The Battle for Control of Specialty Drugs

Pharmaceutical CommercePharmaceutical Commerce - November/December 2011

Specialty distributors, specialty pharmacies and healthcare providers are all competing for a dominant position in drug delivery and reimbursement

Third-party payers are increasingly dissatisfied with the buy-and-bill process for specialty pharmaceuticals covered under a patient’s medical benefit. In response, some pharmacy benefit managers (PBMs) are developing services that substitute a specialty pharmacy-to-provider channel for the currently dominant specialty distributor-to-provider distribution channel. If successful, the shift from medical to pharmacy benefit coverage will minimize buy-and-bill and diminish the role of specialty distributors. Manufacturers will need different commercial strategies and contracts to succeed as increasingly consolidated entities battle for control of specialty drugs.

Specialty pharmaceutical spending today is split between a pharmacy benefit and a medical benefit, although the proportion varies dramatically based on drug and therapeutic condition. For instance, self-administered oral or injectable drugs for many chronic diseases are paid primarily under a patient’s pharmacy benefit. Examples include hepatitis C and infertility medications. Other diseases are treated with products that are injected or infused by healthcare professionals and are covered primarily by a patient’s medical benefit. Examples include cancer and blood cell deficiency.

Medical benefit coverage usually corresponds to a buy-and-bill payment approach by the third-party payer. The healthcare provider, such as a hospital or physician office, will purchase the drug from a distributor, administer the drug to a patient, and then submit a medical claim to the payer for both professional services and the drug. The largest specialty distributors, which are divisions of AmerisourceBergen and McKesson, generate about 75% of total specialty distributor revenues to physician offices.

The perceived and actual challenges of buy-and-bill methodologies are causing payers to migrate from medical to pharmacy benefit coverage. Key issues include:

• Health plans’ ability to capture specialty-drug cost and utilization data from their medical claims systems still lags behind that of pharmacy systems.

• Plan sponsors often pay higher costs for specialty drugs that are reimbursed under a patient’s medical benefit vs. those under a pharmacy benefit.

• A patient’s contribution to a drug’s cost is generally higher when paid under a medical benefit vs. a pharmacy benefit, reducing adherence.

• There are potentially inappropriate financial incentives when a healthcare provider generates profit from both providing care and dispensing drugs.

In response, some PBMs are promoting services to accelerate the shift to pharmacy management of specialty drugs. The three largest specialty pharmacies—Accredo Health (Medco Health Solutions), CuraScript Pharmacy (Express Scripts), and CVS Caremark—are subsidiaries of the largest PBMs. This shift corresponds to the substitution of the specialty distributor-to-provider distribution channel for a specialty pharmacy-to-provider distribution channel.

In a process often called white-bagging, the specialty product is dispensed to the patient by a specialty pharmacy but drop-shipped directly to the provider, such as a hospital pharmacy or a physician office. The provider holds the patient-specific product until the patient arrives for treatment. The specialty pharmacy adjudicates the claim and collects any co-payment from the patient prior to treatment. The provider does not purchase or seek reimbursement for the drug.

There is no buy-and-bill and no transaction with a specialty distributor for the product. If successful, the shift from medical to pharmacy benefit coverage will diminish the role of specialty distributors in the channel. The largest specialty pharmacies bypass distributors, so product volume would leave the wholesale distribution channel and move to the pharmacy channel.

In some parts of the country, white bagging from specialty pharmacies appears to be about one-third of supplies to the physician office market. Many healthcare providers, particularly hospitals, oppose white bagging because of the lost ability to earn any profit margin on drug purchases combined with additional costs of handling and storage patient-specific doses.

To ensure a successful specialty product launch, manufacturers must understand these competing pathways and the varying economic incentives within the drug channel. Each new specialty product requires a customized go-to-market strategy that analyzes the trade-offs in pharmacy vs. distributor fulfillment. These decisions will become even more complex as customers, channels, and payers consolidate.


Dr. Fein is president of Pembroke Consulting, Inc., and author of the widely-read Drug Channels website ( This article is adapted from his new report, The 2011-12 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors (http://www.pembrokeconsulting. com/wholesale. html.) He is also a member of the Editorial Board of Pharmaceutical Commerce.

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