February 14, 2022

Specialty Drug Costs: Who Do They Hurt Most?

About eight out of ten adults in the U.S. claim that prescription drugs prices are unreasonable.  And there’s a good reason why. According to a 2021 RAND study, the U.S. spends more on prescription drugs per capita than most countries. In fact, U.S. prescription prices are 256 times higher than 32 countries combined. 

Specialty drugs are a primary driver of these rising prescription costs. According to AARP, the “average specialty drug price reached $84,442 annually in 2020, rising more than three times faster than the prices of other goods and services.” With “the cost for one specialty medication used on a chronic basis [now being] three times the average annual income for someone on Medicare,” states AARP’s executive vice-president and chief public policy officer, “[t]hese enormous price tags are driving prescription medications out of reach for many older adults, forcing them to choose between the medicines they need and other essentials like rent and food.”

Experts project that drug prices will continue to rise over the next decade at staggering rates, especially with the continued development of new specialty drugs. Currently, specialty drugs account for 53 percent of all prescription spending, driven by oncology and autoimmune drug therapies.

Looking ahead, drug prices are projected to “reach $380-400 billion in 2025, up from $359 billion in 2020.” Further, “[n]ew brand launches are expected to continue at record levels, and the 50-55 new active substances to be launched per year will contribute to about $133 billion in spending growth through 2025, slightly higher than the past five years.”

As a self-insured employer, a third-party administrator (TPA), or a pharmacy benefits manager (PBM), limiting costs is challenging, especially with such huge price increases. In this article, we’re going to explore specialty drug costs – the fastest-growing segment of pharmacy spend – and who these high costs hurt the most.

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What Is Considered a Specialty Drug?

Drug formularies are segmented into tiers. For example, tier 1 includes generic drugs, typically the lowest cost. Tier 2 includes preferred named brand drugs, while Tier 3 includes non-preferred named brand drugs. It’s when we get to the top tier – and the most expensive tier – that specialty drug formularies appear. 

Although there’s no standard definition of specialty drugs (or specialty tier drugs), IQVIA and the Congressional Budget Office (CBO), specialty medications must treat a complex, chronic, or rare disease. Additionally, the drug must have at least four of the following seven characteristics:

  • Be high cost 
  • Be prescribed by a specialist
  • Be administered by a healthcare professional
  • Require special handling, such as refrigeration
  • Be paid for in part by a patient payment-assistance program
  • Be distributed a specialty pharmacy
  • Require monitoring or counseling 

The Centers for Medicare & Medicaid Services places medicines on the specialty tier if they cost more than $670 for a 30-day fill

Why Are Specialty Drugs So Expensive?

Numerous reasons exist for specialty drugs’ high prices. For example, manufacturing them is typically a complicated process. Additionally, they often require special handling, monitoring, and administration.

Let’s look at three specific reasons why specialty drugs are so expensive:

  • The research and development (R&D) costs of complex drugs are high, causing manufacturers to price these drugs to recoup part of their R&D investment. For example, according to the Congressional Budget Office (CBO), the pharmaceutical industry spent $83 billion in 2019, about 10 times that in the 1980s. These R&D costs are further magnified by the small population taking specialty drugs, causing R&D costs to stretch across fewer patients instead of R&D for more common drugs, stretching across larger patient populations.
  • Rarely do specialty drugs have a generic option available. Not only does this limit patients’ choices, but it limits market competition for that drug, keeping the specialty drug exclusive. According to a 2019 study, many brand-named specialty drugs will lose their exclusivity over the next few years as more generics and biosimilars are created.
  • Finally, plan sponsors are trying to reduce their pharmacy spend in their group health plans, often transferring much of specialty drug costs to the employee through coinsurance, making these drugs more costly in the hands of the patient.

How Do Specialty Drug Costs Impact Utilization?

The continuing development of innovative yet high-priced drugs “has intensified efforts by payers to manage use and spending and by pharmaceutical manufacturers to support patient access and sales. Payers are restricting drug formularies, requiring more stringent prior authorizations, and raising patient cost-sharing requirements,” as reflected in a 2021 study.

For example, as specialty drug costs increase, payers have restricted access to these drugs through prior authorizations and shifts in cost-sharing. These utilization management trends have cost the healthcare industry “approximately $93.3 billion in costs annually on implementing, contesting, and navigating utilization management.” Today, approximately one-third of large commercial payers impose restrictions for access to specialty drugs.”

And patients? They spend approximately $35.8 billion per year in cost-sharing caused by these increased utilization management trends.

