PBM BLACK BOX Pharmacys Complexity is a Black

PBM BLACK BOX Pharmacy’s Complexity is a Black Box June 22, 2017 Presented By: Todd Kurth, Principal & Senior Consultant PROPRIETARY AND CONFIDENTIAL

“The only place where success comes before work is in the dictionary. ” ~ Vidal Sassoon~ 2 PROPRIETARY AND CONFIDENTIAL 2

AGENDA DISCUSSION POINTS AND TOPICS • • • 3 Pharmacy Benefits Manager (PBM) – What do they do? Pharmacy Benefits No Longer a Throw in Benefit Common Myths Why So Complicated? How Does a PBM Make Their Revenue? Formulary – Rebates or Lowest Net Cost Growth of Specialty Carve In vs. Carve Out Takeaways Questions PROPRIETARY AND CONFIDENTIAL

PHARMACY BENEFIT MANAGER WHAT IS A PHARMACY BENEFIT MANAGER? • A organization that helps: § Manage the purchasing, reimbursement and dispensing of prescription drugs for employers, plan sponsors or health plans § Create and maintain pharmacy networks § Create formularies that influence physician prescribing patterns to aid in securing drug manufacturer rebates § Negotiate with all parties in distribution chain for discounts, rebates, etc. § Administer clinical and disease management programs to manage utilization 4 PROPRIETARY AND CONFIDENTIAL

PBM 2014 MARKET SHARE by total equivalent prescriptions 10, 000 Life Group 24% 6% 29% 5% 13% All Others 7% 9% Published on Drug Channels (www. Drug. Channels. net) on March 31, 2015. This chart originally appears as Exhibit 47 in the 2014 -15 Economic Report on Retail, Mail, PROPRIETARY and Specialty Pharmacies, January 2015. Available at AND CONFIDENTIAL https: //www. pbmi. com/2015/04/2014 -pbm-market-share/ 6%

PHARMACY BENEFIT TRENDS PHARMACY BENEFITS ARE NO LONGER A “THROW IN” BENEFIT Today’s pharmacy benefits are demanding more time and expertise than most employers and unions are able to provide due to many factors: • • • 6 New drug therapies Complicated benefit designs Double-digit annual increases High-cost specialty medications Predatory industry practices PROPRIETARY AND CONFIDENTIAL

TRUE OR FALSE? Mail Order saves you money Transparency is transparent High rebates mean low costs The FDA reviews the safety and efficacy of compound drugs Coalitions focus on the cost of the drug RFPs bind the PBM The drugs you cover drive low net cost 7 PROPRIETARY AND CONFIDENTIAL

WHY SO COMPLICATED? THE MORE YOU EXPLAIN IT, THE MORE I DON’T UNDERSTAND IT MARK TWAIN • Pharmacy is multi-faceted and unregulated • There is a lack of transparency & disclosure • For a PBM, revenue or shareholder value is the #1 priority; #2 priority is the customer Solution: Educating the buyer is key 8 PROPRIETARY AND CONFIDENTIAL

PBM OPTICS: FULL DISCLOSURE NEAR-INFINITE NUMBER OF WAYS TO HIDE PBM REVENUE 9 Spread vs Passthrough Pricing Administration Fees Average Wholesale Price (AWP) MAC Pricing Mail Order Specialty Network Pharmaceutical Rebates Add-on Services “Branded” Generics Pre-Settlement AWP Claims Repricing Client Contract PROPRIETARY AND CONFIDENTIAL

FORMULARY – REBATES OR LOWEST NET COST? DESIGNING A STRATEGY • Formulary drives to low net cost? – If true, then why are more expensive drugs listed as preferred? Formularies can be greatly influenced by rebates the PBM receives from drug manufacturers – Each PBM selects its own list of drugs, which results in different drugs on each PBM’s list – Therapeutic interchange programs are used to allow the PBM to switch a drug to a formulary medication instead of a non-formulary medication – Option –Select a PBM vendor that is not driven by rebates – Or, throw out the formulary 10 PROPRIETARY AND CONFIDENTIAL

BRAND VS GENERIC DRUG PRICES DRUG COST IS CASH PRICE AND DOES NOT REFLECT PBM DISCOUNT Treats Cholesterol Lipitor 40 mg Atorvastatin 40 mg $374 to $390 $13 – $60 Treats High Triglyceride Levels Lovaza 30 caps Omega-3 -acid ethyl esters Treats Heartburn $80 to $82 $28 to $35 30 caps Treats Blood Pressure 24 HR OTC – Nexium 20 mg $16 to $25 Esomeprazole $41 to $90 Treats Asthma Singulair 30 tablets Valsartan 160 mg Montelukast 30 tablets 11 $265 to $325 20 mg Diovan HCT 160 mg $230 to $240 $26 to $70 Nexium 20 mg $228 to $236 $14 to $63 PROPRIETARY AND CONFIDENTIAL

