F. Randy Vogenberg, PhD, RPh Institute for Integrated Healthcare, Sharon, MA Co-Leader, Midwest BGH Employer Initiative on Biologics & Specialty Pharmacy Copyright © 2011 Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc. All rights reserved. 1 21052767(3)-04/11-SGR 1

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Value-Based Insurance Designs For Sustainable Health Improvement 3 3

Terminology A variety of terms are used in the literature to describe this health management strategy: Value-based insurance design (VBID)1 Value-based benefit design (VBBD)2 Value-based design (VBD)3 This program will use the term VBID 1. Fendrick AM. Value-based insurance design landscape digest. July 2009. National Pharmaceutical Council. www.sph.umich.edu/vbidcenter. Accessed February 10, 2011. 2. Houy M. Health plan capabilities to support value based benefit design. National Business Coalition on Health. www.nbch.org. Accessed February 10, 2011. 3. Nayer C et al. Leveraging the value of health: a decision matrix for value-based designs. www.vbhealth.org. Accessed February 10, 2011. 4 4

Motivation for Value-Based Insurance Designs 5 5

Value-Based Insurance Design: Employer Perspective Definition1 Value-based insurance design uses evidence of effective procedures, treatments, drugs, and providers and appropriate incentives/disincentives to design health benefits that: Motivate those covered to alter their behavior in a positive manner or engage in a health management activity Encourage the use of a provider or specific health care service, test, or drug that is shown to be more effective or provide higher quality than other options Discourage the use of health care services, tests, drugs, and providers when the evidence does not justify the cost or their use 1. Boress L. Employers’ readiness to adopt value-based benefit strategies. Presentation to the Chicago Chapter of the International Society of Certified Employee Benefit Specialists; May 2008; Chicago, IL. Midwest Business Group on Health. mbgh.org/templates/UserFiles/Files/2008/Benchmarking/MBGH_Employer_Survey_May2008.pdf. Accessed November 9, 2009. 6 6

Nonadherence: Clinical and Economic Impact As many as 60% of chronically ill patients have poor adherence to treatment1 Nonadherence results in an estimated 10% of all hospital admissions and 23% of all nursing home admissions2 Costs that result from poor medication adherence have been estimated to exceed $100 billion annually1 1. Dunbar-Jacob J et al. J Clin Epidemiol. 2001;54:S57–S60. 2. Sabaté E. Adherence to long-term therapies: evidence for action. World Health Organization; 2003. who.int/chp/knowledge/publications/adherence_full_report.pdf. Accessed November 9, 2009. 7 7

Market Drives Benefit Design Needs1 Economic downturn accelerated health plan cost-compression. Cost shifting often resulted in delay or abandonment of needed care. New approaches to value-based designs address access barriers to evidence-based care. Value-based insurance designs have demonstrated: Decrease in financial trends Increase in health and productivity outcomes 8 1. Nayer C et al. Leveraging the value of health: a decision matrix for value-based designs. www.vbhealth.org. Accessed March 14, 2011. 8

