2. Site-of-Service Cost Differential Debate and 340B Update John Hennessy, MBA, Vice President, Operations, Sarah Cannon Cancer Services Bruce S. Pyenson, FSA, MAAA, Principal and Consulting Actuary, Milliman Erich Mounce, MHA, Chief Executive Officer, The West Clinic Paul O’Dea, Vice President Hospital Business, McKesson Specialty Health Dan Todd, Former Health Policy Advisor, Senate Finance Committee Elizabeth S. Elson, Of Counsel, Foley & Lardner LLP

3. Site-of-Service Cost Differential Debate and 340B Update Bruce S. Pyenson, FSA, MAAA, Principal and Consulting Actuary, Milliman

4. Chemotherapy Site of Service and Payer Cost: Where is Payment Reform? Bruce Pyenson, FSA, MAAA Principal & Consulting Actuary November, 2014

5. 5 Bruce Pyenson Milliman, NY. November 2014 Disclosure Pyenson is employed by Milliman, Inc.  Some of the material presented here was funded by Genentech (2013), Inc. and US Oncology, Inc. (2011)  Recent work for many insurers, pharmaceutical companies, device makers, advocacy groups, ACOs  Reports with full details available from me: bruce.pyenson@Milliman.com or 646-473-3201 bruce.pyenson@Milliman.com  My opinions and results of my analysis, not necessarily Milliman’s

6. 6 Bruce Pyenson Milliman, NY. November 2014 Chemotherapy Cost and Site of Service  Significant cost on a population basis –Episode of chemotherapy for commercial payers are approaching $100,000 –Under 0.25% of population, but accounts for about ~5% of total cost  Chemotherapy delivered in Hospital OP costs are much higher than Physician office –28% higher for adjuvant colorectal cancer –53% higher for metastatic breast cancer –Similar situation for NSCLC and breast cancer  Hospitals are buying oncology practices because they are profitable for the hospital –Several considerations including 340B pricing

7. 7 Bruce Pyenson Milliman, NY. November 2014 Chemo Patients are More Expensive! Milliman analysis of 2008 Medstat MarketScan with about 30 million commercially insured lives

8. 8 Bruce Pyenson Milliman, NY. November 2014 Questions About the Future?  How will payers respond to higher cost of hospital outpatient chemotherapy? –Limited networks? –Limited reimbursement?  How will ACOs deal with chemotherapy? –ACOs are mostly dominated by hospitals –The higher prices of oncology practices become a liability to ACOs under shared savings, capitation or bundled payments  Is chemo in physician offices a winner for bundled payments? –Shared savings relative to benchmark Medicare spending –Does benchmark include more expensive hospital outpatient services?

9. 9 Bruce Pyenson Milliman, NY. November 2014 Healthcare Reform is Changing Everything In most countries around the world… A period of experimentation as favored policy theories are adopted by governments Focus on reversing decades of automatic spending increases Change is certain and Fast.

10. 10 Bruce Pyenson Milliman, NY. November 2014 Comparing Oncology Cost in Community (Physician Office) and Hospital Outpatient Settings  Huge payer databases are ideal for the HOP / PO comparison.  Earlier studies found that payer oncology costs were higher in Hospital outpatient than physician office settings. But consideration of severity differences were not examined.  Milliman did attempt to address severity differences by separating metastatic and adjuvant patients based on the therapies they received

11. 11 Bruce Pyenson Milliman, NY. November 2014 Accounting for Differences in Severity  Truven MarketScan™ claims data…over 40 million commercial insured lives  large sample size  Patients whose chemotherapy began in 2009-2010.  3 cancers which account for ~54% of chemotherapy patients

12. 12 Bruce Pyenson Milliman, NY. November 2014 Cost Higher in Hospital OP Setting

13. 13 Bruce Pyenson Milliman, NY. November 2014 Higher Costs for Chemotherapy Agents

14. 14 Bruce Pyenson Milliman, NY. November 2014 Details of Higher Cost for mCRC in HOP  Biologic, cytotoxic, radiation therapy, and other

15. 15 Bruce Pyenson Milliman, NY. November 2014 What About the Future? Payer Perspective Possible effects  More bargaining power from larger organizations—upward pressure on prices  Pathways being enforced by ACO instead of payer as risk shifts to ACO  Participation—or exclusion—from limited networks  Referral management—ACO will control which providers get patients

17. 340B Drug Pricing Program Update Elizabeth Elson Of Counsel Foley & Lardner LLP

18. 340B Drug Pricing Program Overview Federal drug pricing program Operated by the Office of Pharmacy Affairs (“OPA”) in the Health Resources and Services Administration (“HRSA”) Drug manufacturers are required to provide significant discounts to participating covered entities on covered outpatient drugs Covered entities include health care providers such as FQHCs, specialized clinics, and DSH hospitals (with DSH > 11.75%) Intended to provide financial relief to facilities that provide care to the medically underserved

19. ACA’s Impact on 340B Drug Pricing Program Affordable Care Act expanded participation to new covered entities: Children's hospitals with Medicare DSH > 11.75% Freestanding cancer hospitals with Medicare DSH > 11.75% Critical access hospitals (CAHs) Rural referral centers with a Medicare DSH > 8% Sole community hospitals with a Medicare DSH > 8% It also created increased program integrity efforts (e.g., annual recertification, increased auditing) and new sanction authority for compliance violations

20. Means of Obtaining 340B Discounts Hospital Provider-Based Clinics Clinics listed as reimbursable cost centers on a 340B Hospital’s most recently filed Medicare cost report may access 340B Drugs Clinics must be licensed and operated as part of 340B Hospital; must also be registered with HRSA as child sites of 340B Hospital Referral Arrangements Documented referral arrangements by 340B covered entity to non- provider-based clinics consistent with Apexus guidance MD Office not eligible for 340B purchasing

21. Provider-Based Clinics Clinics must meet certain requirements such as: – Licensure as part of 340B Hospital – Financial integration with Hospital – Clinical integration with Hospital – Oversight and supervision by Hospital – Location (35 mile rule unless exempted) – Public awareness of clinic as part of Hospital Certain hospital within hospital or joint venture type arrangements may provide access to 340B if provider-based rules met

22. Future of 340B Program Increased government and manufacturer scrutiny HRSA’s anticipated “Mega Regs” Ongoing orphan drug litigation related to ACA provision’s expansion of covered entities; potential impact on “Mega Regs” Questions about how the current political environment will impact future of 340B Program

23. Contact Information: Elizabeth Elson Foley & Lardner LLP (213) 972-4665 eelson@foley.com