Rx Collaborative Annual Report to Employers

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1 Rx Collaborative 2013 Annual Report to Employers

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3 Rx Collaborative 2013 Annual Report to Employers Table of Contents Letter From Rx Collaborative Leadership 2 Value Proposition 4 Clinical Update for Management of Specialty Pharmacy 10 Audit Initiative 17 Data Warehouse and Reporting 21 Annual Employer Meeting 23 Keeping Members Informed and Beyond 25 Leadership Team and Key Contacts 28 Rx Collaborative 2013 Annual Report to Employers 1

4 Letter From Rx Collaborative Leadership Fast Facts As of January 1, 2014, the Rx Collaborative includes 198 employers, representing diverse geographies, sizes and industries, and more than three million covered lives Members 3,000, Prescriptions 31,000,000 Retail 24,000,000 Mail 7,000, Drug Spend $3,300,000,000 Retail $1,600,000,000 Mail $1,700,000, Generic Dispensing Rate 78.6% Dear Members: The Rx Collaborative was founded 10 years ago with the mission to transform the pharmacy benefit management (PBM) business model, and provide clients with exceptional programs and services unique to the marketplace. Year after year, we have successfully fulfilled this vision, proving that employers can offer employees a market-leading pharmacy program while saving millions of dollars. Over the last decade, our membership has grown from just a handful of clients to 198 organizations representing $3.3 billion in annual drug spend. Our members have implemented innovative clinical programs, driven generic dispensing rates to an alltime high of 78.6% in 2013, cut waste and achieved substantial savings. While these statistics are impressive, the greatest measure of our success is our clients satisfaction. I am very pleased to share that 98% of respondents to our annual employer survey would recommend the Rx Collaborative to another employer. The Rx Collaborative provides our members with financial savings, design flexibility, PBM choice, innovative management strategies and PBM oversight. Our members, partners and staff have built the Rx Collaborative into the nation s leading PBM coalition. It is this partnership that will drive our success. I am proud to be the new Rx Collaborative team lead. Throughout my career, I have seen the pharmacy industry from various vantage points: as a retail pharmacist, director of pharmacy finance and pharmacy rebates for a large regional health insurer with an in-house PBM, and most recently, financial team lead for the Rx Collaborative. I have a deep appreciation for the service and financial complexities of the pharmacy industry, and I look forward to continuing to fulfill the vision the Rx Collaborative set 10 years ago. Thank you for your continued support; we look forward to the next 10 years. If you have any questions, comments or suggestions, please contact your Towers Watson pharmacy consultant or me at jasmine.aral@towerswatson.com. Sincerely, Jasmine Aral Rx Collaborative Team Lead 2 towerswatson.com

5 Highlights of 2013 Membership As of January 1, 2014, our membership has grown to 198 employers representing more than three million members and an estimated $3.3 billion in drug spend. Financials Rx Collaborative clients continue to realize significant savings through new contracts and price improvements. 80 clients received a midterm price improvement, effective January 1, 2014, with an additional savings opportunity in 2015 at the time of renewal. New Rx Collaborative employers realized an average savings of 5.7% over their previous arrangement. The majority of Rx Collaborative clients have contracts up for renewal at the end of Our team spent much of 2013 surveying the PBM marketplace and preparing our strategy for these contract renewals. We released a request for information to our two PBM partners in late 2013, and have leveraged our expertise and coalition s size to achieve highly competitive deal terms on behalf of our clients. Rx Collaborative members with contracts that expire at the end of 2014 will receive a value proposition outlining the savings opportunity for both Express Scripts and CVS Caremark. Rx Collaborative Team We have a talented and dedicated team supporting our clients. Towers Watson s pharmacy practice team of 40 members is larger than those of our competitors. More than 20 Rx Collaborative team members monitor marketplace dynamics, negotiate contract terms and handle group-level account management. In addition, each Rx Collaborative client is assigned at least one pharmacist to provide custom consulting and support. Industry Changes Change has been a constant over the last decade. We have seen many blockbuster drugs go off patent, significant PBM consolidation such as the merger of Express Scripts and Medco, and the birth of the Patient Protection and Affordable Care Act (PPACA). In 2013, we continued to help our clients navigate through these changes. Towers Watson is well positioned to guide clients through the complexities of health care reform and help design client-specific strategies to address the impending excise tax. Partnerships We are proud to be a partner of the two leading PBMs in the nation. Express Scripts provides home delivery, and CVS Caremark is retail focused. Both offer competitive deal terms, customized account management, and innovative clinical programs and services. As contracts come up for renewal in the near term, most clients will be able to choose between the two PBMs. Clinical Innovation We developed new clinical strategies to maximize plan design performance. In 2013, as a result of our innovative clinical initiatives, the Rx Collaborative s generic utilization rate rose from 75.9% to 78.6%, the highest in our 10-year history. This can mean real savings to employers. Every 1% increase in generic utilization yields approximately 1.5% to 2% savings in drug spend. We continue to develop clinical recommendations that will result in long-term cost management. The Rx Collaborative s Integrated Insights reporting, which is available to clients that have implemented the Express Scripts RationalMed program, benchmarks medical and pharmacy utilization data and shows opportunities for change. Looking forward to continued success in 2014, our goals for the year include: Providing our renewing members with extremely competitive value propositions Continuing to grow our membership so that we can continue to influence the changing pharmacy landscape Serving clients with exceptional account management and advocating on their behalf Leading the market with comprehensive, best-inclass PBM strategies Rx Collaborative 2013 Annual Report to Employers 3

6 2013 Rx Collaborative Value Proposition Rx Collaborative members benefit from financial savings in addition to value-added services, PBM governance, and advice on market changes and events. In 2013, Towers Watson consultants guided clients through health care changes emanating from reform, helped them navigate through the Express Scripts and Medco integration effort, and continued to grow our offering with CVS Caremark to provide members with an option for the upcoming renewal opportunity. Savings $ Our highly competitive deal terms are the foundation of the Rx Collaborative s value proposition. The financial terms, coupled with audits, price improvements, and clinical and formulary management, provide members with consistent and substantial savings. In 2013, potential clients had an opportunity to realize an average savings of 5.7% in drug spend. There was significant interest in the marketplace, and 25 new clients joined the Rx Collaborative. The Rx Collaborative uses best practice savings evaluation models that accurately show our clients and prospects the financial opportunity in their current utilization. Our models use assumptions developed by the Rx Collaborative team based on a review of client experience from the Rx Collaborative data warehouse. Our market intelligence and financial data ensure the savings opportunity is not overinflated. A complex product process managed by dedicated professionals relieves plan sponsors concerns. John L. Hunt Vice President, MBA Bankers Benefit Corporation Source: 2013 Rx Collaborative Annual Employer Survey Rx Collaborative financial terms remain competitive throughout the term, with a price improvement included in the member s contract. As of January 1, 2014, 80 clients received a midterm price improvement, with an additional savings opportunity in 2015 at the time of renewal. Clinical and formulary management continue to drive long-term savings for members. Towers Watson s pharmacy consultants leverage Express Scripts and CVS Caremark s existing programs, along with exclusive Rx Collaborative strategies, to develop a custom approach for each client. Under this coordinated approach, members have the tools to increase generic utilization, reduce waste and achieve significant savings. Advocacy The Rx Collaborative team works diligently to provide our members with access to premier products and services. We closely monitor marketplace dynamics and oversee group-level account management, confirming that clients understand the implications of market changes and that they receive excellent service from our partner PBMs. We offer a unique, joint account management team approach to oversee implementations and rectify any service issues. To ensure the best possible experience for members, we provide members with access to a dedicated Towers Watson pharmacy consultant and a PBM account manager. These teams supported Rx Collaborative clients through some of the account management issues that arose during the Express Scripts/Medco integration. The size of our coalition gives us access to seniorlevel colleagues at both of our partner PBMs. We meet monthly with Express Scripts executive sponsors to review financial performance and group-level initiatives, discuss market and company changes, and troubleshoot account management issues. We also continue to monitor any Express Scripts/Medco integration concerns that arise. 4 towerswatson.com

