1. Pharmacy Benefit Managers As Bargaining Agents Lawrence W. Abrams Ph.D. Power Point Presentation WEAI 80 th Conference San Francisco, July 6, 2005 labrams@nu-retail.com 831-254-7325

2. copyright - Lawrence W. Abrams - 2005 Medicare Part D  Subsidized insurance covering outpatient Rx.  Largest expansion of entitlement programs in US in decades  Run by private sector entities called  Pharmacy Benefit Managers (PBMs)

3. copyright - Lawrence W. Abrams - 2005 Misconceptions about PBMs due to price theory  PBMs receive rebates for “moving markets”  Government (Medicaid) is a better rebate negotiator that PBMs

4. copyright - Lawrence W. Abrams - 2005 Alternative view of PBMs based on bargaining theory  PBMs are a countervailing force extracting economic surplus from Big Pharma  Rebate averages are a poor measure of bargaining power  PBMs get less than government (Medicaid), but give up less

5. copyright - Lawrence W. Abrams - 2005 Who is the better bargaining agent: PBMs or the Feds?  Recent Medco disclosure (November 28, 2004) Brand rebate average of 10.7%  Recent CBO disclosure (June 21, 2005) Medicaid FFS basic brand rebate average of 19.6% Plus 11.7% inflation protection. Total Medicaid brand rebate average of 31.3%

6. copyright - Lawrence W. Abrams - 2005 Variability of rebate rates  The formulary is a set of therapeutic classes  A therapeutic class can be viewed as a market competitive monopolistic oligopolistic  Bargaining theory predicts that rebates are paid only in oligopolistic therapeutic classes

7. copyright - Lawrence W. Abrams - 2005 Rebates for what?  PBM potential conflict of interest  Drug Spend = ( U sage)*( U tilization)*( U nit prices)  Unit prices , but brand Utilization , drug spend 

8. copyright - Lawrence W. Abrams - 2005 Rebates for what? NOT  brand for generic Rx switch “breach of fiduciary duty” “sin of commission” detectable without PBM full disclosure of rebates “Jury Still Out”  abstaining from generic for brand Rx switch “not playing to win, but playing not to lose” “sin of omission” near impossible to detect – PBM full disclosure would not help.

9. copyright - Lawrence W. Abrams - 2005 Rebates for what?  Not for “moving markets”

10. copyright - Lawrence W. Abrams - 2005 Rebates for what?  Rebates are for abstaining from  discretionary  brand for brand Rx switching  in oligopolistic therapeutic classes  Rebates are the fixed component of a two-part tariff “pay to play” barrier to “enantiomeric” entry by “me-too” drugs

11. copyright - Lawrence W. Abrams - 2005 Who is the better bargaining agent: PBMs or the Feds?

12. copyright - Lawrence W. Abrams - 2005 Medicaid FFS versus Medicaid MCO Lewin study comparing drug benefit plans: Available at www.ahcahp.org/publications/Working Papers/drug study.pdf  Government (Medicaid FFS) delivers higher rebate rates – by 15 percentage points but PBMs (Medicaid MCO) deliver lower overall drug spend – by 10-15 percentage points because of Higher generic utilization rates – MCO - 59%, FFS - 50% Lower usage rates – MCO lower by 15-20 percentage points