The Emerging Market in Medicare Part D and Sponsor Compliance Strategies A Presentation to the Pharmaceutical Compliance

1. The Emerging Market in Medicare Part D and Sponsor Compliance StrategiesA Presentation to the Pharmaceutical Compliance CongressNovember 8, 2005 John Gorman President/CEO Gorman Health Group, LLC 2176 Wisconsin Avenue, NW Washington, DC 20007 (202) 364-8283 Fax: (202) 244-8324 www.gormanhealthgroup.com

2. Today’s Agenda • The Emerging Market in Medicare Part D • Medicare Advantage: Local and Regional Outlook • Prescription Drug Plans (PDPs) • Employers and Retiree Groups • Medicare Fraud, Waste and Abuse (FWA) Issues and Sanctions • Compliance and FWA Elements • Medicare Prescription Drug Integrity Contractors (MEDICs) and Their Role • Part D Plan Sponsor FWA Exposure • PBM Integrity • Subcontractor Oversight • Keys to Minimizing Exposure • Conclusions

3. New Medicare Part DBeneficiaries Will Have Several Coverage Options Medicare Options • Regional Options • Blended benchmark • Stabilization fund • Risk Corridors Prescription Drug-only Plan (PDP)/ FFS Add-On Must offer benefits equivalent to standard coverage Medicare Advantage PPO Option Medicare Advantage HMO Option Must offer benefits equivalent to standard coverage on at least one plan in portfolio Local (county-based) Options Medicare Advantage PPO Option Special Needs Plan (SNP) Option Other Options If insufficient number of PDPs or PPOs emerge in the market Must offer benefits equivalent to standard coverage to receive subsidy Limited Risk or Fallback Drug-Only Plan Qualified Employer Plan

4. Medicare Risk Contracts1985 to 2005 Source: CMS, October 2005. Note: 570 PDPs will launch on January 1, 2006.

5. Convergence of Health Policy Factors Create Opportunities for SNPs Lock-In Exemptions SNPs Medicaid Reform Part D Auto-Enroll of Duals Risk Adjustment

6. Regional PPO Sponsors and Revenue vs. Cost Region 1 118.7% Region 2 107.7% Region 3 111.1% Region 23 119.6% Region 19 116.0% Region 11 110.3% HUM UHC NPA HUM Region 22 111.6% Region 6 114.0% Region 12 114.7% Region 4 106.2% Region 14 110.9% WLP HUM HUM WLP AET WLP SIE HUM Region 24 108.6% Region 5 107.7% Region 15 111.9% Region 7 119.9% Region 13 112.4% Region 20 117.7% Region 18 110.0% Region 21 117.9% AET HUM HUM Region 10 111.7% HUM HUM Region 8 114.3% HUM HNT HUM Region 16 110.4% Region 17 111.0% BSC Region 9 109.7% HUM Region 26 110.8% HUM UHC HUM Region 25 139.9% UHC Source: GHG analysis adapted from CMS 2005 MA Payment Rates and 99% FFS Cost Files, January 2005.

7. Competitive Landscape for PDPs -- 2006

8. Impact of Dual Assignments on PDPs Source: Lehman Brothers and GHG Analysis, September 2005.

9. PDPs to Watch Source: company reports

10. Part D Final Benchmarks for 2006

11. Summary • The minimum number of plans participating in any of the regions is 11 (Region 34, Alaska). • The maximum amount of plans participating is 20 plans (NY, TX, OR/WA). • In 37 states 100% of Medicare eligibles will have access to a PPO plan. • The number of auto-assigned beneficiaries per organization in a given region will range from as low as 2,000 to the 6 plans in Alaska to as high as 133,000 individuals in the 7 plans in California.