General Concepts of Value-Based Insurance Design 9 9

Evolution to VBID The more targeted the benefit plan design, the higher the return on investment. Health outcomes and ROI improve with level of VBID complexity Low High Integrated Rx and condition management + related services Integrated Rx and condition management Employee-specific benefit design Rx only VBID can be applied across a spectrum of choices, from a strategy limited to reducing copays for specific drugs to one that incorporates a comprehensive worker-specific benefit design.1,2 The VBID spectrum displayed in this slide demonstrates the range of complexity that with which this system may be used. There are 2 basic VBID approaches3: Reducing copays for specific drugs Reducing copays for services related to a diagnosis; this approach can be expanded beyond pharmaceutical therapy to include other management-related services, such as behavioral counseling and advice and support for lifestyle modifications The approach with the greatest potential for a positive financial impact is one that is employee-specific. The better the system is at identifying which services are high value for which patients, the higher the financial return will be.1 Simplest level: Reduce or eliminate out-of-pocket costs for a service, usually a medication Next level: Apply predictive modeling to integrated medical and Rx claims to identify high-risk groups, such as those with diabetes, hypertension, and asthma More complex level: Use benefit design to support integrated health management strategies Future level: Real-time integration of data to provide patient-specific benefit designs Fendrick AM et al. Aligning Incentives and Systems: Promoting Synergy Between Value-Based Insurance Design and the Patient Centered Medical Home. National Business Coalition on Health. http:www.pcpcc.net/valuebasedinsurancedesign. Accessed August 19, 2010. Chernew ME, Fendrick AM. Value based insurance design: restoring health to the health care cost debate. Society of Actuaries Web site. http://www.soa.org/library/essays/health-essay-2009-chernew.pdf. Accessed August 19, 2010. Fendrick AM et al. Am Manag Care. 2006;12:SP5-SP10. 10 1. Fendrick AM et al. Aligning Incentives and Systems: Promoting Synergy Between Value-Based Insurance Design and the Patient Centered Medical Home. National Business Coalition on Health. http://www.pcpcc.net/valuebasedinsurancedesign. Accessed August 19, 2010. 2. Chernew ME et al. Value based insurance design: restoring health to the health care cost debate. Society of Actuaries Web site. http://www.soa.org/library/essays/health-essay-2009-chernew.pdf. Accessed August 19, 2010. 3. Fendrick AM et al. Am J Manag Care. 2006;12:SP5-SP10. 10

Value-Based Insurance Design Engages and Reinforces Adherence1 Value-based insurance design is an engagement tool that is part of an evidence-based approach to managing health outcomes Uses data to Invest in benefit designs and programs that Change behaviors to Improve quality, health, productivity, and financial outcomes (dividend) Direct Indirect DATA Insurance Incentives DESIGN HIT Services Communication DELIVERY Health/Productivity Performance Quality Cost Trend Reduction DIVIDENDS 11 1. Nayer C et al. Co-pay incentives: Medicare Advantage (Part D) can replicate successes of commercial payers. Center for Health Value Innovation. vbhealth.org/wp/2009/03/co-pay-incentives-medicare-advantage-part-d-can-replicate-successes-of-commercial-payers/. Accessed November 9, 2010. 11

Key Successes and Challenges in Developing and Implementing Value-Based Insurance Designs 12 12

VBIDa: Implications for Implementation Improve adherence with evidence-based care1,2 Improved functional health status of covered population Sustainable trend modification vs line-item efficiencies Drive greater employee engagement in managing care1,2 Precision-focused benefits/incentives Link health-career investments Promote value with health care provider/practitioner community1 Evidence-driven and patient-centered/competent Accountable care organizations Perceived inequality in designs, fully insured regulations1 aVBID=value-based insurance design. 1. Fendrick AM. Value-based insurance design landscape digest. National Pharmaceutical Council. npcnow.org/Home.aspx. Accessed September 21, 2009. 2. Nayer C et al. Co-pay incentives: Medicare Advantage (Part D) can replicate successes of commercial payers. Center for Health Value Innovation. vbhealth.org/wp/2009/03/co-pay-incentives-medicare-advantage-part-d-can-replicate-successes-of-commercial-payers/. Accessed September 28, 2009. 13 13

Challenges to VBID1,a Human resource concerns: Patients may object to different copays Legal and tax issues: Always a concern, but existing programs illustrate that options may be considered to address these concerns Privacy concerns: Some VBID programs require identification of patients with specific diagnoses; HIPAAb compliance is a must. Unintended incentives: Incentives should steer patients toward healthy vs unhealthy behaviors Adverse selection: Sicker patients may be attracted to plans that have VBID components 14 aVBID=value-based insurance design; bHIPAA=Health Insurance Portability and Accountability Act. 1. Chernew ME et al. Health Aff. 2007;26(2):w195–w203. 14 14

