Preferred National Pharmacy Solutions

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• Preferred National Pharmacy Solutions
• Committed to Revolutionizing the way Pharmacy
  Benefits are Delivered

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• Smoke Mirrors
• An Overview of the
• Pharmacy Benefit Management Industry in America

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Presentation Overview

• Background of pharmacy benefit management
• How pharmacy benefit managers (PBMs) work
• A description of questionable industry practices
• Whats needed to resolve the problem
• Preferred National Pharmacy Solutions
• Creating an honest pharmacy benefit expense
  management capability for your clients

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Historical Perspective

• Until the 1980s, insurers and TPAs processed Rx
  claims
• Prescription Card Services (PCS) and its
  electronic POS pharmacy capability, enabled
  payors to carve out pharmacy benefits and
  outsource them
• Realizing that Rx administrators could be a
  useful tool in pushing their products, the drug
  manufacturers bought them in the 90s
• Post-acquisition, the Rx administrators morphed
  into PBMs with an interest in self-dealing and
  maximizing profits
• There are approximately 50-60 PBMs operating in
  the United States
• It is now well-known that for 20 years, PBMs
  have been
• shielded in secrecy,
• avoiding accountability, and
• acting in their own selfish best interest
• all to the detriment of Plan Sponsors, Plan
  Participants and re-insurers.

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Historical Perspective

• PBMs have engaged in unfair, deceptive and
  self-dealing practices designed exclusively to
  increase their profits by

• influencing the choice of drugs prescribed by
  physicians,

• inflating Rx drug prices with a pricing system
  based on an inflated "sticker" price (AWP) set by
  a middle man,

• not passing the savings negotiated via their bulk
  purchasing power to their clients,
• willfully contributing to escalating drug costs,
  and
• failing in their fiduciary duty to their clients.

Paraphrased from conclusions drawn by U. S.
Senators during Congressional hearings on
pharmaceutical industry practices
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What is a PBM and How do they Operate ?

• Similar to the way in which health insurers, HMOs
  and TPAs are structured and operated, PBMs are
  designers, aggregators and managers of a variety
  of carefully selected products and service
  providers that are integrated to address these
  and other areas

• plan design
• provider networks
• retail pharmacy
• mail-order pharmacy
• specialty pharmacy
• claim processing
• eligibility management
• care management
• rebate management

• customer service
• employer
• patient
• physician
• pharmacist
• performance reporting
• sales and marketing capability
• clinical oversight
• decision-support tools

• Typically, most PBMs outsource several of these
  functions

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Component Parts of a Sophisticated PBM
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PBM Profiteering Tactics and Schemes

• Re-Defining AWP
• The 4.16 Factor
• The 8-Digit NDC Trick
• Mark-Ups Price Spreads
• Backroom Processor Schemes
• Rebate Schemes
• Flat, Access, Market Share
• Rebate Disguising
• Rebate Pumping
• Re-Defining Brand and Generic
• Formulary Steering
• Pre-Authorization Schemes
• Clinical Rules Protocols

• Mail-Order Schemes
• Leveraging Captive Facility
• Multiple MAC Lists
• Drug Switching
• Drug Repackaging
• Fraudulent Plan Design
• Other Profiteering Schemes
• Zero Cost Scripts
• Higher Than Logic
• Pocketing Refunds, Reversals and Returns
• Payor Account Crediting Tricks
• The Specialty Drug Issue

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Common Definitions

• What is a drug formulary ?
• A list of prescription medications that a drug
  plan will pay for
• Some formularies are more restrictive than others
• Open formularies cover both listed and
  non-listed drugs
• Closed formularies cover only drugs included on
  the list
• Tiered formularies encourage the use of
  preferred drugs by charging higher co-pays for
  non-preferred drugs, whereas generic and
  preferred drugs require lower co-pays

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Common Definitions

• What is a therapeutic class ?
• Simply put, all prescriptions fall into a
  therapeutic class
• The National Drug Code (NDC) identifies the 20
  major drug classes to which a drug may belong.
  Examples of therapeutic classes include
• Proton Pump Inhibitors,
• Cholesterol Lowering Products, and
• Antihistamines
• They are the component parts with which
  formularies are created
• PBMs offer several, but not all, drug options
  within a therapeutic class
• What is transparency, full disclosure and pass
  through pricing ?
• Transparency letting the client see and prove
  all that is promised
• Full disclosure disclosing everything and being
  transparent
• Pass through passing all financial benefits on
  to the client

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Redefining AWP

• Definition of Average Wholesale Price (AWP)

• Represented as being an average of prices charged
  by wholesalers
• Actually set by manufacturers and drug pricing
  sources - sticker price
• No independent review
• According to the U.S. General Accounting Office
  (GAO), the AWP may be neither average nor
  wholesale.

• AWP - x is a myth. How do we know this ?
• We studied an analysis of the drug costs of the
  major pricing sources
• Redbook, MediSpan and FirstData Bank
• This study tracked these costs over time
• It identified large-scale price manipulation
• Dave Morgan, Morgan Healthcare Audits

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Not all Rx Pricing Sources are Alike

• Note that FirstData Bank and MediSpan have
  identical prices for the top 10 brands based on
  the of scripts dispensed
• Did they survey exactly the same drug wholesalers
  on exactly the same date to arrive at their
  average wholesale prices ?
• Notice that Redbook is nearly 4 less expensive

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Not all Rx Pricing Sources are Alike

• When we examine the top 10 brand drugs based on
  cost we now see that the price of Oxycontin is
  the same across the board

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The 4.16 Factor

• Now notice that over a few month period,
  FirstData Banks AWP increased by exactly 4.16
  vs. Redbook

• Is it possible that all of the manufacturers of
  these drugs chose to increase their prices by
  exactly the same amount at exactly the same time ?

