The Medical versus the Pharmacy Benefit: An Overview

Explanation of the Medical versus the Pharmacy Benefit

Most patients with health insurance have both medical and pharmacy benefits. Services covered under the medical benefit include physician office visits, hospital stays, laboratory testing, surgery, and visits to the emergency room.

The pharmacy benefit covers outpatient prescription drugs typically dispensed through retail and specialty  pharmacies. In certain circumstances, outpatient prescription drugs administered by a physician are covered under the medical benefit. Which benefit such drugs are covered under depends on the plan’s design. In certain cases, plans may cover the same drug under both the medical and pharmacy benefits.

Drugs covered under the medical benefit may be administered at standalone physician offices, infusion centers, or a hospital outpatient department (HOPD).

Prescription Drug Coverage: Medical versus Pharmacy Benefit

Drugs that may be covered under either the medical or the pharmacy benefit are typically more expensive specialty medications used to treat complex conditions such as rheumatoid arthritis, multiple sclerosis, or cancer.

A 2022 report found that 65 percent of specialty medications are paid for under the pharmacy benefit (meaning just over one-third are paid for under the medical benefit), and that plan spending per beneficiary per year on specialty medications is $38,000 on average, compared with $492 for non-specialty medications.¹

Prescription Drug Claim Submission: Medical versus Pharmacy Benefit

The way in which claims are submitted and paid for prescription drugs is different under the medical versus the pharmacy benefit. Under the medical benefit, drugs are acquired by the provider and billed to the insurance company through a process often referred to as “buy and bill”; the provider separately bills the insurance company for the cost of administering the drug.² Drugs and their associated administration are billed to the insurer under Healthcare Common Procedure Coding System (HCPCS) codes utilized by all major payers, including Medicare, Medicaid, and commercial. HCPCS codes provide a standardized way of billing insurers for drugs and other services. Drug-related HCPCS codes often begin with the prefix “J” and may be
referred to as “JCODES.”

On the other hand, drugs covered under the pharmacy benefit are acquired by pharmacies and dispensed to patients either at brick-and-mortar locations or through the mail. The pharmacy then bills the patient’s health insurer/pharmacy benefit manager (PBM) for the cost of the drug plus a dispensing fee intended to cover the pharmacy’s overhead costs and patient services. Drugs covered under the pharmacy benefit are not billed using HCPCS codes. Rather, each drug is assigned a unique NDC (National Drug Code) used in pharmacy billing.

The product acquisition, dispensing, and claims processing under each benefit are depicted below in Figure 1:

Figure 1. Prescription Drug Product Acquisition, Dispensing and Claims Processing: Medical vs. Pharmacy Benefit

The cost of specialty drugs under the medical versus the pharmacy benefit

The amount that a payer reimburses for a specialty drug often differs between the medical and pharmacy benefit, as well as between Medicare and commercial payers.

Medicare

Medical benefit

In Medicare Part B, outpatient drugs administered in a physician’s office or separately payable drugs administered in an HOPD are reimbursed at ASP (average sales price) plus a markup of 6 percent. Medicare Advantage plans typically tie their reimbursement rates closely to traditional Medicare.

Pharmacy benefit

For both standalone prescription drug plans and Medicare Advantage prescription drug plans, drug reimbursement is governed by the contract between the PBM/payer and the pharmacy/PSAO (pharmacy services administrative organization). For specialty drugs, reimbursement is often tied to a percentage discount from AWP (average wholesale price).

Commercial

Medical benefit

Outpatient drug reimbursement is governed by the contract between the payer and hospital/physician. The reimbursement methodology can differ across payers and sites of administration (physician office versus HOPD), leading to a wide range of reimbursement amounts for the same drug.

In 2018, Drug Channels analyzed commercial reimbursement methods for provider-administered drugs by site of administration and found that a much higher proportion of plans reimbursed HOPDs based on a percentage of charges³ (Figure 2). Since hospitals set their own charges, and charges often are not tied to specific reference prices or acquisition costs, reimbursement set at a percentage of charges can lead to drastically higher reimbursement for specialty drugs under the medical benefit, particularly when the place of administration is an HOPD as opposed to a standalone physician’s office.

Pharmacy benefit

Drug reimbursement is governed by the contract between the PBM/payer and the pharmacy/PSAO, as is the case with Medicare under the pharmacy benefit. For specialty drugs, reimbursement is often tied to a percentage discount from the AWP.

Figure 2. Reimbursement Methods for Provider-Administered Drugs Paid Under the Commercial Medical Benefit, by Site of Care, 2017