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Specialty Drug Costs Poised to Skyrocket but Many Employers Have Yet to Take Note

By Brian Schilling

If the rising cost of specialty drugs is not at the top of your list of health care concerns, it may be soon. Specialty drugs currently account for about 17 percent of the average employer’s overall pharmacy costs, and they’re rising fast.1 One of the nation’s largest pharmacy benefits managers projects that specialty drug costs will increase annually in the range of 21 percent to 24 percent over the next three years.2 An industry report suggests that specialty pharmacy costs may account for 40 percent of total drug spending by 2020.3 Even so, employers are giving the issue a collective shrug. According to a November 2011 survey by the Midwest Business Group on Health (MBGH), 25 percent of employers have little or no understanding of specialty pharmacy and 53 percent have only a moderate understanding.4 Some 30 percent of employers don’t know how much they spend on specialty drugs overall.5

It’s a safe bet that they spend a lot. Specialty drugs are vastly more expensive than their traditional drug counterparts, often costing more than $2,000 per month per patient. Some drugs cost much more. Tretinoin, a drug that can help manage some complications of leukemia, costs $6,800 a month. Others cost upwards of $100,000 per year. The most expensive can cost $750,000 per year.

While no strict definition of specialty drugs exists, they are commonly thought to require: prescription by a specialist; special handling; intravenous administration; and a high degree of patient management to ensure compliance and safety.

Specialty drugs include treatments for AIDS, infertility, obesity, and some other medical conditions, but specialty drugs for just three conditions—cancer, arthritis, and multiple sclerosis—account for more than half of all spending on specialty drugs.6

Dr. Randy Vogenberg, at the Institute for Integrated Healthcare, a consulting firm that conducted the MBGH survey and advises clients on pharmacy-related issues, suggests one reason little attention has been paid to the rising cost of specialty drugs is that over the past decade, billions of dollars in pharmacy costs have been saved as dozens of blockbuster drugs have come off patent, making much cheaper generics available. That has kept overall pharmacy cost increases down to around 5 percent last year. However, this savings is only temporary, he says.

"The pipeline for specialty drugs is enormous," Dr. Vogenberg says. As of late 2009, 633 specialty drugs were in development.7 The profit margins for specialty drugs are robust, so manufacturers aren’t hesitating to invest money in their development. The drugs also typically address chronic illnesses so they may be used by patients for a very long time. Consequently, they’ve been described as "jackpot" drugs for manufacturers. Dr. Vogenberg doesn’t disagree: "This is an evolving area where manufacturers are looking to make up for the revenue they’ve been losing to generics as brands go off patent protection."

Since specialty drugs don’t typically face competition from generics or even from other specialty drugs in certain instances, manufacturers have not hesitated to raise prices annually. In 2006 and 2007, manufacturers increased specialty drug prices 7.9 percent and 8.7 percent, respectively.8 In 2011, spending on specialty drugs rose 16.3 percent.9 Specialty drugs can bring in enormous revenues for manufacturers. Five specialty drugs—Humira, Enbrel, and Remicade (for arthritis) and Avastin and Rituxan (for cancer)—rank among the top 10 best-selling drugs worldwide by revenue and collectively accounted for $29 billion in sales in 2009.10

Health plans and pharmacy benefit managers are using various strategies to manage specialty pharmacy costs for employers, including ratcheting up copayments, limiting prescription durations, requiring the mandatory use of mail-order pharmacies, and using step therapy, which requires patients to try less expensive drugs before more expensive ones become an option.

Dr. Vogenberg isn’t opposed to any of these approaches, but he isn’t enthusiastic about any of them as a solution. "Truly effective strategies for controlling specialty drug costs aren’t going to involve just one approach and they probably don’t exist yet," he says. "Comprehensive strategies are being developed now, but the key aspect they are going to emphasize is that they’re high touch. You can’t effectively apply traditional utilization management strategies across the board to populations this small. It’s an out-of-date approach and it is simply the wrong bag of tools for the job."

