By 2025, the specialty pharmacy market is expected to grow by 35%, led by high-cost treatments for cancer, autoimmune disorders, and other conditions. This article, originally published in June 2024 issue of The Self-Insurer, explores how health plans can mitigate costs and ensure they are realizing the maximum value of these expensive medications.
Specialty pharma – the insurance industry category of medication and treatments for rare, complex diagnoses that often require special handling and administration – has been growing at a record-breaking pace.
Incentives are leveraging the latest technologies and spurring development of treatments such as biologics, biosimilars, and gene- and cell-based therapies, which is increasingly challenging insurers’ ability to predict, control, and manage the costs of these treatments.
Today’s specialty drugs treat a wide and growing range of conditions and needs, from rare diseases to innovative and targeted treatments for cancers, inflammatory diseases, and more. This particular niche launched in earnest in 1983 with the passage of the Orphan Drug Act, which incentivized pharmaceutical companies to investigate treatments for diseases affecting fewer than 200,000 individuals in the U.S. Additional incentives introduced over the years, including the Accelerating Rare disease Cures Program (ARC), established in 2022 by the U.S. Food & Drug Administration’s Center for Drug Evaluation and Research, and the 2023 establishment of the Office of Therapeutic Products (OTP), which aims to improve oversight of and expertise in gene and cell therapies and other biologics, have also accelerated the development of these drugs.
Not surprisingly, claims related to the rare and non-rare (but difficult to treat) conditions for which these drugs are being developed have been rising. In 2022, according to CVS Health Payor Solutions, 50% of new drug approvals were for drugs to treat orphan diseases, and at least half of all payor pharmacy costs currently derive from the 2.5% of insureds on specialty medications.
Hundreds of such new drugs are also currently under way for more than 13 conditions. CVS Payor Solutions is projecting that by 2025, 606 new drugs, 211 supplemental specialty pharmacy indications for existing drugs, 34 new gene therapies, and 30 biosimilars will have received FDA approvals. The specialty pharmacy market overall is also expected to grow at a compound rate of 35% in 2025. Much of the segment’s growth, says specialty pharmaceutical consultancy AscellaHealth, will come from gene therapies, drugs for cancers (particularly blood cancers), autoimmune disorders and non-cancer blood disorders, and neurological disorders.
Many of the newest drugs are giving new hope to patients and their families, but in the past 10 years, high list prices for these drugs have imposed significant financial risks for payors. Drug utilization data for Medicare Parts B and D from the Center for Medicare and Medicaid Services (CMS) from 2014 to 2021 (Chart 1) showed that annual costs for covering specialty and non-specialty cancer drugs rose by approximately 11.7%, compared with 8.4% for non-cancer drugs.
Both metrics include unit cost and utilization trends but exclude the impact of drug rebates, which are not transparently reported to CMS and other stakeholders. Of these, the highest cost cancer drugs, which we define here as typically costing commercial markets in excess of $100,000 per year or more, experienced an annual unit cost-plus-utilization trend of 24.4%. This particular trend drove the overall average increase in costs for the highest cost specialty drugs to approximately 16.3%, versus the highest cost non-cancer drug trend, which was about 10.0%.
While the cancer category is the leading one of continued high specialty pharma trends, certain other rare conditions also have high cost drug treatments:
In terms of cancer, the highest costing patients usually receive escalating treatments ending with bone marrow transplants, which sometimes incur adverse reactions requiring further hospitalization. In addition, the costs of cell therapies (also known as CAR Ts), which are increasing in access and use, are akin to those for bone marrow transplantation, but have further upward financial pressures due to the costs of the CAR T treatment itself.
That said, it is relatively rare to encounter specialty drugs for cancer with costs at the extreme levels seen in the non-cancer conditions. High and rising cancer drug cost levels have, however recently been experienced for the following:
Chart 3 demonstrates how Medicare spending on top 10 cancer drugs and other costly cancer drugs – those that typically cost over $100,000 per year per patient commercially – are playing a material role in elevating U.S. healthcare spending. Biosimilar introductions, competition, and Medicare’s IRA negotiations may succeed in dampening the current cancer specialty drug spend trajectory.
From RGA’s experience with high-cost claims, cancer drugs have higher overall trends due to several factors:
When cases have high excess drug claims, there are strategies to make sure that the health plan is maximizing value:
Biosimilars and generics are often available to compete directly with certain drugs. Once approved, direct writers should ensure that their formularies adopt generics and biosimilars quickly in order to have lower-cost alternatives available and encourage price competition. Plan design incentives to encourage patient use of lower-cost alternatives are recommended as well, such as lower co-pay tier placement. Sometimes it is worthwhile to take high-cost brand names off of a formulary altogether. For example, fentanyl is generically available to help treat pain related to certain cancers but brand-name fentanyl versions can cost eight to 15 times more than the generic, unnecessarily costing some health plans tens to hundreds of thousands of dollars a year.
Health plans should examine whether certain drugs are optimally accessed through a retail pharmacy, a specialty pharmacy, or certain hospitals, as the same drug can cost drastically more when administered by certain providers. This is where benchmarking can help health plans cut costs.
Outlier analysis is a powerful tool for identifying bad actors, human error, or claims system errors. In one case RGA recently encountered, a patient’s cost for post-transplant immunotherapy was eight times more than normal, but was corrected by working with the third-party transplant network vendor.
While Congress and state legislators have increased their scrutiny of pharmacy benefit managers over the past two years, more outlier drug claims are being encountered among physician- and facility-billed drugs (J Code drugs) than retail drugs. Sometimes these egregious cases should imply network exclusion consequences for certain providers or facilities, or at least provider contract implications and intermediary remedies.
Most non-retail drugs, when first approved, are billed using the general J codes J3490, J3590 or J9999 until a specific code is assigned. As general codes are usually not flagged by claims systems, charge levels net of discounts can be incorrectly high. Health plans would benefit from reviewing general J Code claims, particularly high dollar ones.
The bottom line: Detailed client reporting as well as proper flagging will enable identification of issues and actions that will improve outcomes and reduce costs.
What is clear is that planning for and executing specialty drugs requires strong and careful oversight. New high-cost treatments and therapies are coming faster than ever and cases with excessive costs are increasing, which is challenging portfolio management.
Most important? Everyone is looking for a magic bullet. Unfortunately, to date, no one has found one yet. For payors, tightening basic practices and relying on good cost and utilization management is the best bet.
Strong prior authorization processes will validate the right drug for the patient as well as the most cost-effective site of treatment administration. Many specialty drugs can be safely administered in the patient’s home, rather than at a clinic or hospital where costs are much higher.
Monitoring for generic J codes that may slip pass claim system flags, allowing for higher than usual payments, can also help control specialty pharm costs.
