1. Preserve the Benefit: An Overview of DoD Pharmacy Economics and Policy January 9, 2007 Thomas A. Bacon, Lt Col, USAF, BSC Director, DoD Pharmacy Utilization Management TRICARE Management Activity

2. Learning Objectives Understand the DoD Pharmacy program objectives Describe the efforts to control the pharmacy benefit costs since 1994 Describe current initiatives to preserve the pharmacy benefit while increasing the quality

3. DoD Pharmacy Program Objectives Uniformly, consistently, and equitably provide cost-effective drug therapy to meet patients’ clinical needs Provide a World-Class Pharmacy Benefit with a seamless interface between all three points of service Bottom line – Preserve the Benefit

4. DoD Pharmacy Health Policy/Economic Focus To preserve the DoD pharmacy benefit we must manage the Total Cost Total Cost = Volume x Price Total Cost = Direct care + Purchased care –Direct care = Military Treatment Facilities (MTFs) –Purchased care = Retail (TRRx) + Mail Order (TMOP) Total Cost = (Ingredient cost – rebate) + Dispensing fee – Co-pay

5. Total Cost FY 2002 –Total Cost = $3.01B –Cost / beneficiary = $347 FY 2006 –Total Cost = $6.17B –Cost / beneficiary = $672 FY 2010 (projected) –Total Cost = $10.60B

6. Volume Eligible beneficiaries have increased –FY02 = 8.6M –FY06 = 9.2M Pharmacy Benefit Users have increased –FY02 = 5.7M –FY06 = 6.7M

7. Volume Are all pharmacy users created equal? NO As a rule, older patients require more health care therefore more dollars Patients age 65 and older on average cost approx. $1,000 per person per year more than patients younger than 65 years old FY06 (Retired and family members) > 65 = 1.8M or 19% of DoD pharmacy users

8. Volume Keys to remember –The FY01 National Defense Authorization Act extended retail and mail order benefits to all DoD beneficiaries age 65 and over as of 1 April 2001 –TRICARE Reserve Select (Apr 2005) Included all Guard and Reserve (plus family members) brought on active duty for > 90 days –As “other health insurance” (OHI) costs are shifted to the employees from their employers more and more DoD eligible beneficiaries will drop OHI and become DoD pharmacy benefit users –66% of eligibles used the benefit in FY02 versus 73% in FY06

9. Volume Summary We have little ability to (nor do we want to) manage the number of beneficiaries (like our civilian counterparts) –We cannot selectively insure the healthy or young –We cannot shift our > 65 year olds to Medicare Part D –We cannot charge patients based on their benefit use –We cannot cap our expenditures to FY 2006 numbers We are asked to sustain the benefit for all beneficiaries

10. Price Ingredient Cost –Varies by point-of-service Example: Top 50 Branded Drugs (by cost) MTFs $169 vs. TMOP $178 vs. TRRx $376 –Varies by drug Brand vs. generic Generic vs. generic –Varies by therapeutic class –Varies by disease state

11. Efforts to Manage Price Points-of-service –Mail Order (FCP & FSS apply) Demonstration Project: 1994-1996 National Mail Order Pharmacy Program (NMOP): 1997-2002 TRICARE Mail Order Pharmacy Program (TMOP): 2003- present Comprehensive TMOP Marketing Program: 2006 –TRICARE Retail Pharmacy carve out: 2004 Created transparency of pricing and consolidated benefit management under one contract Met legal criteria for access to federal pricing under the Veteran’s Healthcare Act 1992 (Federal Court ruled against DoD in 2006)

12. Efforts to Manage Price Drug Management –Defense Supply Center Philadelphia (DSCP) contract negotiation and compliance –DoD/VA Joint Contracting 1998-present –Mandatory Generic Policy: NMOP 1996 and Retail 1999 Formulary –Basic Core Formulary: 1999 (MTFs only) –Uniform Formulary: Implemented 2004 (all points-of-service; DoD P&T; 3 tiers; prior authorization; quantity limits) –DoD Pharmacoeconomic Center: Therapeutic class reviews, Economic/contract analysis for tier placement, Data analysis/reports, PACER development

