1. This presentation contains confidential and proprietary information of Caremark and cannot be reproduced, distributed, or printed without written permission from Caremark. ©2006 Caremark. All rights reserved. Dollars to Doughnuts: Predicting Prescription Drug Costs of Beneficiaries and the Medicare Program Under Part D M. Christopher Roebuck, Caremark Dominick Esposito, Mathematica Policy Research, Inc. Meredith Lewis, Caremark Jan Berger, Caremark Academy Health Annual Research Meeting, Seattle, June 26, 2006

2. 2 Caremark proprietary and confidential information. Not for distribution. Research Objectives Examine drug utilization and out-of-pocket (OOP) costs of Medicare beneficiaries using a Medicare prescription drug discount card that includes beneficiaries who qualified for the Transitional Assistance Program (TAP) Simulate Medicare beneficiary OOP costs (excluding premiums) and costs to Medicare from the standard Medicare Part D benefit Understand the factors associated with these simulated costs and the probability of being in the doughnut hole (coverage gap)

3. 3 Caremark proprietary and confidential information. Not for distribution. Medicare Drug Discount Card Created via the Medicare Modernization Act Enrolled nondual eligible beneficiaries into the temporary program June 2004 to December 2005 Provided a $600 annual subsidy to seniors with income below 135% of the federal poverty level (TAP) May have charged cardholders an enrollment fee of up to $30 per calendar year

4. 4 Caremark proprietary and confidential information. Not for distribution. Data Consist of eligibility and prescription claims data for enrollees with one of 34 separate Medicare drug discount cards managed by Caremark Comprised of beneficiaries enrolled for six or more months with one or more pharmacy claims between June 2004 and November 2005 (n=37,425) Generated Pharmacy Health Dimensions (PHD), a pharmacy-based risk index that categorizes prescription data into 62 disease indicators 1 Source: 1 Powers, C.M., Meyer, C.M., Roebuck, M.C. and B. Vaziri. 2005. Predictive Modeling of Total Healthcare Costs Using Pharmacy Claims Data: A Comparison of Alternative Econometric Cost Modeling Techniques. Medical Care 43(11): 1065-1072.

5. 5 Caremark proprietary and confidential information. Not for distribution. Sample Characteristics TAP (n=17,317) Non-TAP (n=20,108) Total (n=37,425) Male26%38%33% Mean age767576 Number of conditions2.52.02.2 Hypertension60%45%52% High cholesterol27%30%27% Diabetes19%14%16% Hypothyroidism17%13%15% Osteoarthritis18%12%15% Allergies14%10%12% Depression13%10%11% Note: All differences in means across TAP and Non-TAP groups are statistically significant (p<0.01) using Kruskal-Wallis equality of populations test, except high cholesterol.

6. 6 Caremark proprietary and confidential information. Not for distribution. Annualized Utilization and Costs Under Medicare Drug Discount Card Program TAP (n=17,317) Non-TAP (n=20,108) Total (n=37,425) Mean annual number of prescriptions Brand1189 Generic12710 Total231519 Mean annual drug costs Enrollee paid (OOP)$256$781$538 Medicare paid (TAP)$672$0$311 Total$928$781$849 Note: All differences in means across TAP and Non-TAP groups are statistically significant (p<0.01) using Kruskal-Wallis equality of populations test.

7. 7 Caremark proprietary and confidential information. Not for distribution. Standard Medicare Part D Benefit Enrollee OOP Cost Share $250$2250$5100 100% co-insurance $0 25% co-insurance $2/$5 co-pay or 5% co-insurance

8. 8 Caremark proprietary and confidential information. Not for distribution. Standard Medicare Part D Benefit Simulation Applied Standard Medicare Part D benefit cost- share structure to annualized total drug costs (plus a 3.5% price inflation adjustment from 2005 to 2006) Expected utilization increases under insurance Applied variable induction factors of between 0.70 1 and 1.25 2 for prescription drugs Estimated each $1 decrease in OOP costs to induce between $0.70 and $1.25 of increased drug spending Sources: 1. Mays, J., Brenner, M., Neuman, T., Cubanski, J., and G. Claxton. November, 2004. Estimates of Medicare Beneficiaries Out-of-Pocket Drug Spending in 2006: Modeling the Impact of the MMA. Henry J. Kaiser Family Foundation. Menlo Park, CA. 2. American Academy of Actuaries. May 1995. Medical Savings Accounts: Cost Implications and Design Issues. Washington, DC.

9. 9 Caremark proprietary and confidential information. Not for distribution. Beneficiary OOP Costs

10. 10 Caremark proprietary and confidential information. Not for distribution. Percent of Beneficiaries in the Doughnut Hole

11. 11 Caremark proprietary and confidential information. Not for distribution. Multivariate Analyses Estimated generalized linear models (GLM; gamma/log link) for: Simulated OOP costs under Medicare Part D Simulated Medicare payments under Medicare Part D Estimated a probit model for the likelihood of being in the doughnut hole Explanatory variables included: -Age, gender, geographic region -TAP status -Generic dispensing rate -62 PHD disease indicators

12. 12 Caremark proprietary and confidential information. Not for distribution. Multivariate Results TAP (low income) status is associated with: $58 to $86 higher beneficiary costs $199 to $238 higher Medicare payments Almost no change in the probability of being in the doughnut hole A 10-percentage point increase in the generic dispensing rate is associated with a: $41 to $55 decrease in beneficiary costs $62 to $71 decrease in Medicare payments 1.8 to 2.6 percentage point reduction in the probability of being in the doughnut hole

13. 13 Caremark proprietary and confidential information. Not for distribution. Conclusions/Policy Implications In choosing whether or not to enroll in Medicare Part D, beneficiaries will compare annual premiums with the expected payout of the Medicare program Risk-neutral beneficiaries will enroll at monthly premiums below the $52 to $60 range Faced with higher OOP costs, low-income beneficiaries without low-income subsidies may reduce their drug utilization, potentially resulting in adverse health effects (e.g., those not passing the asset test) To reduce costs, Medicare should actively promote generic substitution With 33 million enrollees, the Medicare program could save more than $2.0 billion to $2.3 billion annually by increasing the generic dispensing rate by 10%

14. 14 Caremark proprietary and confidential information. Not for distribution. Strengths and Limitations Strengths: Actual claims experience, not self-reported use Actual OOP amounts Data on a low-income population (TAP) Limitations: Enrollees with zero claims excluded from the analysis Discount card may not always have been used Simulating the standard Medicare Part D benefit, although most have selected nonstandard plans

15. 15 Caremark proprietary and confidential information. Not for distribution. Thank you. Contact: M. Christopher Roebuck (410) 785-2136 chris.roebuck@caremark.com