Spending growth in specialty pharmacy costs has taken place mainly on the medical side, where utilization and costs may be managed with very different approaches. This disconnect has made it difficult to control costs. "It’s absolutely imperative in managing specialty pharmacy costs that you have a plan for both the medical and pharmacy side of the benefit," said Julie Kulawiec, R.N., senior director of specialty benefit services at Express Scripts, one of the industry’s largest pharmacy benefits managers. "That may be the most important single thing for employers to consider. Don’t just focus on pharmacy or you’ll have half a management strategy."

Traditionally, costs for drugs that are administered intravenously or that require careful follow-up for safety reasons tend to fall under the medical benefit. Safer, self-administered agents are typically covered under the pharmacy benefit. Today, each side accounts for roughly half of total pharmaceutical spending, but the bulk of future increases may be on the medical side as specialty drugs for rheumatoid arthritis, multiple sclerosis, cancer, hemophilia, metabolic disorders, and pulmonary arterial hypertension have all recently earned FDA approval.11

So what can employers do? Vogenberg offers a short list of must-do items for benefits managers who may be tasked with managing specialty pharmacy costs:

  • Establish baselines. Most employers don’t have a clear idea of how specialty pharmacy costs are hitting their bottom line. Comb through available data to determine what illnesses or specialty drugs may be most relevant to your organization. Also, look beyond costs to consider what other impact the related illnesses may have on your organization.
  • Educate yourself. Consider attending the Pharmacy Benefit Management Institute’s annual conference on pharmacy benefits or look for a regional offering through your business coalition. Subscribe to a related journal like Biotechnology Healthcare. And make an effort to familiarize yourself with the specialty drug pipeline to help better forecast costs and other implications for your benefits plan down the line.
  • Rethink contracting. Insist that any vendor tasked with managing pharmacy costs be willing and able to supply timely reports on both cost and utilization. Ensure that those same vendors can provide the kind of high-touch support that individuals prescribed specialty drugs may need.
  • Focus on communications with employees. Make sure that employees understand their benefits, especially when adopting any new strategies for managing specialty drug costs. Out-of-pocket costs, in particular, need to be made clear.

But perhaps the lowest-hanging fruit for employers seeking to keep specialty drug costs in check may be simply giving employees more of an incentive—financial or otherwise—to adhere to their medication schedules. More than three-quarters of employers still don’t do this.12 As former Surgeon General C. Everett Koop once noted, "Drugs don’t work in patients who don’t take them."

"Medication compliance is a huge issue and has been for a long time, but it is one thing if a patient self-terminates treatment because they think they’re better and a $10 antibiotic prescription gets dumped," said Dr. Vogenberg. "It’s another thing if that prescription cost $6,000 and failure to adhere to the schedule lands the patient back in the hospital. No employer wants to have an investment like that go down the drain."

1 URAC, The Patient-Centered Outgrowth of Specialty Pharmacy: Why Patient Management Strategies Are Critical to 21st Century Providers (Washington, D.C.: URAC, 2011), available at
2 B. Nease, S. Miller, S. G. Frazee et al., 2010 Drug Trend Report: A Market and Behavioral Analysis (St. Louis, Mo.: Express Scripts, April 2011), available at
3 MEDCO 2011 Drug Trend Report, available at  
4 MBGH Employer Survey on Specialty Pharmacy, Sept. 23, 2011, available at  
5 Ibid.  
6 F. R. Vogenberg, "Specialty Pharmacy Trends and Plan Sponsor Value," Biotechnology Healthcare, Aug. 2009 6(3):43–45. 
7 Credit Suisse analysis as reported in: E. Silverman, "Drug Pipeline Loses Pressure," Managed Care, Aug. 2010 19(8):23–26, available at  
8 AARP Public Policy Institute, RX Watchdog Report: Trends in Manufacturer Prices of Specialty Prescription Drugs Used by Medicare Beneficiaries, 2004 to 2007 (Washington, D.C.: AARP, Sept. 2008), available at  
9 URAC, Patient-Centered Outgrowth, 2011.  
10 J. Appleby, Kaiser Health News, "Specialty Drugs Offer Hope, But Can Carry Big Price Tags," USA Today, Aug. 22, 2011, available at  
11 URAC, Patient-Centered Outgrowth, 2011.  
12 Vogenberg, "Specialty Pharmacy Trends," 2009.

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