Pharmacy: Pharmacy Landscape and Uncovering the Optical Illusions Gannon Pharmacy Practice | November 15, 2018 Matt Adams The contents of this presentation are confidential and proprietary to the Pharmacy Practice Division of Arthur J Gallagher & Co. and are to be used only by Gallagher Pharmacy Practice for the sole purpose of presentation of prescription drug RFP analysis to this client

The Current Landscape: Prevailing Themes Specialty costs are skyrocketing The supply chain is too complex Vendors are consolidating Seth The regulatory climate is uncertain Trust in the model is deteriorating

Pharmacy Benefit Manager (PBM) Landscape Seth Consolidation and partnerships have significantly changed the PBM marketplace PBM revenue has increased, primarily driven by specialty pharmacy Carve-in Carriers (UHC and Aetna) providing POS rebates for Fully Insured clients.

$ DRUG MANUFACTURER PATIENT Seth

Seth

Optics Gannon

Optics Gannon

Contracting Optics Definition of AWP Definition of Brands & Generics Are single source generics bucketed under the generic or brand bucket? Caveats Rebates Termination clauses Seth

Definition of AWP PBM pricing begins with the Average Wholesale Price (AWP) of prescriptions drugs AWP has been the “price” standard for decades for both brands and generics The most widely used AWP list is published by Medi-Span Derived from the Wholesale Acquisition Cost (WAC) which is based on manufacturers’ reporting Seth The formula: AWP = WAC + 20%

Definition of AWP Sometimes PBMs don’t price using the whole code Some PBMs use nine digits (NDC-9) instead of 11 (NDC-11) Enables them to blend various package sizes of a drug into an aggregate discount that looks better Full AWP (NDC-11) “Average” AWP (NDC-9) AWP $100 $104 Discounted cost $85 Quoted discount 15% 18.3% Seth

Year 1: AWP - 85.00% Year 2: AWP - 85.50% Year 3: AWP - 86.00% Sample Pricing Grid   Brand Generic Participating Pharmacy (1-83 Days Supply) AWP – 17.50% Year 1: AWP – 81.00% Year 2: AWP – 81.50% Year 3: AWP – 82.00% (84-90 Days Supply)(1) AWP – 24.25% Year 1: AWP – 85.00% Year 2: AWP – 85.50% Year 3: AWP – 86.00% Mail Service Pharmacy Year 1: AWP - 85.00% Year 2: AWP - 85.50% Year 3: AWP - 86.00% Seth

Definition of Brands & Generics Seth

Rebates PBMs negotiate with pharmaceutical companies to receive rebates on certain prescriptions dispensed to members Applies principally to brand medications Rebates average around $100 per 30-day brand-name drug Plan sponsors, on average, receive around 90% of rebate dollars Rebate sharing is typically arranged in one of two ways: Flat dollar amount per-script Percentage share of aggregate rebates Seth

Rebates There are different definitions of rebates Do the quoted rebate dollars cover all claims? Some PBMs specify language in the contract such as “per rebateable claim” which means not all claims are considered eligible for rebates Some rebate quotes may exclude drugs dispensed for less than 30 days at retail and less than 90 days at mail, making the quoted rebate dollars look better than they are Seth

Rebates Point Of Sale (POS) Rebates for Fully Insured Clients: Copay Plans – No Member Savings Coinsurance (%) Plan Designs – Member Savings HDHP’s – Member Savings Line of sight / Transparency ? Underwriting – How will it change? Seth

PBM Contract Types Net Profit $6.50 Out to Client In to PBM Profit How PBMs Generate Revenue – “Traditional Model” In to PBM Out to Client Profit Brand Drug AWP $300.00 - Discount 17.00% 16.00% $3.00 Dispensing Fee $0.50 $1.00 Rebates $45.00 $40.00 $5.00 Admin Fees $0.00 Gross Revenue $8.50 Internal Cost $2.00 Net Profit $6.50 Seth

PBM Contract Types Net Profit $6.50 Out to Client In to PBM Profit How PBMs Generate Revenue – “Full Pass-Through Model” In to PBM Out to Client Profit Brand Drug AWP $300.00 - Discount 16.00% $0.00 Dispensing Fee $0.50 Rebates $40.00 Admin Fees $8.50 Gross Revenue Internal Cost $2.00 Net Profit $6.50 Seth

PBM Contract Types Net Profit $6.50 Out to Client In to PBM Profit How PBMs Generate Revenue – “Hybrid Model” In to PBM Out to Client Profit Brand Drug AWP $300.00 - Discount 17.00% $0.00 Dispensing Fee $0.50 $1.00 Rebates $45.00 $38.00 $7.00 Admin Fees Gross Revenue $8.50 Internal Cost $2.00 Net Profit $6.50 Seth

PBM Contract Types Which model is best - Traditional, Hybrid, or Full Pass-Through Model?? One size does not fit all! It is important to evaluate the different models based on what the market is yielding for your business. Seth

Coalition or No Coalition? Coalition PBM contract Pooling clients together to negotiate a “one size fits all” PBM contract. Advantages Enhanced Pricing (group purchasing) Guaranteed Pricing (normally this is still specific to client) Disadvantages Some coalitions require all participants to adopt the same formulary and network and possible clinical programs Some coalition contracts are baked with hidden or exorbitant fees where the PBM pays the consulting houses to move business into the coalition. Seth

Thank you!!! Seth