Blog: The Challenge with Breaking into the Specialty Pharmacy Network

Blog Post No. 1 of 2

Jen Jagodzinski, Sr. Director Payor Access at Loopback Analytics

The Challenge with Breaking into the Specialty Pharmacy Network

I’ve spent a significant portion of my 20-year career working with payors helping them manage their pharmacy benefit.  While we had many conversations over the years about the value of medication therapy and keeping patients ‘well’ and out of the hospital, a good deal of time was spent dealing with the clients’ need to manage costs.  I was also the Director of Pharmacy for a health plan that was owned by a health system. During that time, I myself began to seek cost controls as I noticed large increases in costs for a small portion of my covered members. At the time, I issued a request for proposal for our specialty business and generated considerable savings from moving the specialty business from the pharmacy our members were using to a new pharmacy.  Additionally, if the bidders’ pharmacy was awarded ‘all’ of our specialty business, the plan could save even more money with improved discounts.  We decided to go with an exclusive specialty pharmacy provider because we could not afford to…sometime afterward, I received calls from the hospital pharmacy staff asking for me to approve overrides for them to dispense specialty medications for their patients.  I was told how they had overstock of a popular specialty medication – shipped by the specialty pharmacy – for several patients that never showed up for their infusion.  They couldn’t use the stock for another patient and barely had room to store the medication.  I remember conversations about oncology patients and how difficult it was to manage therapy initiation in a timely fashion.  I recall numerous examples of them bending my ear to ask for us to allow them to dispense – less waste, improved care and patient satisfaction was their mantra.

Over the last 15+ years, the explosion of specialty drugs, which now represent more than 50% of drug spend for roughly 2% of the population, has increased the financial pressure placed on employers and health plans. Payors have sought relief by leveraging industry players that can provide discounted pricing, and secondarily clinical value, resulting (hopefully) in overall cost savings or at least blunted drug trend.  The need for financial relief has driven an increase in the number of payors adopting pharmacy ‘lock-outs’.  To understand how the downward price pressure is exerted, one needs to also understand the business infrastructure that drives the selection of payor pharmacy benefits.

Today, the specialty pharmacy exclusivity problem continues to create difficulty for similar-minded health systems whose ideal patient care model includes the ability to dispense the medication locally to their own patients.  While legislation has been passed in many states to improve access to care and provide reimbursement protections for institutions, there continue to be challenges.  In this blog series, we seek to highlight the industry dynamics that make it difficult for health system pharmacies to provide dispensing and clinical drug management for their patients.



Industry Dynamics

Pharmacy Benefit Managers (PBMs)

Early on in my career at a large PBM, I recall a conversation with my sales counterparts about a quarterly client meeting they had just attended where the client (already contracted with the PBM) asked them, ‘What’s a PBM?”  The answer to this question has evolved over the years for certain, but the ultimate role of the PBM is to make drug purchasing simpler and more cost-effective for payors.  Traditionally, PBMs have demonstrated the ability to aggregate purchasing and dispensing of drugs across all pharmacy dispensing channels, negotiating discounts on behalf of payors while also providing clinical programs that are designed to ensure appropriate drug utilization and improved patient care. 

PBMs offer numerous clinical programs designed to drive appropriate use of medications from prior authorization, step therapy, quantity limits, and formulary drug coverage rules; some also offer care management programs for cross sections of patients with complex diseases.  PBMs employ healthcare practitioners to establish and operate these clinical programs and formulary rules.  With the development of formularies and preferencing rules, the PBM can negotiate with drug manufacturers in the form of a rebate, providing additional cost offsets to payors post-dispense.  While there is quite a bit of negative discussion around rebates and preferencing of drugs with a rebate, the reality is there are other market forces that dictate which drugs will be prescribed. The ‘gross to net’ bubble as it is commonly referred to is a bit of a misnomer.  Here is an example: let’s say a PBM made a formulary coverage rule that disadvantaged drug A $5,000 (with 80% market share) by placing it on a higher cost share tier than drug B (20% market share) $2,500 for a drug category where prescribers are not comfortable switching therapies.  After one year, the share of drug B grew to 23% and the share of drug A dropped to 77%.  The average cost per prescription for these drugs was $4,300 without the rebate on drug A.  If, however, they obtained a 35% rebate on drug A, the average cost per prescription for this therapy would be $3,200. Would you be a happy client?

The rebate challenge will need to be addressed if you are a health system pharmacy trying to gain access to a PBM network when you qualify for 340B.  Manufacturers do not want to pay a rebate to a PBM and grant a pharmacy 340B acquisition for the same claim. In order to ensure the payor is not disadvantaged, there will need to be some concession on reimbursement.  More on this in subsequent blog posts…

Pharmacy Consultants and Brokers

The number and scope of consultants that drive employee benefit selections has grown significantly over the last 15 years. They have created a market for themselves within the complex healthcare landscape by attempting to drive down health care costs and negotiate the drug purchasing process for payors/plan sponsors. They manage the pharmacy benefit bid process and are paid by the payors for whom they negotiate contracts typically in the form of a percentage of savings they generate with the bid.

Pharmacy benefit decisions are typically made using a ‘spreadsheet’ that compares pricing terms from various bidders.  Pricing guarantees have become the norm which has led to added complexity within pricing strategies and contract language. Over time, the bids have resulted in diminishing profitability for the PBMs through the demand that many clinical programs and services be available at zero cost, 100% of the rebate be passed through to payor, network transparency, market pricing checks be available, and continual increase in the drug discounts.  According to expert opinion, these groups have largely been responsible for the ‘commoditization’ of payor pharmacy benefits. While the concept of employing competitive market strategies to drive down the cost of the drug may appear reasonable, purchasing a drug is not the same as toothpaste and should not come down only to price.  The ‘spreadsheet approach’ has diminished the ability for PBMs to demonstrate the relative clinical value delivered by their programs and healthcare providers and to get credit for this value within the payor benefit decision making process and have come to rely heavily on the pharmacy dispensing volume.

What’s up with that pharmacy network access request I submitted last year?

I know this is difficult to hear, but PBMs with specialty pharmacies under their enterprise system are not very excited about the fact that a health system wants access to their network for reasons outlined above.  Payors may feel similarly because they lack responsibility for the pharmacy network administration and complexity of their contract terms.  So, while you may feel strongly about your pharmacy model’s ability to positively impact patient care while growing your revenue, you may need to offer flexibility in your contract terms.  Initially, this means addressing the pricing disparities.  As mentioned, when a payor’s contract with a specialty pharmacy is exclusive, there is a price differential tied to exclusivity.  Additionally, there are rebate disparities for pharmacies tied to 340B covered entities. The 340B claims from an eligible specialty pharmacy will cost the payor a rebate (assuming the manufacturer has a way to identify the PBM claims as 340B).  Health system pharmacies need to recognize that the payor will likely be evaluating these two areas and be prepared to accept reimbursement beyond the ‘standard’ network reimbursement terms.  If you are willing to agree to reimbursement discounts that cover the financial risks, this should open the door to a conversation where you can demonstrate the effectiveness of your business model.

Coming up…you’re interested in pursuing network relationships; how do you go about it?




Jen Jagodzinski, PharmD has spent her nearly 25-year career in managed healthcare. After completing a pharmacy residency in Managed Care at the University of Illinois – Chicago, she joined PCS Health Systems (which later became CVS Health) to assist health plan clients in managing their drug benefits.  Since then, she has held several leadership positions focused on payor strategies and product development including serving as the Director of Pharmacy for a regional health plan owned by a health system. She is excited to be a part of Loopback Analytics leveraging her background to help create value for health system clients.



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