Excluding or Carving-Out Specialty Drugs: What Employers Need to Know

Top Three Things You’ll Learn:

  1. Key differences between excluding and carving-out specialty medications
  2. The role of drug coverage and needs-based funding in a specialty carve-out
  3. Why it’s important to do the math before deciding to carve-out specialty


Specialty drugs for members with chronic and complex conditions can cost thousands or even hundreds of thousands of dollars annually. These drugs often treat or cure members with conditions ranging from common and debilitating to rare and life-threatening to substantially improve the quality and length of their lives. However, these drugs account for a disproportionate share of plan costs.  On average, one to two percent of members are responsible for roughly half of total prescription plan costs or more.  If your clients haven’t experienced this yet, they are likely to at some point in the future.

Finding ways to address the growing impact of specialty medications on employer healthcare costs has become top of mind for benefits advisors. Despite proven successes with utilizing an independent prior authorization program and a variable copay and/or accumulator protection programs, additional strategies are being increasingly explored in the market: fully or partially carving-out specialty medications or excluding specialty drugs from the pharmacy benefit.

One of these approaches may appear to be a good option for employers, but the decision carries significant weight and deserves careful consideration. The savings potential and member experience for each of these solutions will be different based on the specific drug utilization, and it’s important that you fully analyze these options before making a final decision to implement.

Understanding the Difference

Excluding specialty: When specialty medication is excluded from the covered benefit, the member is completely on their own to cover the expenses for their specialty medications.

  • The PBM system is coded to reject claims as not covered.
  • Drug discounts are not applied.
  • No payment solution exists for any of the products not covered.
  • No ability to request an exception or medical necessity, or override the PBM system, even if the employer approves and asks for it to be covered for this member.
  • If employers choose to exclude some drugs, a custom exclusion list is needed and requires custom coding, drug list maintenance, reports, and support for overrides.
  • Impacts member access to needed medications and potential legal concerns about excluding drugs based on cost or specific disease state.
  • There is no consideration for the medical channel, i.e., will specialty medications be blocked from medical coverage.

Full or partial carve-out of specialty: In a partial carve-out, there are two specialty benefits  – one for some medications and one for everything else. Processes relative to specialty drug prior authorization and coverage rules may run separately from the primary PBM’s systems and processes in the case of a partial specialty carve-out approach.

  • Drugs under consideration are an excluded benefit from the PBM perspective.
  • Some medications may find their way onto the medical channel
  • The primary PBM formulary, or list of covered specialty drugs, may not apply.
  • Affects network rates, rebates, and other cost-savings programs in place with the PBM.
  • Coverage is not guaranteed for all products, requiring employers to maintain a specialty benefit for out-of-scope products and members that do not qualify.
  • If accessing patient assistance programs, converting members over to fully covered products by a charitable program can vary dramatically, depending on the employer’s member demographics and population taking the covered specialty drugs.
  • Access into a patient assistance program is subject to the utilizing member’s income and the availability of needs-based funding.
  • If access patient assistance programs, program administration requires active participation from the employer’s HR team.
  • For those partial carve-outs utilizing patient assistance programs, there is a potential to negatively impact member experience:
    • Funding and medication availability are not always guaranteed
    • Poor coordination of care between specialty and traditional medications
    • Potential employee turnover as they seek coverage elsewhere
  • Can impact prior authorization process and reporting if the vendor handling partial carve out is also the entity reviewing for medical necessity.
  • Can have a significant impact on existing rebates for non-specialty medications and specialty medications remaining under the primary PBM benefit.
  • If patient assistance programs are being utilized, 100% of the costs may not disappear, but the plan pays a fee that can approach 20%-30% of the cost of the medication without discounts or rebates.
  • Misaligned vendor revenue models and lack of clinical oversight may result increased specialty utilization.
  • If accessing patient assistance funds, there can be a lag in qualification of the member for which the plan must provide ‘bridge’ funding, which may lead to compliance issues. In some cases, bridge funding is supplied from a Medical Expense Reimbursement Program (MERP), which may lead to further plan scrutiny.
  • If accessing patient assistance programs, compliance issues may be present:
    • If available on an HDHP and a member accesses and a plan is charged a shared savings ‘fee,’ the plan could be in violation of ‘1st dollar coverage.’ This would also occur in the bridge funding scenario.
    • If available on a PPO and a member accesses without paying a copay, this could be considered a ‘Cadillac’ plan.

