1. Reimbursement Trends & Observations Presented by: John Aforismo B.Sc. Pharm., R.Ph Chairman & Founder RJ Health Systems International, LLC AMCP 21 st Annual Meeting April 17, 2009

2. 1.Current trends in reimbursement  Payor issues  Payment methodologies 2.Observations on reimbursement methodologies 3.Future issues  Discussion on necessary changes since AWP settlement is complete 4.Q & A

4. What issues are Payors struggling with? Home Infusion Contracts Pharmacy Network Contracts Rebates on “Specialty Products” Physician Contracts

5. PAYORS Reimbursement Methodologies? AWP? Average Wholesale Price ASP? Average Sales Price ABP? Alternate Benchmark Price MAC? Maximum Allowable Cost WAC? Wholesale Acquisition Cost

6.  Payors (Commercial & Federal government) are using variations of the following: 1. ASP (Average Sales Price) 2. AWP (Average Wholesale Price) 3. MAC (Maximum Allowable Cost) 4. WAC (Wholesale Acquisition Cost)  NEW to consider:  ABP (Alternate Benchmark Price)

7. ASP Methodology per HCPCS Drug Code Pharmaceutical Sales Data For Each NDC  Average Sales Price (CMS: 1/1/2005) shall include:  Volume discounts, prompt pay discounts, cash discounts, charge backs, and rebates to the first point of sale  Number of Units sold (Prepare a Weighted Average)  Calculated Quarterly (calendar)  Two quarter lag

8. AWP Discussion Price at which a wholesaler sells a product to a provider (Physician, Pharmacy, Hospital, etc.) Sources of AWP  National Data Sources  First Data Bank  Medi-Span  Red Book  Wholesalers  Manufacturers  Suggested only

9. Who sets the AWP?  Manufacturer  Sets WAC and Direct Price, may offer “suggested AWP”  Wholesaler  Sets AWP by percent profit or other method (leads to regional differences)  National Data Sources  Publish AWP which is based on mark-up factor from WAC or publish the “suggested AWP” from manufacturers  Used nationally as a base for reimbursement by many payors

10. How do the National Data Sources determine AWP?  First Data Bank (presently)  If manufacturer only provides a WAC price – a 25% mark-up is used to determine the AWP  If manufacturer provides a suggested AWP generally it is used as the First Data Bank (FDB) AWP  Medi-Span (presently)  If manufacturer only provides a WAC price – a 25% mark-up is used to determine the AWP  If manufacturer provides a suggested AWP generally it is used as the Medi-Span AWP

11. How do the National Data Sources determine AWP? (cont’d)  Red Book (presently)  If manufacturer only provides a WAC price – a 20% mark-up is used to determine the AWP  If manufacturer provides a suggested AWP generally it is used as the Red Book AWP  If manufacturer does not provide a suggested AWP but does provide a List (low spread) or Hospital List price (high spread) it may be used to set the Red Book AWP

12. Issues with current National Data Sources (FDB, Medi- Span, Red Book)  Variations in calculation of AWP among sources  WAC plus %  Manufacturer’s suggested AWP  Direct Price plus %  Hospital List Price (plus %)  Wholesaler Surveys

13. AWP Settlement Update  Due to litigation: both FDB and Medi-Span will be changing their AWP mark-up to 20% for drugs that currently have a 25% mark-up from WAC  Will not affect manufacturer suggested AWPs that are 25% mark-up from WAC  As part of the settlement FDB agreed to discontinue publishing an AWP

14. AWP Settlement Update (cont’d)  FDB has begun publishing an Alternate Benchmark Price (ABP)  Currently the ABP matches the AWP price published by FDB so this may be a change in name only  Court approved final settlement on March 30, 2009  Pricing changes will NOT go into effect until 180 days after the court approval of the final settlement (September 30, 2009)

15. AWP Settlement Update (cont’d)  Medi-Span  Will follow FDB’s new mark-up methodology  To Date: No new terminology for their new “AWP”  Red Book  Not part of original lawsuit  To Date: No changes noted in “AWP” designation

16. AWP Settlement Update (cont’d)  NDCs possibly effected by the settlement  FDB: 22,990 NDCs 15,766 NDCs - pharmacy claims 9,040 Rx 6,726 OTC 7,224 NDCs - medical claims (HCPCS)

17. AWP Settlement Update (cont’d)  NDCs possibly effected by the settlement  Medi-Span: Approximately 18,631 NDCs 166 are INACTIVE 11,260 pharmacy claims  4,906 Rx  6,354 OTC 7,371 – medical claims (HCPCS)

19. Present Payor Contracts  Retail pharmacy  Brand name drugs: usually AWP discounts range from AWP- 17% to AWP-19% (plus dispensing fee)  Generic drugs: MAC plus dispensing fee  Mail order pharmacy  Brand name drugs: usually AWP discounts range from AWP- 22% to AWP-25% (plus small or no dispensing fee)  Generic drugs: AWP-30% to AWP-50% (plus small or no dispensing fee) Usually no MAC for generics

20. Present Payor Contracts  Specialty pharmacy  Usually AWP discounts range from AWP to AWP-22% (plus small or no dispensing fee)  AWP discount can vary by drug with maximum discount of AWP- 35% Usually only contracts for high cost brand name drugs and/or biotech drugs

21. Present Payor Contracts  Physicians  AWP based: minus 15 to 20% Still see AWP + %  Medicare Allowable: ASP + 6% (also +10%, +12%, +15%)  NEW: WAC & MAC  Home Infusion  NDCs must be provided on claim  Paid at AWP minus % NDCs tied to HCPCS code

22. Medicare Allowable (ASP + 6%) HCPCS Drug Code Comparisons  AWP based compared to ASP + 6%  Average AWP based reduction is minus 30.25%  WAC based compared to ASP + 6%  Average WAC based reduction is minus 9.35%

23. PAYOR SURVEY Payor opinions on pharmacy contracting since AWP settlement was completed

24. Pharmacy Reimbursement  Are you considering a change in your contracted rates to pharmacies based on the change in AWP? YES:107NO: 160 Survey results based on 267/315 responses received as of : noon, April 16, 2009

25. Pharmacy Reimbursement  If yes, what do you anticipate will be implemented? Smaller discount off of AWP (e.g. AWP -15% move to AWP -10%) 83 Move to another base reimbursement rate (e.g. WAC) 21 OTHER Sample response: “Our pharmacy agreements specify that both parties will be made whole, but we haven’t determined what changes will be made. Modifying AWP based reimbursement won’t work long term, as AWP is probably going away completely in the next two years.” 3

26. Medical Reimbursement  Are you considering a change in your contracted rates to providers based on this change in AWP? YES:192NO:2 N/A:38 N/A: (if AWP is not the standard base price used for reimbursement)

27. Medical Reimbursement  If yes, what do you anticipate will be implemented? 107 Smaller discount off of AWP (e.g. AWP -15% move to AWP -10%) 85 Move to another base reimbursement rate (e.g. WAC, ASP)

28. Contracting Changes Due to Effect of AWP Settlement  Physicians & Buying Group Purchase Agreements  AWP based

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