At a Pharmacy Near You: The Specialty Drug Turf War

Drug therapy is the most efficient method to treat most illnesses — often substituting for hospital treatments and even surgery. The pace of scientific advancement in pharmacology is rapid. So-called specialty drugs are displacing traditional drugs as the primary component of drug spending. Only about 10 such drugs were available 20 years ago, but today there are more than 300. Cancer treatments are the most common type of specialty drugs, making up one-third of  the 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.

Specialty drugs are expensive. Although comprising only about 1 percent of drugs prescribed, specialty drugs account for more than one-quarter of prescription drug spending — increasing to 50 percent by 2020. These therapies cost anywhere from $15,000 per year to as much as $750,000 per year. Most have no close substitutes, rendering health plans’ traditional efforts to control costs by encouraging generic substitution largely ineffective.

Due to the vast amounts of money involved, a diverse assortment of new and old competitors are jockeying for position and vying to enter the field of specialty pharmacy. These market participants include not just traditional large retail chain drug stores, but also infusion providers (clinics specializing in intravenous therapies), hub vendors (specialized middlemen), therapy-based service providers (clinics specializing in specific diseases), group purchasing organizations and so forth. Small, independent community pharmacies are also teaming up and organizing their own networks in order to break into the market for specialty drugs.

Also due to these medications’ high cost and fragile nature, health plans are becoming much more discriminating about which specialty drug providers they partner with. 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 look for qualified vendors and 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 (and new ones want a piece of the action). As preferred pharmacy networks have become more common, drug providers shut out of preferred networks have lobbied Congress and state legislatures to enact laws that prohibit preferred pharmacy networks. This past January, the Centers for Medicare and Medicaid Services (CMS) tried to ban preferred pharmacy networks in Medicare drug plans. Numerous states already have regulations that restrict preferred or exclusive drug networks. According to the Federal Trade Commission (FTC), such so-called consumer-protection laws are actually costly to taxpayers, employers and patients.  Not only do such policies boost patients’ costs, they also compromise safety and invite fraudulent providers who jeopardize the effectiveness of specialty drug therapies.

So what’s the problem? Dispensing and administering specialty drugs requires a level of experience and expertise that most traditional pharmacies simply do not possess. A specialty drug pharmacy doesn’t resemble the corner drugstore most consumers have come to know. These new drugs represent the latest high-tech therapies, including large-molecule biologics (essentially derived from organic substances or living organisms) — most of which may require careful handling. Stocking and dispensing biological agents requires sophisticated logistical planning, climate-controlled shipping and meticulous storage — with specific protocols and documentation. Patients who receive these therapies require extensive monitoring, risk evaluation, mitigation strategies for side effects and the close support by a physician.

Physicians are in a position to evaluate the expertise and capabilities of the specialty pharmacy providers their patients patronize. In a recent survey, two-thirds of the physicians agreed that “some” traditional pharmacies are competent to handle and dispense specialty medications, but three-fourths also agreed that “most” pharmacies do not possess the expertise and capability to manage complex drugs.

After intense lobbying by a diverse group of stakeholders, CMS backed away from its proposed ban on preferred pharmacy networks — at least for now. However, the federal agency never officially withdrew its proposed rule change. Unfortunately, this isn’t the end of the debate about whether health plans have the right to lower enrollees’ costs using exclusive networks. When there’s money at stake, politicians (both state and federal) are often receptive to constituents’ pleas for help. Small businesses like community pharmacies often get a sympathetic reception when they descend on the state capitols lobbying for protection against health plans that force them to compete on price. Similar battles are being waged in California and New York State. However, Congress and state legislatures should avoid these bogus consumer protections.

Comments (14)

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  1. Devon Herrick says:

    Someone complained to me that I apparently prefer government-sanctioned monopolies rather than small businesses in the market. I’m not suggesting anything of the sort. Really, all I’m proposing is a marketplace where the parties are allowed to negotiate freely and contract without state or federal government interference.

    I want an environment where competition determines business relationships — rather than lobbying by one party to enact so-called Consumer Protections that grand an advantage over another party. The Federal Trade Commission has reported on numerous occasions that some of the proposed state Consumer Protections actually harms consumers.

  2. Patrick Skinner says:

    Other countries set price controls and the US doesn’t. As much as I hate more regulation, it has created an unfair playing field that results in Americans subsidizing the research and development of pharmaceuticals. This is about the only place I can see price controls in the US being beneficial by forcing big pharma to spread the R & D costs to all customers, not just Americans.

    • Devon Herrick says:

      It’s been illegal for years for Americans to import drugs from abroad by anyone other than the drug company who owns the product. The Customs Service has always been more concerned about counterfeit drugs (i.e. making an unauthorized Viagra tablet that appears to be an authentic Viagra tablet) than stopping unauthorized generics of American drugs still under patent protection.

      Recently there was a coordinated raid by FBI, DEA and Customers at several ports of entry for mail-ordered drugs coming in from abroad. Of course, the only reason why an American would order a drug from abroad that is available domestically is if they can get a price-controlled drug or an unauthorized generic drug still under patent protection in the U.S.). It’s a growing problem that was quietly ignored until it could no longer be ignored. But you’re correct that drug R&D seems to fall on Americans disproportionately. Trade negotiations increasingly take into account intellectual property. It’s not just a case of Americans bearing the brunt of the costs. Firms in India and China increasingly knock-off our patents and sell cheap versions to the entire world.