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The 4.16 Factor

• This 4.16 increase was actually phased in across
  the board over time

• Upon closer examination we note that narcotics,
  generics, and high profile drugs (e.g. Viagra,
  Zyrtec) are not impacted

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The 4.16 Factor

• The smoking gun

• When the drug price manipulation program has an
  error, the price of the drugs reverts back to the
  pre-manipulation date !

• a

• 4 months later, when the problem is realized,
  the price manipulation program changed the
  prices back to the post-manipulation Level

Proof that AWP is a manipulated artificial number
and not market based
The 4.16 Factor was Discovered by Dave Morgan,
a Nationally-Recognized Rx Benefit Expert and a
Member of the PNPS Distinguished Panel of Advisors
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The 4.16 Factor

• In the settlement of the resultant civil class
  action case brought against First DataBank, one
  of several companies that report data on
  prescription drug prices, First DataBank agreed
  to reduce the reported AWP of certain drugs. by
  approximately four percent
• The following language appears in a similar
  settlement agreement with Medi-Span
• and now you know
• ..the rest of the story

Subject to the provisions of Paragraph
(9)(A)(3) below, on a date which is no later than
three (3) years from the Effective Date of this
Agreement, Medi-Span shall discontinue
publishing, electronically or otherwise, the AWP
data field for any pharmaceutical. Medi-Span
shall use the three year period described herein
to notify its customers of the change in its
publications contemplated by this paragraph.
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Re-Defining AWP

• Spread The difference between the price charged
  to payors for drugs and the price paid to
  pharmacies
• Essentially amounts to marking-up claims !
• Typical spread 4 - 6 /script or 9 - 13 PEPM
• For generics, PBMs use multiple Maximum Allowable
  Cost (MAC) lists
• PBMs may charge payors the MediSpan AWP and pay
  pharmacists the lower Redbook AWP
• PBMs that own mail-order facilities keep the full
  spread on these drugs
• Encourages PBMs to push drugs with highest
  spreads by manipulating the formularies
• PBMs hide the fact that they create spreads by
  claiming that their contracted AWP rates with
  their pharmacies are confidential

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The 8-Digit NDC Trick

• The National Drug Code (NDC) is a unique
  11-digit, 3-segment number assigned to all
  medications intended for human use
• The 1st segment identifies the manufacturer,
  repackager or distributor
• The 2nd segment identifies the strength, dosage
  form, and formulation
• The 3rd segment identifies the package size
• Ex NDC number 00135-0315-52 is for
  Glaxo-Smith-Klines (00135) 1 Denavir Cream
  (0315) in a 1.5 gram tube (52)
• To prevent competing PBMs from comparing Rx
  charges, PBMs often provide reports containing
  only 9 digits, which are useless
• NDC 00135-0315-52 (a 1.5 gram tube) costs
  70.00 whereas
• NDC 00135-0315-51 (a 2.0 gram tube) costs
  80.00
• Without the last two NDC digits, it is
  impossible to compare charges
• PBMs often claim they cant provide 11-digit
  NDCs this is untrue because they use 11-digit
  NDCs to pay their network pharmacies

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Backroom Processor Schemes

• Most PBMs outsource claim processing to one of a
  few backroom companies that own the electronic
  POS pharmacy network
• These companies, which are largely unknown,
  include
• Most of these companies provide call center and
  reporting services
• These companies not only facilitate and support
  the profiteering schemes of PBMs, they partake in
  several of their own including
• marking-up drug prices an average of 4 before
  the the PBM mark-up
• charge pharmacists as much as .25/script in
  undisclosed fees
• look the other way re pharmacy errors and
  profiteering tactics

• SXC Health Solutions
• DST - Argus Health Systems
• Emdeon Business Services
• McKesson/Relay Health

• First Health Services
• Unisys Health Services
• Ramsell Public Health Rx

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Rebates and Rebate Disguising

• Drug manufacturers reward PBMs for promoting
  their brands
• Offered only for single-source drugs for which
  there are no generics
• Rebates represent a very significant source of
  PBM revenues
• Average rebates are 10 of AWP or 3 - 6/script
  or 6 - 12 PEPM
• Average rebate for the top 25 rebatable drugs is
  gt 20/script
• PBMs promote drugs that yield the highest
  rebates, not ones that are necessarily in the
  patient's best interest (most efficacious)
• PBMs have historically kept rebates, now theyre
  being forced to share
• Retaining interest on rebates by collecting
  monthly, remitting quarterly or even less
  frequently

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Rebates Come in Many Forms

• Access rebates - for formulary placement
• Market share rebates - for exceeding estimated
  targets
• Administrative rebates - for compiling data and
  verifying results
• Rebates for influencing a doctors prescribing
  patterns
• Rebates to cover educational expenses
• PBMs redefine rebates to exclude them from the
  amounts shared with payors and disguised by PBMs
  as formulary savings

• Court Rulings A rebate is a rebate whether its
  called an
• educational grant,
• marketing incentive, or
• administrative fee

