Managed Care Pharmacy Financials January 15, 2015

Insurance Basics Spread the risk over a group of people in the mix Cover catastrophic vs. expected expenses Goal is to cover anticipated expenses, allowing a small profit or margin for growth, reserves, etc. But the “Tragedy of the Commons” can intervene.

3 What MCO Pharmacy Does: Management Tactics Formularies; The P and T process; Quality improvement PA, step edits, restrictions Exception process Benefit design Manufacturer contracting Pharmacy networks and mail order CME; profiling Member education; profiling Disease management Monitor Performance (clinical and/or financial) Other 3

Discounts & Rebates For health plans that own pharmacies (e.g. Group Health, VA): negotiate discounts on the drugs they purchase, take ownership of, and dispense to their members For other plans (e.g. Regence, Premera) that do NOT own pharmacies: get rebates (often via their PBM) based on number of tablets (or other dosages) filled for their health plan members. 4

Example - Discount GHC negotiates for a 10% discount off WAC for Wondermycin. They order a shipment of 100 btls of 100 tabs (WAC = $250/btl). GHC takes ownership of the Wondermycin so it can be dispensed to their members in GHC pharmacies. The shipping invoice states: I00 X 100 = $25,000 Minus 10% negotiated discount = $2,500 Net due = $22,500 GHC sends a check for $22,500 to the manufacturer

Example - Rebate Premera negotiates for a 10% discount off WAC for Wondermycin. Premera owns no pharmacies so they do not order Wondermycin or take ownership of it. But Premera affiliated MDs prescribe Wonderycin for Premera members. These Rxs are filled at pharmacies under contract with Premera As a part of the claims process, Premera’s PBM creates a file listing how much Wondermycin was dispensed to Premera members Periodically Premera or its PBM sends a bill to Wondermycin’s mfg: - number of Wondermycin tabs dispensed = 10,000 - WAC price = $2.50/tablet; gross sale price = $25,000 - Negotiated discount = 10%; therefore rebate due = $2,500 The manufacturer sends a rebate check to Premera or its PBM for $2,500.

ManufacturerHealth Plan Pharmacy Benefit Manager Rebates Data Physician Group Data Rebates Data Rebates 7

PBM Pricing Terminology AWP – Average Wholesale Price – Originally data reported from the largest wholesalers to First Data Bank. Now common to have the number simply equal to the manufacturer’s WAC+20% – Published by Medi-Span – Many PBMs still using this outdated and repealed metric due to systems implementation 8

Pricing Terminology, con’t WAC – Wholesale Acquisition Cost – Manufacturer’s published price (also referred to as ACQ or AAC) MAC – Maximum Allowable Cost – Defined by the PBMs individually AMP – Average Manufacturer Price – CMS mandated price as reported by the manufacturer and should equal the actual average sale price for all classes of trade. 9

Pricing Terminology, con’t Discount – Negotiated % discount (varies between brands and generics) Dispensing Fee – Nominal fee for service on pharmacy contracts (varies between brands and generics) Rebate – Negotiated % or flat $ return for utilization Administrative Fees – PBMs per prescription fee 10

Pricing Terminology, con’t ASP – Average Sale Price – weighted average of ALL non-federal sales to wholesalers and is net of charge-backs, discounts, rebates, and other benefits tied to the purchase of the drug product, whether it is paid to the wholesaler or the retailer AMP – Average Manufacturer Price – Retail Pharmacy only ASP for Medicaid compliance 11

Average Sale Price In 2005, Medicare began to pay for most drugs using an entirely new methodology based on ASP rather than AWP. Unlike AWP and WAC, there is a specific method to calculate ASP set forth in the MMA and the Act. Section 1847A(c) of the Act, as amended by the MMA, defines ASP as a manufacturer’s unit sales of a drug to all purchasers in the United States in a calendar quarter divided by the total number of drug units sold by the manufacturer in that same quarter. The ASP is net of any price concessions such as volume, prompt pay, and cash discounts; free goods contingent on purchase requirements; chargebacks; and rebates other than those obtained through the Medicaid drug rebate program. Certain sales are exempt from the calculation of ASP, including sales at a nominal charge. Manufacturers report ASPs to the Centers for Medicare & Medicaid Services (CMS) on a quarterly basis by national drug code. Third quarter 2004 ASP submissions to CMS from manufacturers served as the basis for first quarter 2005 Medicare allowances for most covered drug codes. As of January 1, 2005, Medicare’s allowance for most covered outpatient drug codes is equal to 106 percent of the volume-weighted ASPs for those drugs. 12

Average Manufacturer Price Similar to ASP, average manufacturer price (AMP) is defined by law and based on actual sales transactions. In order for a manufacturer’s drug to be eligible for Federal Medicaid matching funds, section 1927(a)(1) of the Act mandates that drug manufacturers enter into rebate agreements with the Secretary and pay quarterly rebates to State Medicaid agencies. Under these rebate agreements and the law, manufacturers must provide CMS with the AMP for each of their national drug codes on a quarterly basis. Medicaid calculates drug rebates based on AMP. Section 1927(k)(1) of the Act defines AMP to be the average price paid to the manufacturer by wholesalers in the United States for drugs distributed to the retail pharmacy class of trade minus customary prompt pay discounts. The AMP is calculated as a weighted average of prices for all of a manufacturer’s package sizes of a drug sold during a given quarter and is reported for the lowest identifiable quantity of the drug (e.g., one milligram, one milliliter, one tablet, one capsule). 13

Financial Reports Monthly, quarterly, annually with comparisons Organize into demographic and other groupings Focus on -Retail pharmaceuticals -Specialty -Buy and bill -Inpatient

Financial Reports (cont.) Examples: -PMPM (net/net?) -Top drugs by spend and volume -Who is ordering/filling all the Rxs for …. The Holy Grail: Do patients treated with drug A do better than those treated with drug B?