Specialty Pharmacy Costs

3 ways to combat rising trends Wes Smith

Photo: shutterstock.com/Talaj

Specialty pharmacy is a hot topic these days—and for good reason. The entire health care industry is finding more of their total cost being attributed to and driven by specialty drugs.

Evernorth’s 2020 Drug Trend Report found that specialty drugs accounted for more than half of total spend under the pharmacy benefit despite being used by less than 2 percent of the population. Further, 17 of the top 25 drugs were specialty when ranked according to total pharmacy spend.1 CVS found similar results in its 2020 report, with specialty accounting for 52 percent of drug spend and five therapeutic classes driving 90 percent of specialty.2

With a robust pipeline of new therapies on the way, some having multimillion-dollar price tags, it is unlikely this trend will reverse any time soon. Doom and gloom aside, here are three basic ways actuaries can help combat rising specialty costs.

Step 1: Ask for More

One simple way to get started is to begin pushing your internal and external partners on what they are already doing—and what more they can do—to help you control and manage specialty pharmacy.

Reactive Versus Proactive

It is difficult to try and solve a problem if you aren’t getting accurate and timely information. Don’t get stuck reacting year after year, constantly chasing. Whether the source is internal or external, ensure you are getting up-to-date reporting and analytics to monitor new developments and support faster decision-making.

Balance retrospective and prospective views in the context of what’s happening today. Ask for specifics about what can be done proactively to stay ahead of specialty trends and the emerging pipeline, and consider using artificial intelligence (AI) and predictive modeling to better anticipate cost and care needs.

Member Engagement and Support

An important part of managing specialty costs is engaging with the right patients and ensuring they have the education and clinical support they need. The Centers for Disease Control and Prevention (CDC), citing external studies, notes approximately 20 percent of new prescriptions are never filled, and about half of those filled are not taken correctly.3

Simply ensuring members understand their options when it comes to alternative therapies, fulfillment location and duration, and sites of care can make a huge difference. Similarly, providing targeted condition-specific specialty pharmacy support can help increase adherence and outcomes and reduce discontinuance and waste. This all helps improve member health and lower costs.

Program Return on Investment (ROI) Validation

If you have vendors or programs with specific ROI requirements, make sure performance is validated independently. Though intentional misrepresentation or outright fabrication is rare, some vendors have lots of “choosy” criteria tucked in their measurement methodologies that tend to tip the evaluation scale in their favor. Make sure you understand and agree with your vendor’s performance results, and seek outside expertise if needed.


Two areas particularly prone to limited transparency are drug rebates and “shared savings” arrangements. Unsurprisingly, these two areas tend to be big revenue generators for those on the other side. Push for more transparency to ensure you are not missing out on opportunities to offset high specialty costs.

  • Pharmacy rebates are a well-known source of cost offset for plan sponsors. These are generally evaluated and discussed through the pharmacy benefit, but don’t forget about drugs flowing through the medical benefit. Pharmaceutical Strategies Group’s (PSG’s) 2020 Specialty Report found nearly 40 percent of specialty spend occurs under the medical benefit.4 This can include many high-cost drugs, so you want to ensure you are receiving a portion of the medical pharmacy rebates as well. Request specifics on what you are—or are not—receiving today, and ensure it is competitive with the marketplace.
  • “Shared savings” programs can be particularly tricky. The names and specifics can take various forms, but they typically follow a similar pattern: “If we, the vendor, save you $X, we take a percentage of that $X and give you the balance.” Sounds great, right? Not so fast. Unfortunately, these programs can create some questionable, and in some cases outright conflicting, incentives. Be cautious of these arrangements, and if needed, seek additional expertise to help you navigate the situation.

Step 2: Manage What You Can

The next step is to dig in. These techniques can help you manage specialty pharmacy by turning your disjointed data into unique insights, improving member access and support and evaluating alternative care options.