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Rebate Pumping

• Rebate pumping occurs when a PBM creates a
  formulary substituting new, higher cost drugs for
  low cost drugs
• This creates greater spreads and more PBM profit
• These higher cost drugs are often not the most
  appropriate (efficacious) drug in the therapeutic
  class
• By acting in its own self-interest, the PBM has
  created a serious conflict of interest between
  it, the payor, plan participant, physician and
  pharmacist and often pit one against the other

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Examples of Rebate Pumping

• Protonix is 19 less expensive than Prevacid, and
  Lipitor is 46 less expensive than Zocor
• PBMs typically push Prevacid and Zocor however
  because they offer them larger rebates

• Prevacid and Zocor are often not the best drug
  for (most efficacious) a patients ulcer or
  cholesterol lowering treatment

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Re-Defining Brand and Generic

• The intentional blurring of the definitions of
  "brand drugs" and "generic drugs" by PBMs to suit
  their financial interests
• This tactic represents several percentage points
  in undisclosed PBM revenues, costing payors tens
  of millions of dollars annually
• It is not known to payors, consultants or anyone
  but the PBMs
• Contracts do not define these terms or are
  ambiguous, such as
• "branded generics a brand drug that is so
  cheap its considered the generic of itself and
  equal in cost as either a brand or generic, an
• "multi-sourced brands, another term that is used
  to provide wiggle room in the miscategorizing of
  products
• Experts believe that this practice is very
  widespread and involves dispenses that can
  account for up to 10 of typical utilization

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Re-Defining Brand and Generic

• By miscategorizing drugs
• charging brand prices for generic products,
• retaining rebates for brand drugs by calling them
  generics, and
• misstating a payors generic drug utilization
  rate
• PBMs miscategorize brand and generic drugs for
  the purposes of
• invoicing a generic drug as a brand drug to
  charge higher prices (e.g., AWP 17) rather
  than the true price (e.g., AWP 65)
• labeling a brand drug a generic to keep the
  rebate, as almost all contracts require that
  rebates be passed on only on brand drugs
• counting a brand drug as a generic to meet the
  generic fill level necessary to earn a bonus or
  meet a guaranty requirement
• Nefarious, illegal, unethical ? Fraud is
  difficult to prove in court.

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Re-Defining Brand and Generic

• Miscategorizing Example 1 Amoxil
• The antibiotic Amoxil is the same as amoxicillin,
  and the same price
• Amoxil is categorized as a generic to achieve an
  overall generic fill-rate guarantee and as a
  brand to maximize profit (because the PBM can
  charge AWP 17 rather than AWP 65)
• The same-priced amoxicillin may appear both on a
  PBM's MAC list (as a generic) and as a brand at
  the same time !
• Miscategorizing Example 2 Oral contraceptives
• Oral contraceptives may in fact be generic, but
  still contain a trade name, and priced either
  (the Kleenex facial tissue scheme)
• Miscategorizing Example 3 Albuterol Inhalers
• Teva, a generic manufacturer, introduced its
  ProAir HFA as a brand
• FDB/MediSpan classified it as a generic vs. the
  innovator product
• As its price moved to that of the innovator, it
  changed back to a brand

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Re-Defining Brand and Generic

• When is a drug a generic rather than a brand ?
  When
• the product's label name is the same as the
  generic name,
• the drug is not listed as an "innovator product"
  by a drug data source,
• the drug was never FDA-listed as a New Drug
  Application (NDA), or
• the drug is listed as a generic in the FDA's
  Orange Book (re patents) or, it was otherwise
  found to be approved by the FDA as a generic
• To avoid this problem, payors need to
• deal exclusively with reputable pharmacy expense
  managers,
• use specific contract language which prohibits
  definition manipulation,
• be specific and very clear about how terms are
  defined and used, in particular contexts,
  including examples where necessary

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Formulary Steering

• Influencing the prescribing doctor to change a
  prescription to increase a PBMs revenue and
  profit
• Example Astra-Zeneca paid Express Scripts 500K
  to call 22,000 MDs to substitute high-cost Nexium
  for Prilosec, when Prilosec went generic
• Formulary steering is aided when a PBM alters the
  formulary to eliminate low cost alternatives in
  favor of high cost brands
• PBMs can place a drug on a formulary and still
  influence its use
• by implementing prior-authorization requirements
  and
• by implementing clinical rules and protocols that
  make it difficult to prescribe/dispense the lower
  cost drug
• Formulary steering is not easily traceable or
  caught

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Formulary Steering

• The practice of formulary steering is increasing
  despite greater opportunity for savings with the
  introduction of hundreds of new low cost drugs
  and generics
• Formulary steering will continue as patents on
  brand name drugs with more than 30 billion in
  market sales will expire over the next few years
• Formulary steering occurs with both multi-tiered
  plans and plans with open formularies

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Mail-Order Pharmacy

• Why is controlling mail-order pharmacy so
  critical ?
• Mail-order is one of the fastest growing areas of
  pharmacy benefits
• In 2001, mail-order was 12 of U.S. prescription
  sales, or 20 billion.
• By 2004, mail-order sales were 34 billion, a 67
  increase in just 3 years
• By 2006, mail-order sales were 42 billion, a 23
  increase in just 2 years
• Today, mail-order represents 25 40 of a
  payors drug spend
• Mail-order pharmacy is practical for persons who
  take drugs on a regular, long-term basis where
  prescriptions are refilled regularly
• Persons who use mail-order are typically on
  multiple medications and require maintenance
  drugs for longer-term, chronic conditions
• Due to the nature of this type of treatment,
  mail-order companies experience a larger quantity
  of medication per dispense

