Specialty drugs face industry shift to new distribution model

Co-authored by Alexis Ashman, Senior Consultant, Tech., Pricing, Contracting & Market Access and Anami Patel, Senior Associate, Pricing, Contracting & Market Access.

As the pharma/healthcare marketplace for specialty drugs such as cancer and immune treatments continues to grow, distribution channels are shifting in response. Traditional buy-and-bill distributors are beginning to be displaced by specialty pharmacies. Taking a closer look at this industry trend, we can explore the impact and challenges of these two distribution models.

Model 1: Buy-and-bill

In the traditional buy-and-bill method, physicians typically utilize specialty distributors rather than wholesalers for the purchase of specialty drugs. Because specialty distributors are able to provide more focused services to cater to the niche drug market, this model has some advantages.

In the buy-and-bill model, the burden of storing and maintaining drug inventory is placed on the physicians themselves. This burden can lead to increased administrative and facility costs on the physician to ensure drugs are not wasted, over-purchased, or under-purchased.

Offsetting the higher maintenance and up-front cost for drugs, is the opportunity for physicians to submit for higher reimbursements to payers. But this comes with the added risk of a claim being denied or paid at a lower than submitted amount.

With the buy-and-bill model, manufacturers also face challenges related to measuring contract performance and determining how to pay rebates to physicians. Since the physicians are contracting directly with the manufacturers, there is the possibility that manufacturers will have to maintain thousands of individual contracts, as opposed to group contracts when physicians contract within a GPO. A high volume of contracts will increase organizational requirements for costly sales field support. Being aware of this manufacturer challenge, physicians, in turn, are able to negotiate for higher rebate agreements.

Model 2: Specialty pharmacy

The specialty pharmacy landscape itself entails a variety of subtypes. Expanding on the three types of specialty pharmacy distribution methods discussed in the NIH article, “Distribution models for biologics and other specialty pharmaceutical products,” we see unique challenges for each method:

A. Brown bagging

With brown bagging, the patient is responsible for acquiring and transporting the drug, and as a result, the likelihood of improper storage and wastage increases. For instance, some patients will turn away the drug at the pharmacy pick-up upon receiving the invoice, or some patients don’t follow the special care instructions of the drugs (proper refrigeration). Consequently, the physician will discard the drug before it can ever be used. For safety reasons, many healthcare providers are starting to forbid physicians from administering specialty drugs that are transported by the patient.

B. White bagging

Hospitals and physicians are seeing a burden with white bagging; the method of delivery by which specialty drugs are dispensed by a specialty pharmacy (SP) for a specific patient. One main issue is the financial burden imposed on hospitals and physicians. There is no compensation received for the storing or handling of the drugs for the patient, even though there are costs incurred related to the responsibility and liability to ensure proper risk evaluation and mitigation and drug integrity. The patient may also face added financial burden as the coverage of specialty drugs shifts from the medical benefit to the pharmacy benefit plan, which may entail different coverage.

C. Specialty pharmacy provider (SPP)

When a physician drops out of a payer network that insists on a specific specialty pharmacy provider (SPP), it could lead to access issues for their patients. Manufacturers are seeing an increase in rejected lines when consumers are not using payer-preferred SPPs. This results in time lost for the patient to receive insurance reimbursement.

Trends in specialty drug distribution channels

By understanding the challenges faced within each specialty drug distribution method described, a few overall trends can be identified:

  • Although there is an influx in specialty pharmacies, the buy-and-bill process continues to dominate the oncology drug sector.
  • Physicians will also continue to follow the white bagging method for high-priced specialty drugs, as they are no longer responsible for handling the reimbursement, lessening their financial risk.
  • Although, buy-and-bill used to predominately be used by lower-cost physicians, there is a shift in this method being used by higher-cost outpatient facilities. Under an IDN (Integrated Delivery Network), patients are sent to whichever facilities will yield the highest reimbursement. For example; if there is no Medicare/Medicaid 340B pricing, the physicians will buy the drug; but if there is 340B pricing, the outpatient hospital facility will buy. As a result, in many areas, the 340B utilization rate is going up for high-priced drugs.
  • To offset hospitals being able to submit high reimbursements, many manufacturers charge a trace discount in order to maintain visibility to the flow of sales. In order to get chargebacks sent in, if the customer pays list price, the distributors will not submit chargebacks so that the manufacturers will offer a minimal few cent discount (trace discount) in order to receive chargebacks and ultimately see the resulting sales.
  • Brown bagging will continue to be a lesser-utilized distribution method due to the inherent safety and financial risks.
  • White bagging and SPPs will continue to have a growing presence in the specialty pharmacy industry. To combat the decreased visibility into drug spending, fee-for-service agreements with manufacturers will increase, allowing visibility to end location data and sales. Manufacturers tend to contract with a limited amount of specialty pharmacies so there are less companies to contract with to get data.
  • For payers, the shift to white bagging is a direct result of purchasing drugs at a lower cost, shifting the greater cost responsibility to the patient, and increasing visibility into drug spending.
  • Today, the industry is seeing considerable realignment of SP organizations that are being taken over by IDNs or larger wholesalers. IDNs are commonly acquiring SPPs or creating one of their own because of reimbursement issues. Specialty distributors exist for many wholesalers – for example, Cardinal Health has Cardinal Specialty, McKesson has McKesson Specialty, and Amerisource Bergen has Oncology Supply, Besse, and ASD. However, a few remain unattached to a wholesaler (Curascript, Metro, and Henry Schien).

The future of specialty drug distribution

Overall, the future state of specialty drug distribution depends on the type of drug and the means of administration. For example, if the drug must be in a vial, stored at a specific temperature, and administered by a physician; the buy-and-bill method will continue to dominate.

With more potential for new cures and treatment, more brand-name specialty drugs will enter the market, thus expanding the utilization and creation of specialty distributors. Each of the earlier-mentioned companies, whether IDNs or wholesalers, sees these specialty distributors as purchase points. Although chain pharmacies continue to be the biggest customer for distributors, hospitals and specialty pharmacies are starting to purchase more through distributors and will only continue to gain market share. Everybody wants a share of this expanding market.