12. Part D Projections: 2006 • GHG expects in 2006: • $112B in revenues generated for private plans (up from $51B in 2005) – 38% ($42B) through PDPs • 900,000 new beneficiaries in MA products (5.8M in 2005) • 14.3M in PDPs (including duals and low-income) • Therefore, over 21M beneficiaries in some form of managed care in 2006

13. Strategies Employers Are Likely to Pursue in 2006

14. Retiree Health Benefits: Two Choices for Employers • For 2006, Expect Most Employers to Choose RDS but some may prefer Part D • Actuarial Equivalence - employer plan may not qualify for the RDS • Part D offers higher subsidies, especially for employers with low utilization • Tax status - governmental entities or nonprofits do not realize the tax benefits of RDS • Retirees already in MA plans • LIS – may be better off in Part D • Administrative – Part D plans handle administration and financial risk

15. Retiree Health Benefits: Two Choices for Employers • For 2007 and Beyond, expect a shift to Part D • Market will be known • Financial benefits of Part D will be clearer • Time to submit Part D applications • Fewer employers will qualify for the RDS, e.g. percent of plans meeting cap

16. Employer Options for Retiree Drug Coverage

17. Impacts of Retiree Drug Coverage Options

18. Impact of Likely Employer Strategies -- 2006 • 77% of retirees likely to be in plans that continue drug benefit coverage and accept the 28% subsidy • 6% of retirees likely to be in plans that supplement Medicare drug coverage • 4% of retirees likely to be in plans that discontinue drug coverage • 13% of retirees in plans that do not yet know their strategy or had a different strategy Source: Kaiser/Hewitt Survey, December 2004.

19. Privatization of the Drug Market Total U.S. Drug Spending After Medicare Drug Benefit Before Medicare Drug Benefit Consumer Out-of-Pocket 18% Consumer Out-of-Pocket 30% Private Health Insurance 48% Medicaid, Other Public 12% Private Health Insurance 70% Medicaid, Other Public 22% Sources: CMS, National Health Spending, 2002; and CBO, Issues in Designing a Prescription Drug Benefit for Medicare, Oct, 2002.

20. Compliance Strategies for Part D Sponsors

21. Government Oversight Structures • CMS – Part C & D Monitoring Programs • 2-3 year on-site, regularly - scheduled audit cycle, depending on risk assessment for MA plans (3 years for PD plan) • Focused/targeted desk and on-site audits, depending on risk assessment • MEDICS Monitor and evaluate data and trends to identify potential fraud, abuse, and waste in the Medicare Part D Program. • Receive reports from contractors and beneficiaries • Develop and refer cases to the appropriate Law Enforcement (LE) Agency or to CMS for administrative action as necessary • Inspector General • Civil Money penalties • Exclusion • Department of Justice • Civil and Criminal Prosecution

22. Medicare Part D Compliance Plan Required Elements 7 Required Elements of a Part D Compliance Program • Written policies, procedures and standards of conduct regarding compliance with all applicable Federal and State standards • Compliance Officer and Committee accountable to senior management • Effective training programs for employees, contractors, agents and directors • Effective lines of communication • Enforcement through well-publicized disciplinary guidelines • Effective internal monitoring and auditing • Prompt response to detected offenses (e.g. payment or delivery of drugs) and development of corrective action initiatives (e.g. repayment of overpayments and disciplinary actions) Comprehensive Fraud and Abuse Program • Detect, correct, and prevent fraud, waste, and abuse • Voluntary self-reporting of potential fraud or misconduct • Separate plan or integrate with the other 7 compliance plan elements

23. Medicare Compliance and FWA Risks • Standard Part C Compliance Tests that will Apply to Part D Sponsors: • Fails to provide medically necessary services, if adverse effect • Imposes excess charges on enrollees • Discourages enrollment due to health status • Misrepresents or Falsifies information • Employs or contracts with excluded individuals and entities • Substantially fails to carry out the contract, inefficient administration of the contract, or no longer substantially meets the contract requirements