Integrated Analytics and Reporting

Data is everywhere. The International Data Corporation (IDC) estimated in 2012 that the total volume of data would double about every two years through 2020—and it was right.5 Astonishingly, a majority of this data was created in just the past two years, and machines account for almost half of the data generated in 2020.6

Like many things, more is not necessarily better. Without the right tools, attempting to tease out important themes in your health care data can be a monumental task. The key is viewing member-level data on an integrated basis across domains. This supports a more comprehensive view of each member’s conditions, utilization, cost and engagement. A siloed approach isn’t effective, especially for specialty pharmacy, which can span both medical and pharmacy channels. Here, member specifics can make a big difference in properly understanding trends and where to take action.

Therapy Access and Supply Management

Prior authorization and step-therapy programs help ensure evidence-based protocols and safe prescribing patterns are followed, confirming that a member meets medical necessity requirements and, where possible, starts members on low-cost therapies first. This is particularly important when it comes to high-cost specialty drugs.

With increased e-prescribing and e-authorizations, electronic health record (EHR) integration and data interoperability, these programs operate faster and more efficiently than ever. Supply management optimization programs can leverage remote monitoring software and analytics to assess accumulation of unnecessary supply and adjust future dispensing.

Finally, consider the use of pharmacogenetic testing as part of the therapy approval process for rare conditions or extremely high-cost drugs. All of these programs work to reduce negative outcomes for members, help ensure prescribers follow treatment guidelines and aim to reduce fraud, waste and abuse (FWA).

Investigate Alternatives

Two areas that can generate substantial savings opportunities are the optimization of site of care and biosimilars. Site-of-care optimization refers to moving care from a nonpreferred setting to a preferred setting without changing the therapy or dosage the member is receiving. High-cost infusion drugs, such as Herceptin or Soliris, are a common focus of this type of program. By simply changing where the therapy is administered—from, for example, an outpatient hospital to a provider’s office or a patient’s home—significant savings can be realized. This is because there can be up to a 70 percent cost differential between outpatient hospital and alternative settings. This is on top of the significant differences in the cost to administer the drugs and is further bolstered by improved outcomes and patient satisfaction.7,8

Similar to substituting a generic drug for a brand-name drug, a biosimilar can be substituted for an originator. This can lead to substantial savings for both members and the plan sponsor. With a number of options currently available and a robust pipeline, biosimilars are a growing mechanism to combat rising specialty costs. However, it is important to understand the impact of rebates in this equation and how migrating utilization from originators to biosimilars may impact net costs.

Payment Integrity

A persistent issue in the industry is properly coded and billed units and costs on medical drug claims. Having access to tools and expertise to validate and cleanse these claims can allow for more accurate analytics and reporting. Further, as these improperly coded claims are adjudicated, overpayment becomes a major concern. By leveraging tools and expertise, such as an independent review organization (IRO), outliers can be identified for detailed review and potential recovery.

A 2020 AMS study found nearly $100 million of suspected overspend from a sample claims data set of $24 billion in total allowed using one such tool.9 However, it is critical that the strategy includes root cause fixes and ongoing, proactive identification—not just perpetual retrospective review and recovery.

Step 3: Protect Your Organization

Prior to the Affordable Care Act’s (ACA’s) removal of lifetime and annual limits, claims of more than $1 million were rare, as this was the typical plan limit. However, since then, claims of more than $1 million have been on an exponential, near meteoric rise—with no end in sight. The industry is seeing (and funding) claims in excess of $10 million on an annual basis. Now more than ever, it is imperative to make certain the proper safeguards are in place, so a catastrophic claim does not become an operational risk.

