State Drug Purchasing in a New World: The New World

1. State Drug Purchasing in a New World:The New World Stephen W. Schondelmeyer, Pharm.D., Ph.D. Professor and Director, PRIME Institute, University of Minnesota Invitational Summit for State Policymakers October 8, 2004 Philadelphia, Pennsylvania

2. Overview • Dynamic Market • Dollars (Drug Prices) • Discounts (and Rebates) • Drug Purchasing • Disruptions • Directions What will be covered? D’s precipitated by Part D

3. Dynamic Market • Change at All Levels • Manufacturer (rebates under new rules & new competition) • Wholesaler(↓ chargebacks & discount contracts, ↑ rebates by-pass) • Pharmacies (further loss of cash pay customers) • Patients (↑ cost-sharing, complex programs, more price sensitive) • Payers(↑ cost shifting, drop spouses & retirees, direct from mfg discounts) • PBMs & PDPs (↑ need for transparency, assumption of risk) • Many Moving Parts • New Business Models • Transparency & Intense Scrutiny

5. Are Drug Prices Still an Issue?

6. Wholesale Price per Day of Therapy for Norvasc 5 mg tab (Pfizer): 1997 to 2004 Wholesale Price $/Day AWP / Day WAC / Day Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC (Feb 4, 2004) and AARP Prescription Drug Program.

7. % Change in Wholesale Price per Day of Therapy for Norvasc 5 mg tab (Pfizer): 1997 to 2004 Percent Change in Price ($/Day) Average Annual Percent Change Percent Change vs. Previous Month CPI All Items Less Energy Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC (Feb 4, 2004) and AARP Prescription Drug Program.

8. Recent Drug Price Increases: Jan 31, 2004 vs Jan 31, 2003 (Average Wholesale Price) % Change in Price 2004 v 2003 Consumer Price Index – All Items 2.2% Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.

9. Recent Drug Price Increases:Jan 31, 2004 vs Jan 31, 2003(Average Wholesale Price) % Change in Price 2004 v 2003 Consumer Price Index – All Items 2.2% Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.

10. Rx Price Impact • AWP Increases Result in: •  Cash Pay Consumers •  Employer Health Plans •  State Medicaid & SPAP Programs •  Medicare Part B & Discount Card •  State & Federal Employees Who pays more when AWP increases?

11. Top Drugs Most Used by Elderly Brand Price Inflation & CPI All: 1998 to 2004 Annual % Change Brand Inflation Drug Firm Discount Cards AWP National Elections WAC Medicare Discount Card CPI All Items Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC and Penn. PACE program annual reports.

12. Discounts • Current Focus on: • % Discount (rarely describe from what?) • Retail pharmacy price • Getting More Rebates • Should Focus on: • Defining Starting Point for Discount • Actual Net Price • Who Is Getting Reverse & Perverse Incentives?

13. Do Bigger DiscountsMean Lower Net Price? Don’t Count on It.Beware of Pricing Games !

14. Actual AWPs Listed in Price Database Celebrex Cap 100 mg (Jan 1, 2003) $/Unit 3 Originator NDCs with Same AWP 15 Re-Labeler Products With Inflated AWP AWP Inflation vs Original AWP 2% to 77% Orig AWP Source: Compiled by PRIME Institute, University of Minnesota from data found in PriceChek PC (Facts & Comparisons, Inc), January 1, 2003

15. Drug Purchasing: State Strategies • State as Regulator [ME, most developed countries] • Utility Model: Drugs as Public Good • State as Wholesaler [certain EU countries, untested in US] • Controlled Distribution: State Liquor Stores • State as Importer [IL, WI, MN & others, esp., border states] • Importation from Canada & EU: Free Trade Approach • State as Subsidizer [PA, NY, NJ many others] • Welfare Program Model: Medicaid or Food Stamps • State Pharmacy Assistance Programs: Coordination with Medicare • State as Prudent Purchaser [IA market, OR ref prices] • Market-based Competition: Competitive Bidding • Payment-Limits Model: Set Maximum Payment / Reference Price • Multi-State Purchasing or PBM: Competitive Bidding • State-wide Purchasing: Combine all state programs (Medicaid, SPAP, State hospitals & mental health facilities, prisons, state employees & retirees, county & local employees, colleges & universities, state retired teachers, public health clinics, etc.)