PRICE VS COST LOWEST NET COST REQUIRES MUCH MORE THAN “GOOD RATES” Mix Management: Which drugs / treatments? 12 Utilization Management How much? Channel Management Where? PROPRIETARY AND CONFIDENTIAL Total Cost

GROWTH OF SPECIALTY DRUG COSTS PAST AND PROJECTED SPECIALTY DRUG COST TRENDS 13 PROPRIETARY AND CONFIDENTIAL

SPECIALTY DRUG TRENDS SPECIALTY MANAGEMENT STRATEGIES PRODUCE RESULTS Tightly Managed Employers • 13. 6% • Specialty • Increase Unmanaged Employers 14 • 27. 8% • Specialty • Increase PROPRIETARY AND CONFIDENTIAL

PIECES OF THE SELFFUNDING PUZZLE L A IC D E M RX LO SS A C A ST O P 15 PROPRIETARY AND CONFIDENTIAL

CARVE IN Disadvantages Q Q Account team is focused and trained on medical benefit to detriment of Rx benefit. Better outcomes are often limited and not effectively reported to the employer Q Reporting often provides less Rx detail than stand-alone PBM provides Q Less transparency, and no stand-alone PBM contract; pricing (discounts) is rarely guaranteed. Q Rx discounts disappear as bundling takes place. Rx pricing becomes a function of admin fee only. Q Terms, definitions, calculation methodologies are not articulated in ASO contract. Q Q Advantages üOne vendor and one account team may simplify vendor and benefit management üPotential for combining Rx and medical data for better medical outcomes ü Already established relationships with physicians ü Potential for more effective management of population health ü Bio-metrics are under one roof if lab results; physician visits; Rxs are all integrated for outcome üMarketing is easier at renewal Rebates are rarely shared at 100%; exclusions of drugs is typically not allowed Relationships w/ physicians due to PPO contracts make specialty med negotiation PROPRIETARY AND CONFIDENTIAL 16 difficult.

CARVE OUT Disadvantages Advantages Q Two companies, two account teams – more administrative work? Q outcomes with results Focus on Rx outcomes does not realize potential value of focus on combined medical and Rx Q May limit opportunity for real-time exchange of medical and drug data and eligibility for CDHP Q Paid claims data must be integrated for reinsurance or DSM programs or lifetime maxes Q Two invoices to pay ü Some PBMs combine elements of medical data for improved clinical management information üDetailed reporting specific to the needs of the employer ü Flexibility with clinical programs and administration ü Likely more rapid implementation of leading- Q May require 2 ID cards if medical payor insists üUse Rx data to focus on Rx edge technology and capabilities üSeparate contract for Rx only that discloses more information on PBM practices ü Easier to mange Rx benefit and administration 17 PROPRIETARY AND CONFIDENTIAL

PIECES OF THE SELF FUNDING PUZZLE LO SS A C A ST O P R X AL IC D E M 18 PROPRIETARY AND CONFIDENTIAL

TAKEAWAYS BE INNOVATIVE • • • 19 15% to 25% of a Health Plans Expense is directly related to Pharmacy Data is Power - Carve Out allows you to see your Rx Plan Data Discounts only go so far – Plan Design, which drugs you cover and changing member behavior help reduce Plan Costs Specialty Drug/Biologics sales has and will continue to explode Get Contractual Guarantees PROPRIETARY AND CONFIDENTIAL

20 PROPRIETARY AND CONFIDENTIAL

EXPERIENCE & EXPERTISE TODD KURTH, PRINCIPAL & SR. PHARMACY CONSULTANT Todd is a Principal and Senior Pharmacy Benefit Consultant with over 20 years’ experience in the healthcare industry— 13+ of which are in pharmacy benefits. Todd has significant experience in, and knowledge of, the PBM industry having held a position with The Segal Company as a Senior Pharmacy Benefits Consultant for their National Health Practice and heading up the Western Region. Todd also worked for Caremark as a Senior Underwriting Analyst where he analyzed, provided recommendations on client pricing, and financial terms within the client contracts. As a Senior Pharmacy Benefit Consultant at Scrip. Point, Todd is an expert in PBM pricing methodologies, contract evaluations and negotiations, electronic claims audits, PBM RFP development and analysis, PBM training, and benefit design modeling. Todd has extensive experience working directly with clients in the Taft-Hartley and employer group markets administering prescription drug plans and serving as the main point of contact between the benefit plan and the PBM. Todd also spent seven plus years working for the State of Illinois in employee benefit administration, serving the last year as the Director of Local Government Health Plan. In this role, Todd served as the marketing representative and spokesperson, analyzed PBM RFP’s, managed administrative functions and worked with the actuary to develop sound funding strategies and plan designs. Todd resides in Phoenix, Arizona. He holds a Bachelor’s Degree from Washington State University and is a Master’s Degree Candidate in Public Health. He is a Veteran of the U. S. Air Force. Todd is also a nationally recognized pharmacy expert who has contributed to articles published in several trade journals. 21 PROPRIETARY AND CONFIDENTIAL T: 602 -293 -3085 tkurth@scrippoint. com