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Mail-Order Pharmacy

• As a result of the growth of mail-order services,
  many PBMs have bought mail-order facilities to
  continue their profiteering
• The 3 largest PBMs own captive mail-order
  facilities and dispense an estimated 75-80 of
  all commercial mail-order scripts
• Today, mail-order has become a huge profit driver
  for PBMs generating up to 60 of the net income
  for some companies
• Mail-order is much more profitable than PBM
  administration indeed, industry experts report
  that the average profitability of a mail-order
  dispense is four times that of a retail
  prescription
• More than 50 of all mail order dispenses are for
  high-margin single source drugs. Recently,
  Medcos CEO refers to its mail-order unit as the
  companys crown jewel
• Mail-order is still very much a black box and a
  component of pharmacy benefit management that is
  still largely out of control

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Mail-Order Pharmacy

• PBM-owned captive mail-order facilities can
  create a significant conflict of interest as the
  pharmacy administrator is also a seller
• PBMs with captive facilities usually own them to
  engage in deceptive mail-order practices to
  increase profits
• PBMs boast that the discounts for mail-order
  dispenses are always greater than discounts for
  retail, but they are not
• Major mail-order frauds
• Drug switching
• Re-packaging
• Using different MAC and AWP lists for payors and
  pharmacists
• Failing to promote starter dosages pushing
  mail-order scripts are for 90- versus 30-day
  supplies

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Mail-Order Pharmacy

• What is drug switching ?
• Contacting a prescribing physician to persuade
  him or her to change a prescription from generic
  or preferred brand to a non-preferred brand
  product to earn a greater spread or larger rebate
• Incentives for drug switching ?
• PBMs earn rebates on single source drugs vs.
  multi-source drugs where generic equivalents are
  available
• Drug manufacturers know that when generics are
  available, patients will request them
• The challenge for PBMs many states have
  substitution laws that promote generic
  substitution via automatic dispensing by
  pharmacist
• Its the unique ability that mail-order firms
  have to facilitate changes in prescriptions from
  one drug to another that creates special value,
  not automated dispensing technology or paperless
  order processing

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Mail-Order Pharmacy

• How is drug switching accomplished ?
• There are several days between the order and
  expected dispense date allowing the mail-order
  pharmacy time to obtain the prescribing
  physicians permission
• Physicians often accept PBM representations about
  the added benefits of the new single-source drug
• It is also just as profitable for the PBM to get
  a physician to switch from one single-source drug
  to a more expensive single-source drug
• Several studies provide ample evidence to support
  opportunistic self-dealing via drug switching by
  PBMs with captive facilities
• This evidence shows significantly lower generic
  substitution rates by captive vs.
  independently-owned mail-order facilities
• The federal government has asked the FTC to
  investigate the matter

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Mail-Order Pharmacy

• What is drug re-packaging ?
• The re-packaging and re-pricing of mail-order
  scripts to extract more from the payor and
  the patient
• How is re-packaging accomplished ?
• Creation of a proprietary NDC that is not
  recognized by the FDA
• Creation of a price with an inflated per unit AWP
• Billing the payor using the proprietary NDC and
  inflated AWP
• Charging 100-unit price when buying in bulk (the
  gazillion unit price)
• Buying from another re-labeler or re-packager
• PBMs can do this while staying within their
  contract terms

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Mail-Order Pharmacy

• An example of re-packaging of Celebrex
• PBM negotiates retail pricing of AWP-10 3
  dispensing fee
• Mfg.s AWP is 105.34 for 60-Day supply or
  1.76/unit
• Plans cost is 97.81 (105.34 10 3) or
  1.63/unit
• PBM gets plan to push mail-order with a deal of
  AWP-25 3 disp. fee
• Case 1
• PBM establishes a 100 unit AWP of 2.76/unit (per
  contract)
• PBM re-packages Rx into 60-unit pack and charges
  payor 127.20
• (60 x 2.76 25 3)
• New PBM profit 127.20 97.81 29.39 ( 30)
  plus the margin it would have realized with the
  original AWP !!!
• Case 2
• PBM buys drug from re-labeler and establishes an
  AWP of 3.10/unit
• PBM charges payor 142.50 (60 x 3.10 - 25 3)
• New PBM profit 142.50 97.81 44.69 ( 45)

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Mail-Order Pharmacy

• 15 re-labeler products with inflated AWPs for
  Celebrex

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Mail-Order Pharmacy

• 60-Pill Celebrex dispense price rose 77 from
  105.34 to 186.3

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Mail-Order Pharmacy

• What is plan design fraud ?
• Concept provide financial incentives for
  patients to use mail-order by requiring fewer
  co-pays because the PBM offers the payor greater
  AWP discounts and lower dispensing fees via
  mail-order
• By requiring only 2 co-pays for a 90-Day drug
  supply (vs. the standard 3 if the prescription
  were purchased at a retail pharmacy) the payor
  agrees to absorb the added cost in exchange for
  the anticipated savings
• In most cases, the co-pay amount absorbed by the
  payor is greater than the savings, resulting in
  an increase in overall costs
• As illustrated in the following slides, PBMs
  dramatically increase their revenues and profits
  on these mail-order dispenses

