Donald J. Pfundstein
Published on : 2022-12-12

Specialty Prescription Drugs – These drugs are the very expensive medications that treat complex, chronic, or rare conditions (such as cancer, multiple sclerosis, rheumatoid arthritis, etc.)   They commonly have special handling and patient-administration requirements.  The price of a specialty drug can range from thousands to tens of thousands of dollars per treatment regimen.  In New Hampshire, the October 2022 Cost Drivers in Healthcare Report, prepared by Gorman Actuarial, found that specialty drugs represented fifty-five percent of the entire retail pharmacy drug spend in 2021.  (The high cost specialty drugs that are administered by providers in clinical settings are not included in this statistic.) Additionally, specialty prescription drug cost trends (increases) significantly outpaced trends in non-specialty drugs.  Specialty drugs are an enormous and growing market.

Physician/hospital Administered Specialty Drugs –  These drugs cannot be administered by the patient alone or with the assistance of a care giver. They are typically infused or injected by a healthcare provider in a physician’s office, clinic, infusion center or hospital setting.  Traditionally physician/hospital administered specialty drugs have been purchased by the medical practice/hospital directly from wholesalers.  The drug cost is then marked up substantially by the provider /hospital and billed to the health insurer or other payer in addition to the separate charge billed for administering the drug to the patient.  Several recent studies have demonstrated that this “Buy and Bill” revenue method of providing specialty drugs has resulted in average mark ups of 200-400% nationwide.  More alarming is the finding that hospitals participating in the federal 340B Program[1] charge on average nearly 400% of the cost for a patient’s cancer treating specialty drugs.[2]

Brown, White & Clear Bagging – The continuing escalating costs for physician/hospital administered specialty drugs and the growing patient need for affordable, life sustaining medicines sparked innovative disruption of the traditional “Buy & Bill” revenue model.   The market disruptors rolled out safe and lower cost non-hospital specialty pharmacies that are nationally accredited by the same organizations lauded by the hospital-owned specialty pharmacies.  Previously, specialty drugs 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 or the health care provider, developed precisely because the hospital/facility based delivery of these specialty medications had simply become too expensive with continuous out of control increases.

“Brown Bagging” – The practice of a non-hospital specialty pharmacy providing specialty drugs directly to the patient who in turn brings them to the health care provider to be administered is known as “brown bagging”.  The physician/hospital only bills for the service of administering the specialty drug to the patient, not for both the drug (which it didn’t buy) and administering it as in the traditional “Buy & Bill” revenue model. The patient gets the required medication therapy in a safe and secure manner at substantial savings for the family, employer and commercial or government insurer/payer.  The physician/hospital gets reimbursed for its service of administering the drug.  As with many entrenched incumbents faced with disrupted revenue models, the hospitals have organized politically to defend the “Buy & Bill” revenue model in an effort to retain their enormous profit margins.  No incumbent likes disruption and disintermediation, particularly that which threatens one of its most lucrative profit centers.  However, such disruption is imperative if there is any hope of bending the cost curve on specialty drugs and improving affordability for patients, employers, and taxpayers.

“White Bagging” – The practice of a non-hospital specialty pharmacy delivering a patient’s specialty drugs directly to the hospital, infusion center or other medical facility is known as “white bagging”.   The facility appropriately stores the medicine until the patient’s appointment, during which the hospital or other facility administers the drug and bills the insurer or other payer for the administration service but not for the drug which was furnished by the independent specialty pharmacy.  As with “brown bagging”, the medication is administered in a safe and secure manner at substantial savings due to elimination of the hospital’s huge mark up.

“Clear Bagging” – Hospitals have reported rapidly growing, substantial revenue streams from owning and operating a specialty pharmacy.  When used on site or transported to one of its facilities, the physician/hospital’s provision of specialty drugs is sometimes referred to as “clear bagging”.  However, there are no savings to the patient, insurer or government payer from “clear bagging”.  The hospital-owned specialty pharmacy marks up, bills and receives reimbursement for the drug and the hospital bills and receives reimbursement for administering the marked-up drug which its owned pharmacy provided.

This Guide provides only a simple overview of some specialty pharmacy issues to introduce the unfamiliar reader to the subject.  Hopefully, it is useful for the intended purpose.  Evolving specialty pharmacy is critically important to our health and to treat complex and chronic diseases.  It is enormously expensive and growing rapidly.

This Guide was prepared by Donald J. Pfundstein, Esq. who is fond of saying he proudly practices as an insurance industry lawyer/ lobbyist although the information and views here are solely his own except as otherwise specifically noted.


[1] The 340B Program was created by Congress to assist low income citizens but has turned into a revenue stream enhancement tool and cost shifting accelerant.  The program has been the subject of much debate, litigation, agency disputes and is in need of substantial reform.

[2]A 2018 study by The Moran Company, Hospital Charges and Reimbursement for Medicines: Analysis of Cost-to-Charge Rations for Medicines, found “that, on average, hospitals charge 479% of their cost for drugs nationwide.”  The study goes on to report that “Most hospitals (83%) charge patients and insurers more than double their acquisition cost for medicine, marking-up the medicines 200% or more. The majority of hospitals (53%) markup medicines between 200-400%, on average.  A small share of hospitals – one in six (17%) – charge seven times the price of the medicine… One out of every twelve hospitals (8%) has average charge markups greater than 1000%.”

As noted recently by the Journal of the American Medical Association (JAMA), under the Buy-and-Bill practice, “physicians and hospitals face limited incentives to mitigate spending.”  

Hospitals participating in the 340B drug discount program price oncology drugs at an average of 3.8 times their 340B acquisition costs, according to a report by Moto Bioadvisors for the Community Oncology Alliance, Examining Hospital Price Transparency, Drug Profits, & the 340B Program, published Sept. 14, 2021.  The team found of 59 cancer drugs studied, the lowest median markup was 2.4 times the 340B acquisition cost (Adcetris), and the highest was 11 times (Epogen) (pp. 8-9).   They also found 340B hospitals don’t decrease the prices they charge insurers or patients when their acquisition prices decline, which nullifies efforts to reduce prices at the drugmaker (sic) level. “Obviously problematic” was the observation that 340B hospitals often charge their cash-paying customers (or, uninsured) the same as the median price for commercial insurers……400% of cost!  (p. 14.)

Earlier this year, Adam Fein, PhD of Drug Channels noted …”Hospital-owned pharmacies are able to generate significant profits by participating directly in the 340B Drug Pricing Program. In response to changes in manufacturers’ policies regarding external contract pharmacies, hospitals have accelerated their investments in in-house specialty pharmacy operations.”  

Specialty pharmacies are big businesses.  They can be found  vertically integrated with insurers and PBMs on the one side and combined with the hospitals and health systems on the other end of the spectrum.


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