Examples of Value-Based Design Models and Return-on-Investment 15 15

Plan Design Approaches1 Financial Design Value-Based Design Conserve resources through decreased utilization Focus on long-term outcome of improved functional health Efficient management of each line item Total cost picture to include indirect costs Cost sharing based on acquisition cost of service or product Subsidize effective services through lowered out-of-pocket exposure Decrease or eliminate subsidy for ineffective services Plan design applies to all members Vary financial subsidy based on individual needs The experiences of plan sponsors show a common theme: the investment in workforce health is founded on variability in cost sharing based on value to the individual and the organization.1 1. Mahoney J. Value-based designs. Presented to the Health Care Service Corporation, May 2009; Richardson, TX. 16 1. Mahoney J. Value-based designs. Presented to the Health Care Service Corporation; May 2009; Richardson, TX. 16

Value-Based Insurance Design Approaches1 Design by service Waive or reduce copayments or coinsurance for selected drugs or services, such as statins or cholesterol tests, no matter which patients use them. Design by clinical condition Waive or reduce copayments or coinsurance for medications or services, based on the specific clinical conditions with which patients have been diagnosed. Design by disease management participation or disease severity Waive or reduce copayments or coinsurance for high-risk members who would be eligible for engagement in or who actively participate in a disease management program. 17 1. Fendrick AM. Value-based insurance design landscape digest. National Pharmaceutical Council. d.scribd.com/docs/6zd5wsv7mtazz3f6put.pdf. Accessed November 9, 2009. 17

Pitney-Bowes: Reducing Copayment Stabilized Clopidogrel Adherence1 As was seen with statin adherence following the introduction of a new copayment policy at Pitney Bowes, the reduction of copayment for clopidogrel stabilized adherence in the intervention group. Ultimately, the stabilized adherence resulted in a 4% difference between the intervention and control cohorts.1 1. Choudhry NK et al. Health Affairs. 2010;29(11):1995–2001. 18 1. Copyrighted and published by Project HOPE/Health Affairs as Choudhry NK et al. At Pitney-Bowes value-based insurance design cut copayments and increased drug adherence. Health Affairs. 2010; 29(11):1995–2001. The published article is archived and available online at www.healthaffairs.org. 18

Predicted Effect of VBIDa Program on Total Drug and Medical Spending1 The investigators measured spending based on eligible charges for prescription drugs and inpatient and outpatient medical services. Although the difference in spending between groups was not significant in the first year, this difference grew over the following 2 years. 1. Gibson TB et al. Health Affairs. 2011;30(1):109–117. 1 2 3 Years After Implementation 19 aVBID=value-based insurance design. bRx=prescription. 1. Copyrighted and published by Project HOPE/Health Affairs as Gibson TB et al. A value-based insurance design program at a large company boosted medication adherence for employess with chronic illness. Health Affairs. 2011;30(1):109–117. The published article is archived and available online at www.healthaffairs.org. 19

VBIDa Model: The Asheville Project1 Voluntary consumer incentive program for patients with chronic conditions 2 employers: City of Asheville and Mission–St. Joseph’s Health System Began enrolling patients with diabetes in 1997 Pharmacist coaching coupled with benefit design alterations for medications Results Improved clinical outcomes Reduced health care costs Example of Design by Disease Management The Asheville Project highlighted this approach by offering free medications and testing equipment only for diabetic patients who attended educational seminars.1 Long-term clinical and economic outcomes of the Asheville Project included2: Clinical outcomes Lower hemoglobin A1C and improved cholesterol levels Increased percentage of patients reporting having had a foot examination Economic outcomes Decreased costs for inpatient and outpatient services Increased costs for pharmacy benefits Direct medical costs decreased by $1,200 (to $1,872) per patient per year compared with baseline Decreased number of sick days Increased employee productivity 1. Fendrick AM. Value-based insurance design landscape digest. July 2009. National Pharmaceutical Council. d.scribd.com/docs/6zd5wsv7mtazz3f6put.pdf. Accessed November 9, 2009. 2. Cranor CW et al. J Am Pharm Assoc. 2003;43(2):173–184. 20 aVBID=value-based insurance design. 1. Cranor CW et al. J Am Pharm Assoc. 2003;43(2):173–184. 20

