Let’s Talk About Cost- Supply Chain Briefing Sharon Brigner, MS, RN Deputy Vice President, State Policy October 5, 2018

Follow the Dollar: How the Supply Chain Shapes Brand-Name Medicine Prices Robust commercial market negotiations between PBMs and biopharmaceutical companies have resulted in substantial rebates, discounts and fees paid to supply chain entities. These price concessions have continued to increase despite a slowdown in brand-name drug list price growth In some cases, patient cost-sharing may exceed the price the health plan actually pays for a medicine. When this occurs, cost-sharing payments in excess of the medicine’s cost are retained by health plans and PBMs—not by biopharmaceutical companies Some industry observers and government agencies have questioned whether insurers and PBMs are more focused on the size of rebates than on achieving the lowest possible costs and best outcomes for patients

Spending on retail and physician-administered medicines continues to represent just 14% of total health care spending Pharmaceuticals are a small and stable share of the overall health spend. Brands and generics make up 10 percent of prescription medicine spend. And Brands make up only 7 percent. However, supply chain entities pull in 4%. Primary drivers are Hospitals, Physician and clinical services, and home health and nursing home care. Source: PhRMA analysis of CMS National Health Expenditures data, Altarum Institute study and Berkeley Research Group study. *Supply chain entities- stakeholders involved in bringing medicines from manufacturer to patient, including wholesalers, pharmacies, PBMs and healthcare provider locations. **Other includes expenditures for Other Professional Services, Nondurable Medical Products, Durable Medical Equipment, Public Health Activity, Research, Structures, and Equipment.

In the midst of incredible scientific progress, medicine cost growth is declining 2016 Data 2017 Data U.S. Federal Govt. 9% 3.2% 3.8% 0.8% Pharmaceutical prices, net of rebates and discounts, have been extremely low. 2015 2016 2016 2016 -0.2% 1.3% 1.9% 1.5% 2016 2017 2017 2017 3

Discounts and Rebates Growing Medicine cost growth is declining, but patients are facing rising out-of-pocket costs 2017 Medicine Spending Discounts and Rebates Growing Patient Costs Growing $106.4B $84.6B $67.0B Prescription prices have increases at a low rate. Discounts and rebates have increased at a significant rate (reaching $127 billion in 2016, and $153 billion in 2017) While Prescription medicines have patient deductibles and cost sharing have increased. The growing use of deductibles and coinsurance for prescription medicines creates affordability challenges for many patients. 1.5%

Too often, these negotiated savings do not make their way to patients Cost sharing for nearly 1 in 5 brand prescriptions is based on list price. More than half of commercially insured patients’ out-of-pocket spending for brand medicines is based on the full list price. 52% In addition to rebates and discounts not being shared with patients, often times the cost sharing is based on the undiscounted list price. The love the patients so nice they charge them twice: 1) not passing on savings, 2) indexing cost sharing to undiscounted list price. Copay Deductible Coinsurance Source: Amundsen Consulting Group study.

The PBM Industry is Highly Consolidated About 70% of all prescription claims are processed by 3 PBMs: Express Scripts, the Caremark business of CVS Health, and the OptumRx business of UnitedHealth In contrast, in 2011, the top 3 PBMs accounted for just under half of the market These 3 PBMs have also become more vertically integrated with other parts of the supply chain:

Insurers and PBMs have a lot of leverage to hold down medicine costs Prescription Medicines: Costs in Context  www.phrma.org/cost    Insurers and PBMs have a lot of leverage to hold down medicine costs Negotiating power is increasingly concentrated among fewer pharmacy benefit managers (PBMs). Insurers determine: FORMULARY if a medicine is covered TIER PLACEMENT patient cost sharing ACCESSIBILITY utilization management through prior authorization or fail first PROVIDER INCENTIVES preferred treatment guidelines and pathways 22% 30% Top 3  Market Share: 70% 24% 24% OptumRx/Catamaran* CVS Health (Caremark) Express Scripts All Other Note: OptumRx and Catamaran merged in 2015. Their 2014 shares are shown combined. Source: Drug Channels Institute.