  3. H D Carroll says:

    Health care services are not the same kinds of goods as breakfast cereal. I don’t care how many OEMs, whole-sellers or resellers there are, but they should be prohibited from price discrimination when it comes to, for example, pharmaceutical products. Starting from the manufacturer on down to the ultimate consumer, the price charged at any stage by any purveyor through which the product flows, all in after all adjustments, rebates, discounts, premiums, etc., should be required to be the same to all comers. Parties should compete via administrative efficiency (not “price volume discounting” which only reflects territorial rent seeking), innovation in marketing, and particularly customer service, not through a favored nation pricing practice. That should apply internationally as far as I can see, and to governments as well as private customers. Anything else leads to market distortion and profiteering, and cannot at the end of the day be good for society. Set your price for this either OEM or “pass through” product where you want to, but to all payers it should be the same. Then we will know the “value” of the product itself, and any value added you bring to the table yourself. (In particular, if developing countries want a drug, they should have to pay the same, fair, rate that any other country pays for it, period. Then, if some entity wants to subsidize that price via contributions, it won’t distort the market in first world countries, and we will know the true value of the subsidy, rather than it being hidden in the name of “what is fair to poor people.”)

    • John R. Graham says:

      Thank you but I very much disagree. Price differentiation is the best way to ensure socially optimal pricing of prescription drugs.

      If the government forces the same price for everyone, that price will be high, meaning low-income households will not be able to get the meds.

      The scholar who best explains this is Patricia Danzon of Wharton Business School, University of Pennsylvania. I wrote a paper on this very topic way back in 2000, which cites her. It is at

      • H D Carroll says:

        John – just where did I ever say the government sets any prices? I explicitly state that the “provider” sets the price. They just can’t discriminate based on payer. I have suggested that government might set the boundary conditions and rules for playing, and non-discriminatory pricing is key. Payer price discrimination within health care services and products distorts price, cost shifts, allows intermediary rent taking/protection schemes, etc., etc. I think the government should have to pay whatever that provider charges as well – Maryland hospital “all” payer pricing has been successful, full stop, and no one will ever convince this actuary otherwise. The feds are scared to death that the little secret will get out and they will have to pay a “fair” rate for Medicare elsewhere just like there. It eliminates the obfuscation created by discounts, special deals, etc., that have no basis in true economic savings for volume, but rather lead to vested interest power grabbing without adding value.

        • H D Carroll says:

          Oh, by the way, before someone hops all over me by pointing out in the Maryland hospital system, the government does, in fact, set the prices – that is not the basis of what I was alluding to. I believe the aspect of the system that makes it work to smooth out everything for everybody is not that that the government sets the prices (it could be done other ways), it is the “all payer” aspect of the price that a provider is given or comes up with – nobody, including the government programs, gets to claim a “discount” off of that. I’d be willing to allow the hospitals to set their own rates in a competitive environment with the exception of “emergency” related care, which needs to have some boundaries, surely.

          • John R. Graham says:

            The economics of hospitals and the economics of research-based prescription drugs are very different.

            On the other hand, they have proportionately high fixed costs which are analogous to the proportionately high R&D costs in the research-based Rx industry. In both cases, we would expect the market to result in price differentiation.

            Hotels price differentiate. Uber price differentiates. Movie cinemas price differentiate (through popcorn sales). It is the best way to approximate optimal social welfare.

            At the extreme, outlawing price discrimination in hospitals outlaws charity care. The Medicare most-favored-customer clause has been indicted as a cause of hospitals sending invoices to people who cannot pay them.

            Similarly, outlawing price differentiation by research-based Rx companies would end all discount drug programs.

        • Devon Herrick says:

          Another aspect that would worry me is the price-fixing nature of “everybody pays the same price.” Logistically, not allowing price variation (or discrimination) makes it hard to liquidate excess inventory. But I also believe it would also allow manufacturers to set the price artificially high.

        • John R. Graham says:

          You never stated the government sets the price, nor did I allege you did.

  4. Thomas says:

    Specialty drugs are going to change the landscape of how treatment and how these drugs will be accessible to patients. This changes the market of pharmaceuticals and will be interesting how everything plays out.

  5. MrFreedom says:

    We should all be weary anytime the government steps in and tries to implement “consumer protections.” Just as trade “protections” cause a disequilibrium in the international market and actually hurt consumers, so too will the government’s attempt to help consumers in the drug market.

    Price controls NEVER work, the way to reduce prices and improve quality is to encourage more competition. I know it sounds simple, but forgive me for not speaking like a bureaucrat who has to make everything seem more complicated in order to justify my existence.

  6. Studebaker says:

    Part of the issue is that biologics are overtaking other pharmaceuticals as the bulk of drug expenditures. By 2020 nearly half of drug spending will be biologics and other specialized drugs. Just imagine, 1% or 2% of drugs will generate about half of drug revenue. By inference, 98% or 99% of drugs filled by pharmacies will be worth only 50% of drug revenue. Which segment would you want to work with? The one where you work hard for peanuts? Or the one where you handle some highly specialized drugs and gross as much as pill pushers working 25 to 50 times as hard?

    • John R. Graham says:

      The behavior of the pharmacies tells us that dispensing specialty Rx is profitable, but I’m not sure why it is. For small-molecule drugs, generics are more profitable to dispense than brand-name meds.

      I would have thought that the biologic manufacturer would have more negotiating power with a pharmacy than manufacturers of small-molecule meds, but I mus be wrong.