Pharmacy Benefit Strategies for Lowering Prescription Drug Costs

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1 Pharmacy Benefit Strategies for Lowering Prescription Drug Costs Mid-sized Retirement and Healthcare Plan Management Conference Chicago, IL June 6, 2012

2 Pharmacy Benefit Strategies for Lowering Prescription Drug Costs - Overview Taking Advantage of Block Buster Brand Drugs Losing Patent Protection Brand to Generic Conversion Strategies Combating the Impact of Manufacturer Coupons on your Prescription Drug Costs Lowering Health Care Costs by Carving-Out Pharmacy Benefits Traditional vs. Transparent PBM Pricing Offer Mail Service Does it Really Save Money? Specialty Drugs Retiree Drug Subsidy and Employer Group Waiver Plans Key Take Aways

3 Taking Advantage of the Block Buster Brand Drugs Losing Patent Protection Over the next months $57 billion of brand drugs will lose patent protection. Brand drugs expected to lose patent protection include: Avandia, Lexapro, Plavix, Singulair and Viagra in 2012 Avodart, Cymbalta and OxyContin in 2013 Actonel, Celebrex, Lunesta and Nexium in 2014 Generics already represent approximately 70-72% of all prescriptions dispensed expected to exceed 80% in 2013 Pharmacies will be highly motivated to pull-thru the newly released generics increased profit margins Drug Manufacturers will stop paying rebates once their brand drug is generically available Negotiate generic effective rate guarantees with PBM

4 Brand to Generic Conversion Strategies The keys to successfully converting plan participants from a brand to a generic is to incent them financially Conversion Strategies: Tiered Copays Generic, Preferred Brand and Non-Preferred Brand Copays Flat dollar copays ($10, $25, $40) Percentage copayments with minimum and maximum amounts 4 th tier for specialty drugs 5 th tier for lifestyle drugs Waive initial copay when converting to the generic Dispense as Written (DAW) Penalties Doctor authorized the brand drug Plan participant wanted the brand drug Substitution not allowed by State law Mandatory Generic Benefits Plan Participant Education including targeted mailings

5 Combating the Impact of Drug Manufacturer Coupons on your Prescription Drug Costs Brand drug manufacturers are offering coupons directly to plan participants Coupons range from $10-$25 per month Removes copay incentives to use a lower cost generic drug Strategy helps maintain market share of brand drugs losing patent protection Coupons could significantly increase employers costs

6 How Drug Manufacturer Coupons Increase Costs Assumptions: Ave. Brand AWP=$175 Brand Discount=AWP-16% Brand Copay=$25 Ave. Generic AWP=$70 Generic Discount= AWP-65% Generic Copay=$10 Manufacturer Coupon=$15 Employer s Brand Cost = $147 - $25 = $122 Employer s Generic Cost = $ $10 = $14.50 Plan Participant s Brand Cost = $25 - $15 = $10 (same as Generic) Increased Cost due to Brand being dispensed = $107.50

7 Strategies to Combat the Impact of Manufacturer Coupons on your Prescription Drug Costs Percentage Copayment on Brand Drugs Dispense as Written (DAW) Penalties Shift additional cost to plan participant Plan participant pays their generic copay Total plan participant cost will never exceed pharmacy s U&C Mandatory Generic Benefit Brand drug is not covered once generic is available Step Therapy Requires plan participant to first use lower cost generic or pay full price for the brand drug being targeted with a coupon

8 Lowering Health Care Costs by Carving-Out Pharmacy Benefits Health care premiums continue to rise Pharmacy benefit rider represents 25-33% of health care premium 80% of Fortune 500 employers carve-out their pharmacy benefits Requires employers to self-insure the prescription drug costs Employers can save 10-20% off their health care premiums by contracting directly with a PBM