24. Medicare Compliance and FWA Risks • Administrative Sanctions • Contract Termination • Intermediate Sanctions (Suspension of enrollment and payment) • Exclusion from all Federal Programs • Civil Monetary Penalties • $25,000 for each failure to provide medically necessary services, health screening or falsification of information to the Secretary • $25,000 for each determination of failure to carry out the contract if adverse effect

25. Medicare Compliance and FWA Risks • Criminal Penalties (felony conviction and up to 5 year imprisonment) • Knowing and willful false statement or misrepresentation of fact in application for benefit or payment under a federal health care program • Knowing and willful kickback, bribe or rebate to inappropriately secure federal funds • False Claims (Whistleblowers) Act • Signature acknowledging that information is being submitted for purposes of obtaining Federal funds triggers the FCA • FCA prohibits false or fraudulent claims • Treble damages and up to $11,000 per claim • Whistleblowers receive up to 30% of the recovery • Liability extends to those who submit the false claim and those who “cause” the submission of the false claim • Intent to defraud is not required – mistake or negligence with system wide effects sufficient

26. MEDIC Part D - Data Analysis • Utilization Management • Medication Adherence and Persistence • Quality Assurance • Performance Measures • Coverage Determination • Long Term Care (LTC) - Pharmacy Access • Complaint Tracking

27. CMS Data Collection – Management Information Integrated Repository • Performance Assessment • Data mining and standard reports will be used to inform CMS of Plan’s performance under Part D • Standard Required Reports • PDE data (claims data) • Eligibility data • Complaint data (CTM) • Plan-reported data (HPMS) • Plan-finder data

28. MEDICS Role In CMS Compliance and FWA Review & Audit–CMS’ Defense against the “Mississippi River of Dollars” • IDIQ Contract (Indefinite Delivery – Indefinite Quantity Solicitation) • Of the 21 “Examples” of General Fraud, Waste and Abuse in the MEDIC Statement of Work, 15 were targeted toward PBM or pharmacy related issues and business practices – 6 were Beneficiary fraud issues • PBMs and Part D Sponsors will be at risk for the acts of their downstream pharmacy contractors for false claim submission • Of the 12 Examples of potential Financial Fraud, all 12 will impact PBMs • Effective cost allocation systems critical for administrative services • Rebate contracts will be under scrutiny

29. General Fraud and Abuse Issues • Misrepresenting the enrollment, encounter, or prescription drug event data • Improper reporting of prescriptions dispensed to maximize payments. • Billing for services not furnished and/or drugs not provided. • Billing that appears to be a deliberate application for duplicate payment • Soliciting, offering, or receiving a kickback, bribe, or rebate • Billing based on “gang visits” • Billing non-covered prescriptions as covered items • Billing under Part A or Part B, and also under Part D

30. General Fraud and Abuse Issues (Continued) • Dispensing without a prescription • Billing for recycled prescription drugs • Submitting false Medicare claims • Receiving duplicative co-pays or premiums from beneficiaries • Billing for brand when generics are dispensed • Altering scripts or data to obtain a higher payment amount • Misrepresentations of dates, descriptions of prescriptions or services

31. MEDICS Role In CMS Compliance and FWA Review & Audit–CMS’ Defense against the “Mississippi River of Dollars” • 8 MEDICs selected: • NDCHealth • Delmarva Foundation for Medical Care • Electronic Data Systems (EDS) • IntegriGuard • Livanta • Maximus Federal Services • Perot Systems Government Services • Science Applications International Corporation (SAIC)

32. MEDICS Role In CMS Compliance and FWA Review & Audit–CMS’ Defense against the “Mississippi River of Dollars” • MEDICs’ Responsibilities include: • Review Part D and RDS plan compliance data to detect fraud • Review bids and FWA components of compliance plans • Coordinate with law officials • Conduct investigations, including audits of PDPs and sub-contractors • MEDICs will annually audit at least 1/3 of PDP and MA plans • Risk Based Audit Strategy – conduct more investigation and analysis with unusual billing patterns

