Pharmacy vs. medical benefit

Specialty Pharmacy Section

In 2014, the U.S. drug expenditure was $373.9 billion—the greatest outlay to date—with FDA approving a record-high 44 new medications.1 Of these newly approved drugs, 14 will be covered, mostly under the medical benefit.1

Sixteen (35%) of the drugs approved last year were biologics, 2 were for the treatment of hepatitis C virus, and 8 were cancer medications.1 In addition, a record 18 of the newly approved medications were orphan drugs (used to treat patient populations of fewer than 200,000), with 9 of these qualifying as ultra-orphan drugs (for the treatment of patient populations fewer than 10,000).2

Specialty drugs can be covered under the pharmacy benefit, the medical benefit, or both depending on the benefit design of the payer. The medical benefit specialty drug pipeline is very robust with near-term (2016) oncology agents. Also in this pipeline are medications for hemophilia (which have an extended half-life), muscular dystrophy therapies, and drugs for rare diseases, all of which lend to coverage under the medical benefit.3

In addition, the specialty drugs that are receiving approvals or are in the pipeline are highly effective from a cure rate (hepatitis) or remission rate (cancer) perspective. However, the cost of these drugs remains high, with a 12-week course for hepatitis ranging from $85,000 to $95,000 and orphan drugs for rare chronic diseases costing up to $750,000 per year.4

Payers have been working with their pharmacy benefit managers (PBMs) and specialty pharmacies for more than 10 years to develop and implement programs that provide clinical services to patients who need these medications, as well as management initiatives to assist in controlling costs. Specialty pharmacies establish therapy-specific clinical protocols to ensure that patients are compliant and persistent and to counsel patients on adverse effect management, which is common for these therapies. In addition, specialty pharmacies work with their clients to adopt such cost-controlling management techniques as prior authorizations, preferred products or step therapy, utilization management, and member cost share initiatives.

Specialty drugs that are covered under the pharmacy benefit use national drug codes (NDCs) for billing. These codes provide comprehensive information that identifies the drug, dosage, and package size (number of units). Moreover, NDCs are assigned to a drug when it receives FDA approval. As a result, all of the information needed for both clinical and financial management of the drug/therapy is available.

However, some of these drugs may be covered under the medical benefit; on average, up to 50% of specialty drugs are covered under medical.4  Visibility of these drugs is limited as a result of coding and submission via paper claims rather than electronic submission via the PBM. Medical benefit drugs are coded by J-codes per the Healthcare Common Procedure Coding System. A J-code identifies the chemical name of the drug but is limited in that it does not identify the medication manufacturer, strength, or package size. Other billing limitations of the J-code include the following:

  • Several different drugs may be represented by one J-code. 

  • J-codes do not specify drug quantity dispensed.
J-codes may not be assigned until up to 18 months after drugs are launched, forcing billing via an unclassified J-code.5

As a result of these limitations, drugs billed using J-codes under the medical benefit are missing necessary information to manage—either from a clinical or cost perspective. There are also additional costs associated with these medications, which require a clinician to administer or to teach the patient self-administration. These costs vary depending on the site of care and are not accounted for in the J-code billing process.

Based on the volume of medications covered under the medical benefit, the difficulty identifying these drugs under the medical benefit, and the associated costs, payers are increasingly collaborating with specialty pharmacies and PBMs to identify management solutions. Solutions vary by disease state but may include preferred products, case management, requiring NDC-level coding on claims, prior authorization, step edit requirements, clinical pathways, and site-of-care management. 
Despite challenges, a significant percentage of specialty drugs will continue to be covered under the medical benefit. An opportunity exists for specialty pharmacies to lead the way in identifying and implementing solutions for all stakeholders to assist in managing specialty drugs from both a clinical and cost-savings perspective.


  2. Medicines use and spending shifts: a review of the use of medicines in the U.S. in 2014

Forward-Looking Statements

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Industry and Market Data

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