9 Pros and Cons of Carving-out Pharmacy Benefits Pros: Potentially lowers overall health care costs PBMs are more effective at managing drug utilization Ability to integrate pharmacy and medical data together Cons: Employer goes at risk for drug costs Specialty and Biotech drugs are expensive Typically represent 2-3% of utilization, but 10-15% of drug costs Negotiate Medical only pricing with health plan Health plan may try to keep the profitability of the drug benefit Implement benefits designs that control utilization Days Supply Limitation Quantity Level Limits Utilize cost control tools to limit financial risk Maximum Allowable Benefit Stop-Loss Coverage for Specialty drugs Based on our analysis employers can save up to $1,200 per employee each year by carving-out their pharmacy benefits

10 Traditional vs. Transparent PBM Pricing Offer PBMs have historically offered two pricing options: 1. Traditional Pricing PBM charges the client a fixed rate on brand drugs and goes at risk for any variability in their negotiated pricing with the pharmacies. Typically PBMs do not charge an administrative fee in a Traditional offer. Traditional pricing is similar to how most retail businesses price their products. The PBM purchases the medication from the pharmacy at one price and sells it to their client at another, retaining enough margin to cover their costs and make a profit. 2. Transparent or Pass-Through Pricing PBM charges the client the same pricing it is paying the pharmacy, for both brands and generics, and charges the client an administrative fee.

11 Traditional vs. Transparent Pricing Decisions Generic pricing is the key determinant in this decision Generics will soon represent 80% of all prescription claims Rebates will typically be offered on a brand only basis Brand and Generic drugs must be clearly defined Clear understanding of how pricing guarantees will be calculated PBM must be at risk for pricing performance Transparency doesn t always mean lowest cost!

12 Mail Service Does it Really Save Money? Large PBMs promote mail service as a cost saving strategy Plan participants typically get a 90 days supply for 2 retail copays Employers are offered more aggressive discounts and a larger rebate per brand prescription at mail Key Considerations: 1. Forgiving one retail copay may not be offset by the more aggressive mail discounts resulting in higher costs to the employer 2. Employers will see an increase in utilization, especially with mandatory mail 3. Increased utilization doesn t necessarily mean increased compliance and can lead to stock piling if refill controls are not in place Mail Service is a convenience, not a cost saver!

13 Specialty Drugs Specialty drugs are the fastest growing component of prescription drug costs and utilization is expected to increase 18% on an annual basis Key contributors include drugs for rheumatoid arthritis (26.8%), multiple sclerosis (20.1%) and oncology (16.9%) Pharmaceutical pipeline is filled with specialty drugs 55% of Phase 3 & 4 molecules awaiting FDA approval are specialty drugs Cost Control Strategies: 1. PBM contract should specify the discount on each specialty drug 2. Specialty drugs should be limited to a 30 days supply 3. Establish a specialty drug copay tier 4. Develop step-therapy protocols 5. Consider a plan stop-loss limits for specialty drugs

14 Retiree Drug Subsidy Deduction PPACA is eliminating the tax deduction on RDS as of 1/1/2013 This will increase an employer s tax liability and increase the cost of providing retiree prescription drug coverage Employer Options: 1. Eliminate retiree drug benefits a) Potential litigation under ERISA if employer has not reserved right to terminate prescription drug coverage 2. Continue to receive the RDS as taxable income 3. Employer Group Waiver Plan ( EGWP ) plus Wrap a) Med-D plan with employer s benefits wrapped around it b) Retirees receive similar benefits to employer s current plan c) PBM coordinates the benefits d) Most savings occurs in Donut Hole not covered by Medicare e) Pharma will cover 50% of brand drug cost in Donut Hole f) Potentially saves employer money vs. taxable RDS

15 Strategies for Lowering Prescription Drug Costs Key Take Aways Strategies are available to increase utilization of lower cost generics Drug manufacturers will attempt to maintain their market share by offering coupons directly to plan participants Carving-out your pharmacy benefits can save a significant amount of money but there is risk Must put your PBM at risk for pricing performance Transparent pricing doesn t always mean your are getting the best pricing available in the market Mail service may actually increase your prescription drug costs Specialty drugs need to be aggressively managed EGWP plus Wrap may be a viable alternative to taxable RDS