Hospital Specialty Pharmacy – follow the money!

Donald J. Pfundstein
Published on : 2021-07-16

Specialty pharmacy (sometimes, “SpRx”) is the business of providing usually expensive and sometimes scarce medicines to patients with complex and often chronic health conditions.  They are not the prescriptions you get filled at the corner pharmacy.  Hospitals, their specialty pharmacists, trade associations and consultants know specialty pharmacy is a financial juggernaut.  They prefer to speak in terms of patient safety as they pursue SpRx growth and seek to restrict or bar safe, lower cost competition.  However, let’s follow the rate of explosive growth in hospital owned specialty pharmacy and the resulting money.  Then, decide what you think is the real motivation in this SpRx arms race.

Special pharmacy is big business….and, real big money.  One advisor had previously predicted that by 2018 special pharmacy would represent forty percent (40%) to fifty percent (50%) of entire drug spending (depending on the report).  Another firm estimated that in 2020 specialty pharmacy would approximate $400 Billion Dollars.  Big money, even for healthcare.  Turning to New Hampshire, the November 2020 Cost Drivers in Healthcare Report, prepared by Gorman Actuarial, stated that at least forty-five percent (45%) of the entire drug spend in 2019 was specialty pharmacy and that specialty pharmacy trends (cost increases) significantly outpaced trends in non-specialty drugs.   At almost 20% of health insurance costs, we spend more on pharmacy than inpatient hospital services! Specialty pharmacy is an enormous and growing market.  One writer asserts that total pharmacy spending is the second largest category of spend in the entire economy behind only food and drink.  It’s a huge portion of the economy.   Specialty drugs represent approximately 1% of all prescriptions but 45% of the total pharmacy spend.

Due to the enormous numbers and rates of increases in SpRx, the incumbents’ (i.e., hospitals’) delivery of these drugs was the target of market disruptors which rolled out safe and lower cost specialty pharmacies that are nationally accredited by the same organizations lauded by the facility-owned SpRx providers.  Previously, SpRx had been an inpatient and more recently outpatient hospital service and significant revenue pool.  White and brown bagging, where specialty pharmacies ship medicines directly to the patient (brown bagging) or the health care provider (white bagging), developed precisely because the hospital/facility based delivery of these specialty medications had simply become too expensive with continuous “out of control” increases.  No incumbent likes disruption and disintermediation particularly that which threatens one of its most lucrative profit centers.

National hospital pharmacists’ survey data reportedly show that during 2015-2019, ownership of a specialty pharmacy by large hospitals increased from 44% to 89% of those hospitals.  In other words, according to Adam J. Fein’s (Ph. D. Wharton) review of the survey data, nine out of every ten large hospitals owned a specialty pharmacy by 2019.  The American Hospital Association is now lobbying to prohibit brown bagging and white bagging by independent, non- hospital owned specialty pharmacies purportedly based on patient safety concerns.  The local lobbying group is doing the same here in the granite state.  This hospital SpRx revenue stream has been significantly threatened by the growing number of home infusions which are done safely for several types of specialty drugs and at much lower cost than in the hospital.

URAC accreditation, a well-respected national seal of approval, is promoted by Dartmouth Hitchcock’s Specialty Pharmacy as evidence of its own specialty pharmacy’s “commitment to quality care…and better patient outcomes.”  (accessed June 11, 2021).   One non-profit’s work up of URAC data shows that out of over thirty million (30,000,000) specialty drugs dispensed and distributed by accredited special pharmacies during the review period, the zero error rate was 99.98% and 99.96%, respectively.  Again, the hospital lobby wants to ban white bagging and brown bagging by non-hospital-owned specialty pharmacies which are accredited by the exact same organization that accredited the hospitals’ specialty pharmacies.  The targets of the proposed ban, namely the independent specialty pharmacies, have in fact, in the words of the large local incumbent, also demonstrated through their identical form of accreditation “commitment to quality care ….and better patient outcomes.”  The only apparent difference then between these two types of specialty pharmacies is that one is generating substantial profits for the hospitals and the other is providing much needed competition that lowers costs for health care consumers and health insurance premium payors.

Turning again to New Hampshire, Upper Valley media reported on June 20, 2021 that Dartmouth Hitchcock Health’s financial improvement had “…been bolstered by the continued expansion of {its} contract and specialty pharmacy business….”   Similarly, on March 3, 2021 it was reported locally that federal stimulus payments “combined with growth in its contract and specialty pharmacy business, resulted in a $111.1 million increase in revenue…” over the prior year’s same 6 month period.  On August 28, 2020 local media also reported despite losses in 2020, total revenue and incoming money grew to $2.35 Billion Dollars thanks to $88.7 million in CARES funds and “growth in D-HH’s specialty pharmacy program…” citing a then current D-HH bond filing. According to a newspaper report of September 3, 2019 “…all areas of operating revenue have grown, especially D-H’s contract and specialty pharmacy business, which grew $61.8 million or 41.5% compared with 2018.” (All references to Valley News with date specified).

Interestingly, the increase in scope and frequency of lobbying on this issue and related public affairs activity by the trade associations on behalf of the incumbent health systems and providers seems closely correlated to growth of specialty pharmacy ownership by hospitals, accelerated by the disruption underway to correct the market extremes (i.e., absorbent prices) occasioned by hospitals’ Buy and Bill processes.  It is not an unusual response by incumbents, even those not solely legacy in their ways, to strike out against those with new ideas by trying to ban or restrict new entrants’ participation in the market.  Every day, you can find a story or two about some sector of the economy fighting over turf, revenue and margins.  Heck, you even get a politician in a consumer costume when polls tighten.  However, the true win for the consumer, which won’t need “the guy across the avenue’s thumb on the scale” (credit to my great grandmother, the butcher shop owner), is elimination of the excessive pricing which spurred the disruption.  Consumers must ask if there is a safe, lower cost alternative for their drugs than a hospital.  The answer is yes. The best course for the incumbents if they want to stay in the game?  Reverse the economic distortion and resulting damage and maybe you will disrupt the disruptor.

As a proud insurance lawyer/lobbyist I know…. thou not always saintly … but let’s not forget the providers know their way around the collection plate! The opinions and views in this article are solely those of the author.

Attorney Pfundstein is admitted in the state and federal courts of New Hampshire.

THIS ARTICLE IS NOT INTENDED TO PROVIDE LEGAL ADVICE, AND DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.