1. How Pharmacy Benefit Managers Work April 28, 2016 Producer: Alexander Perry Director: Afzal Bari

2. PHARMACY-BENEFIT MANAGERS 1 Pharmacy Benefit Managers Process Prescriptions for Payers and Leverage Their Size to Negotiate With Drug Makers What is a Pharmacy Benefit Manager? Pharmacy Benefit Manager April 28, 2016 | Alexander Perry Sources: Thomas Gryta, “What is a ‘Pharmacy Benefit Manager?’” The Wall Street Journal, July 21, 2011; Andrew Kingery, “The Basics of Pharmacy Benefits Management (PBM) 2009,” Anthem, 2009; Noun Project, Gregor Črešnar, Cris Dobbins, Simon Mettler. A Pharmacy Benefit Manager (PBM) is an organization that provides programs and services designed to help maximize drug effectiveness and contain drug expenditures by acting as an intermediary between the payer and rest of the health care system; The top three PBMs each manage about 20% of the almost 4 billion prescriptions dispensed in the U.S. every year Services Provided by Pharmacy Benefit Managers Serve as intermediaries between employers and wholesalers Contracting with and building a network of pharmacies Negotiating rebate agreements Administrative services in processing and analyzing prescription claims Maintaining programs to ensure patient compliance Performing drug utilization reviews Implementing therapy or disease management programs Developing and managing formularies and prior authorization programs Operating mail order pharmacies and mail order claims Offering specialty pharmacy and distribution services Major PBMs Include:

3. PHARMACY BENEFIT MANAGERS 2 Pharmacy Benefit Managers Serve as Middlemen Between Insurance Companies, Pharmacies and Manufacturers How Pharmacy Benefit Managers Interact with Insurers, Pharmacies and Drug Makers April 27, 2016 | Alexander Perry Sources: Jack Du, “What is the Pharmacy Benefit Management Industry?” Investopedia, Accessed 2016; Andrew Kingery, “The Basics of Pharmacy Benefits Management (PBM) 2009,” Anthem, 2009; Noun Project, Andrew Vine, Pham Thi Dieu Linh, Gregor Črešnar, Edward Boatman, Creative Stall Pharmaceutica l Manufacturer Individuals pay premiums to their employer, plan sponsor or health insurer Consumers Insuranc e Compan y Pharmacy benefit manager (PBM) The insurance company pays the PBM to manage its drug costs and get rebates from drug manufacturers – PBMs often get a share of the rebates The PBM negotiates prices with the drug manufacturer, which then pays rebates to the PBM in exchange for placement on a plan’s formulary Pharmacy The pharmacy negotiates with the drug maker or a wholesaler for drug costs, as well as discounts and rebates based on the volume of drugs the pharmacy handles Individuals cover their prescription drug copay, or pay cash to the pharmacy The PBM negotiates with the pharmacy over reimbursement for drugs and dispensing fees Filled Prescription Copayment Admin FeeManaged Costs Place on Formulary Rebate Dispensing Fees Price Discounts Insurance Coverage Premiums Volum e Price

4. PHARMACY-BENEFIT MANAGERS 3 Pharmacy Benefit Managers Have Multiple Revenue Streams Main Revenue Streams for Pharmacy Benefit Managers April 28, 2016 | Alexander Perry Sources: Dennis Tumminia, “How Your Pharmacy Benefit Manager Makes Money,” Edgewood Partners Insurance Center, February 14, 2013; Andrew Kingery, “The Basics of Pharmacy Benefits Management (PBM) 2009,” Anthem, 2009; Jack Du, “What is the Pharmacy Benefit Management Industry?” Investopedia, Accessed 2016; Noun Project, Danil Polshin, Nicholas Menghini, Amy Chiang, Edward Boatman, Gregor Črešnar, Andrew Vine, Simon Mettler. Rebates Pharmaceutical manufacturers provide rebates and discounts to PBMs in exchange for placing their drugs on formularies. This positions PBMs to benefit both employers/health plans and drug manufacturers Often, PMBs retain a percentage of these rebates RebatePlace on formulary Price Spread – Brand and Generic Ingredients The price spread is the difference between the amount plans or employers pay PBMs and what the PBMs pay pharmacies for a drug; e.g. a PBM may contract with a retail pharmacy at Average Wholesale Price (AWP) -18% and then offers a plan sponsor a discount of AWP-17%, pocketing the difference Generic discounts, as opposed to brand discounts, can be priced at a Maximum Allowable Cost (MAC), which tends to be a much lower cost, and can increase the price spread for the PBM Plan Sponsor Pharmacy Pays for drug (ex. AWI- 10%) Pays pharmacy less (ex. AWI- 12%) PBM Pockets the difference Administrative Fees The fees charged by PBMs for negotiating with pharmacies, insurance companies, and drug manufacturers and for processing prescriptions Mail Order & Specialty Prescriptions When filling a mail-order prescription, a PBM essentially becomes a drug store – it makes money by selling the drug at a higher price than what they paid for it In exchange for

5. PHARMACY-BENEFIT MANAGERS 4 Pharmacy Benefit Managers Use Formulary Placement to Negotiate Rebates With Drug Manufacturers Types of Manufacturer Rebates Pharmacy Benefit Managers Can Negotiate April 28, 2016 | Alexander Perry Sources: Thomas Gryta, “What is a ‘Pharmacy Benefit Manager?’” The Wall Street Journal, July 21, 2011; Andrew Kingery,“The Basics of Pharmacy Benefits Management (PBM) 2009,” Anthem, 2009. Flat/Access Discounts A rebate typically offered for formulary positioning Example: On Formulary - 25% Rebate Performance Discounts (Adjusting) A rebate typically affiliated and compared to quarterly national market share (NMS) figures Example: NMS-1 – 20% Rebate NMS – 25% Rebate NMS + 1 – 30% Rebate Performance Discounts (Fixed) A rebate typically affiliated and compared to fixed/non- adjusting market share Example: 20% Mkt Sh – 20% Rebate 25% Mkt Sh – 30% Rebate 30% Mkt Sh – 40% Rebate Combination Discounts A rebate combination of flat/access discounts and performance discounts Example: On Formulary – 20% Rebate NMS-1 – 25% Rebate NMS – 30% Rebate NMS + 1 – 35% Rebate Rebate Rebate refers to a specified amount the manufacturer pays the purchaser in exchange for placing their brand-name drugs on formularies, promoting the products and driving their usage.