1. Opportunities for Pricing Reform through Pharmacy Benefit Manager Regulation Prepared by David Balto 1350 I St. NW Suite 850 (202) 577-5424 david.balto@yahoo.com

2. The Role of Pharmacy Benefit Managers (PBMs) PBMs act as middlemen between individuals, plan sponsors and drug manufacturers. They have the potential to achieve significant savings by using the purchasing power of enrollees to bargain for lower prices and larger rebates from manufacturers.

3. The Role of Transparency Plan sponsors and their enrollees dont necessarily see these savings, though, thanks to a lack of transparency: – PBMs play the spread, charging plan sponsors more per prescription than what they reimburse the pharmacy for it. – PBMs do not necessarily pass on rebates to plan sponsors in the form of savings. Without transparency, plan sponsors have no idea if their PBM is really saving them money.

4. PBM Profits are Skyrocketing Between 2003 and 2007, the profits of the Big Three PBMS, ExpressScripts, Medco and Caremark, nearly tripled: Over $900 million … to over $2.7 billion The Big Three hold over 80% of the market.

5. Transparency is Growing in Popularity Plan sponsors across the country have chosen to negotiate transparent PBM contracts: – Corporations like 3M and McDonalds – States like Texas, Maryland and New Jersey – The University of Michigan – Huge federal plans like TRICARE – Unions like New Yorks DC-37

6. These Plan Sponsors Enjoy Huge Savings New Jersey anticipates savings of over $550 million over six years by enacting transparency on their plan, which covers 600,000 employees, retirees and dependents.

7. These Plan Sponsors Enjoy Huge Savings TRICARE saved nearly $1 billion in 2007 by negotiating their own drug prices and rebates with manufacturers.

8. Without Transparency, a Layer of Fog The First Circuit court of appeals observed, in support of Maines PBM transparency legislation: – Although PBMs afford a valuable bundle of services to benefit providers, they also introduce a layer of fog to the market that prevents benefits providers from fully understanding how to best minimize their net prescription drug costs.

9. Behind the Fog, Fraudulent and Deceptive Conduct Between 2004 and 2008, the Big Three have paid over $370 million damages to states, plans and patients in six major court cases.

10. Charges Include… Government fraud Secret rebates Drug switching Failure to meet state quality of care standards Kickbacks Submission of false claims Deceptive trade practices Repackaging …and more

11. 11 PBM REFORM United States v. Merck & Co., Inc., et.al – $184.1 million in damages for fraud, secret rebates, drug switching, and failure to meet state quality of care standards. United States v. AdvancePCS (now part of CVS/Caremark) – $137.5 million in damages for kickbacks, submission of false claims, and other rebate issues. United States v. Caremark, Inc. – pending suit alleging submission of reverse false claims to government-funded programs. State Attorneys General v. Caremark, Inc. – $41 million in damages for deceptive trade practices, drug switching, and repackaging. State Attorneys General v. Express Scripts – $9.5 million

12. An Model for Transparency in Texas 2006 hearing on PBMs led to an audit report Audit report found significant discrepancies: Two separate Employee Retirement System plans – Plan managed by Medco cost $994 per enrollee – Plan managed by Caremark cost $2737 per enrollee Found other inefficiencies: – State could not conduct regular, meaningful audits – Unclear pricing structures

13. Texas Enacts Transparency In response to the audits findings, Texas enacted legislation requiring transparency for state plans. Texas anticipates savings of over $260 million.

14. What Does This Mean? These plan sponsors chose transparency because it leads to greater savings. Smaller plan sponsors do not have the bargaining power to demand transparency.

15. The bottom line: There is no evidence that transparency leads to higher drug prices. Mounting evidence shows that transparency leads to lower costs and greater accountability.

16. 16 Applies to plans in the state-operated exchanges (private and FEHBP administered plans) and Part D plans NAIC to develop model legislation (model policies) to provide to the states for the exchanges. Need to meet with OPM because will sponsor 2 multi-state plans in each state NAIC also charged with developing uniform enrollment form for use by all exchanges PPACA Healthcare Reform: PBM Transparency

17. 17 PPACA Health Reform: PBM Transparency PBMs to report to the Secretary and contracting plans on: – Retail vs mail; generic dispensing rates; – Aggregate manufacturer rebates earned and passed through to the plan – Aggregate payments from plans to PBMs and subsequent payments to pharmacies

18. Ongoing developments in PBM Transparency

19. PCMA v. DC 2004- DC passed a law mandating PBM transparency PCMA filed suit seeking to block enforcement of the law – ERISA, Commerce Clause, Unconstitutional Taking Court found in favor of PCMA DC filed appeal, DC Circuit affirmed

20. Department of Labor Regulations DOL is currently considering extending ERISA fee disclose to welfare benefit plans to PBMs They should use broad definition of fee – Discounts received by a PBM with respect to its acquisition of goods and services for resale or in connection with service to be rendered by the PBM and any related profits; – Income earned by a service provider with respect to the provision of plan benefits; and – Fees received by a service provider for services performed for or on behalf of a third party, provided that the services performed are part of an independent fee for a service relationship.

21. Contact David Balto 1350 I St. NW, Suite 850 Phone: (202) 577-5424 Email: david.balto@yahoo.com