Express Scripts' Disruptive Specialty Strategy

The 2010 Drug Trend Report from Express Scripts (NASDAQ:ESRX) shows an eye-popping 19.6% increase in spending on specialty drugs. See Insights from the new Express Scripts Drug Trend Report.

The new trend report also sheds lights on how Express Scripts is trying to solve this problem for its plan sponsor clients.

As I see it, Express Scripts is ahead of its PBM peers with an innovative and risky strategy for absorbing the buy-and-bill specialty drug spending from health care providers. If successful, the company will become the clear leader in a big new addressable market for PBM services.

This strategy puts Express Scripts on a collision course with AmerisourceBergen (NYSE:ABC) and McKesson (NYSE:MCK) for control over specialty channels to physician offices and clinics. It also sets up a battle for control over specialty drugs with the hospital systems that are busy acquiring physician practices.

Put another way, Express Scripts is playing three-dimensional chess against sectors that are used to playing checkers. Biopharmaceutical manufacturers should pay close attention when designing contracting and commercialization strategies.

Read on for more details revealed in the 2010 Trend Report along with highlights of fascinating and previously-unpublished new data on specialty drug spending.

THE STRATEGY

Specialty drug trend is a big pain point for third-party payers. Express Scripts launched Specialty Benefit Services late last year with the not-so-modest goal of combining PBM and specialty pharmacy services with management of specialty drugs covered under the medical benefit. Eagle-eyed readers will note that this strategy was previewed in their 2009 Drug Trend report.

So, what is Express Scripts up to? The answers are hidden in plain sight on page 18 of the 2010 Drug Trend report:

“Historically, PBMs have offered only specialty pharmacy distribution channels and benefit management services. Express Scripts has now added a vital third component – management of specialty medications billed under the medical benefit – through our long held subsidiary, Care Continuum™. As a result, Express Scripts is able to offer plan sponsors savings guarantees on specialty medical drug spend and enhanced comprehensive member care throughout the entire pharmacy – medical spectrum.”

The report is alluding to the fact that specialty pharmaceutical utilization is split between the pharmacy benefit and the medical benefit “buy-and-bill” world of physician and provider locations. Here are three brief background articles from Drug Channels that will help you to make sense of Express Scripts strategy:

• Specialty Drugs: The Medical vs. Pharmacy Benefit Muddle
  
  
• Get Your Specialty Strategy Ready for the End of Buy-and-Bill
  
  
• Channel Strategy at the PBM-Wholesaler Intersection

Note that ESRX is the only one of the big three PBMs with its own distribution business for physician office and clinics—Curascript SD.

THE EVIDENCE

As far as I know, Express Scripts’ latest Drug Trend report provides the first publicly-available data on specialty drug utilization by coverage and therapy area. Here’s one of the incredibly fascinating exhibits from the section on pages 29-31:

On average, 55% of specialty drug spending is billed under a medical benefit, but the proportions vary widely across therapy classes.

THE OPPORTUNITY

Why does the exhibit above show an opportunity for Express Scripts' strategy?

• Out-of-pocket costs can vary dramatically between medical and pharmacy benefit. The 2010 ICORE Healthcare Medical Injectables & Oncology Trend Report (Figure 24) shows that 74% of covered member lives do NOT have parity across benefits in terms of member contribution. In other words, a beneficiary’s contribution is different depending on whether the drug is paid under the medical or pharmacy benefit. Say hello to channel surfing for maximum benefits and uncontrolled spend!
  
  
• Payers can’t get real-time visibility on specialty drug spending paid by a buy-and-bill medical benefit. Traditional utilization management is also difficult. Hence, we see payers such as United Healthcare combining clinical pathways with cost-plus drug reimbursement for physicians. See UnitedHealthcare: Cost-Plus for Cancer Drugs.
  
  
• Retrospective analysis of medical benefit spending is also hard given the use of HCPCS J codes, which contain much less information than the National Drug Code (NDC) from a pharmacy prescription. in response, payers are starting to shift medical benefit coverage to the pharmacy benefit. According to a 2010 Medco survey called Leading Trends in Rx Plan Management, 41% of plans have already taken this step. (The figure seems high to me.)

MY BOTTOM LINE

The battle for control over specialty drugs is just getting started.