Based on the how biotechnology drugs are administered to patients and reimbursed by health insurance companies, the drugs are classified as medical benefit and pharmacy benefit drugs. Generally, medical benefit drugs are administered by injection or infusion. Pharmacy benefit drugs are oral medications.
Health insurance companies reimburse medical facilities for the injection or infusion service and include the cost of the medical benefit drug. Pharmacy benefit drugs, on the other hand, are reimbursed separately by health insurance companies.
In the United States, healthcare providers are reimbursed mainly by health insurance companies such as Aetna, Cigna, and Humana. Health insurance companies provide reimbursement for a list of predetermined medical services and drugs in exchange for premiums or fixed payments from the claim sponsors.
Medical benefit drugs
About half of all biotechnology drugs belong to the medical benefit category. Specialty distributors, which are either independent or part of a full line wholesaler, purchase these drugs from biotechnology companies (IBB) such as Amgen (AMGN), Biogen (BIIB), Celgene (CELG), and Regeneron (REGN). Then they supply them to hospitals and retail chains.
The drugs are purchased based on a price called wholesale acquisition cost (or WAC). WAC is a manufacturer’s list price for the drug sold to a wholesaler or direct retailer, but it doesn’t include discounts offered by the manufacturer to the wholesaler. Specialty pharmacies then sell these drugs to hospital pharmacies and other retail distributors that can dispense biotechnology drugs.
Pharmacy benefit drugs
In the case of pharmacy benefit drugs, an additional intermediary called a pharmacy benefit manager (or PBM) is involved in the distribution process, mainly to reduce the cost of drugs. Although PBMs perform several other functions, they play a major role in the drug distribution model.
PBMs such as Express Scripts and Cardinal Health are involved in designing the benefit structure and contracting with drug manufacturers on behalf of health insurance companies. Benefit structure involves a list of drugs and the proportion of their price that will be reimbursed by the health insurer. Costlier drugs are given lower preference, as the health insurer covers a smaller part of the price of the drug. To further reduce healthcare costs, PBMs operate Internet pharmacies and supply drugs to people suffering with chronic ailments.