Paying for Pills or Paying for Outcomes? Joel White May 22, 2018

About CAHC Vision A vibrant and competitive health system where every person has access to coverage they can afford Mission Enact policies that lower health costs and expands access to affordable coverage Principles Promote competitive, efficient and transparent markets Expand choices for consumers and employers Support value-based delivery and payment reforms Support incentives for wellness and prevention Promote entitlement reforms that improve long-term program stability, strong safety nets, patient choice, efficiency and value

CAHC’s Members Employer Payer/Provider Patient Biopharmaceutical Tech/Broker Views are my own. Members across issue campaigns.

Health Costs What is driving health costs and premiums, and what impact is it having on affordability?

Quick Overview of Health Costs US Spends more than $3.3. trillion on health care About 1/3rd or almost $1 trillion of spending is waste People are paying more and getting less Prices are main culprit in driving health spending (costs) Prices are directly correlated to market concentration Even so, we have worse outcomes than most developed countries Because medical costs are rising, premiums and costs are increasing. About 80 percent of the total are medical costs $3 trillion spent on health care. $910 billion may be wasted on care that is unnecessary or even harmful to consumers. U.S. prices for common tests and procedures typically are 3-5 times higher than in other developed countries.

Medical Cost Growth Relative to Wages Since 2010, the medical cost trend (MCT) has grown by 73% Since 2010, the MCT has grown four times faster than the average wage and five times faster than the Consumer Price Index MCT is cost of prescription drug and health services paid by employer health plans.

Spending grew 0.6% net of off-invoice discounts and rebates, as invoice-level growth slowed to 1.4%. • Discounts, rebates and other price concessions on brands reduced absolute invoice spending by an estimated 28% to $324.4 billion. • Spending growth slowed in 2017 due to lower price increases for protected branded products, price declines for generics and less growth from new products despite a large increase in the number of new product launches. • On an invoice basis, spending has risen 60% since 2007, but rose just 36% on a net basis, with more than two-thirds of net growth occurring since 2013. • After the historically high growth in 2014 and 2015, driven predominately by innovative new medicines, 2017 growth was slower on a net basis than all but two of the last ten years. Total market invoice spending on medicine was nearly $130 billion higher than manufacturer net realized revenues in 2017, a significant increase from 2013 when the difference was only an estimated $74 billion. • Manufacturer off-invoice discounts and rebates to intermediaries, and other costs that reduce net revenues, have all increased substantially over the past five years. • Of particular note, invoice-level spending for retail pharmacy and mail-order delivery of medicines declined by 0.3% in 2017, but declined by 2.1% on a net basis. • Non-retail medicine spending, including the administration of drugs in outpatient and inpatient settings, are a significant portion of the overall medicine spend. It represents 35% of 2017 net revenues but only 30% on an invoice basis, as discounts and rebates are larger in the retail pharmacy market. • Total net spending increased by only 0.6% in 2017. This is the slowest rate of growth since 2012 when the largest period of concentrated patent expiries took place, and is also much less than in 2014 and 2015. • These estimates differ from the CMS prescription drug spending in the National Health Expenditure Accounts, which estimates net retail spending but also includes intermediary margins and patient copays.

Real net per capita spending declined by 2.2% from $896 per person in 2016 to $876 in 2017. • Specialty share of net spending across institutional and retail settings rose from 24.7% in 2008 to 46.5% in 2017. • Specialty medicines are rapidly approaching half of medicine spending, driven by innovation. • Real net per capita spending for specialty medicines peaked in 2014, when it grew by 22.4%. • The largest proportion of new medicines launched in the last five years have been specialty drugs, and specialty share of spending has risen, while traditional net medicine spending has declined by more than $133 per person over the past decade. • Across all settings, specialty medicines treat relatively few patients, and have costs far higher per patient than traditional medicines. • In terms of prescription volume, specialty represents just 1.9% of prescriptions and 37.4% of spending in the same retail and mail-order distribution channels. • In non-retail settings, specialty drugs represent 60% of invoice spending and 2.3% of standard unit volumes. • Spending on traditional medicines has declined primarily due to patent expiries, and associated brand losses of exclusivity, as well as a general shift in the focus of innovation.

Value Based Payment Arrangements How do we involve all participants – like pharmacists, prescribers and patients - in the value equation most effectively? If most spending is on hospitals, how do we lower hospital costs through drug policy? How do we ensure the right drug is delivered to the right patient at the right time with maximum clinical effect? How do we pay for new, high cost products while guaranteeing access? What are VBAs and what has been the federal take up?

What Are VBAs? A value-based payment arrangement is an agreement in which the payment terms for medication(s) or other health care technologies are tied to agreed-upon clinical circumstances, patient outcomes, or adherence to a care plan Prevention of hospital admission or readmission Reduction in A1C Completion of anti-biotic or Hep C medication

VBAs in Commercial Contracts, not Federal or State programs Why? Anti-kickback statute (AKS) Medicaid “best price” Pre- and Post-market communications between plans and manufacturers are restricted by FDA Others: ASP, AMP, Stark prohibits anything of value to induce the purchase of items or services reimbursed by Federal health programs. The lack of clarity from HHS on how the AKS might apply to modern value-based systems has impeded adoption of VBAs in Medicare and Medicaid. requires manufacturers to include the lowest price made available to any other entity to the Medicaid program. This creates economic disincentives to provide rebates or discounts that trigger additional Medicaid rebate liability.

CAHC Rx Value Approach Build a consensus-based approach that engages the wide range of affected stakeholders in a concerted effort to address drug costs and overall health care spending.

VBA outline Pre- and post-market communication between payers and manufacturers Stark/Anti-Kickback – allow care coordination Allow for donated technology and reporting systems Exceptions for Medicaid Best Price and AMP

Impact of Value Based Payments Savings % of Drugs in a Value Based Payment Arrangement Volume of Drugs and Prices $71 billion 10% 39% Annual total health savings when fully implemented $3 to 6 billion in 10 year taxpayer savings Prices decline by 10 percent, but volume increases by 10 percent. No change in Rx Spend +5% Rx Volume  -1% Associated Hospital and Physician Spending Three-Month Speedup of Time to Formulary/VBA 39% by 2026, up from 4% today

White Papers

Federal Response to Date American Patients First – “we need more negotiations to drive down costs” CMS – Use CMMI to tie new, expensive products to a VBA Kimrya (pediatric cancer) Luxturna (blindness) Congress is working on legislation

THANK YOU Council for Affordable Health Coverage 440 First Street, NW, Suite 430 Washington, D.C. 20001 (202) 559-0192 Joel.white@cahc.net Cahc.net @C4AHC  Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation. Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers. That’s your job. Get to work.