7 The Rx Collaborative s audit initiatives monitor the financial and operational performance of Express Scripts. At the end of each contract year, Caribou Systems, an independent, third-party vendor, audits discounts and dispensing fees on behalf of Towers Watson to verify that Express Scripts correctly adhered to contract terms. KPMG, one of the leading accounting firms in the industry, audits a sample of Rx Collaborative employers to verify that Express Scripts adhered to rebate pass-through and guaranteed contract terms. Towers Watson also performs an operational assessment, which examines Express Scripts delivery of service and provides recommendations for future process improvements. Here are some examples of how Towers Watson supported Rx Collaborative members during integration: New formulary rollout. As part of its integration, Express Scripts rolled out a new formulary (National Preferred Formulary) that excluded 40 drugs. Towers Watson provided a point of view on the exclusions and helped review the financial impact for our clients. Network migration. Express Scripts created several new retail networks and transitioned Rx Collaborative clients to the one that most closely aligned with their network under legacy Medco. The Rx Collaborative team was able to provide advance notice of the migration along with client impact and sample member communications. Action Rx Collaborative Employers Have Access to Redesigned Performance Guarantees Once a year, the Rx Collaborative team reviews performance and implementation guarantees to ensure they appropriately address key market dynamics. In 2013, Rx Collaborative clients expressed concerns about account team performance and member services. In response, Towers Watson worked with Express Scripts to redesign the contractual performance guarantees available to employers. The options now provide for a more streamlined process for accountability, and performance is based on quantitative metrics. Results For contracts that began January 1, 2014: Express Scripts increased the amount Rx Collaborative clients can allocate to performance guarantees by $40,000. Express Scripts and Towers Watson redesigned the account management performance guarantee to allow clients to rate their account team s performance on responsiveness, issue management, analytics and strategy. In addition, Express Scripts increased the at-risk amount an employer can allocate to this guarantee from 20% to 30%. Performance guarantees were added to ensure the timeliness of Express Scripts reconciliation reports. Express Scripts is contractually obligated to provide annual reconciliation reports on the following: pricing guarantees (net effective discount), rebate guarantees and administrative fees. Employers may allot up to $10,000 for each report. Existing clients will have access to these performance guarantee enhancements upon renewal, effective January 1, The Rx Collaborative team will review the Express Scripts and Towers Watson 2013 client satisfaction survey results to determine if additional enhancements should be developed for January 1, Rx Collaborative 2013 Annual Report to Employers 5

8 Flexibility CVS Caremark and Express Scripts represent a 60% share of the total PBM market. Both Rx Collaborative partners are leaders in the industry, providing outstanding services across product lines. Beginning with the 2015 contract renewal, most Rx Collaborative clients will have the option of selecting either CVS Caremark or Express Scripts as their PBM. Unlike many coalitions, the Rx Collaborative allows clients to have complete flexibility and control over their plan offerings. Clients can work closely with their pharmacy consultants to determine the plan design, retail network and formulary that best fit their company s needs. Our membership includes both large companies and small firms in a variety of industries, and their pharmacy benefits are just as diverse. Innovation We continually review our PBM partners utilization management and formulary strategies, and develop recommendations for our clients to implement. Clients can save up to 20% in drug spend when implementing all of our clinical recommendations. Furthermore, the Rx Collaborative s Integrated Insights reporting provides information to clients on their utilization and concrete recommendations for future cost management. As the Rx Collaborative grows, Towers Watson will continue to monitor market trends in pricing and clinical management of pharmacy benefits, and negotiate market-leading arrangements. We expect to maintain strong executive sponsorship from our PBM partners, and provide best practice services and premier programs. 6 towerswatson.com

9 2013 Rx Collaborative Clinical Update for 2013 The year 2013 was another important one for the management of the pharmacy benefit. While specialty drugs were the main drivers of cost increases, their impact on total drug spending was blunted by new generics and plan sponsors utilization management strategies targeting nonspecialty drugs. Generic Dispensing Reached an All-Time High As a result of patent expirations and utilization management strategies, the Rx Collaborative generic dispensing rate (GDR) for non-specialty drugs reached an all-time high in 2013: The group average was 79% based on prescription counts and 75% based on days of supply, up from 76% and 71%, respectively, in The financial impact of the GDR is evident when one compares covered charges for a month s supply of generics and brands. Taking Rx Collaborative contract discounts into account, the covered charge for a 30-day supply of generics (non-specialty) was $26 in 2013, whereas a 30-day supply of brands was $180 nearly seven times greater. There were 42 first-time generics approved by the Food and Drug Administration (FDA) in 2013, which represented approximately $29 billion across the entire U.S. pharmaceutical market. For the Rx Collaborative, the patent expirations represented $175 million of the group s total drug spend $169 million for non-specialty and $6 million for specialty drugs. For example, here are a few of the products that converted to first-time generics: Cymbalta for depression and pain: $18.00 per member per year (PMPY) Niaspan for high cholesterol: $5.30 PMPY Lidoderm for pain relief: $3.25 PMPY Aciphex for heartburn and ulcers: $2.65 PMPY Temodar (specialty) for cancer: $1.25 PMPY Figure 1. Covered charges PMPM for Rx Collaborative clients $100 $80 $60 $40 $20 $ Source: Express Scripts $92.96 $93.67 $91.52 $93.70 $81.95 $80.98 $76.97 $76.61 $11.01 $12.69 $14.55 $17.09 $ Specialty drugs Non-specialty drugs All drugs $90.19 $ Over the past five years, covered charges per member per month (PMPM) for Rx Collaborative plan sponsors decreased 3.0%, which is the aggregate result of a 13.5% PMPM decrease for non-specialty drugs and a 75.5% increase PMPM for specialty drugs. Rx Collaborative 2013 Annual Report to Employers 7

