1. Spread Pricing and the Quest for Optimal Pricing in Traditional and Pass Through Models Robert I. Garis, RPh, MBA, PhD Creighton University School of Pharmacy Pharmacy Benefit Diagnosis Suite (PBDS) Software www. pbdsuite.com 402.203.0229 Pharmacy Benefit Contracting Excellence Chicago, IL 7/22/09

2. Topics of Discussion Definitions: traditional and pass through Traditional PBM pricing model Pass through PBM pricing model Current literature comparing the models Optimal pricing in the benefit Resources

3. Recognized Definitions of PBM Pricing Models “Traditional” defintion: The PBM retains a network spread as compensation for their service. “Pass Through” defintion: The PBM charges a sponsor no more than the amount that it pays the pharmacies in its retail network for brand and generic drugs. PBM retains an agreed upon fee for service. No industry-accepted definitions

4. Traditional Model Spread Pricing Mechanics Generic drugs have two prices A High price The “sticker price” called Average Wholesale Price (AWP) A Low price The “maximum allowable cost” (MAC) price Every organization in managed pharmacy has their own MAC price – An example of one generic drug follows –

5. Copyright Robert I. Garis, PhD All Rights Reserved 5 AWP and Generic Vasotec 5 mg ManufacturerAWP Price / 100 tablets (Price Alert 4/15/09) Apotex$ 102.10 Mylan$ 102.00 Ranbaxy$ 102.10 Taro$ 102.72 Vasotec (originator) $ 242.10 Maximum allowable cost (MAC) (Source— Commercial MAC price) $ 14.00

6. Copyright Robert I. Garis, PhD All Rights Reserved 6 Differential Contracting Billing terms AWP - 66% to plan sponsor: AWP = $102.00 - 66% discount ~ $34.00 / 100 tab Payment terms to pharmacy: MAC price = $14.00 / 100 tab Spread to PBM $20.00 ($ 34.00 billed - $14.00 paid)

7. Chronology of the Spread Pre-2000Not documented 2001-2003Huge variation probably > $5-$8 /Rx 2004-2005$3-$5/Rx 2006-2007$2-$4/Rx 2008-2009$3-$6/Rx and rising Copyright Robert I. Garis, PhD All Rights Reserved 7

8. Why the upward trend in generic spread? Generics 60-65% of all Rx – More spread opportunities – Spreads make up for fewer rebate dollars Flood of blockbuster brands losing patent – Ambien – Zocor – Zofran – and many, many more Copyright Robert I. Garis, PhD All Rights Reserved 8

9. Generic Drug MAC lists— caution Wide differences in MACs among PBMs – “Wildcard” Get your MAC list regularly as a condition of the RFP MACs should be – Comprehensive – Aggressive MAC pricing varies greatly among PBM Numbers of products included Prices of those products Copyright Robert I. Garis, PhD All Rights Reserved 9

10. Spreads Subsidize Contract Offering Typical Contract Offering: Brands AWP-17% Generics AWP-66% Mail Brands AWP -22% Rebates $4.00/Rx Typical Contract Offering: Brands AWP-17% Generics AWP-66% Mail Brands AWP -22% Rebates $4.00/Rx SPREAD PRICING

11. No Spreads “Weaker” Contract Offering Typical Contract Offering: Brands AWP-15.5% Generics AWP-66% Mail Brands AWP -20% Rebates $3.00/Rx Typical Contract Offering: Brands AWP-15.5% Generics AWP-66% Mail Brands AWP -20% Rebates $3.00/Rx NO SPREAD PRICING

12. Pass Through Model no Spread Pricing PBM revenue comes from a specified fee for service – $/Rx – $ PEPM – $PMPM There is no spread pricing Newer model in response to sponsor demand

13. Yeah, but what about our Plan? Let’s see what has been said about the two models – PBM industry – Coalitions – Industry Observers – Other benefits professionals

14. Literature comparing pricing Models Beste P. Eberle B. The Transparent PBM Pass-Through Model: Managing Drug Spending Through Aligned Incentives. Employee Benefit Plan Review 62:7. Jan 2008. Pub. WoltersKluwer Company NY. Articles from the following AIS compilation: PBM Contracting and Transparency Issues and Models. Erin Trompeter, Ed. Susan Namovicz, Managing Editor. Pub. Atlantic Information Services, Inc. Washington DC. : PBM Transparency Deal May Lower Rx Drug Spending, but Won’t Shake Up the Industry. More PBM Transparency May Not Cut Costs but Could Boost Trust. Client’s Transparency Demands Spawn New Firms, Shake up Other PBMs’ Strategies. Experts Offer Advice to Payers on Comparing Transparent PBM Bids. Drug Benefit News 9:(24). December 12, 2008. PBMs Tout Their ‘Transparency’, but Model Doesn’t Always Lower Clients’ Drug Costs. Neal Learner, Managing Editor. James Gutman, Executive Editor. Pub. Atlantic Information Services, Inc. Washington DC.

15. Literature warning on pass through Remove spread the PBM could lack the incentive to negotiate aggressively for network discount and drug manufacturer rebates.

