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

1. 1 Preferred National Pharmacy Solutions Committed to Revolutionizing the way Pharmacy Benefits are Delivered

2. Smoke & Mirrors: An Overview of the Pharmacy Benefit Management Industry in America

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

4. 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.

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

8. 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

11. Definition of Average Wholesale Price (AWP)

12. 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

13. 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

14. Now notice that over a few month period, FirstData Bank�s AWP increased by exactly 4.16% vs. Redbook

15. This 4.16% increase was actually phased in across the board over time

16. The smoking gun:

17. 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�

22. Access rebates - for formulary placement Market share rebates - for exceeding estimated targets Administrative rebates - for compiling data and verifying results Rebates for influencing a doctor�s 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

24. 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

31. 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 payor�s 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

32. 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, Medco�s CEO refers to its mail-order unit as the company�s 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

33. 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

34. 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 It�s 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

35. 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 physician�s 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

36. 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

37. 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 Plan�s 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%)

38. 15 re-labeler products with inflated AWPs for Celebrex

39. 60-Pill Celebrex dispense: price rose 77 % from $105.34 to $186.3

40. 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

41. 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

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

43. 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

44. �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 > $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

45. Examples of specialty drugs and their annual treatment costs

46. Like mail-order, a captive specialty pharmacy is a dishonest PBM�s 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 physician�s 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

47. 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

48. 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 U&C, 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

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

50. 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

51. 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

54. 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 ERISA�s prohibited transaction requirements)

55. 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����

56. Why PBMs are fiduciaries of the plan PBMs exercise both judgment and discretion in the plan�s 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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63. 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)

64. 64 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

65. 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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