Additionally, because of the shifts in cost-sharing and the high price of specialty drugs, not all patients take their prescriptions as prescribed. According to a 2021 study, 20 percent of prescriptions are abandoned and never filled, causing delays in treatment and potentially causing adverse health outcomes. According to the FDA, failure to take medications as prescribed can lead to increased health issues, hospitalization, or death. In fact, medication non-adherence can “account for up to 50% of treatment failures, around 125,000 deaths, and up to 25% of hospitalizations each year in the United States.”

Of course, that’s not to say that specialty medicines can’t positively contribute to utilization and outcomes. Specialty drugs reduce medical costs overall even if they are shifting costs to other players, such as patients. For example, if it would cost the insurer $500,000 over a patient’s lifetime to treat a disease that can be cured with a specialty drug, totaling $150,000 in lifetime costs, then everyone wins.

But things aren’t so clear-cut – especially in the healthcare industry.

Who Do Specialty Drug Costs Hurt?

High specialty drug costs can include a vast array of people, including those with lower household incomes, the disabled, employers, senior citizens, insurers, minorities, children, and the Medicaid and Medicare programs – to name a few. Let’s delve into three of these specific groups, seeing how high specialty drug costs impact them.

The Disabled

According to the advocacy group Protect Our Care, high prescription drug costs disproportionately hurt the more than 60 million Americans living with disabilities. With approximately 85 percent of disabled Medicaid recipients making less than $25,760, the high cost of specialty drugs is often out of reach. And, as we mentioned above, when drugs aren’t taken as prescribed, disabled individuals can see significant health impacts.

For example, for those individuals taking Humira for their rheumatoid arthritis, they’ve seen 27 price increases over the drug’s existence, making the drug one of the top ten most expensive popular name-brand drugs coming in at just over $9,000 monthly.

Senior Citizens

Senior citizens are also disproportionately impacted by the high cost of specialty drugs. Today, “[n]early 9 in 10 Americans over the age 65 take prescription medications, with many struggling with serious conditions such as diabetes, arthritis, and cancer.” Additionally, as many as 25 percent of seniors (or more than 10 million) struggle to afford their medications.

For example, the Kaiser Family Foundation recently found that half of all Medicare Part D drugs had average price increases of 3.5x the annual inflation rate for 2018 and 2019. Further, in January 2021, manufacturers increased prices on more than 830 drugs by an average of 4.6 percent, including 175 specialty medications.

Small Business Employers

Small business employers are another sector of the economy adversely affected by the high cost of specialty drugs. According to a 2021 national survey of over 1,000 small businesses, 89 percent of respondents stated healthcare is too expensive. Because of the high costs, nearly one in three small business owners providing health coverage have considered dropping it.

Moreover, more than 33 percent of small businesses providing health insurance have “changed or reduced their healthcare coverage as a result of their rising health costs,” and 15 percent “have reduced their workforce or laid off an employee as a result of their rising healthcare costs.”

When it comes to prescription drugs, “66% of small business owners surveyed say the current prescription drug market is not working and is in need of a major overhaul and 93% overall think the market needs changes.” Further, “82% say it’s time for the government to limit unjustified price increases to no more than inflation and 79% say lower drug prices will not hurt industry’s ability to develop new treatments and cures.”

How Can We Combat Specialty Drugs’ Rising Prices?

So, how can we address – and combat – these rising prices for specialty drugs? It will definitely take a concerted effort. However, it’s not an impossible task if you have the right tools.

One effective tool? Healthcare data analytics. For employers, for example, they can ensure that their employees are adhering to the prescription as written while avoiding prescription overfills through reviews of timely and actionable data.

Additionally, healthcare data analytics can help TPAs, PBMs, and employers find cost drivers and make drug formularies adjustments while helping to keep drugs accessible and affordable. By having the tools to track, measure, and address costly prescription spending, employers, TPAs, and PBMs can effectively minimize inefficient spending.

To help curb healthcare costs and increase adherence, make sure you have detailed, actionable data to help manage your pharmacy spend. With Xevant, you can identify trends in pricing and utilization, intervening with patient management solutions while saving you money. Whether you’re a PBM, TPA, or benefits manager, Xevant provides the data you need before you need it.

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Brandon Newman, CEO of Xevant


Brandon Newman, CEO of Xevant

"Brandon has a dynamic, 25-year leadership career spearheading several businesses with emphasis on growth, revenue, and sales performance. He has run many high-growth environments, including start-ups, turnarounds, and $1B+ dollar businesses. As a serial entrepreneur, he has a proven record of founding new businesses and advancing them through growth and acquisition, merger, or roll-up including ScripPoint, Veridian, and AviaraMD. He is the driving force for vision, new market strategy, revenue growth, technology development, and partner alliances."


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From the 2023 drug trend report

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