National Health Expenditures as a Share of Gross Domestic Product (GDP) FIGURE 7.1 Between 2001 and 2011, health spending is projected to grow 2.5 percent per year faster than GDP, so that by 2011 it will constitute 17 percent of GDP. Actual Projected Percent of GDP Calendar Years Source: CMS, Office of the Actuary, National Health Statistics Group. 1

Figure 7.2 2

FIGURE 7.3 3

PAYERS Private Insurance, Government (CMS) $ $ Figure 7.4 EMPLOYERS $ PAYERS Private Insurance, Government (CMS) $ $ Premiums Taxes MANUFACTURERS $ $ Suppliers, wholesalers, specialty pharmacies etc $ Services Products PROVIDERS Physician Hospital Pharmacy $ $ Co-pay + uninsured PATIENT Services/products 4

Figure 7.5 5

Pharmaceutical Manufacturer Payers Wholesaler Pharmacy Consumer Shared Discounts Rebates Negotiated payment PBMs (+ Mail Order Pharmacy) Pharmaceutical Manufacturer Payers (Health plans) Govt, private, MCO etc Discounts Rebates Admin fees Ingredient cost Dispensing Fee Ingredient Cost Cost of drug Cost of drug Discounts Cost of drug + wholesaler margin Wholesaler Pharmacy Co-Pay Co-Pay mail-order pharmacy Consumer Figure 7.6 6

Specialty Distributor Cost of drug + dispensing fee Payers (Health plans) Govt, private, MCO etc Consumer Cost of drug + dispensing fee Premiums Co-Pay Co-Pay Pharmacy Cost of drug + distributor margin Specialty Distributor Admin fees Ingredient cost Cost of drug Cost of drug Shared Discounts Rebates Dispensing Fee Ingredient Cost PBM (+ Mail order Rx) Cost of drug Discounts Rebates Discounts Rebates Biotech Manufacturer Cost of drug Cost of drug Figure 7.7 7

Clinics / Hospital / Diagnostic Labs Device / Diagnostic Manufacturer Cost of device/Dx + distributor margin Rebates discounts Payers (Health plans) Govt, private, MCO etc Distributors Cost of Device/Dx Clinics / Hospital / Diagnostic Labs Co-Pay or cost of device/Dx Consumer Figure 7.8 8

Physician fee schedule Physician fee schedule Physician fee schedule Coverage National or local Figure 7.9 ICD-9 diagnosis codes (Dx) P.E. = Practice expense ICD-9 Dx = ICD-9 Diagnosis code ICD-9 Px = ICD-9 Procedure code Other abbrev – see text. - Why patient was treated - Used to verify treatments Medicare Payment Group Location of delivery of care Claims filed (product purchaser in bold) Codes used to file claims Hospital / IPPS + M.D. (work + facility P.E.) ICD-9 Dx, ICD-9 Px. ICD-9 Dx, CPT DRG Physician fee schedule Hospital Inpatient Hospital / OPPS + M.D. (work + facility P.E.) ICD-9 Dx, ICD-9 Px. ICD-9 Dx, CPT Hospital Outpatient APC schedule Physician fee schedule Ambulatory Surgical Center (ASC) ASC + M.D. (work + facility P.E.) ICD-9 Dx, ICD-9 Px. ICD-9 Dx, CPT ASC schedule Physician fee schedule M.D.’s office (work + non-facility P.E.) ICD-9 Dx, CPT Physician’s Office CPT -Physician Fee Schedule Patient’ s House Provider / Patient + M.D. (work + non-facility P.E.) Per diem for services DMEPOS Fee Schedule ICD-9 Dx, CPT ICD-9 Dx, CPT Hospice, DME 9

CLINICAL TRIALS FDA APPROVAL Drug Device Figure 7.10 Phase I II III Collect economics data – compare with standard of care Define patient groups; identify target payer(s) Design clinical trial to also collect data for reimbursement considerations FDA APPROVAL CLINICAL TRIALS Phase I II III NDA or BLA FDA review Manufacturing Production prototype Pivotal study Pilot study Clinical grade drug Drug Device Launch PMA Key opinion leaders / Medical specialty group / Publication Strategy COVERAGE Informal / formal meetings with payers Educate payers CODING MARKETING Hospital Procedure Coding CPT Coding PAYMENT Work with medical specialty group to get new technology/procedure value Figure 7.10 10