10 Figure 2. Distribution of edits by frequency 4% 18% 12% Source: Express Scripts 66% 66% Smart rules 18% Traditional prior authorization 12% PDST 4% Quantity per dispensing event Figure 3. Distribution of savings by type of edit 33% 9% 2% Source: Express Scripts 56% 56% Smart rules 33% Traditional prior authorization 9% PDST 2% Quantity per dispensing event Figure 4. Distribution of Rx Collaborative custom generic-first edits 33% 11% 3% 1% Source: Express Scripts 52% 52% PPIs 33% High cholesterol (Crestor ) 11% Antipsychotics (Seroquel XR ) 3% Narcotics (Oxycontin ) 1% Antiplatelet drugs (Brilinta ) Utilization Management Experience for Rx Collaborative Plan Sponsors Over 300,000 drug utilization management edits targeting over 860 specialty and non-specialty drugs were triggered for Rx Collaborative claims. In total, the edits saved $170 million 5.2% of covered charges, or $555 per edit. The edits included smart rules, such as inferred qualification for coverage based on medications already in history, prior authorization to confirm diagnosis (common with specialty drugs), preferred-drug step therapy (PDST) edits, and quantity-per-prescription and dose optimization. As expected, smart rules accounted for the highest volume of edits (66%) and amount of savings (56%). Prior authorization generated the most savings per occurrence, largely due to its application in managing specialty drugs. Rx Collaborative Custom Edits As a supplement to Express Scripts, the Rx Collaborative created eight custom edits of nonspecialty drug classes to maximize GDR and generate maximum savings. The edits target brand products in the statin, proton pump inhibitor (PPI), antipsychotic and other classes. In 2013, the custom generic-first savings averaged $320 per edit. The generic-first Crestor edit saved the most (75%), with an average of $410 each time the edit triggered. The savings associated with each edit depend on many factors, including the cost difference between the targeted prescription and the desired result. Interventions targeting specialty drugs averaged more than $1,000 per intervention because of the high cost of these products. On the other hand, edits targeting non-specialty drugs resulted in savings of $453 per edit, on average. Although we expect more non-specialty drugs to lose patent protection in the next several years, which will drive cost down further, Rx Collaborative plan sponsors should continue to actively manage this sector with a goal of outperforming the industry GDR averages. 8 towerswatson.com

11 Figure 5. Average savings for the 10 most frequently triggered edits Savings per edit $0 $300 $600 $900 $1,200 $1,500 Important Patent Expirations in 2014 Non-Specialty Drugs Patent expirations slated for 2014 are likely to continue the negative trend for non-specialty drugs. The launch of a generic for Nexium (esomeprazole) is one of the most eagerly anticipated in After this ulcer drug loses its patent, the PPI class will essentially be all generic. Although this patent is due to expire in the first half of 2014, one manufacturer will have exclusive rights to sell the generic form for the first six months. This exclusivity will keep prices for the class higher in 2014 than they will be in 2015 and beyond. Other important generic launches for non-specialty drugs in 2014 include Lyrica, which is used for the treatment of painful conditions, and Lantus, the most widely prescribed form of long-acting insulin. Specialty Drugs Although some patents on specialty drugs are also expiring, new drugs in that sector will overshadow that effect on trend. Unlike non-specialty drugs, the active ingredients made to replicate the original product may not be exactly the same. For specialty drugs that are biologics, the copies are referenced as biosimilars. They are materially the same as the original biologic, but not chemically exact. Rituxan is the most notable example. We anticipate that biosimilar versions of Rituxan will be available in the future, but not necessarily in This is because the path to FDA approval of these copies is not yet totally clear. So the impact of patent expirations of certain specialty drugs remains uncertain. One of the most frequently prescribed drugs for multiple sclerosis, Copaxone, is losing its patent in In contrast to Rituxan, we expect that Copaxone will have generics suitable for substitution that likely will be lower in cost compared to the brand. In this case, utilization management will be critically important because in 2013, the FDA approved a new version of Copaxone that will compete with the generic form. Because the new form is a different strength, the impact of Copaxone s new generic may be blunted. Erectile dysfunction High cholesterol $376 Migraine Ulcer, heartburn (PPI) $279 ADHD, narcolepsy $272 Allergy (intranasal steroids) $232 Acne therapy $147 Sedative hypnotics $68 Weight loss $55 Nausea $50 All other (including specialty) Source: Express Scripts Another important specialty drug patent expiration is Gleevec, a drug that revolutionized the treatment of one form of adult leukemia. It is scheduled to lose its patent during the second half of 2014, and we expect an exclusive single-source generic form by the end of Summary $369 $543 In 2013, as a result of new generics and utilization management strategies some created by the Rx Collaborative plan sponsors maximized GDR without impeding access to essential therapy. In 2014, patent expirations will convert more classes to all generics. However, specialty drugs require as much or more focus on prior authorization, preferred-drug policies and other targeted utilization management rules to control cost. $1,322 Rx Collaborative 2013 Annual Report to Employers 9

12 2013 Rx Collaborative Management of Specialty Pharmacy Specialty medications continue to represent a major area of focus for plan sponsors trying to manage costs in In 2013, these medications while used by only 1.3% of Rx Collaborative members and accounting for just one-half of 1% of all claims drove a disproportionate 21% of covered charges PMPM for the group. Express Scripts had a similar experience, according to its most recent Drug Trend Report. While specialty drugs represented less than 1% of prescriptions filled for its population in 2013, they accounted for almost 20% of total prescription drug expenditures. Figure 6. Rx Collaborative group average cost over the past five years Covered charges PMPM $100 $80 $60 $40 $20 $ Source: Express Scripts $92.96 $93.67 $91.52 $93.70 Specialty drugs All drugs $90.19 $11.01 $12.69 $14.55 $17.09 $ It s a trend we ve seen over the past five years. While the total annual cost of our collaborative s pharmacy claims has been relatively flat in part, due to the high number of patent expirations and increased GDRs for traditional drugs covered charges for specialty drugs increased an average of 15.1% PMPM annually. Express Scripts projects more of the same for the next several years, largely due to the growing number and prices of specialty drugs. Plan sponsors costs will rise as newer, more-sophisticated therapies, with price tags of tens and hundreds of thousands of dollars, are brought to market. If this rate of growth were to continue, covered charges for specialty drugs for our group would be more than double what they were in 2009 by 2015, likely exceeding $25 PMPM. And in another five years, specialty drugs would likely represent 50% or more of plan sponsors overall drug spend. Notably, the top three fastest-growing therapy classes (inflammatory conditions, multiple sclerosis and cancer) are expected to continue accounting for more than half of all specialty spend until the end of the decade. Integrated Utilization and Cost Data Analysis The Rx Collaborative Integrated Insights report summarizes specialty drug utilization and cost based on data from health plans and Express Scripts. In the following paragraphs, we identify some of the current profiles for the Rx Collaborative plan sponsors. 10 towerswatson.com