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Mail-Order Pharmacy

• Payor saves 11.36/script in ingredient and
  dispensing costs only to pay an additional 20.98
  co-pay costs for a net added expense of
  9.92/script

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Mail-Order Pharmacy

• Carroll Study of 2 vs. 3 co-pay plan design for
  90-day supply
• 44,847 scripts from non-captive mail-order
  pharmacies

• Summary
• Pharmacies lose 269,082 in dispensing fees Rx
  margins rebates
• Payor pays 7 (308,904) greater costs
• PBM gets control of 6.4 million in new
  ingredient cash flow
• Members save 809,532 at the expense of payor and
  pharmacies

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Mail-Order Pharmacy

• Other sources of PBM revenues from captive
  mail-order
• Excess revenue from 90-day scripts earned from
  terminated EEs
• Revenues from wasteful usage 90-day supplies vs.
  step therapy (in which a patient starts a new Rx
  treatment regimen with an initial dispense of a
  few pills to see if they can tolerate the drug)
• PBMs earn (typically undisclosed) administration
  fees for data collection (re member Rx usage)
• PBMs earn (typically undisclosed) greater generic
  market share fees from greater vendor selection
• Entering into seemingly transparent,
  full-disclosure contracts but unwittingly
  slipping 100 count pricing language into the
  contract so that they can stay within the letter
  of the law and not have to price their drugs on a
  bulk rate or an acquisition cost basis

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Specialty Pharmacy

• Specialty pharmacy is a relatively new area of
  prescription medications including non-orally
  taken pharmaceuticals, biotech products,
  gene-based therapies and injectables used to
  treat a variety of chronic, high dollar, complex
  conditions for which no other viable
  pharmaceutical option exists
• While affecting only a small number of people,
  specialty pharmacy is expensive, averaging gt
  1,500/mo and as much as 15,000/mo
• It is the most explosive Rx market in terms of
  growth, utilization and cost growing from 22
  billion in 2001 to 60 billion in 2005
• With 600 biotech drugs in development and 150
  about to emerge from the pipeline, we will spend
  an est. 100 billion on specialty drugs by 2010
  (making it the largest category driving drug
  trend)
• Used for treatment of anemia, cancer,
  cardiovascular disorders, diabetes, respiratory
  disorders, MS, and rheumatoid arthritis, etc

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Specialty Pharmacy

• Examples of specialty drugs and their annual
  treatment costs

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Specialty Pharmacy

• Like mail-order, a captive specialty pharmacy is
  a dishonest PBMs gold mine as it provides the
  means by which to sell high priced, high margin
  drugs and generate enormous revenues for the PBM
• Specialty drugs are covered under the medical
  benefit and typically provided by physicians in
  the buy and bill model
• Physician writes a prescription
• The script is ordered through the PBM
• The drug is administered at the physicians
  office
• The payor is billed by the physician on a HCFA
  using a J code
• Costs of product administration and patient
  monitoring services are often wrapped into the
  product cost
• A University of Michigan study showed that
  physician-office based dispenses are 8 more
  expensive than those through other means

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Specialty Pharmacy

• Effective specialty drug utilization management
  programs include the following components
• Formulary development
• Clinical guidelines
• Prior authorization
• Step therapy
• Quantity limits
• Reporting and claims review
• Provider education
• Member education

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Profiting from Zero-Cost Scripts, Refunds,
Reversals and Returns

• Up to 20 of all prescriptions cost less than the
  co-pay
• The differential is not passed on to either the
  patient or payor
• PBMs and pharmacies often keep or share the
  overage
• Keeping the overage may be a violation of ERISA
• Appropriate contract language should also include
  lesser of language that allows for the payor
  and plan participant to pay the lesser of the
  guaranteed AWP discount, or the UC, or the MAC
• Many scripts are eligible for refunds and
  reversals
• Due to pharmacy errors and changes
• Returned prescriptions
• Patient not picking up the script
• Many audits of PBMs show them to be sloppy" with
  respect to crediting payor accounts

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Profiting from Zero-Cost Scripts, Refunds,
Reversals and Returns

• The wink and nod pharmacy bonus program
• How it works
• Why ?
• Who pays ?
• Who is accountable ?

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Profiting from Zero-Cost Scripts, Refunds,
Reversals and Returns

• How bad is it ?
• In this plan audit example, 61,693 mail-order and
  retail dispenses were found to be greater than
  the co-pay.
• The result was nearly 43,000 in overpayments or
  .69/prescription

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Profiting from Zero-Cost Scripts, Refunds,
Reversals and Returns

• Is the pharmacy costing consumers money ? Audits
  prove it.
• Shortened days supply with extra refill
• Drug diversion schemes
• Dispense generics but charging for brand name
  drugs
• No claim reversals
• Billed for services not rendered
• Filling beyond authorized refills
• Improper record keeping
• Not catching invalid prescribers

• 8.0 totally fictitious prescriber IDs
• 2.5 no prescriber ID submitted
• 1.5 prescriber ID does not match prescriber
  name
• Total of 12 bill back to pharmacy

