a member to consider either a less expensive therapy or discontinue the medication if there are questionable benefits or significant side effects.
However, there are several drawbacks to consider. First, with increased member costs, medication adherence may decrease, thus negating the benefit from treatment that's truly necessary. Second, plan sponsors typically bear the majority of the cost — typically 70% – 90% — so it really only defrays a minor portion of the financial burden for the plan sponsor.
Coupons and rebates from pharmaceutical manufacturers can help members with the financial burden and ultimately help increase compliance. However, often the specialty drug costs are offset to the plan sponsor and they end up bearing the majority of the costs. Plan sponsors that use a coupon strategy need to ensure that the coupon value is not being attributed to the member's out-of-pocket maximum.
For example, on a $4,000 drug, increasing a member's copay from $30 to $100 still leaves $3,900 for the plan sponsor. Raising coinsurance limits is an option, but the maximum out-of-pocket language limits the impact of this strategy. If a member has drug costs totaling $65,000 a year, a $2,000 maximum out-of-pocket per year is only a small percentage of that and will not lower the cost to the plan sponsor very much.
The bottom line: Increasing member contribution is a common strategy for specialty drug management. However, this strategy provides only a minor offset of the cost of specialty medications — usually 2% or less.

3. Mandating specialty pharmacy providers

Impact on cost reduction: Minimal

This strategy is highly connected to the aggressive price negotiation strategy discussed earlier. Specialty pharmacies usually provide 1% – 3% improved pricing through higher AWP discounts. Unfortunately, while mandating a specialty pharmacy is commonly recommended, the cost relief to the plan sponsor is minimal.
There are potential benefits to improving patient outcomes as a result of educating patients and enhanced patient monitoring, but there are drawbacks to consider with this approach as well.
First, moving to an exclusive specialty pharmacy may hamper prior authorization management, as the pharmacy providing the prior authorization is also making money from the drugs' distribution. That's why it's helpful to have an objective, third-party analysis of a pharmacy benefits manager's (PBM) prior authorization criteria and monitoring of their effectiveness through complex metrics.
PBM pharmacy and therapeutic committees exist to evaluate the cost-effectiveness of specialty drugs and recommend product restrictions. However, their methods are often not completely disclosed — and have been found in some cases to be subjective, unsystematic, and even incomplete.4
The bottom line: Mandating specialty pharmacy is a strategy that's commonly promoted, but really does not have a significant impact on reducing costs. For example, if you look at the difference of AWP minus 18% versus AWP minus 20%, the cost impact of mandating specialty pharmacy is of minimal impact when you model it on a real-data basis.

4. Maximizing formulary rebates

Impact on cost reduction: Moderate

Formulary rebates have faded and reappeared in the industry. The cost of specialty drugs has created the need for renewed aggressive strategies for contracting with PBMs.
When you hear about PBMs getting "discounts" from manufacturers that supposedly lower costs, often those discounts do not end up on the plan sponsor's bottom line. Another drawback to this strategy is that formulary rebates may limit the prior authorization of specialty drugs because the entity negotiating the rebates is also the one providing prior authorization.
On the plus side for this strategy, there is opportunity for significant cost offset with rebates. To maximize the value of rebates, plan sponsors need to ensure that objective metrics and thorough monitoring of the rebate yield are integrated into their PBM contract. Common methods, including phrasing such as "client will receive 100% of rebates collected," may leave the plan sponsor with significant fiscal amounts unsecured.
The bottom line: With the high cost of specialty drugs, it's more critical than ever to perform scrutiny of formulary components, prior authorization, and step therapy. There's ample opportunity to explore new, innovative methods to secure higher rebates for specialty drugs. For example, at Wells Fargo Insurance, we've designed methods in our RFP and contracting areas to maximize formulary rebate yield while assuring aggressive prior authorization. While plan sponsors shouldn't pursue rebates as a primary focus, they have emerged as a measurable offset to costs.