13. Efforts to Manage Price Federal Pricing –Federal Pricing Initiative for TRICARE Retail Pharmacy (TRRx): 2006 (under legal review) –Proposed legislation for TRRx Federal Pricing: 2006 (Congress rejected the proposed legislation) Implementation of Voluntary Agreements for TRICARE Retail Pharmacy Rebates (VARR): 2006

14. Efforts to Manage Price Dispensing fees –Retail is able to keep dispensing fees relatively low because they make up margin in the ingredient cost –Ingredient cost at TMOP is FCP / FSS therefore administrative costs and profit is incorporated in the dispensing fee –MTF = $8 (estimate) / prescription Co-pays –TRICARE Senior Pharmacy: 2001 (2 tiers) –Uniform Formulary: 2004 (3 rd tier added) –Efforts to increase beneficiary cost share (2006) by increasing co-payments was rejected by Congress and a freeze was placed on co-pays until late 2007

15. Price Keys to Remember –Inflation –Product mix Brands going generic – decrease cost Brand medications that treat diseases better or more safely than before (ex. Biotech drugs) – increase cost (based on narrow point-of-view)

16. Total Cost = Direct Care + Purchased Care Direct Care (MTFs) –49% of workload (30-day equivalent in Sep 06) –25% of the cost (Prime Vendor data) Purchased Care (TMOP & TRRx) –TMOP 14% of workload (30-day equivalent in Sep 06) 12% of cost (PDTS data) –TRRx 37% of workload (30-day equivalent in Sep 06) 63% of cost (PDTS data)

17. Purchased Care Usage Base Realignment and Closure (BRAC) –MTF closures led to a significant increase in the numbers of DoD beneficiaries utilizing the retail pharmacy point-of-service FY01 NDAA opened TMOP & TRRx to Seniors 11 Sep 2001 – War on Terrorism –Addition of Guard and Reserve (plus families) –Lack of MTF staff due to deployments have pushed patients to the Managed Care Support Contractors and the retail venue

18. Total Cost = Direct Care + Purchased Care Direct care (MTFs) –Advantages Costs Restrictive formulary Tighter control of provider staff –Disadvantages Not convenient Location not based on beneficiary demographics Restrictive formulary Lack of capacity in some locations Manpower issues (deployment & recruiting)

19. Efforts to Manage DoD Pharmacy Benefit DoD Pharmacy Board of Directors: 1997 Pharmacy Benefit Redesign Project: 1998-1999 Pharmacy Resource Reallocation Project: 2000 Advances in Medical Practice: 2000 Pharmacy Data Transaction Service (PDTS): 2001 Pharmacy Commercial Off the Self (RxCOTs) award: 2004 (Centricity)

20. Current Congressional Requirement Demonstration project: Selected over-the- counter drugs place on Uniform Formulary –Program to begin May 2007 –At least 2 venues and at least 5 sites in each TRICARE region –Length: Shorter of two options At least as long as current pharmacy contracts Five years –Report to Congress NLT 2 years after implementation Costs and benefits of the demonstration project Recommendations on whether permanent authority should be provided

21. Current Strategies to Manage the Benefit Contain growth at retail point-of-service –Educate and market the benefits of mail order to our beneficiaries –Expand the VARR program ASAP TRICARE Pharmacy (T-Pharm): 2007(?) Managed Care Support Contract (T-III): 2008(?) Expand utilization management efforts

22. TMA Pharmacy Utilization Management Data Integrity –PDTS, M2, Prime Vendor Data Analysis Point-of-Contact –Supply to Congress, DoD leadership, TMA Directorates, Contractors, and Audit agencies –Review analyses accomplished by outside sources Develop pilots & measure outcomes –Polypharmacy pilot –Provider profiling pilot Educate beneficiary groups on Pharmacy benefit Keep abreast of healthcare policy and research

23. Long Term Strategies E-Pharmacy Initiatives Contain growth & costs at retail point-of-service Pay MTF pharmacies for the ingredient cost plus a dispensing fee (Prospective Payment System) –MTF Commanders should look at pharmacy as a revenue source rather than a cost center –Will result in more open MTF formularies – less need for patients to utilize retail network Expand number of military pharmacies –On base and off base –Full service formularies

24. Wildcards? Congress –Republican to Democratic power swing –2008 Elections Unified Medical Command Lobbyists –PHARMA –Military Beneficiary Groups –National Association of Chain Drug Stores

25. Questions?