VBIDa Model: The Asheville Project Health Care Costs1 $7,082 $ $4,651 $ $ b $ Even though prescription costs increased owing to waived copays, the project demonstrated an overall reduction in total health care costs of approximately 34%.1 1. Cranor CW et al. J Am Pharm Assoc. 2003;43(2):173–184. [CALCULATION OF % REDUCTION IN TOTAL HEALTH CARE COSTS: 4,651/7,082=0.66 1–0.66=0.34=34% reduction in total health care costs] n=164 n=155 n=116 n=74 n=43 n=28 21 aVBID=value-based insurance design; bRx=prescription. 1. Cranor CW et al. J Am Pharm Assoc. 2003;43(2):173–184. Copyright American Pharmacists Association (APhA). Reprinted by permission of APhA. 21

Average Expenditures Per Patient Per Year, $ Diabetes Results1 Diabetes-Related Health Care Costs at Varying Levels of Medication Adherence Average Expenditures Per Patient Per Year, $ a a a a 1%–19% 20%–39% 40%–59% 60%–79% 80%–100% Adherence Levelb aIndicates significantly higher medical cost vs the 80%–100% adherence group (P<0.05); bAdherence was defined as the percentage of days during the 1-year analysis period that patients had a supply of 1 or more maintenance medications for the condition. 1. Sokol MC et al. Med Care. 2005;43(6):521–530. Reproduced with permission from Wolters Kluwer Health. 22 22

Hospitalization Risk, % Results: Diabetes1 Diabetes-Related Hospitalization Risk at Varying Levels of Medication Adherence Hospitalization Risk, % 1%–19% 20%–39% 40%–59% 60%–79% 80%–100% Adherence Levelb a aIndicates significantly higher medical cost vs the 80%–100% adherence group (P<0.05); bAdherence was defined as the percentage of days during the 1-year analysis period that patients had a supply of 1 or more maintenance medications for the condition. 1. Sokol MC et al. Med Care. 2005;43(6):521–530. Reproduced with permission from Wolters Kluwer Health. 23 23

Asheville Project: Reduction in Annual Sick Days1 12.6 6.0 8.5 7.3 7.7 6.4 3 6 9 12 15 Baseline 1 y 2 y 3 y 4 y 5 y Mean Number of Sick Days Within the first year of the new benefits program, the participants reduced their number of sick days by 6.6 days per person. Further, the reduction in sick days continued over the course of the 5 years of the program. The number of people enrolled in the program changed for various reasons (eg, dropped out, left employment, died), but data were available for 37 patients for all years from 1996 (baseline) through 2001. The estimated value of increased productivity was $18,000 per year.1 1. Cranor CW et al. J Am Pharm Assoc. 2003;43(2):173–184. 37 patients for the years 1996 (baseline) through 2001 24 1. Cranor CW et al. J Am Pharm Assoc. 2003;43(2):173–184. 24

Value-Based Insurance Plus Disease Management —Employer Study Study Design1 Study cohort: Patients with diabetes employed by different units of a large multiindustry firm Study design: Observational cohort design to evaluate cost effects of VBIDa and DMb programs and effects on use over 3 years Intervention: VBID pharmacy plan – reduction of copayments to 10% coinsurance This study by Gibson et al looked at the effect of a value-based insurance design (VBID) pharmacy program for diabetes that lowered out-of pocket costs for antidiabetic medications in 2 units of a large, multiindustry firm. The comparison group was a matched cohort from the remainder of the firm’s units, which had a traditional 3-tier pharmacy plan: 10% copayments for generic drugs, 20% for preferred brand-name drugs, 35% for nonpreferred brand-name drugs.1 All of the participants had the option to enroll in a disease management program consisting of targeted mailings, a workbook about the disease, telephone outreach by a nurse, coaching, and periodic monitoring. Additional communications reinforced diabetes management goals.1 Merck provided funding for this study and one of the coauthors is a Merck employee. 1. Gibson TB et al. Health Affairs. 2011;30(1):100–108. Objectives: To compare pharmacy use, guideline use, and the financial effects of the VBID pharmacy program, with and without DM. aVBID=value-based insurance design. bDM=disease management. 1. Gibson TB et al. Health Affairs. 2011;30(1):100–108. 25 25

