The decline of the specialty pharmacy

FORTUNE -- When Elizabeth Purvis' son Tater was born last year with hemophilia, she had a wide range of pharmacies available to her through her pharmaceutical benefits manager (PBM), Express Scripts. Because the clotting medicine Tater takes to prevent excessive bleeding is rare and difficult to administer, she can't get it at her local pharmacy; it is only sold at so-called specialty pharmacies, which also offer nursing services. Two months later, Express Scripts dropped the pharmacy she chose, Coram, from its network, and sent her a letter with three choices. The first, "Hemophilia of the Sunshine State," was an out-of-state pharmacy she had never heard of. She later found out that it was owned by Express Scripts.

"They were pushing for all of us to use Express Scripts," says Purvis, who lobbied for a local alternative and eventually found a nearby provider that could bill Tricare, the health insurer for military families (her husband is in the Army). "The little branches are able to provide so much more for us," she explains, adding that she was apprehensive of depending on a large mail order operation based in another part of the country. "I didn't just want to be another number in Express Scripts' rolodex," she says.

Specialty drugs, which treat rare diseases such as hemophilia, cancer, and multiple sclerosis, are one of the fastest-growing--and most lucrative--areas of healthcare. Due to their small patient volume (there are about 20,000 hemophiliacs in the U.S., compared to some 37 million people with high cholesterol) and complex manufacturing requirements, specialty treatments can cost tens of thousands of dollars. According to the 2010 Drug Trend Report put out by Medco, one of the country's biggest PBMs, specialty drug prices climbed 14.7% last year, while regular brand-name drugs increased 9.2%.

Over the last decade, PBMs, which act as middlemen between retail pharmacies and employers or insurers, have started selling drugs, too; mostly through their massive mail order units, but also via their in-house specialty pharmacies. The big three companies--Express Scripts (ESRX, Fortune 500), CVS (CVS, Fortune 500) Caremark, and Medco (MHS, Fortune 500)--have all expanded their rare drug operations. When speaking about specialty drugs at a conference in June, Express Scripts CEO George Paz said: "This is going to be the growth driver."

Are PBM's steering customers away from speciality pharmacies?

Such pronouncements are worrisome to the owners of specialty pharmacies, who accuse the PBM industry of exploiting its position to capture more business. Russell Gay, the chairman of the Independent Specialty Pharmacy Coalition, says it is unfair that pharmaceutical benefits managers, who are supposed to evaluate drug transactions on behalf of payers, are also the ones executing those transactions. "How can you provide a check and balance against your own company?" he asks.

The shift has also affected clinics. Joe Pugliese, the head of the Hemophilia Alliance, a coalition of 83 federally funded, non-profit treatment centers, says the big PBMs have moved in recent months to shut out the centers from selling drugs, which he says they need to do to sustain their operations. "It is increasingly difficult for treatment centers to remain in network," he says.

Dr. Steven Miller, the chief medical officer at Express Scripts, says that, while it is true that PBMs sometimes direct patients to their own specialty pharmacies, they do so because it's in the best interests of customers and payers. "We're looking for pharmacies that have the clinical expertise to support our patients, and also the buying power and systems to keep costs appropriate," he says. "Many of the local specialty pharmacies can often match the safety factor...but often times they're still not competitive from a cost standpoint."

"The best confirmation is the marketplace," says Mark Merritt, the CEO of the Pharmaceutical Care Management Association, which represents PBMs. Merritt points out that payers are sophisticated buyers who hire consultants to evaluate the plans.

But the savings generated by PBMs can be murky, even to experienced payers, says Terri Bernacchi, an analyst at healthcare research firm IMS who previously directed Wisconsin's Blue Cross program. "Sometimes when mail order is promoted to a health plan, they don't understand the implications from a cost perspective," she says. "It's like a big algebra equation."

The new healthcare reform law calls for PBMs that participate in state insurance exchange to disclose detailed information on their pricing mechanisms and savings rates. The clause has become a battle ground issue for community pharmacists, who support it, and representatives of the PBM industry, who say it would hurt competition.

PBMs argue that they can cut costs because their networks are bigger and more efficient. Their specialty pharmacies also offer phone hotlines and contract with nurses who make home visits. But some specialty drug patients say that, given the nature of their illnesses, they need greater choice and personalized attention.

Purvis wasn't the only Express Scripts member who saw her options whittled down after Tricare altered its agreement with the PBM last year. Hemophiliac patients and parents around the country received similar letters, and many were forced to switch providers. Though Express Scripts later widened the network, some customers, like Tricare member Colleen Pascua, still say their choices are insufficient.

Pascua, whose nine year old son has hemophilia and receives injections through a catheter embedded in his chest, lives in Redding, Calif., a rural town that is about two and a half hours away from Sacramento. When her son outgrows his catheter, she says, she will need the help of a nurse to inject medicine directly into his veins. But the only nurse in her area works for Accredo, which is owned by Express Scripts rival Medco and is not on her list of in-network providers.

Express Scripts says it accepts out-of-network requests, but doing so would require Pascua to pay a steep co-payment on a drug that she says costs some $20,000 a month. A spokesman for Express Scripts wrote in an email: "In the tough economic climate, some of our clients are having to make difficult decisions, including restricting their networks." Tricare, Pascua's insurance plan, did not immediately respond to requests for comment.

Pascua is skeptical of the PBM's motives for changing her options. "They're funneling all of these specialty patients because they want their business," she says. "It's a fox in the henhouse. They want to wipe out their competition."