13 Figure 7. Specialty drug claims by site of service Sites of Service Figures 7 and 8 illustrate the utilization and cost distributions that have been consistent over the last four years for Rx Collaborative plan sponsors. Specialty drugs given to patients by health care providers account for 40% of the claims under the medical benefit (35% by physician offices and 5% by other health plan providers), while pharmacy providers account for 60% of claims. However, health plan providers receive only 22% of the amount paid by health plans, while pharmacy channels receive 78%. To refine a specialty drug management strategy, plan sponsors should drill down into the types of medications dispensed through these channels. Whereas almost all specialty drugs must be authorized for coverage in advance, many of the medications provided by health plan providers should be considered for medical channel management (MCM), which requires a specialty pharmacy to provide the medication to the administration site. MCM advantages include pricing transparency and consistent practices to minimize waste. Medical Conditions Driving Utilization and Cost Consistent with previous years, the top 10 disease diagnoses drove over two-thirds (70%) of specialty drug utilization and over four-fifths (86%) of its cost. Three umbrella disease groups alone (autoimmune conditions, multiple sclerosis and cancer) drove 44% of utilization and 61% of cost (Figures 9 and 10). This distribution is likely to continue because the majority of specialty drugs newly approved by the FDA last year targeted a disease in one of these top 10 categories. Notably, medications to treat hepatitis C accounted for 3% of claims and the total amount paid. We expect to see dramatic increases in treatment of hepatitis C due to the approval of two new oral drugs at the end of 2013 and the pent-up demand of a large, untreated population. Additionally, there are more new drugs in development for hepatitis C, creating significant changes in the way this infection is treated. (See the accompanying article on page 13 for more details.) 20% 40% 35% 3% 1% 1% 35% Physicians office 3% Home infusion 1% Hospital outpatient 1% Other medical providers 40% Accredo 20% Retail pharmacies Source: Rx Collaborative group-level data from the 2014 Integrated Insights report Figure 8. Specialty drug amount paid by site of service Figure 9. Conditions driving specialty drug utilization 30% 13% 65% 3% 1% 4% 3% 4% 3% 8% 17% 23% 12% 9% 4% 17% Physicians office 1% 4% Home infusion 1% Hospital outpatient 65% Accredo 13% Retail pharmacies Source: Rx Collaborative group-level data from the 2014 Integrated Insights report 23% Autoimmune conditions 9% Multiple sclerosis 12% Cancer 8% Other rare conditions 3% Growth hormones 4% Immune deficiency 3% Lung disorders 4% Low platelet and blood cell 1% Hemophilia 3% Hepatitis 30% All other Source: Rx Collaborative group-level data from the 2014 Integrated Insights report Figure 10. Conditions driving total amount paid 3% 3% 3% 3% 4% 4% 5% 14% 16% 26% 19% 26% Autoimmune conditions 19% Multiple sclerosis 16% Cancer 5% Other rare conditions 4% Growth hormones 4% Immune deficiency 3% Lung disorders 3% Low platelet and blood cells 3% Hemophilia 3% Hepatitis 14% All other Source: Rx Collaborative group-level data from the 2014 Integrated Insights report Rx Collaborative 2013 Annual Report to Employers 11

14 Specialty Drugs Driving Utilization and Cost Figure 11. Top 10 specialty drugs driving utilization 65% 9% 7% In addition to the medical conditions driving utilization and cost, drug mix is an important factor. Figures 11 and 12 illustrate that the top 10 drugs drove 35% of utilization and half of the amount paid. Three of the top 10 drugs require administration by a health care professional: They are Remicade (for inflammatory conditions), Neulasta (for supportive treatment after cancer chemotherapy) and Octagam (for the treatment of immune deficiency and neurologic conditions). These products would be targeted by MCM strategies, which require the specialty pharmacy to provide the drug and Express Scripts to process claims. 3% 3% 2% 4% 1% 1%2% 9% Humira 7% Enbrel 3% Copaxone 3% Avonex 2% Nutropin 4% Remicade Source: Rx Collaborative group-level data from the 2014 Integrated Insights report Figure 12. Top 10 specialty drugs driving amount paid 49% 11% 9% 4% 3% 7% 7% 11% Humira 9% Enbrel 7% Copaxone 7% Avonex 4% Nutropin 4% Remicade 3% Octagam 2% Neulasta 1% Gleevec 1% Gilenya 65% All other 3% Octagam 2% Neulasta 2% Gleevec 2% Gilenya 49% All other Summary and Management Strategies in the Future In 2013, the Rx Collaborative refined its integrated reporting capabilities and increased the number of plan sponsors receiving Integrated Insights from 59 in 2011 to 96 in Additionally, we completed a successful pilot program designed to minimize waste of specialty drugs that are administered orally (described on page 15). From now on, the Rx Collaborative will continue to focus on specialty drug management, especially in terms of expanding clinical strategies. In 2012, we developed the Rx Collaborative Specialty Utilization Management package, which has been very well received. In the future, plan sponsors should prepare to adopt a number of management components, including the following: Differentiation between preferred and nonpreferred products in certain treatment categories, potentially including biosimilars if they are equivalent and less costly Be prepared for Express Scripts to expand its interest in excluding certain products from the formulary if they are more costly than competing products and their outcomes are the same New benefit designs that involve multilevel formularies for specialty drugs or incentives to drive utilization to the most cost-effective product or dispensing channel More management of dispensing and distribution channels, including management of the medical channel, or better coordination across medical and pharmacy benefits Care coordination and expansion of programs to minimize waste and misuse 2%2%2% 3%4% Source: Rx Collaborative group-level data from the 2014 Integrated Insights report 12 towerswatson.com

15 New Hepatitis C Treatments Require Utilization Management Hepatitis C is an infectious disease affecting primarily the liver, and it is caused by the hepatitis C virus (HCV). The infection initially causes mild or no symptoms, but it quickly settles in the liver of about 85% of people infected. Chronic HCV infection can lead to scarring of the liver and ultimately to cirrhosis, which may only become apparent after many years. In some cases, those with cirrhosis develop liver failure, require a transplant or die of liver cancer. Hepatitis C infection is the leading cause of liver transplants. Here are a few of the facts about hepatitis C infection: Roughly three million to four million people are infected each year with HCV. 150 million to 200 million people (about 3% of the world s population) are thought to be living with chronic HCV three million are in the U.S. HCV has six different genetic variations. More than 350,000 people die each year from HCV-related diseases. In 2010, nearly 200,000 deaths occurred due to liver cancer derived from HCV infection. 1,2 Promising New Hepatitis C Treatments Hepatitis C is an important issue for plan sponsors for several reasons. Treatments are expensive, and their side effects often cause people to stop taking them, which leads to relapse. As a result, there is pent-up demand for drugs with fewer side effects. Such drugs might provide a viable alternative to liver transplants, which are costly. In addition, use of these drugs could grow if more of the large number of undiagnosed individuals with HCV infection are ultimately treated. In November and December 2013, the FDA approved two new oral drugs for the treatment of HCV: Olysio (Janssen Pharmaceutical) and Sovaldi (Gilead Services). They are better tolerated, and the cure rates are higher than first- and second-generation treatments. 3,4 Their costs are also significantly higher than first- and second-generation treatments. Figure 13. Progression of hepatitis C infection For every 100 people infected Figure 14. Hepatitis C treatment: Cost per day $0 $250 $500 $750 $1,000 $1,250 Pegasys Ribasphere Incivek Victrelis Olysio Sovaldi Class (avg.) will develop chronic infection will develop chronic liver disease 5 20 will develop cirrhosis * will die of cirrhosis or liver cancer , , *Projected Source: Rx Collaborative group-level data from the Rx Collaborative Data Warehouse; accessed February 21, World Health Organization; Hepatitis C; factsheets/fs164/en/index.html; Accessed 12/15/13 2 Centers for Disease Control; Hepatitis C Information for Health Professionals; Accessed 12/17/13 3 American Society of Health System Pharmacists; Simeprevir approved for Hepatitis C Infection; aspx?id=3988; Accessed 12/17/13 4 American Society of Health System Pharmacists; Sofosbuvir approved for Hepatitis C Infection; aspx?id=3993; Accessed 12/17/13 Rx Collaborative 2013 Annual Report to Employers 13