16. Traditional & Pass-through Compensation Traditional ModelPass Through Model Retains the spread + Retains Drug Manufacturer Administration Fee Retains a full and fair fee: Per-Rx PEPM, or PMPM + Retains Drug Manufacturer Administration Fee

17. Literature endorsement of Spread Model Sponsor may have less risk with spread model because the PBM is at risk for any pharmacies that charge a higher rate.

18. Consider this Why would the pharmacies in the network even know whether a sponsor in their PBMs book of business is a pass through or a traditional account. If the pharmacy contracts for one rate for one model (spread) why not the other model (pass through).

19. The literature and auditing Many recommend a contract with an auditor or oversight agent as “Mutually acceptable” to the PBM and pharmacy. – The sponsor should be in sole control of who audits their plan – Sponsors get your Rx transaction data every quarter

20. Literature warning on pass through “Risk” to the sponsor that rebates will go down if generic drugs become available. No rebate guarantee. – Seems like a benefit to me since $1.00 rebate income requires $5.00 drug spend Availability of generics is NOT a risk to the sponsor

21. Confused??? The pros and cons of traditional and pass through are confusing Let’s look at an alternative evaluation of models—Optimal Pricing We will consider the resources we have – Pharmacy data are rich in information PBM has your data in exquisite detail—get your Rx data! – Public information on pricing

22. Copyright Robert I. Garis, PhD All Rights Reserved 22 Optimal Pricing v. Pass-through Optimal Pricing: Charging the Plan the lowest reasonable price that the retail pharmacy will accept or the PBM-owned mail order pharmacy’s MAC list used in the retail program. Common “Pass through” defintion: The PBM will charge a sponsor no more than the amount that it pays the pharmacies in its retail network for brand and generic drugs.

23. Copyright Robert I. Garis, PhD PBDS Rx Analytics All Rights Reserved 23 What if… In what situations might the PBM pay a pharmacy more than the lowest reasonable price that pharmacy will accept? – Strategic decision?

24. Copyright Robert I. Garis, PhD All Rights Reserved 24 Assumption in examples Optimal price of drug 5¢/tablet – Acceptable to the pharmacy – Good value to the sponsor

25. Copyright Robert I. Garis, PhD All Rights Reserved 25 PBM affiliated pharmacy PBM Chain Rx #1 5¢/tablet PBM-affiliated Rx 12¢/tablet Chain Rx #2 5¢/tablet Independent Rx 5¢/tablet

26. Copyright Robert I. Garis, PhD All Rights Reserved 26 PBM buys favor with pharmacy– a walk through On pass-through accounts the PBM is revenue neutral PBM offers some pharmacies better reimbursement on selected (pass-through) accounts, if Pharmacies agree to lower reimbursement on traditional (spread model) accounts – www.oag.state.ny.us/media_center/2008/jul/july29 a_08.html Case was settled with no admission of guilt www.oag.state.ny.us/media_center/2008/jul/july29 a_08.html

27. Copyright Robert I. Garis, PhD All Rights Reserved 27 PBM buys favor with pharmacy PBM Chain Rx #1 5¢/tablet Chain #3 Higher rate on Transparent accounts 12¢/tablet Chain Rx #2 5¢/tablet Independent Rx 5¢/tablet

28. The distinction Optimal price (to the sponsor) = 5¢ /tab Pass-through (to the sponsor) = 12¢/tab Copyright Robert I. Garis, PhD All Rights Reserved 28

29. Optimal Pricing in the Benefit Examples of optimal pricing Why it is important Sponsor activity – Spot checks with publicly available prices

31. Copyright Robert I. Garis, PhD All Rights Reserved 31 State Medicaid MAC Lists Minnesota— http://www.dhs.state.mn.us/main/groups/business_partners/documents/pub/dhs_id_016923.pdf Illinois— http://www.mslcillinois.comhttp://www.mslcillinois.com (Then click on “State MAC List”) Virginia— http://www.dmas.virginia.gov/downloads/pdfs/pharm-va_mac_list.pdf Washington State— http://fortress.wa.gov/dshs/maa/pharmacy/smaclistforbi03.xls http://fortress.wa.gov/dshs/maa/pharmacy/smaclistforbi03.xls South Dakota-- http://www.primetherapeutics.com/mac/macsearch.asp http://www.primetherapeutics.com/mac/macsearch.asp

32. Pharmacy Benefit Diagnosis Suite Web application to monitor “optimal” pricing Videos on spread pricing and mail order pharmacy service www.pbdsuite.com Call with questions 402.203.0229 More on topics discussed on web Google “garis and pharmacy benefit” Copyright Robert I. Garis, PhD All Rights Reserved 32

33. Summary Sponsors get your Rx transaction data from PBM regularly (Quarterly) Sponsor get the MAC list regularly (Quarterly) – Confidentiality agreement will be necessary Spread pricing is a significant threat to our benefit Complicates proposal evaluation Excess cost to the sponsor Confusion abounds traditional v. pass through Consider optimal pricing in your PBM model Copyright Robert I. Garis, PhD All Rights Reserved 33

34. Thank You for the Opportunity!