Full carve-out of specialty: When specialty drugs are fully carved-out from the traditional pharmacy benefit, there is a covered benefit of all specialty drugs administered by a third-party vendor. Many of the same risks listed previously may exist in the event patient assistance dollars are utilized. However, a few notable differences may be present:

  • Coverage may be guaranteed for all specialty products
  • Will have a more stringent prior authorization process than the PBM which may offset any contract losses
  • May have a separate rebate contract from the primary PBM that may offset any contract losses
  • May utilize copay optimization programs in a similar manner as the PBM
Check out our free eBook, Understanding Alternative Funding, to know when alternative funding makes sense.

Examining the Details

Specialty carve-out programs often speak to how simple it is to exclude specialty drugs from the pharmacy benefits coverage and may give the impression that they cover all specialty medications without a cost to employer or member. However, the reality can be vastly different depending on the employer’s existing pharmacy benefits contract, specialty drug mix and utilization, member demographic composition, presence of a patient assistance program component, and fee structure imposed by the 3rd party vendor.

Consider these factors as you guide your clients through the discussion:

  • Drug coverage limitations: Many of the specialty carve-out programs on the market have a limited formulary that addresses 300 or fewer medications, compared to as many as 1,300 specialty medications covered by PBMs. What amount of coverage exists will determine whether a partial or full carve out can be attained without member abrasion or operational inefficiencies.
  • Access to needs-based funding: Needs-based funds come from financial assistance provided by a drug manufacturer, a disease-specific foundation, and other sources to help uninsured/underinsured consumers pay for specialty medications. These programs vary in eligibility requirements and amounts. Access can be limited for highly compensated employees, individuals with access to an employer sponsored benefit, or those who have previously received funding. As more employers pursue needs-based funding for their members, competition for these dollars will increase. Additionally, the mechanism through which these dollars are attained should be vetted – are members purposefully placed into an uninsured or underinsured situation to access these funds? This would be analogous to a plan stating you are covered, unless you are not and then we’ll cover you in certain circumstances under a custom benefit.
  • Custom benefit administration: Members who cannot obtain alternative funding (in part or in total) will need the employer to grant exceptions to allow for coverage through the traditional prescription benefit anytime the member changes medications or dosage. This is more typical of the partial carve out scenario. These overrides require manual coordination between the carve-out vendor, the employer, and PBM to administer. Lists for exclusion also will need to be maintained throughout the year as new specialty drugs enter the market. Typical PBM benefit change requests can take up to 60 days, leaving a drug potentially eligible for dispensing during that time. Additionally, a custom benefit administration challenges the concept of a consistent application of benefits and should be evaluated by the employer’s legal team.
  • Impact on rates, rebates, and savings: Any promise of cost-savings must be tempered against all fees and loss of contract value. Changes to the pharmacy benefit arrangement with the PBM will the impact the plan’s pharmacy network rates and drug rebates, prior authorization approval rates and savings, costs associated with non-targeted medications, and short-term versus maintenance therapies. Is the gap closed or exceeded with a partial or full carve out relationship?

When considering the value of excluding specialty and/or specialty carve-out for your clients, make sure you understand the details of the true problem they wish to solve. Why are they considering either of these options? What results are they trying to achieve? The details matter, so it’s important to do the math and analyze the impact of specialty carve-out benefits against the impact on the member experience, especially in industries facing worker shortages.

An effective specialty drug management approach requires a system of high-touch utilization management that most PBMs are not equipped to do. This management is critical to preventing waste in this category, by closely managing upfront drug, dose, and site selection, as well as monitoring adherence and response. A trusted, independent pharmacy benefits partner can help evaluate these options for your clients, if needed.

Learn about the medications and conditions driving specialty drug spend in 2022.


Originally published on: March 23, 2021  |  Updated on: August 11, 2022

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