16 Figure 15. Hepatitis C treatment: Cost Covered charges PMPY $20 $18.72 $15 $10 $5 $0 $ $2.22 $ $ *Projected Source: Rx Collaborative Data Warehouse; accessed on February 21, 2014 Figure 16. Hepatitis C: Utilization Days of therapy PMPY $0.07 $0.06 $0.05 $0.04 $0.03 $0.02 $0.01 $0.00 $ $ $0.06 $ *Projected Source: Rx Collaborative Data Warehouse; accessed on February 21, $ $ * $ * Other pharmaceutical manufacturers such as AbbVie, Bristol-Myers Squibb, Merck, and Johnson & Johnson have additional new HCV drugs in development. 5 In 2013, the average cost per day for the class was $130, or nearly $4,000 per month. However, the newest medications, Olysio and Sovaldi, cost $800 and $1,000 per day, respectively. Because of the unmet demand for better HCV treatment and Sovaldi s high price, some analysts expect that it will become one of the best-selling drugs in the world. In fact, one analyst predicted that its annual sales could surpass the record of nearly $13 billion, which was achieved by Lipitor in its peak year. Pharmacy Benefit Utilization and Cost Management Strategies Because of the anticipated increase in utilization and high unit cost of hepatitis C medications (which are self-administered, either by mouth or subcutaneous injection), employers should be prepared to manage cost and utilization through their pharmacy benefit managers. Frequently Asked Questions About Managing Utilization of Hepatitis C Therapy Do hepatitis C therapies meet the definition of specialty drug? Yes. On average, these medications cost $4,000 per month (ranging from $400 to $30,000). Additionally, they require genetic testing to be sure the virus strain is likely to be susceptible to the medication prescribed, and they require clinical monitoring for response to the drugs used and to assure compliance with the treatment regimen. Is the health plan or pharmacy benefit manager in the best position to adjudicate claims for hepatitis C therapies? Because hepatitis C therapies are suitable for self-administration, claims are best adjudicated by PBM systems. In contrast to health plans, PBMs document dates of service, member eligibility and specific product identifiers, and apply consistent ingredient-cost discounts each time members obtain a medication supply. What is the optimal dispensing channel? These are self-administered medications, and compared to medical providers, pharmacies are better equipped to dispense them. In most cases, exclusivity with the specialty pharmacy delivers the best discounts. 5. The New York Times; FDA Approves New Pill to Treat Hepatitis C; December 8, 2013; Accessed 12/17/13 14 towerswatson.com

17 What is the most practical utilization management strategy for hepatitis C therapies? Prior authorization, formulary and limited quantities per fill are the essential components of a hepatitis C utilization management strategy. Prior authorization. Require that the PBM authorize these claims in advance of distribution to ensure that the prescribed regimen is effective against the virus s genetic type. Product placement. Allow the PBM to negotiate preferred and non-preferred drug status for the pegylated interferons (Pegasys and PegIntron products). The approach is reasonable because these products are therapeutically equivalent, and supply-chain exclusivity can drive lowest net cost for plan sponsors. Be prepared to potentially exclude certain manufacturers product(s) from the formulary if they are not priced competitively and outcomes are no better. For instance, Express Scripts has stated that it will identify which drugs can be pitted against each other and make some really tough formulary decisions especially if there are no compelling advantages of one manufacturer over another. 6 Waste. Limit quantities for the very first prescription (at least) of the oral medications (Incivek, Olysio, Sovaldi and Victrelis) to avoid waste. Summary Infection with HCV initially presents with mild symptoms. However, if left untreated, the disease can lead to liver cirrhosis, cancer, organ transplant and death. Treatment regimens are difficult to tolerate, and the cure rates are suboptimal largely due to early discontinuation. New drugs appear to be more effective, but they are up to 100 times more costly. Plan sponsors should adopt a comprehensive utilization management strategy to control the cost of these specialty drugs. 6 Bloomberg News; Express Scripts Pushes Price Competition for Gilead Drug; December 10, 2013; Accessed 12/17/13 Rx Collaborative 2013 Annual Report to Employers 15

18 Case Study: Successful Rx Collaborative Split-Fill Strategy Reduces Waste Serious side effects are often associated with specialty drugs, which can result in early discontinuation of therapy. In addition to reducing the drugs efficacy, early discontinuation creates waste and unnecessary cost for plan sponsors. To reduce waste, the Rx Collaborative team worked with Express Scripts to design a pilot program targeting certain specialty drugs for cancer that are administered orally. Plan sponsors that use Accredo pharmacy exclusively were invited to participate. Because of the pilot program s success, Express Scripts expanded the list of targeted drugs beyond cancer indications and will offer it to all clients beginning in Program Description As of January 1, 2013, 245,000 lives were enrolled. For 12 medications, Accredo pharmacists dispensed a partial supply (usually lasting 10 to 14 days) for the very first fill of the prescription: Targeted medications included Erivedge, Iclusig, Nexavar, Sprycel, Sutent, Tarceva, Tasigna, Votrient, Xalkori, Zelboraf, Zolinza and Zytiga. After one week, Accredo contacted each patient to assess whether (s)he tolerated the medication and intended to continue taking it: If so, Accredo dispensed the remaining supplies as prescribed and obtained the right prescription documentation from the physician, if necessary. If not, Accredo did not dispense additional supplies. Results Between January 1 and June 30, 2013, Accredo took action on 42 claims. The program avoided 193 days of therapy and saved $4,800 per patient involved with the split-fill program ($0.47 PMPY). For this sample, the savings totaled $47, towerswatson.com

19 2013 Rx Collaborative Audit Initiative Towers Watson s Rx Collaborative was founded to provide employers with the tools they need to manage pharmacy costs while providing their members access to effective care. One component of effective pharmacy management is an audit of the PBM to ensure it complies with contract terms and meets or exceeds industry service delivery standards. Towers Watson s annual audit includes: Group-level claim audit Rebate review Operational assessment This governance gives employers a level of assurance unavailable to non-rx Collaborative employers, and results in process and service improvements. Group Claim Audit In 2013, the Rx Collaborative team conducted an audit of all 2012 pharmacy claims, the fifth annual claim audit performed on behalf of Rx Collaborative employers. Results showed that Express Scripts correctly applied contracted discounts and dispensing fees, and that process improvements implemented as a result of previous audits led to improved claim-processing accuracy. Process The comprehensive audit, performed by Caribou Systems, included: Pharmacy claims for 173 clients, including terms from five contract generations effective from 2008 to 2012 An audit sample containing 32.3 million claims representing covered charges of $3.4 billion and plan costs of $2.8 billion: 24.8 million retail claims and 7.5 million mail claims 25.1 million generic claims, 7.1 million brand claims and 146,000 specialty claims Express Scripts provided data to Caribou for review. Caribou excluded claims known to produce false positives (e.g., reversal pairs) and determined that 96% of the transactions were auditable. For each claim, Caribou determined whether or not Express Scripts correctly matched the Average Wholesale Price (AWP), as published by Medi-Span (a nationally recognized source of AWP), in effect on the date the claim was processed. The audit verified that the appropriate AWP was used in the adjudication of 2012 claims. Caribou then applied the negotiated discounts to each specialty and non-specialty claim based on the guaranteed pricing set forth in the contracts. Claims that were in question were reviewed with Express Scripts, and findings were reviewed with Towers Watson. Results Audit results found that Express Scripts correctly applied the contracted discounts and dispensing fees in compliance with contract terms except for a few specialty issues. In those cases, Express Scripts corrected the system, determined the financial impact and processed payments due. Here are the details: Rx Collaborative client contracts implemented after January 1, 2011, stipulate that there are no postage increases to the dispensing fee on mail-order claims in the first year of the contract. The audit found that while Express Scripts correctly implemented the postage increase provision, there were some errors in the net effective discount (NED) reporting. Express Scripts has implemented process improvements to ensure accuracy in NED reporting. Rx Collaborative 2013 Annual Report to Employers 17