16. U.S. Outpatient & Total Rx Expenditures: 1988 to 2012 Expenditure In Billions 23.8% of NHE $642 19.2% of NHE Rx Expend: All Settings $319 $422 $217 Rx Expend: Outpatient Only $210 $143 $ 57 $ 38 SOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical Assistance Programs, National Pharmaceutical Council, 1976 to 2002.

17. Drugs Are a‘Small Part’of Health Care ?

18. Disruptions • Medicaid  Medicare • Moving ~ 50% of beneficiaries to an entirely different drug program • Legislative price negotiation  PBM negotiation of price or NOT • AWP May Disappear • Medicaid Chaos • What will be used for Part D? • Private Third Party Contracts Chaos • How Will Medicare Set Rx Payments? • Community  Mail Order Pharmacy • No one to watch mail order prices or fraud & abuse (PBM owns mail order) • Shifts Rxs out of communities (esp,, Rural Pharmacies) • Marginal Cost Becomes Average Cost (No Where Left to Get Acute Rxs) • Re-importation • May get access to Canadian prices • Canada may have U.S. type prices

19. What Direction in the Future?

20. Stay Flexible&Stay Focused

21. What Tools Can Be Used? • Better Than “Best Price” Rebates • Not volume, but market share movement • Supplemental rebates get “better than best price” rebates • Best Price is extended to ‘retiree health plans’ in private market • Preferred Lists (Formulary) & Prior Authorization • Address drug overuse & inappropriate • Counter-balance Direct to Consumer Ads • Disease Management programs • Evidence-based Preferences & Payment • Co-Payments Can Help • But Only If They Are Actually Collectable by Pharmacy • Balance effect on utilization & outcomes • Fraud & Abuse of Prescription Drugs • OxyContin: Encourage Pain Med Use/Discourage Street Med • Card Holder Misuse: Selling Card to Someone Else to Use

22. Make Sure the ProgramDoes What It Was Intended To Do -- follow the policy advice of former President Reagan on nuclear disarmament: Trust and verify!

23. “You may be on the right track the train will still run over you.” Will Rogers but if you are not moving fast enough and moving in the right direction,

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25. Medicaid Rx Payment Components: 1980 to 2002 (Constant 2002 $) $ / Rx Rebate Amount Drug Product Payment Dispensing Fee Payment SOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical Assistance Programs, National Pharmaceutical Council, 1976 to 1998.

26. Drug Rebates as a % of Total Drug Expenditures % of Medicaid Drug Expenditures % of Drug Product Cost (AMP) % of Total Drug Expenditures Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 1998 and in HCFA Form 64.

27. harmaceutical esearch n anagement & conomics PRIME InstitutePRIME University of Minnesota

28. Reverse & Perverse Economics Pharmaceutical Firms have been able to reverse the economic flow in the Rx market to co-opt major players: • PBM Revenue from Drug Firms • Creates Conflict of Interest with Client’s Expectations • Medicare Over-Pays for Office-Based Drugs • Doctor Has Incentive to Prescribe Highest Priced Drug • Brand Firms Pay Generic Firms Not to Enter Market • Cost of Settling Lawsuit Less than Added Revenue

29. What About Buying Drugs from Canada or on the Internet?

30. What About Drugs from Canada? • May Be Cheaper • Lower Because Drug Company Charges Less • Drug Firms Have Threatened Supply Limits in Canada • Is It Legal? • Not Exactly • Coordination of Care with Others • Physician & pharmacist review all meds • Other insurance coverage

31. What Is Meant by Re-importation of Drugs from Canada? • What would re-importation allow: • Purchase of U.S. made drugs from approved Canadian sources • Pharmacies & wholesalers could buy from approved Canadian sources • Consumers could buy from approved Canadian internet sites • What would re-importation NOT allow: • Importation of counterfeits from anywhere in the world • Internet purchases from anywhere, except approved U.S. & Canadian sites

32. How Many Consumers Would Buy Prescriptions on the Internet -- If They Could Buy the Same Medication at Their Corner Drug Store at the Same Price?