33. MEDICS Role In CMS Compliance and FWA Review & Audit–CMS’ Defense against the “Mississippi River of Dollars” • MEDICs Responsibilities (cont’d) • Review improper enrollment and eligibility • Review improper marketing and distribution • Audit RDS sponsors, including RDS eligibility and claims review • Conduct Part D, MA and RDS complaint investigations

34. MEDIC Audit Target Drivers • Near Term: • Beneficiary Complaint Data (e.g. sales misrepresentation) • Past PBM issues identified in legal proceedings will be focus of audit • Areas where there are questions of transparency • Eligibility and Claims Data audits for Retiree Drug Subsidy • Longer Term: • PDE data and comparisons with other Medicare Claims Data • Whistleblowers • Routine on-site audit reviews (P & T, FWA implementation etc.)

35. MEDIC Audit Target Drivers • The “Good News” on MEDICS • All New to Medicare Part D • First Timers or with Some Experience • Data will take time to gather  But get it right from the start

36. General Keys To Avoiding the Inspector General • Listen to the “Noise” surrounding Part D • Identify potential CMS or Congressional “hot button” issues and address them – e.g. Beneficiaries can find appropriate education materials • Avoid Misinterpretation of Part D Requirements – Ever watchful for changing CMS regulation or guidance • Pay attention to past industry criticisms, jibes and legal proceedings and develop policies and oversight in the areas of concern • Assess and audit current business and operational practices at a granular level to identify areas of exposure or lack of controls • Require process by process policy review and standards and FWA monitoring requirements • Ensure documentation of procedures and process descriptions • Ensure diligence in systems configuration auditing to catch errors prior to submission

37. Further Keys To Avoiding the Inspector General • Implement granular financial auditing, process controls, monitoring • Use central tracking system for all internal FWA control reporting • Establish routine monitoring and audits of operations • Review appropriate staffing for internal auditors • Review staffing, scope and frequency of pharmacy audit • Monitor Enrollee grievance and appeals activity • “Enrollees who don’t get things” trigger problems • Early Warning System • Develop corrective action plans • Establish processes for self-reporting of potential FWA • Encourage / Incent Internal FWA issue identification & referrals • Make the FWA department well known • Thorough training at all levels

38. Part D Compliance & FWA Exposure - Overview • 5 Critical Areas for a Part D Plan Sponsor • Part D Specific Requirements – Audits in areas such as TrOOP, Copay application, COB, PDE data, formulary changes, etc. • PBM Integrity – Major PBMs are high profile candidates for FWA audits in areas like pricing, rebates, benefit adjudication, etc. • Subcontractor Oversight and FWA Issues – Retail pharmacies, LTC pharmacies (Part A/D), enrollment contractor etc. • Beneficiary-Prescriber FWA Identification and Management – Identifying and managing these issues • Sales Misrepresentation and Fraud- a new issue for PDP Sponsors and a common CMS target and reason for sanction based on complaints

39. Part D Compliance & FWA Exposure - Overview • For Each 5 Critical Areas, Part D Plan Sponsors should develop: • Tracking and Reporting mechanisms to report to CMS and the MEDICS • Audit and Monitoring Strategies with designated Resources • On-Site or Desk Audit • Conducted by the Part D plan sponsor, the PBM, or Audit organization • Corrective Action strategies • Training • Self-reporting of suspected FWA

40. Part D Specific Requirements - FWA Touch Points • Enrollment Accuracy – LIS, Duals, Late Penalty, Proper Effective Dates • Beneficiary Billing Accuracy • Direct bill vs. SSA • Proper Refunds to Beneficiaries, Charities • Premiums, cost sharing and accounting • Reconciliations • General Administrative Cost Allocations • Specific program cost allocations, e.g. MTMP