20 The Rx Collaborative arrangement features more aggressive discounts on specialty drugs when Express Scripts Accredo pharmacy is the exclusive provider: Express Scripts incorrectly applied the more aggressive discounts associated with Accredo exclusivity to six clients. As a result, Express Scripts corrected the programming error but did not attempt to recover clients underpayments. Express Scripts incorrectly applied nonexclusive discounts to four clients. Express Scripts corrected the error and processed payments. Express Scripts incorrectly applied a lower discount for one specialty drug, Egrifta, than was contracted for seven Rx Collaborative clients. Express Scripts corrected the error and issued adjustments. The Group Claim Audit was discussed on the December 2013 quarterly call, and a report was released to clients Rebate Review In 2013, Towers Watson engaged KPMG to conduct a review of 2012 rebates earned by Rx Collaborative employers. This eighth annual rebate review included a statistically valid sample of rebates paid by drug manufacturers to a sample of Rx Collaborative employers. The purpose of the annual audit was to: Verify that Express Scripts complied with contract terms requiring it to pass through all manufacturers revenue Verify that Express Scripts correctly calculated the year-end guaranteed rebate amounts Verify Rebate Pass-Through Rx Collaborative contracts require that all rebates earned by employers be passed through to clients. Clients can earn rebates from drug manufacturers based on their specific utilization, placement of preferred drugs on their formulary and the clinical management programs in place. However, sometimes PBMs receive additional financial payments from drug manufacturers that fail to get passed on to clients because they were never identified as rebates. It is, therefore, important that PBM contracts define rebates to include other money paid by drug manufacturers to PBMs based on drug utilization. The rebate audit includes a review of all manufacturer rebates and monies paid, defined in employers PBM contracts as Total Rebates. The review included a statistically valid sample of rebates paid by drug manufacturers to a corresponding sample of Rx Collaborative employers. For selected plans, KPMG collected data that included quarterly rebate reports, utilization data, and formulary and plan designs. Data collected for the selected manufacturers included rebate agreements, invoice/ market-share information and all other agreements that fall under the Total Rebates section of the contract. KPMG collected some of this information onsite at Express Scripts, performed an analysis of the information collected and resolved discrepancies with Express Scripts. The audit included a sample of manufacturers representing 35% of the total gross commercial rebates paid to the sample plans. KPMG s calculation reconciled within 0.2% of Express Scripts payment, well within a reasonable range, and showed that Express Scripts accurately passed through rebates based on the contract terms. Some notable items include: KPMG reviewed documentation and invoices from Express Scripts that support the financial arrangements with the five manufacturers and confirmed the payments passed through to sample employers included all applicable payments from drug manufacturers. 18 towerswatson.com

21 It is Express Scripts policy not to pay earned supplemental rebates until it receives payment from the drug manufacturer. Therefore, rebates may be paid later than in the period in which they are earned. KPMG verified that all plans reviewed received their share of supplemental rebate payments in Verify Rebate Guarantees The second step of the rebate review was to verify that guaranteed rebates were calculated and reported correctly for the sample clients. KPMG received claim detail and formulary guarantee reports from Express Scripts, and then verified that the guaranteed rates per prescription type (retail, mail, open, incentive) reconciled with the contracted rates. KPMG next calculated the expected rebate amount by multiplying the claim count by type by the guaranteed rate and checked the amounts against those provided on the formulary guarantee savings report. KPMG found that in all cases, the guaranteed rates used in the savings reports agreed with the rates defined within the plan contracts. Auditors were able to reconcile the calculated rebate to the amount on the Formulary Guarantee Savings Report within 0.2% for all plans. KPMG s report was distributed to clients in January In addition, KPMG representatives attended the fourth quarter client call to explain the audit and results. Operational Assessment Towers Watson also performed an operational assessment in Express Scripts operations were evaluated through: The primary objectives were to determine Express Scripts effectiveness in providing best-in-class service to Rx Collaborative members by comparing its processes and procedures to industry standards and best practices, and identifying administrative issues that could lead to member and employer service disruption. We would then work with Rx Collaborative executive sponsors to develop and implement process improvements that would improve overall service. The review was performed by the Rx Collaborative audit team. Throughout the review, Express Scripts personnel key to the administration of the Rx Collaborative program were available to discuss results and clarify processes. We focused on core services as well as the following key areas: Integration. Express Scripts was formed in mid-2012 by the merger of two legacy organizations, Express Scripts and Medco Health Solutions. Express Scripts is in the second year of integration. Integration efforts in 2013 included changes in the areas of benefits administration, member services, client services, client reporting and clinical management. Account management. Rx Collaborative clients have access to our unique account management service model, which includes discounted service fees and proprietary performance guarantees. Site visit. The audit team evaluated Express Scripts operations by going onsite to the Express Scripts Pharmacy and its behavioral economics center, the Research and New Solutions Lab, in St. Louis on June 26. Our oversight role on behalf of Rx Collaborative clients Review of Express Scripts responses to a comprehensive questionnaire that asked for information on performance metrics and performance guarantee results Observations during a site visit to the Express Scripts Pharmacy, and the Research and New Solutions Lab in St. Louis on June 26, 2013 Rx Collaborative 2013 Annual Report to Employers 19

22 Results Overall, the findings revealed that Express Scripts meets or exceeds industry standards in all operational areas, including benefits administration, account management, member service, cost containment, clinical management and pharmacy provider management. The new organization is in its second year of an extremely aggressive integration and system update strategy. Express Scripts has the processes to support a high level of service to Rx Collaborative clients and members. However, the platform integration, system upgrades, redefinition of the account management model, and transition and training of personnel have resulted in service disruption. The disruption is a result of administrative and operational missteps, and is not systemic in nature. The migration to a single benefit platform should result in administrative improvements and help stabilize service. Observations during the site visit revealed the dispensing operation at Express Scripts mail facility is efficiently run and includes state-of-theart processes and quality control procedures. The Research and New Solutions Lab is an innovative facility using new techniques to develop programs that can improve patient outcomes and reduce costs, especially in terms of medication adherences. Towers Watson recommends that Express Scripts consider the following development opportunities: Reassess changes from integration efforts: Proactively communicate changes to manage clients expectations. Assess staffing levels. Review current levels of decision-making authority to ensure account teams have the appropriate power to implement client strategies. Train patient care advocates on all Express Scripts services and the patient perspective. Continue to emphasize adherence to the Rx Collaborative account management model, especially in terms of managing escalated issues and delivering consistent messaging. Continue to improve core service delivery: Improve reporting and quality assurance checks for true-up and performance guarantee metrics. Align the rollout for the 2015 formulary with clients timelines for strategy decisions and member communications. Improve average response speed for both specialty and non-specialty member services. Simplify the pricing of utilization management programs to ensure clients fully understand the cost of management strategies. Towers Watson will work with Express Scripts to implement process improvements based on findings from the 2013 audit initiative. We will continue the initiative in 2014 as part of our ongoing effort to provide the tools necessary for effective pharmacy management. Having the ability to go to the Rx group when there are problems or for a second opinion is very valuable. Also, the Rx Collaborative audits give me a sense of security because I don t have the time to handle those matters. A.O. Smith Corporation Source: 2013 Rx Collaborative Annual Employer Survey 20 towerswatson.com

