Devon Herrick

Drug therapy is growing more complex and costly! So-called specialty drugs are gradually displacing traditional drugs as the primary component of drug spending. The market is expanding rapidly. Only about 10 such drugs were available 20 years ago but today there are more than 300.

These drugs typically treat medical conditions that are life-threatening, chronic and often rare. Cancer treatments are the most common type of specialty drugs, making up one-third of total. Drugs for autoimmune disorders, rheumatoid arthritis, and Crohn's disease, medications for HIV and drugs for multiple sclerosis are responsible for another third of specialty drug spending.

Although only about 1 percent of drugs prescribed, specialty drugs now account for more than one-quarter prescription drug spending. This is expected to grow to 50 percent by 2020.

Specialty drug therapy costs from at least $15,000 per year, to as much as $750,000 per year. Most have no close substitutes, rendering health plans’ traditional efforts by to control costs by encouraging generic substitution largely ineffective. Due to these medications’ high cost, health plans carefully manage the procurement and administering of these drugs. For instance, health plans are increasingly relying on exclusive preferred pharmacy networks to reduce costs and ensure the quality of specialty drug therapy.

When drug plans create preferred pharmacy networks they negotiate for the lowest possible prices. Negotiated prices are the result of bargaining power — the ability of the drug plan to deny business to a firm if their bid isn’t favorable. Bargaining power also strengthens the ability of drug plans to demand quality-enhancing safeguards and patient protections.

As you might expect, when a new market segment displaces an old one, stakeholders in the old market understandably don’t want to be shut out. As preferred pharmacy networks have become more common, so too have the calls for lawmakers to enact laws that restrict the ability of health plans to partner with exclusive pharmacy networks. The less competitive drug providers lobby CMS, Congress and state legislatures to restrict the ability of drug plans to effectively negotiate for lower prices. This past January the Centers for Medicare and Medicaid Services (CMS) tried to ban preferred pharmacy networks in Medicare drug plans. CMS had been under pressure from pharmacy interests shut out of Medicare Part D drug plans.


Devon Herrick

Devon Herrick is a health economist and a senior fellow at the National Center for Policy Analysis (NPCA).