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2000 to 2007 Market Value Changes in Healthcare
Sector
Is it any wonder why PBM values increased 1,000
since 2000 ?
2007 YTD
2000 Current
2006 FY
1,000 PBM 1 28
634 Clinical Labs 17 (1)
490 Managed Care (7) 4
460 Renal Dialysis 6 (4)
397 Skilled Nursing 21 33
161 Wholesale Dist. (2) 11
117 Home Respiratory (2) 4
107 Med Tech (3) 4
68 Hospitals 3 9
28 Large Cap Pharma 14 7
2 SP 500 14 5
Source Factset, as of 4/30/2007. PBM includes
CMX (while active), ESRX, MHS, and ADVP (while
active). CLINICAL LABS includes BRTL, DGX, LH,
SP, and LABS (while active). MANAGED CARE
includes AET, WLP, CI, UNH, CVH, HNT, HUM, PHS,
SIE, and WC. RENAL DIALYSIS includes RCI (While
Active) and DVA. HOME RESPIRATORY includes LNCR
and AHG. SKILLED NURSING includes BEV, EXE,
GHCI, KND, HCR, and NHC. WHOLESALE DISTRIBUTION
includes ABC, CAH, and MCK. LARGE CAP PHARMA
includes ABT, AZN, BMY, LLY, GSK, JNJ, MRK, NVS,
PFE, RHHBY, SNY, SGP, and WYE. MED TECH
includes MDT, BSX, GDT, STJ, ZMH, SYK and
BMET. HOSPITALS includes CYH, HCA, HMA, LPNT,
THC, TRI, and UHS.
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Regulatory Concerns

• ERISA defines a a fiduciary as any person who,
  with respect to an employee benefit plan,
  exercises ANY discretionary authority or control
  with regard to managing a plan or its assets and
  a person who provides services to the plan as a
  party-in-interest
• Plan Sponsors are clearly fiduciaries of the plan
• Health insurers are often ERISA fiduciaries
• TPAs and PBMs are clearly parties-in-interest of
  the plan
• ERISA places significant requirements on those
  who participate in the operation of employee
  benefit plans (incl. pharmacy benefits)
• ERISA strictly prohibits a wide variety of
  transactions between parties-in-interest and plan
  fiduciaries

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Regulatory Concerns

• What requirements does ERISA impose on
  fiduciaries ?
• Fiduciaries must
• operate the plan exclusively in the sole
  interest of plan participants
• strive to get a fair, honest and reasonable
  deal for participants
• act with the care, skill, prudence and
  diligence of a prudent man
• not deal with plan assets in their own interest
• not act in a transaction involving a plan on
  behalf of a person whose interests are adverse to
  the interests of the plan or its participants
• ERISA requires that the compensation of a
  party-in-interest be reasonable and that it be
  disclosed (per ERISAs prohibited transaction
  requirements)

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Regulatory Concerns

• The U.S. Department of Labor posits that both
  TPAs and PBMs are fiduciaries of the plan
  (although this is arguable in the former case)
• In a 2004 action against Express Scripts, Judge
  Limbaugh of the 8th Circuit Court ruled that PBMs
  are fiduciaries of the plan
• Numerous court decisions, regulatory bodies and
  legislatures have deemed PBMs to be fiduciaries
  or to be subject to acting as one
• PBMs reject the notion that they are ether
  parties-in-interest or fiduciaries of the plan,
  despite court rulings to the contrary
• Are PBMs fiduciaries or parties-in-interest? You
  decide

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Regulatory Concerns

• Why PBMs are fiduciaries of the plan
• PBMs exercise both judgment and discretion in the
  plans design and operation. Examples include
• formulary creation
• establishing pricing structures
• selection of generic manufacturers
• PBMs are engaged to administer the Rx plan and
  negotiate fair, honest and reasonable deals for
  plan sponsors and plan participants, however
• PBMs use their bulk purchasing power for their
  own benefit, and not that of the plan sponsor or
  plan participant
• PBMs earn both unreasonable and undisclosed fees
• PBMs engage in dishonest, deceptive
  double-dealing and profiteering practices
• PBMs cloud the judgment of payors with excessive
  compensation arrangements

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Regulatory Concerns

• Knowing how PBMs work, and what ERISA requires,
  are payors and plan sponsors at risk if they
  continue to work with PBMs ?
• Yes - both are in clear and present danger.
• ERISA implicitly tasks plan sponsors, payors and
  TPAs with getting a fair, honest and reasonable
  deal for plan participants and operate the plan
  in the sole interest of plan participants
• TPAs, payors and plan sponsors are at risk for

• not researching and evaluating PBMs
• being aware of such practices and not acting
• trying to hide behind the cloak of ignorance

• Service providers compensation from PBMs may be
  challenged re ERISAs reasonableness
  requirements and the new DOL 408(b)(2) fee
  disclosure regulations that focus on this very
  issue

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Regulatory Concerns

• Since 2002, 30 legislative bills in 25 states
  imposing fiduciary-like standards for PBMs have
  been introduced, many passing
• ERISAs new 408(b)(2) fee disclosure regulations
  require disclosure of direct and indirect
  compensation received by service providers and to
  disclosure potential conflicts of interest
• Proponents of PBM regulation say that
  comprehensive regulation is necessary to deal
  with fundamental conflicts of interest, lack of
  transparency, and other problems in the PBM
  business model to
• provide payors with information regarding their
  internal workings and the contractual
  relationships between PBMs and drug manufacturers
• require PBMs to act in the interest of the plan,
  provider and participant
• prevent or provide guidelines for certain types
  of prohibited conduct
• require disclosure of all monies paid by PBMs to
  TPAs, brokers, etc
• provide status reports to regulators on a regular
  basis

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Regulatory Concerns

• PBMs have steadfastly denied allegations of
  wrong-doing and argue that competition rather
  than regulation will yield efficiencies and
  reduce drug costs for payors and consumers
• Indeed, PBMs assert that additional regulation
  will reduce benefits, increase costs and make
  consumers worse off
• While PBMs embrace transparency and full
  disclosure publicly, the The Pharmaceutical Care
  Management Association (PCMA), a PBM trade
  association, has been vigorously fighting any
  regulation including the new DOL 408(b)(2) fee
  disclosure regulations
• Ironically, a key PCMA argument against state PBM
  regulation rests on its claim of ERISA
  pre-emption, i.e., that PBMs are subject to
  federal law (ERISA) and ergo not subject to state
  regulation !