33. Factors Contributing to Change in Medicaid Drug Expenditures:1992 to 2002 (Constant $) 10-year % Change Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 1998

34. % of Adults Using Medicationin Previous Week % Using Meds In Previous Week % of Elderly Using Meds in Previous Week • Any Medication includes: • Prescription drugs • Over-the-counter meds (OTCs) • Vitamins & Minerals • Dietary Supplements • Natural & Herbal Remedies • Contraceptive Drugs & Devices Source: JAMA, Vol 287, No. 3, Jan 16, 2002, based on adult population survey in 1998-99.

35. How to Choose a Direction • Clearly DEFINE the problem you are addressing • Know SOURCE of the problems you address • Make sure you TARGET solution to the source • Know how you will MEASURE impoact What direction should we go?

36. Stephen W. Schondelmeyer, Pharm.D., Ph.D. Professor and Director PRIME Institute, University of Minnesota

37. Definitions & Status of Key Terms • Access • Opportunity to buy an insurance plan (If you can afford it!) • Choice & Voluntary • Opportunity to choose who’s plan you buy • Beneficiary can buy the low cost plan • Plans can avoid high cost patients (adverse selection)

38. Definitions & Status of Key Terms • Transparency • Retail Price Published • Manufacturer Prices & Rebate Not Disclosed • PBM Rebates & Switching Fees Not Disclosed • Private Market • Program Delivery Limited to PBMs • No Price Negotiation with Drug Firms

39. Are Drug Prices Still an Issue?

40. Is there anyone who has not needed (or used) a prescription drug? Is there anyone who has never been sick a day in their life? Virtually everyone needs, has used, or will use drugs in their lifetime.

41. U.S. Outpatient & Total Drug Expend.as a % of GDP: 1988 to 2012 Drugs as % of GDP Rx Expend: All Settings Rx Expend: Outpatient Only Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 2002 and in HCFA Form 64.

42. What Tools Can Be Used? • Preferred Lists (Formulary) & Prior Authorization • Address drug overuse & inappropriate • Counter-balance Direct to Consumer Ads • Disease Management programs • Better Than “Best Price” Rebates • Not volume, but market share movement • Use Pharmacy & Therapeutics Committee • Tiered Co-Payments Can Help • But Only If They Are Actually Collectable by Pharmacy • Currently Pharmacy Bears Cost (25%-75% of copays uncollected) • Fraud & Abuse of Prescription Drugs • OxyContin: Encourage Pain Med Use/Discourage Street Med • Card Holder Misuse: Selling Card to Someone Else to Use

43. U.S. Outpatient & Total Drug Expend.as a % of NHE: 1988 to 2012 Drugs as % of NHE Rx Expend: All Settings Rx Expend: Outpatient Only Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 2002 and in HCFA Form 64.

44. Dynamic Market • Change at All Levels • Manufacturer • Wholesaler • Pharmacies • Patients • Payers • PBMs • Many Moving Parts • New Business Models • Transparency & Intense Scrutiny

45. What is the Source of Drug Spending Growth?

46. Medicaid Rx Payment Components: 1980 to 2002 (Current Dollars) $ / Rx $57.63 $48.97 $27.06 Drug Product Payment $17.72 $12.01 $7.06 Dispensing Fee Payment SOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical Assistance Programs, National Pharmaceutical Council, 1976 to 1998.

47. Factors Contributing to Change in Medicaid Drug Expenditures:1992 to 2002 (Constant $) 10-year % Change Total Drug Expenditures ↑303% current $ ↑ 215 % inflation adjusted $ Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 1998

48. Discount Cards & Discounts • What is a discount? • Lower net price at the time of purchase. • Lower price that is based on market forces. • What is NOT a discount? • Rebates not passed on to the end payer. • A $600 subsidy; it helps but is not a discount • A generic price already available in market

49. Recent Drug Price Increases:Jan 31, 2004 vs Jan 31, 2003(Average Wholesale Price) % Change in Price 2004 v 2003 Consumer Price Index – All Items 2.2% Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.

50. Dynamic Market