23 2013 Rx Collaborative Data Warehouse and Reporting Since the launch of the Rx Collaborative Data Warehouse in 2005, data technology, data access and the science of data mining have advanced significantly and so has our growth in these areas: Rx Collaborative plan sponsors grew from an original group of 28 to 164. Employee members grew from one million in 2005 to nearly 2.3 million in Data on over 24.2 million pharmacy claims, accounting for approximately $2.5 billion in drug spend, were loaded to the data warehouse for calendar-year 2013, up from 9.8 million when launched in A number of factors have triggered Rx Collaborative Data Warehouse growth, including increased awareness of the strategic value of this unbiased information, concerted efforts by the data warehouse team to enhance the value-added benefits of participation through maintenance of a highly secure data environment, enhanced dataquality oversight, and production of an array of standard and ad hoc reports. However, even without individual participation, plan sponsors still benefit from our data warehouse capabilities. Their Rx Collaborative consulting team uses data warehouse resources to answer questions regarding regional drug use, specialty product costs and retail network access. In addition, they use warehouse data to evaluate the impact of strategic financial and benefit design decisions, including estimating the outcome of changes they make and comparing savings through financial modeling of what if scenarios. As we head toward the warehouse s 10th anniversary, we plan to build upon previous successes while growing new functional capabilities. We are evaluating new analytic tools for expanding our reporting capacity and data integration in order to enhance the data warehouse s ability to successfully support the Rx Collaborative s strategic decisions. The Rx Collaborative is the only pharmacy purchasing coalition that supports and maintains a data warehouse capability. In 2013, we continued to expand oversight, security and data quality all focused on enhancing the reporting proficiencies and value of data to Rx Collaborative participants. While participation in the data warehouse is optional, most plan sponsors elect to take part after joining the collaborative, significantly enhancing the value of their membership. It allows them to gain access to the warehouse s standard quarterly reports (which include, when available, industry and Rx Collaborative benchmarks) and on-demand reporting to address employer-specific issues and support planning for future initiatives. These reports provide more data to support a wide array of report segmentation and activity stratification. Rx Collaborative 2013 Annual Report to Employers 21

24 The Rx Collaborative s extensive database was used to develop key metrics and trends over multiple years. These results were derived from data provided by Rx Collaborative employers from 2008 to 2013 and adjusted to the 2013 population mix to allow for direct comparison year over year. Notable results include: Gross cost for all drugs rose from $84.45 in 2008 to $94.32 in 2013, an increase of 11.7%. There was a dramatic increase in spending for specialty drugs, from $9.49 PMPM in 2008 to $19.51 PMPM in 2013, an increase of more than 100%. Specialty spend grew to 20.7% of total drug spend. Overall member cost share has steadily declined, from about 19.6% in 2008 to 17.1% in Generic medication use increased steadily, from about 59.9% in 2008 to over 78.4% in Little growth has occurred in generic specialty utilization due to limited opportunity. Figure 17. Rx Collaborative key metrics and trends Gross cost PMPM Member cost share $100 $95 $90 $85 $80 $84.45 $95.22 $95.42 $92.04 $88.55 $ % 20% 15% 10% 5% 19.6% 19.2% 18.5% 18.7% 17.5% 17.1% $ % Specialty gross cost PMPM Generic dispensing rate $20 $15 $10 $5 $9.49 $13.02 $11.37 $17.57 $14.71 $ % 90% 80% 70% 60% 59.9% 62.2% 66.1% 69.6% 75.1% 78.4% $ % Specialty as % of total 25% 20% 15% 10% 11.2% 13.7% 12.8% 16.0% 18.4% 20.7% 5% 0% Source: Rx Collaborative Data Warehouse 22 towerswatson.com

25 2013 Rx Collaborative Annual Employer Meeting Annual Employer Meeting: RxNext As part of our core services, we invite Rx Collaborative clients to attend our annual employer meeting. RxNext, our ninth annual conference, was well attended by 78 clients from 59 organizations. The two-day event took place April 24 25, 2013, at Disney s Coronado Springs Resort in Orlando, Florida (following the Express Scripts 2013 Outcomes Symposium). Participants had the opportunity to hear industry experts present the latest developments in pharmacy benefit management, and strategies for emerging challenges and benefits emanating from health care reform. In addition, they were invited to share ideas through case studies and peer discussions. Highlights from the meeting included: Keynote of the Rx Collaborative Executive Sponsors. Paul Matthews, practice leader of Health and Group Benefits High Value Solutions at Towers Watson, and Tim Wentworth, senior vice president and president of sales and account management at Express Scripts, on the Rx Collaborative partnership and current issues impacting health care Health Care Reform. The New Landscape Emerges. Randy Abbott, senior consultant and North American leader for Health and Group Benefits at Towers Watson, on emerging challenges and opportunities created by health care reform, including optimizing plan performance for long-term sustainability, emergence of public and private exchanges, and total rewards considerations; Randy then moderated an HCR client panel of three plan sponsors, each sharing strategies for navigating the evolving health care landscape Employer Case Studies From Rx Collaborative Members: Specialty Pharmacy: An Employer s Approach to Managing Trend. Eric Michael, senior consultant, Health and Group Benefits at Towers Watson, on how a medical device manufacturer was able to successfully reduce specialty trend Transforming Chubb s Benefits for the Future. Nadina Rosier, Pharm.D. and North America Pharmacy practice leader at Towers Watson, and John Rowland, assistant vice president and health and welfare benefits administrator at Chubb & Son, on how Chubb enhanced their benefit offering and reduced expenses by shifting to account-based health plans Improving Care Through Better Coordination. Katie Asch, senior consultant, Health and Group Benefits at Towers Watson, and Jeff Klegon, director of benefits at Ameriprise Financial, on the value and success of their onsite health clinic and implementation of Express Scripts ExpressAlliance, and integrating their new Best Doctors program with vendor partners Focus on Rx Collaborative Clinical and Specialty Strategies. Bridget Eber, Pharm.D., senior consultant and clinical lead for the Rx Collaborative, and Dr. Gary Owens, chair of the Towers Watson Rx Collaborative Pharmacy and Therapeutics Committee, on successfully managing pharmacy trend with the Rx Collaborative s custom clinical edits, specialty strategies and Integrated Insights reporting The Road to Exchange Solutions. Ben Pajak, senior vice president of Strategy and Business Development at Towers Watson, on the role of exchanges in health care strategy and OneExchange solutions Special guest Seth Cohen from Castlight Health on Castlight s price transparency solutions and how they reduced Honeywell s spend while improving quality of care 89% of 2013 survey participants rated the meeting as excellent or very good The conference was a value add and worth my time away to learn; thank you for offering a top-notch event! Sandy Rosenberg VP, Health and Security Benefits, and Absence Management at KeyBank Source: 2013 Rx Collaborative Annual Employer Survey Rx Collaborative 2013 Annual Report to Employers 23