Matched using summarized propensity score Value-Based Insurance Plus Disease Management —Employer Study (continued) Study Design1 Total diabetes patients N = 4,408 VBIDa pharmacy program n = 2,204 Participated in DMb program n=1,876 Opted out of DM program n = 328 Tiered pharmacy program n = 2,204 Participated in DM program n=1,876 Matched using summarized propensity score This diagram illustrates the breakdown of the study design. The post-intervention period included 3 years: 2006, 2007, and 2008. All enrollees aged under 65 years with at least 4 consecutive quarters of enrollment were included in the study.1 Enrollees in the value-based program and the disease management (DM) program were matched with similar enrollees in the DM program alone. Similarly, enrollees in the value-based program alone were matched with diabetes patients who were not in either the value-based program or the DM program.1 1. Gibson TB et al. Health Affairs. 2011;30(1):100–108. 2005 was baseline year; 2006, 2007, 2008 were post intervention. aVBID=value-based insurance design. BDM=disease management. 1. Gibson TB et al. Health Affairs. 2011;30(1):100–108. 26 26

Estimated Effects of VBIDa + DMb on Medication Possession Ratio1 Value-Based Insurance Plus Disease Management —Employer Study (continued) Estimated Effects of VBIDa + DMb on Medication Possession Ratio1 VBID + DM DM, no VBID Program effect This graph shows the estimated program effect on medication possession ratios for the study enrollees with the value-based program plus disease management compared with those with disease management alone.1 For patients in the VBID-plus-DM group, in the first year after implementation the medication possession ratio for oral medications rose 3.7% above the ratio for those not in the value-based program. In the second year this increase was 4.8%, and in the third year it was 5.8% above the ratio for patients not in the value-based program.1 1. Gibson TB et al. Health Affairs. 2011;30(1):100–108. All antidiabetic medications Oral antidiabetic medications Insulin aVBID=value-based insurance design. bDM=disease management. 1. Copyrighted and published by Project HOPE/Health Affairs as Gibson TB et al. Value-Based Insurance Plus Disease Management Increased Medication Use And Produced Savings. Health Affairs. 2011;30(1):100–108. The published article is archived and available online at www.healthaffairs.org. 27 27

Estimated Effects of VBIDa + DMb on Diabetes Guidelines Measures1 Value-Based Insurance Plus Disease Management —Employer Study (continued) Estimated Effects of VBIDa + DMb on Diabetes Guidelines Measures1 This graph shows the estimated program effect on diabetes guidelines measures for the study enrollees with the value-based program and disease management vs those with disease management alone.1 The program effect reflects the difference in increase of these measures between the group with VBID and the group without VBID. 1. Gibson TB et al. Health Affairs. 2011;30(1):100–108. HbA1c test Lipid test PCPc visit Urinalysis aVBID=value-based insurance design. bDM=disease management. cPCP=primary care physician. 1. Copyrighted and published by Project HOPE/Health Affairs as Gibson TB et al. Value-Based Insurance Plus Disease Management Increased Medication Use And Produced Savings. Health Affairs. 2011;30(1):100–108. The published article is archived and available online at www.healthaffairs.org. 28 28