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Regulatory Concerns

• Following the upholding of the Maine PBM
  regulations in Court, a PBM suffered an immediate
  and sustained decline of 11.5 billion in equity
  value evidencing the markets expectation about
  expected future effects of PBM litigation and
  regulation
• This is an enormous decline relative to the
  actual and potential direct fines that have
  resulted to date from these investigations
• Support sources available upon request
• DOL Fact Sheet Service Provider Disclosures
  Under ERISA 408(b)(2)
• 02/02/08 Wellpoint letter to the DOL protesting
  fee disclosure regs
• PCMAs publication independent pharmacists
  undermine competition
• PCMAs Appeal of Maines PBM disclosure statue
  2699

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The Present PBM Business Model is Broken

• Our present pharmacy benefit management business
  model is rife with insurmountable flaws that
  cannot be easily overcome
• Drug costs are out of control and continue to
  escalate at a rapid rate
• Having limited control, and no understanding
  where their dollars are being spent, makes it
  difficult for payors to reduce their drug spend
• PBMs make 711 per retail script and 3-4 times
  that amount on mail-order dispenses, while saying
  that their revenues are only 12/script
• PBMs cant operate profitably as stand-alone
  companies earning only 12/script because their
  cost of acquiring business is too great
• If PBMs abandon their business model their stock
  prices will plummet
• Simply replacing one PBM with another is a
  well-worn tactic that doesnt address any of the
  fundamental flaws in the present system

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The Present PBM Business Model is Broken

• Despite trends toward transparency and full
  disclosure, PBMs remain a black box, neither
  accountable, monitorable nor truly auditable
• PBMs dont negotiate in good faith or enter into
  honest, truthful contracts as they reject the
  notion that they should act in a fiduciary-like
  manner
• Historically, efforts to fix a business model
  that is so broken fail what is required is a
  paradigm shift in pharmacy management that
  replaces the present PBM business model with a
  new one that
• leverages core competencies, forges new ways to
  partner, offers new value propositions,
  establishes new distribution channels, etc.

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63
A New Business Model is Needed

• Any successful new business model must be founded
  on the guiding principle that trust, integrity
  and fair dealing as it relates to pharmacy
  benefit management must necessarily involve much
  more than just agreeing to cost-related
  contractual issues such as transparency,
  full-disclosure, and pass through pricing
• It must pre-suppose dealing openly and in good
  faith in every aspect of the way in which you
  conduct business, by all concerned, at all
  levels, and at all times whether someone is
  looking or not
• As we see it, you are either honest, or you are
  not
• Given this, the new pharmacy benefit expense
  management business model must align the
  incentives of all those involved (payor, plan
  participant, physician and pharmacist)

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A New Business Model is Needed

• The key ingredients of a truly honest PBM
  offering are as follows
• A transparent, full disclosure and pass through
  pricing structure
• A pharmaceutical cost structure based on net
  acquisition cost
• The ability to deal directly with the
  pharmaceutical manufacturers
• An expansive network of retail pharmacies,
  including sub-networks
• Multiple large-scale redundant mail-order and
  specialty pharmacies
• Proven, flexible technology that supports complex
  coverage rules and utilization controls and is
  accessible via the Internet to all remote users
• The creation of a formulary that is value-based,
  not profit oriented

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A New Business Model is Needed

• The key ingredients (continued)
• Plan designs that encourage the best result for
  the plan participant
• An independent P T committee that acts in the
  sole interest of patients
• Full support in the management of clinical
  initiatives including outbound education programs
  for patients, providers and pharmacies
• The ability to support integrated medical and Rx
  claims processing
• Advanced online tools to support plan participant
  decision-making
• A call center for HR directors, plan
  participants, physicians and pharmacists staffed
  with highly-trained personnel that act only on
  their behalf
• Independent outside program oversight to ensure
  program integrity

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PMCS to the Rescue
A Heritage of Integrity and Credibility
Much like it legitimized the out-of-network
claims management industry with its unique claim
settlement process, PMCS has created a new type
of company committed to bringing legitimacy to
pharmacy management

• Why PMCS? Because PMCS
• understands the challenges faced by payors,
• has established and maintained trusted
  relationships with many payors,
• has an efficient distribution channel (ergo, a
  low business acquisition cost),
• has a largely paid-for infrastructure
• can aggregate the mass purchasing power of 2.3
  million employee lives with an estimated annual
  drug spend of more than 3.5 billion, and
• has the technological know-how to coordinate and
  link the component parts

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Why Now?
Because the market is demanding a better
solution and because the wherewithal is there