Subjecting Prescription Drugs to a Combined Deductible Results in Disproportionately High Patient Cost Sharing When drug coverage is subjected to a large combined (medical and drug) deductible, on average, patients pay a higher share of their drug costs compared with their other health care services costs. Average Share of Costs Paid by the Plan Among Silver Plans With a Combined Medical/Drug Deductible, 2014* *Silver plans accounted for a majority of Health Insurance Exchange enrollment, and combined deductibles were the most common type of deductible arrangement among these plans. A deductible is the amount patients must pay annually with their own money (out of pocket) before a health plan will pay for any expenses. The figure shows the actuarial value for each service category listed (ie, the percentage of covered costs paid by the plan). Source: Milliman, Inc.

Supply Chain Summary Manufacturers pay PBMs 1) Formulary access rebates, 2) Price protection rebates/fees, and 3) administrative fees. All three are based on a percentage of the list price. Price protections similar to cpi penalty in Medicaid.

Flow of Payment for a $100 Blood Pressure Medicine Janet is enrolled in a commercial health insurance plan and has a $40.00 copay for her blood pressure medicine. Because Janet’s health plan receives a 25% rebate off of the list price of her medicine, her copayment of $40.00 is slightly more than the $38.00 net price paid by her health plan. After rebates and fees, the manufacturer retains $62.00, roughly two-thirds of the original list price of $100.00. Assumptions: $100 list price per prescription 25% base rebate Patient pays a $40 fixed-dollar copay

Flow of Payment for a $400 Insulin Since Scott hasn’t reached his deductible, his insurer does not cover any of his costs Scott pays more than the list price of his medicine The PBM and health plan pay nothing, and actually earn $292.75 on this prescription Due to industry consolidation, the PBM, health plan, and even the pharmacy are often part of the same parent company Assumptions: $400 list price per prescription 65% base rebate Patient pays full undiscounted price of medicine

Flow of Payment for a $3,000 HIV Medicine Diane has HIV and has commercial coverage with a coinsurance of 20%. Even though Diane’s insurer receives a rebate that reduces the cost of her medicine by 20%, her coinsurance is calculated based on the medicine’s full undiscounted price. Specialty pharmacy is owned by the PBM, so the PBM earns a total of $522.25 on Diane’s prescription ($308.00 + $214.25) Assumptions: $3,000 list price per prescription 20% base rebate Patient pays 20% coinsurance

WSJ: Aetna to Pass on Drug Rebates to Consumers NYT: United Healthcare Says It Will Pass On Rebates From Drug Companies to Consumers In response to growing consumer frustration over drug prices, UnitedHealthcare, one of the nation’s largest health insurers, said on Tuesday that it would stop keeping millions of dollars in discounts it gets from drug companies and share them with its consumers. WSJ: Aetna to Pass on Drug Rebates to Consumers Move comes as insurers face pressure to lower costs, improve transparency Patient’s

Key Takeaways Total prescription medicine spending is expected to remain constant at about 14% of total health care expenditures from 2015 through 2025 even as many new treatments reach patients. Less than half of all net spending on prescription medicines – or about 7% of total health care spending – goes to brand biopharmaceutical manufacturers . 10% is from brand and generics. (7% brands / 3% generics). 4% is from other supply chain entities. Federal government actuaries report retail prescription medicine spending grew just 1.3% in 2016, less than one-third the rate of overall health spending growth. 90% of all prescriptions filled in 2016 were generics, up from 80% in 2011. IMS projects that $140 billion of U.S brand sales will face competition from generics of biosimilars between 2017 and 2021. There is no similar type of cost containment for other health care services. Claims from PBMs, payers, and others about “skyrocketing prices” of medicine almost always focus solely on list prices, which are not reflective of actual spending trends. In 2017, biopharmaceutical companies paid out $153 billion in rebates and discounts to government and private payers, but these rebates and discounts were typically not shared with patients at the pharmacy counter. Patients would greatly benefit from these savings.

Partner on Solutions Explore options that share prescription drug savings with patients and provide meaningful transparency from all stakeholders Improve access and affordability to increase patient adherence PhRMA wants to work with the state and stakeholders on patient affordability solutions…. Further value-based contracting for new medicines