Commonwealth Connector Pharmacy Benefits July 12, 2007

1 Prescription Drug Coverage  Prescription drugs are an integral component of treatment for many acute and most chronic conditions  With many major drugs having lost their patent protection over the past three to four years, highly effective generic drugs are now available to treat most conditions  However, a significant portion of current drug utilization is for high cost brand drugs which provide little or no added therapeutic value over lower cost alternatives –This is largely driven by drug manufacturer’s active marketing to physicians and direct-to-consumer advertising  Because of Massachusetts’ mandatory generic substitution requirement, generic utilization now averages over 60% in the Commonwealth  However, generic utilization could be increased to 75-80% with no reduction in therapeutic effectiveness

2 Prescription Drug Costs  Total drug costs are about $65 - $70 per member per month (PMPM) in Massachusetts –The typical benefit covers 75-80% of drug costs, resulting in plan costs of about $50 - $55 PMPM  There are essentially three tools that can be used to reduce prescription drug costs: –Formulary design –Pharmacy benefit management –Cost-sharing  Based on our analysis and discussions with the major health plans, we project that formulary design and pharmacy benefit management can reduce total drug costs to about $55 PMPM  To achieve a drug premium under $20, the plan will need to pay about 35% of drug costs or less

3 Formulary – A Listing of Drugs Origin:Aid to Training of Physicians In Academic Medical Centers Purpose:Safe, Efficacious Drug Therapy Types:1.Select 2. Open 3. Therapeutically Based

4 Therapeutically – Based Formulary  High quality  Comprehensive  Selective  Differentiated

5 Pharmacy Management - Example

6 Design Considerations  About 85-90% of brand costs are for prevention and treatment of chronic conditions –Exempting these drugs from an upfront deductible would largely eliminate the impact of the deductible  If formulary design and pharmacy management are fully effective, brand drugs should fall into one of two categories –Drugs which provide necessary additional therapeutic value for members relative to available generics –Drugs for which there are no generic treatment alternatives  The latter drugs include categories such as: –Antineoplastic agents –Immunosuppresants –Antiretroviral agents –Asthmatic inhalers  Exempting these brand drugs from a deductible would add about $1-$2 PMPM

7 Key Classes

8 Design Considerations  Generic drugs provide a very high ratio of therapeutic value to cost  While an upfront deductible of $250 is permitted under MCC regulations, generic coverage can be provided on an affordable basis without an upfront deductible –Applying a $250 deductible to both brand and generic drugs rather than brand only reduces costs by less than $1 PMPM  Even if generic utilization is increased to 75%, the cost of brand drugs will be over 60% of total drug spend  Drug utilization is highly skewed –Less than half of members use brand drugs –20% of these members generate about 70% of brand drug costs  An upfront deductible on brand drugs will probably be needed to: –Keep premium affordable –Keep cost sharing affordable for high utilizing members

9 Illustrative Plan Costs

10 Comparison to Bronze Drug Prices  Tufts benefit –Deductible: $250 –Copays  Generic:$20  Brand:$50 –Premium*:$19.76 (8.7% added cost) –Estimated premium: $16 - $21 without deductible on generics  Blue Cross Blue Shield benefit –Deductible:None –Copays  Generic:$15  Brand:$30 –Premium*:$33.87 (13.8% added cost) –Estimated premium:$29 - $34  Implications –Initial premiums are likely to be at high end of estimated range –As experience evolves, premiums are likely to increase modestly over first few years * 37 year old individual

11 Recommendations  Encourage use of therapeutically-based formularies and pharmacy management programs  Cover tier 1 drugs (generics) and brand drugs in the following select classes without an upfront deductible –Antiasthmatic inhalers –Antineoplastic agents –Antiretroviral agents –Immunosuppressants  Allow up to $1,000 deductible on other tier 2 and tier 3 drugs  Allow co-pays or co-insurance for brand drugs