41. Part D Specific Requirements - FWA Touch Points (Continued) • Formulary development and beneficiary notification of formulary changes • Generic vs. Brand • Appeals and Grievances • Monitoring, Feedback Loops and Disciplinary Programs • COB data collection, working with the COB Facilitator

42. Part D Specific Requirements - FWA Touch Points (Continued) • TrOOP accumulation • Includes only eligible cost sharing, e.g. includes beneficiary payments and excludes group health plan payments • Properly includes all 6 payment fields: • Patient Pay Amount • Other TrOOP • Low Income Cost Sharing Subsidy Amount (LICS) • Covered D Plan Paid Amount (CPP) • Non-covered Plan Paid Amount, (NPP) • Patient Liability Reduction due to Other Payer Amount (PLRO)

43. Part D Specific Requirements - FWA Touch Points (Continued) • PDE (Prescription Drug Event) data accuracy • 100% claims data necessary to calculate risk adjustment, LICS, reinsurance, and risk corridor payments • Proper reflection of costs to be included or excluded in each of the 4 payment calculations, e.g. • Only Part D drugs covered under the specific plan • Risk corridor calculations must exclude administrative costs, patient pay amounts, induced utilization, rebates, reinsurance subsidy • Reinsurance calculations must reflect full TrOOP accounting • All calculations must properly account for all rebates, discounts, and other price concessions

44. PBM Integrity FWA Touch Points • Pharmacy Contracting, Term Application and Disclosure • Proper Benefit Set Up And Adjudication at POS • Eligibility Accuracy and benefit plan assignment • Drug Pricing – AWP, MAC etc. • Claims Edit & Processing Accuracy (e.g. Part A, B and excluded drugs)

45. PBM Integrity FWA Touch Points (Continued) • Mail Order Prescription Fills • Rebate Accounting and Pass – Through  Member level detail and transparency • E-Prescribing

46. Subcontractor Oversight • Retail Pharmacy • Monitor dispensing activity of specifically identified retail pharmacies • Retail audit by PBM or Audit organization to identify outlier pharmacies • Desk audit on all outlier claims to determine: • Appropriateness of RX dispensed • Correct quantity and strength of medication • Correct administration of benefit design and trend management programs • Instances of potential fraud and abuse • On Site audit of pharmacies that continue outlier dispensing performance

47. Subcontractor Oversight • Retail Pharmacy (continued) • Automated reporting editing systems can include the following triggers: • Dispensing volume of high profile medications (e.g. controlled substances, medications targeted for re-sale or addicted medications) • Significant number or percent of U & C claims • Multiple instances of reversed or altered claims • Multiple pharmacy overrides to excluded or Prior Authorized medications • Excessive units per day dispensing • High dollar medications

48. Subcontractor Oversight • Retail Pharmacy (continued) • Individual Pharmacist Audit - Based on conclusions from the on-site audit, more focused audits of individual pharmacists may be warranted to review: • Potential cases of trafficking • Potential cases of fraud and abuse • Retail Pharmacy audits also may include review of: • Disclosure of low cost generic • Non-submission of “zero-balance claims” • COB Audits – Duplicate Billing

49. Subcontractor Oversight • LTC Pharmacies • Example: Determining whether LTC pharmacy filed claims should be part of a Part A Skilled Nursing Benefit • Proper destruction or return of drugs • Enrollment and Premium Billing Subcontractors • Developing appropriate metrics and audit protocols • Insurance Subsidiaries • Enforcing integrity downstream • Re-insurance costs if provided by subsidiaries • Subsidiary service pricing and cost allocations

50. Beneficiary and Prescriber FWA • New populations and schemes may require enhanced system edits • Addressing Issues common within the Medicaid population • Development of Beneficiary and Prescriber Fraud, Monitoring, Investigation and Referral Unit • Divining whether Grandma Smith or her nephew Billy is responsible for the rash of inhaler purchases • Physician submission of claim for same drug dispensed at retail pharmacy or by infusion provider