Value-Based Insurance Plus Disease Management —Employer Study (continued) Effect of VBIDa Program on Payments In the DMb Program Not in the DM Program Year 1 Year 2 Year 3 Payments Medical All causes –0.019 –0.01 –0.002 –0.306f –0.272d –0.235 Diabetes –0.264d –0.338d –0.405e –0.043 0.096 0.256 Rxc 0.125f 0.169f 0.216f 0.083 0.155 0.232 0.157f 0.167f 0.177e –0.058 –0.11 –0.158 Total (medical + Rx) 0.033 0.059 0.085 –0.203f –0.162 –0.118 –0.066 –0.153 –0.04 –0.004 0.034 Diabetes-related prescription spending in the value-based insurance design plus disease management (VBID + DM) group increased due to higher adherence to medications. This increased medication adherence was evident in the first year and persisted throughout all study years. Significant decreases in diabetes-related medical spending offset prescription increases to produce an overall decrease in diabetes-related costs. Diabetes-related medical costs decreased in the first study year and showed further decrease in each subsequent year. Program impact on all-cause total medical + prescription spending was minimal and not statistically significant. VBID + DM program spending: Diabetes-related Rx spending increased Diabetes-related medical spending decreased 29 aVBID=value-based insurance design. bDM=disease management. cRx=prescription. dP≤0.10. eP≤0.05. fP≤0.01. 1. Copyrighted and published by Project HOPE/Health Affairs as Gibson TB et al. Value-Based Insurance Plus Disease Management Increased Medication Use And Produced Savings. Health Affairs. 2011;30(1):100–108. The published article is archived and available online at www.healthaffairs.org. 1. Gibson TB et al. Health Affairs. 2011;30(1):100–108. 29

Value-Based Insurance Plus Disease Management —Employer Study (continued) Conclusions1 The combination of VBIDa with a diabetes DMb program produced improvements: in the use of diabetes medications adherence to medical guidelines Results showed the combination of VBID and DM had a greater impact on prescription use and adherence to recommended medical services guidelines than DM alone These effects not only were sustained, but they grew over time The program showed modest cost savings over 3 years aVBID=value-based insurance design. bDM=disease management. 1. Gibson TB et al. Health Affairs. 2011;30(1):100–108. 30 30

Value-Based Designs in an Evolving Health Care System 31 31

3 Concepts at the National Level1 Supply-side reform Pay for performance Patient-centered medical home Accountable care organization System delivery reform Health information technology Demand-side reform Value-based insurance design 32 1. Fendrick AM. Value-based insurance design landscape digest. National Pharmaceutical Council. npcnow.org/Home.aspx. Accessed September 21, 2009. 32

VBIDa: Lessons Learned in the Public Sector1,b Health risks can be reduced Quality of care can be improved and productivity loss can be minimized VBID requires a team effort that is typically cross-functional VBID requires continuous communication with key decision makers and the greater community Collaboration using shared data can drive relationships with health plans, health management companies, and other suppliers Data are essential to design phase and ongoing adjustments Over time, dividends can accrue through: Improved health and productivity Reduction in health care cost trends Improved adherence Reduced utilization aVBID=value-based insurance design; bCharacteristics observed in a review of 5 public sector employers. 1. Value-Based Design in Action: How Five Public Sector Employers are Managing Cost and Improving Health Using Value-Based Design. University of Michigan Center for Value-Based Insurance Design. sph.umich.edu/vbidcenter/pdfs/Value-Based%20Design%20in%20Action%20-%20Aug%202009.pdf. Accessed November 9, 2009. 33 33

Drive the Value of Every Health Dollar Data drive decisions1 Design must be straightforward and simple1 Delivery and sustainable behavior change depend on adherence1 Easy, actionable goals Frequent, relevant communication Dividends are measured in total health impact1 Must be shared with stakeholders “Ultimately, the alignment of financial incentives...will encourage the use of high value care...and produce more health at any level of healthcare expenditure.”2 1. Nayer C et al. Co-pay incentives: Medicare Advantage (Part D) can replicate successes of commercial payers. Center for Health Value Innovation. vbhealth.org/wp/2009/03/co-pay-incentives-medicare-advantage-part-d-can-replicate-successes-of-commercial-payers/. Accessed September 28, 2009. 2. Fendrick AM et al. Am J Manag Care. 2009;15(6):338–339,343. 34 34

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