What Employers Should Know about Specialty Drug Costs

One of the toughest challenges businesses face today is the skyrocketing cost of their members’ medications. One of the heftiest line items? Specialty drugs.

Generally speaking, specialty drugs are high-cost, high-complexity medications that make up a growing share of pharmacy benefits budgets. Some estimates show they now account for over 50% of pharmacy spending, despite making up a tiny fraction of claims. 

While this broad category of medications does drive spending for plans, there is technically no single, universally accepted definition for specialty drugs. Legacy pharmacy benefit managers (PBMs) take advantage of this uncertainty and have shifted the narrative around speciality medications to suit their own interests—which is extremely problematic for businesses who work with them and their members.

However, modern PBMs are rethinking how specialty medications are defined and managed for good—by moving away from restrictive tactics and toward transparency, patient-centric care, and cost-effective solutions. 

Let’s explore which medications fall into the ‘specialty drug’ category, how legacy and modern PBMs treat these drugs, and what a more innovative, sustainable approach to specialty drugs can look like for plans.

What are Specialty Drugs?

Specialty drugs are a class of pharmaceuticals that are typically high-cost, used to treat complex or rare conditions, and may require special handling, administration, or patient monitoring. These drugs may include biologics, which are medications derived from living cells and are often administered via injection or infusion. They typically treat serious, chronic conditions such as multiple sclerosis (MS), rheumatoid arthritis, certain cancers, and HIV.

The financial impact of specialty drugs is staggering. The specialty pharmaceutical market grew significantly in recent years and is projected to continue its rapid expansion. In 2024, the market was valued at nearly $130 billion and is expected to reach over $965 billion by 2030. This growth is driven by the increasing number of novel drugs in development, with specialty drugs representing a significant portion of the total drug pipeline. At the same time, because specialty drugs may treat rare diseases, there isn’t as much competition in the space due to the small number of total utilizations—which in turn leads to high costs for the entire specialty category.

How Legacy PBMs Treat Specialty Drugs

There isn’t a singular medical definition of ‘specialty drugs’. That means that legacy PBMs can throw any medication they want into a ‘specialty’ tier and then restrict access to their owned specialty pharmacies. These restrictive policies end up passing significant costs onto plans and members due to misaligned incentives with legacy PBMs

A key tactic used by legacy PBMs is to require patients to obtain these "rare" drugs from a specialty pharmacy (often their owned one). This is a gate-keeping strategy designed to control the flow of prescriptions and limit competition. 

Many of the largest PBMs are vertically integrated, meaning they own their own specialty pharmacies. By steering patients to these “in-house” pharmacies, they can set their drug prices, create a captive audience and can maximize their own profits, often at the expense of the employer and the patient. This model also leads to limited access to certain medications and an overall lack of transparency, which ends up hurting plans and members.

The Federal Trade Commission found that some of the largest legacy PBMs, referred to as the Big 3, have padded their margins by over $7.3 billion with markups for specialty drugs. On top of that, the Big 3 PBMs also have their own private labels on biosimilars and now manufacture their own products, which further deepens their vertical integration and allows them to manipulate the entire supply chain at the expense of employers and patients.

What’s more, legacy PBMs are not executional in nature. This means that even for lower-cost specialty biosimilar alternatives, the legacy PBM will simply identify multiple different drugs and their prices, but not necessarily actively ensure the most cost-effective drug is the one that’s ultimately filled by the patient. 

How Modern PBMs Treat Specialty Drugs

In contrast, modern PBMs are challenging the traditional model by focusing on patient outcomes and real cost savings. While they recognize the high cost and complexity of these medications, their approach to management is fundamentally different.

A key strategy is to leverage biosimilars and generic products. A biosimilar is a biologic medical product that is highly similar to an FDA-approved original product. They offer no clinical difference in safety and effectiveness as the original product but at a much lower cost. Modern PBMs can promote the use of biosimilars, such as those for autoimmune conditions. This approach not only lowers costs but also improves patient access and convenience. In the case of specialty drugs that don’t have biosimilars, such as medications for HIV, MS, and oncology, a modern PBM like SmithRx can source these through non-specialty avenues for savings. 

At SmithRx, we believe in leveraging specialty medications for good. That means fewer prior authorizations (PAs) for many specialty drugs, less pharmacy restrictions, and a focus on getting the best net price for the client and member. In fact, we’ve removed prior authorizations for our preferred autoimmune and MS products to promote easier access for our members. To secure the best price for our members and clients we partner with Mark Cuban’s Cost Plus Drugs to offer low-cost generic drugs for many specialty products.

Unlike vertically integrated legacy PBMs, SmithRx isn’t invested in other parts of the pharmacy supply chain. We don’t own insurance organizations or pharmacies—we partner with the best partners available. Given that we don't own a pharmacy, SmithRx can instead shop for the best price for these very high cost products and then execute to move the member to the most cost-effective option. We even stand out among modern PBMs in that we’ve built our pharmacy network from the ground up and own it 100%. This true ownership of our network allows us to build partnerships with the best pharmacies available to patients.

In addition, we use a transparent, pass-through model, so employers pay what the pharmacy is paid and receive 100% of the rebates. This approach aligns our incentives with our clients, ensuring that we are always working to secure the lowest possible cost while delivering high-quality care.

5 Ways to Manage High Specialty Drug Costs

Here are some of the top ways a modern PBM can help manage high specialty drug costs and take control of your pharmacy benefits:

• Specialty Drug Tiers: Implementing separate tiers for specialty drugs within your formulary can help manage costs by encouraging the use of lower-cost alternatives, such as generics or biosimilars, when available.

• Driving to the Lowest-Cost Biosimilars and Generic Products: Although biosimilars and generics provide no clinical difference in terms of efficacy and safety to the reference or brand products, they don't all cost the same. Work with a modern PBM that will drive to the lowest net cost products

• State Caps on Out-of-Pocket Costs: Several states have implemented caps on a patient's out-of-pocket costs for specialty drugs. This can help prevent financial barriers that may lead to non-adherence, but it's important to understand how these laws affect your plan design.

• Assistance Programs: Employers can leverage patient assistance programs offered by manufacturers to help employees with the high cost of their specialty medications, such as patient assistance programs and copay cards.

• Pharmacy Optimization: A modern PBM that isn’t constrained by vertical integration and pharmacy ownership can leverage their pharmacy network to optimize for the pharmacy offering the best price for the specialty product.

The landscape of pharmacy benefits is complex, but employers have more power than they might think to control costs and improve care for their employees. The rising expense of specialty drugs is a significant challenge, but by understanding the different approaches of PBMs, you can make informed decisions.

To get started on your journey to a more transparent and cost-effective pharmacy benefit plan, contact SmithRx today to learn how we can help your business thrive.