5. Implementing effective, evidence-based prior authorization

Impact on cost reduction: Most significant

In our experience, an evidence-based prior authorization strategy may truly be the only way to create double-digit impacts on specialty drug costs. Unfortunately, this strategy is the most difficult for employers to implement. While corporate finance may express concerns about escalating costs, the human resource team faces the very real daily challenges of dealing with pushback from employees, who may complain that they feel the health plan is getting in the middle of their decision with their health care provider.
The first key to making this strategy succeed is to ensure prior authorizations are evidence-based. Providers are trying to do the right thing, but if there's a drug that's costing $80,000 or $100,000 a year, and there's no evidence (or poor evidence) of efficacy in a given condition, that's a challenge. There are many ways to interpret evidence-based processes, but you need to look at the quality of studies and develop ways to channel treatment to get the best outcomes. That's an important point to emphasize, because you're really seeking the best outcomes, not just saving pharmacy dollars.
When prior authorization is performed well in a good environment, it will accomplish the following: 1) Control a given drug's use in certain conditions where a very expensive drug has not been studied, or where the available evidence does not prove that the drug works well, 2) Determine if it's appropriate to first require the use of other agents to treat the patient where the evidence for the expensive drug is lacking, and 3) Determine if there are less-costly treatments available that are equally effective.
PBMs may not have very restrictive or strong prior authorization procedures, as this approach limits rebates. It's important for plan sponsors to scrutinize what a PBM is doing to manage their risk from a prior authorization standpoint. A good consultant will be able to assess the effectiveness and appropriateness of a PBM's clinical management programs, including step therapy, prior authorization strategy, and methods.
The second key with this strategy is really working to find the right balance between open access and higher costs — or very strong controls and lower costs — with pushback from providers and members. It's a very challenging pursuit, but the reality is, if there is no prior authorization at all, the fiscal impact is tremendous. Plan sponsors and their brokers or consultants need to have frank conversations about where on that balance spectrum they can find their comfort level.
The difficult balance of cost control vs. member complaint
The bottom line: While there are a number of strategies with the potential to impact costs, more aggressive price authorization will have the most effect in the current environment. To meet fiscal challenges, plan sponsors may find this to be a necessity moving forward and should work with their consultants and brokers to have candid conversations about striking the right balance.

Q. What about substitution with the growing market of biosimilars (generic versions) of these specialty drugs?

Killilea: We are seeing some generic versions of specialty drugs come to market. The challenge is that until there are multiple generic options for each drug on the market — three to four options — prices for the generic drug will only be about 10% – 20% less than the original. It's going to take at least two or three years, if not longer, for prices in the marketplace to decrease based on the availability of generics. It's also important to assess the application of a generic copay in the context of a generic specialty drug.

Q. What about site optimization?

Killilea: Requiring physicians who administer specialty drugs to get them through the PBM is a popular concept — and not a bad one — but obviously this approach will impact a physician's margins. These are strategies worth watching and modeling, but they're not the panacea for controlling costs, either. The impact needs to be modeled whether the drug is obtained through a prescription benefit, a physician's office, or in the clinic via a specialty pharmacy.

Q. How can Wells Fargo Insurance help?

Killilea: One or two members can increase a plan sponsor's costs by 15% – 20%. However, projecting costs is still very difficult because it's difficult to predict the volume of specialty drug use in any given population. We advocate detailed analysis, monitoring and planning, and examining data on a month-by-month or quarterly basis to identify the impact of specialty drugs early. It's complex, but it's a manageable fiscal burden.
Understanding and optimizing pricing is important, but advocating evidence-based utilization management is essential in that it's the primary method to effectively impact specialty drug costs. We help plan sponsors negotiate their PBM contract to ensure terms related to specialty drug pricing, formulary, and pricing are in the best interest of the plan sponsor.
1. High-Priced Drugs: Estimates of Annual Per-Patient Expenditures for 150 Specialty Medications. America's Health Insurance Plans. April 2016.
2. Wells Fargo Insurance USA, Inc. National Healthcare Claims Trend Survey. Spring 2017.
3. Specialty Pipeline: Blockbusters on the Horizon. CVS Health Insights, April 2016.
4. A Prescription for Improving Drug Formulary Decision Making. PLOS Medicine. May 22, 2012.
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