The most expensive U.S. Food and Drug Administration (FDA)-approved drug in the United States currently is Zolgensma, a one-time treatment for spinal muscular atrophy with a list price of more than $2 million. Zokinvy and Danyelza were approved in late 2020 and carry regimens that cost about $1 million annually.10

The pipeline is quite full. There are more than 1,000 gene, cell and tissue-based therapies currently in development and undergoing clinical trials globally.11 The FDA expects to approve 10 to 20 therapies per year by 2025, and it is actively staffing up to support this process.12 Of note, Roctavian, a hemophilia A gene therapy, is expected to come to market soon and is estimated to cost around $3 million.13 According the manufacturer, this is a bargain over the current regimen, as it can save up to $25 million over a patient’s lifetime.14

So, how are these treatments being funded today, and what can you do to protect your plan or organization?

Stop-loss (Reinsurance) Coverage

An overwhelming majority of self-insured groups carry stop-loss coverage—or reinsurance—on claims that are more than a defined threshold. In most cases, stop-loss policies are structured to “mirror” the medical and pharmacy coverage, so there are no gaps in coverage. However, there are exclusions of which to be aware, such as “lasers,” where a stop-loss policy will exclude a whole member, claims tied to a specific condition or therapy for a member, or claims up to a defined dollar limit for a member.

If not in place at your organization today, consider adding stop-loss insurance to include pharmacy coverage. If you have stop-loss coverage but are unsure about policy specifics like mirroring, lasers or coverage for high-cost gene therapies, contact your stop-loss insurer.

Health Plan Programs

As of late 2019, at least one large national insurer began covering both Zolgensma and Luxterna under a newly created program for gene therapy administration and member support. Another carrier will follow in 2022 with a similar program. For an additional fee, plan sponsors can participate and receive targeted direction and support from the insurer’s participating provider network before, during and after administration. When opting in to such a program, make sure to coordinate across coverages (e.g., stop-loss) to ensure there is a clear understanding of who is at risk for such claims and eliminate the cost of any duplicate coverage.

New Funding Mechanisms

In addition to the options presented in this article, some industry experts are thinking outside the box. They are conceptualizing new types of organizations to support member access, care and funding of high-cost specialty drugs like gene and cell therapies.

One example is the orphan reinsurer benefit manager (ORBM) concept a group of researchers at MIT proposed.15 At the highest level, the ORBM functions as a complete carve-out entity. The ORBM manages all treatments on a predefined list, which bundles the funding, administration and care for the patient pre- and post-treatment all in one organization. This structure provides the opportunity to serve multiple payers, which can help maximize negotiating power and economies of scale.


Managing specialty pharmacy is certainly a challenge, but you’re not alone. New life-altering and lifesaving therapies have extraordinary benefits for the recipients, but they come with staggering price tags. Some in the industry are deeply invested in maintaining the status quo, but innovation is occurring everywhere, especially with specialty. Outcomes-based contracting is being piloted more and more. Manufacturers are expanding need-based and amortization programs. Sourcing requirements are expanding rapidly, and payers are developing niche solutions for payments and care delivery.

There is no single solution to managing specialty pharamacy costs. Instead, the future is the deployment of a multidimensional approach that allows you to take back control though:

  • Integration—no more silos. Integrate your data across domains. Embrace new technologies to amplify your analytics, including AI and predictive modeling. Truly understand total cost of care. Analyze specialty costs at the claim, member and provider level—not just in aggregate.
  • Transparency—demand clarity. Know precisely what you’re paying for and what you’re getting from each vendor.
  • Accountability—from provider coding and billing, to member outcomes, health plan and pharmacy benefits manager (PBM) performance, demand more from your partners. Be aware of incentives, and hold each accountable using objective, mutually agreed-upon success measures.
  • Protection—understand the risk you retain and the risk you transfer. Evaluate new mechanisms as the marketplace evolves. Protect your plan, and protect your organization.

Armed with the right tools, techniques, planning and expertise, you can effectively manage specialty costs. Specialty pharmacy doesn’t need to be a nightmare. Deploy these tactics, and get a better night’s sleep.

Wes Smith, FSA, CERA, MAAA, is SVP, Advisory & Consulting, at Certilytics.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2021 by the Society of Actuaries, Schaumburg, Illinois.