26 Rx Collaborative Keeping Members Informed Quarterly Client Calls Our national group conference calls are an opportunity for our members to keep informed on important Rx Collaborative updates and current events related to pharmacy benefits management. On a quarterly basis, the Rx Collaborative leadership team hosts these calls to share information and answer questions from our members. These calls are well attended by members and recorded for members unable to attend. Our 2013 calls included updates on the Rx Collaborative, group audit results and the latest intellectual capital regarding clinical management, specialty drug strategies and health care reform. Highlights include: A summary of the key clinical indicators for the first quarter of 2013, including a review of the Rx Collaborative specialty cost management strategy by Rx Collaborative clinical lead Bridget Eber to address client concerns over the rising cost of specialty drugs A two-part series on health care reform by Randy Abbott, senior consultant and North American leader for Health and Group Benefits at Towers Watson: Understanding the Excise Tax in 2018: Implications and Potential Pathways, providing definition and guidance on estimating the impact of the excise tax Rethinking Health Benefit Delivery, presenting emerging opportunities under health care reform and new decisions facing plan sponsors (increasingly, employers will find that the highestvalue solution to delivering health benefits for certain populations will be through leveraging a public and/or private exchange model in addition to maintaining a self-managed, employer-sponsored plan) Towers Watson s overview of Express Scripts changes to its National Preferred Formulary for 2014 the pros and cons, recommendations and next steps for clients Results of our audit initiatives, including the 2012 claim audit, rebate audit and operational review of Express Scripts (including a KPMG presentation of results from the rebate audit it conducted on behalf of Towers Watson) Rx Collaborative e-newsletter The Rx Collaborative monthly e-newsletter provides members with articles addressing contemporary or emerging issues related to pharmacy benefits. Our editor and Rx Collaborative clinical lead, Bridget Eber, takes a consultative approach to her commentary and offers strategies clients can apply to their organizations. Some of the topics addressed in 2013 were: 2013 Rx Collaborative Integrated Insights Report on Specialty Drugs Management Strategies for Specialty Drugs Biosimilars on the Horizon 2013 Rx Collaborative Integrated Insights Report on Rx Collaborative Medication Adherence Prescription Pricing Is Not the Same at Every Store Newer Drugs May Not Be Better Bending the Medical Cost Curve Affordable Care Act Update Factors That Influence Statin Prescribing Physicians Not Following Treatment Guidelines for Low Back Pain Testosterone Replacement Therapy Utilization Increasing Formulary Strategy Combats Coupons Drug Mix and Cost for Asthma Treatment Elevated Cholesterol: A New Treatment Approach 24 towerswatson.com

27 Looking Forward in Health Care 2014 and Beyond The delivery of health care is changing rapidly in While much of the focus has been on the launch of the Health Insurance Marketplace under the PPACA, many other significant trends need to be noted. Health care spending continued to grow relatively slowly, as reported recently: According to the 2014 Towers Watson/National Business Group on Health Employer Survey on Purchasing Value in Health Care: The 4.1% increase in 2013 employer costs after plan changes was the lowest in 15 years. However, trend is still more than double the rate of inflation. Trend is expected to be 4.4% in Overall health care costs are expected to reach $12,535 this year, up from $11,938 in Employees share of premium costs is expected to rise nearly 3% between 2013 and 2014, from $2,888 to $2,975. Likewise, in the journal Health Affairs, the Office of the Actuary at the Centers for Medicare and Medicaid Services reported that national health spending grew 3.7% in 2012, continuing a four-year low growth rate. When comparing to growth rates of the past, such as 9.7% in 2002, the authors of this report indicate they did not have the data to show it was a long-term trend. Instead, they could only credit the recession for the slowdown. 7 While moderation in health care cost growth should be welcome news to plan sponsors, there are many unknowns in 2014 and beyond. Outstanding questions that need answers include the following: Are these rates related to the recession, and will they change as economic recovery occurs? How much of this change is due to cost shifting to employees? When fully implemented, what impact will the PPACA have on health care cost trends? Driving Cost Down There are numerous factors that could impact health care cost trends, both positively and negatively. Some of the drivers of potential decreases are noted below: In terms of site of care, there continues to be a shift away from costly hospital and emergency room settings to retail and freestanding facilities. The trend is also applicable to the administration of specialty drugs, where hospital outpatient departments have been the most costly site of care. Some large plan sponsors (for example, Walmart and Lowes) announced initiatives to contract directly with health care systems for complex procedures such as heart and spinal surgery. Such custom, high-performance networks have the potential to improve quality and create price competition. Plan sponsors widespread adoption of highdeductible health plans may facilitate active consumerism in health care utilization and potentially moderate trends. Emerging technologies designed to engage consumers, for example, Castlight Health s price comparison tool, will allow members to comparison shop for providers and services. The high number of pharmaceutical patent expirations was a catalyst for widespread increases in generic drug utilization: In 2013, the Rx Collaborative group average generic dispensing rates for non-specialty medications was 79% based on prescription counts and 75% based on days of supply up from 76% and 71%, respectively, in National Health Spending in 2012: Rate of Health Spending Growth Remained Low for the Fourth Consecutive Year, Health Affairs, January 2014, 33:67 77 Rx Collaborative 2013 Annual Report to Employers 25

28 Pharmacy Contributions to Health Care Costs As noted on page 7 in this report, the cost for nonspecialty pharmacy claims for the Rx Collaborative, in total, has been relatively flat, in part because of the high number of patent expirations and increased generic dispensing rates for traditional drugs. For the Rx Collaborative group, the increase in covered charges for specialty drugs averaged 15.1% PMPM every year over the past five years. If this rate continues, covered charges for our group will more than double by 2015 compared to 2009, representing nearly 30% of total drug spend projected at that time. Driving Cost Up Industry consolidation and the expansion of the specialty drug market contributed to increasing costs. The health industry consolidation has increased more than 50% since This activity is expected to continue through 2014, and higher prices could result as competition decreases in some markets. In 2014 and beyond, new FDA approvals of specialty drugs, including biologics, will outpace approvals for non-specialty drug approvals, especially in areas of significant therapeutic advances: In 2013, the change in drug mix (new specialty drugs and new indications for existing specialty drugs) was responsible for 27% of the total increase in covered charges for specialty drugs for the Rx Collaborative group average. Many researchers predict specialty drugs will account for more than half of payors pharmacy budget by Based on the Rx Collaborative s five-year trend, it appears that these drugs will account for half of our group s pharmacy budget by Therefore, it is essential that plan sponsors assess their pharmacy management strategy with a particular focus on specialty pharmacy management. Plan sponsors should focus on the following areas to better understand cost drivers, contain cost and deliver benefits efficiently: Generics. In 2014, nearly $50 billion in brandname drugs are expected to lose patent protection in the U.S. market. Many of them are specialty drugs and injectables that may or may not have adequate supplies of generic replacements immediately, if at all. Among the non-specialty drugs that will have new generics in 2014 are Nexium, Lantus and Lyrica, which ranked second, ninth and 21st, respectively, by cost in 2013 for the Rx Collaborative. Plan designs such as member-pay-the-difference for brands that have generic equivalents and utilization management strategies such as generic-first step edits will help maximize generic dispensing rates. 26 towerswatson.com