• The Rx POS infrastructure (electronic card-based
  technology) and claim processing technology used
  by the largest payors/PBMs is in place, mature,
  proven and inexpensive to access, just like an
  ASP-based healthcare plan administration system
• Retail pharmacy, mail-order and specialty drug
  networks are available to be contracted (just
  like a medical PPO) on a fair-priced, transparent
  and pass-through basis
• Rebate contracting and access to Rx purchasing
  co-operatives are available to make the
  acquisition cost of pharmaceuticals for PNPS
  clients as low as that of the nations largest
  purchasers

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Introducing PNPS

• Preferred National Pharmacy Solutions (PNPS) was
  created to be the the only legitimate, cost
  effective, truly transparent and ERISA-compliant
  pharmacy expense management solution
• To create PNPS, we conducted exhaustive research
  of the PBM and pharmaceutical industries
  (including the companies and technologies that
  support it) to develop the best solution to this
  complex issue and concluded that
• the problem in the Rx industry is not the drug
  manufacturers, its the entities between them and
  the patients
• the drug manufacturers are upset with the
  practices of PBMs and welcome the creation of an
  alternative transparent distribution channel
• the current PBM model, which pits drug
  manufacturers, PBMS, payors and plan participants
  against one another, cant be fixed
• resources exist in the marketplace with which to
  construct a new and viable business model for the
  pharmacy management industry

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PNPS Turnkey Offering Components
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PNPS Offering Includes

• ALL of the key ingredients of a truly honest PBM
  offering that were previously articulated and
  more
• The best features found in the most sophisticated
  PBM offerings
• Access to exclusive contracts, operating methods
  and technologies that are not otherwise available
  to TPAs anywhere in the industry
• The only contract form that guarantees plan
  sponsors full fiduciary compliance with any
  current or future state/federal requirement by
• our enthusiastically signing on as an ERISA
  party-in-interest,
• the most honest, straight-forward service
  agreement in the industry (supported by service
  partner contracts having identical ERISA
  language)
• The ability to build a fully-equipped pharmacy
  management unit at your TPA to integrate with its
  medical administration unit, and
• Private labeling that will make the PNPS program
  one of your own

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The PNPS Alliance Partners

• Technology platform
• Claims administration
• Network management

• Call center support
• Utilization management
• Performance reporting

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Why Ventegra ?

• Ventegra was formed to create a new channel to
  deliver Rx benefit services that is more
  efficient, more integrated, more honest and less
  costly

• Like Switzerland, Ventegra is neutral within the
  distribution system
• Ventegra is the first pharmacy Contracting
  Services Organization (CSO) representing payors,
  providers and patients as their fully transparent
  contracting arm
• Ventegra is also a Group Purchasing Organization
  (GPO) abiding by the safe harbors and federal
  regulations that govern GPOs
• Ventegra has negotiated agreements with the
  manufacturers that facilitate simplified
  contracting between them and medical groups,
  public and private health plans, employer
  coalitions and nonprofits

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Why Ventegra ?

• Employing highly sophisticated proprietary
  technology
• Ventegras contract terms are full disclosed and
  available for client viewing over the Internet on
  a 24/7 basis
• all discounts, rebates and other incentives
  received are always passed through and returned
  directly to the payor monthly (vs. quarterly or
  annual), and also available for client viewing

Ventegrathe first market player of its
kind.provides a novel pharmacy benefit
contracting model that goes beyond traditional
PBM and PBA services, reports the industrys
leading drug benefit news publication from
Atlantic Information Services (AIS), Drug Benefit
News, in its December 9, 2005 newsletter.
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Why Pharmacy Data Management ?

• Nearly 25 years of pharmacy benefit management
  support experience for both commercial and public
  sector (Medicare and Medicaid) programs
• A legacy of honest business dealings (e.g., no
  spreads, hidden revenue streams)
• A proven claims and plan administration platform
  that supports the integration of remote service
  partners via web-based technology
• Battle-tested at more than 4 million lives
• Operates a proprietary pharmacy network offering
  competitive pricing
• Able to fully support the flexibility that the
  PNPS program requires
• Achieved the highest rating among respondents to
  the PNPS industry survey

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Independent Auditing Program Oversight

• Most retrospective Rx claim audits prove to be
  ineffective as they often result in contentious
  audit recovery attempts

• PNPS has engaged the industrys most innovative
  and advanced forensic Rx claims auditor to verify
  each bi-weekly claims invoice
• Ongoing audits serve as a preventive maintenance
  tool (much like an oil change), reviewing claims
  and the systems adherence to contract re
  pricing, plan design, formulary, utilization
  management
• Dynamic audits are reinforced with full annual
  retrospective audits
• This audit proticol, the industrys most
  stringent (far beyond any URAC process), will
  enable your clients to satisfy all their ERISA
  fiduciary requirements for pharmacy benefit
  program management

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Why Morgan Healthcare Audits ?

• More than 150 audits in the last 5 years alone
• More than 200 million in identified recoveries
  in 2007
• Considered the top pharma industry computer
  forensic source used by the U. S. Dept of Justice
  and the FBI
• Instrumental in locating anthrax-making cells for
  the FBI
• The big PBMS have teams devoted to defeating them

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Forming a collaborative initiative, PNPS would be
pleased to help you help your clients reclaim
control of their pharmacy benefit management
program by retrofitting a unique version of our
sophisticated turnkey and single-source solution
in your company.
Thank You for your time and consideration
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Questions Comments ?
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