Commonwealth Connector Pharmacy Benefits

1. Commonwealth ConnectorPharmacy Benefits July 12, 2007

2. Prescription Drug Coverage • Prescription drugs are an integral component of treatment for many acute and most chronic conditions • With many major drugs having lost their patent protection over the past three to four years, highly effective generic drugs are now available to treat most conditions • However, a significant portion of current drug utilization is for high cost brand drugs which provide little or no added therapeutic value over lower cost alternatives • This is largely driven by drug manufacturer’s active marketing to physicians and direct-to-consumer advertising • Because of Massachusetts’ mandatory generic substitution requirement, generic utilization now averages over 60% in the Commonwealth • However, generic utilization could be increased to 75-80% with no reduction in therapeutic effectiveness

3. Prescription Drug Costs • Total drug costs are about $65 - $70 per member per month (PMPM) in Massachusetts • The typical benefit covers 75-80% of drug costs, resulting in plan costs of about $50 - $55 PMPM • There are essentially three tools that can be used to reduce prescription drug costs: • Formulary design • Pharmacy benefit management • Cost-sharing • Based on our analysis and discussions with the major health plans, we project that formulary design and pharmacy benefit management can reduce total drug costs to about $55 PMPM • To achieve a drug premium under $20, the plan will need to pay about 35% of drug costs or less

4. Formulary – A Listing of Drugs

5. Therapeutically – Based Formulary • High quality • Comprehensive • Selective • Differentiated

6. Pharmacy Management - Example

7. Design Considerations • About 85-90% of brand costs are for prevention and treatment of chronic conditions • Exempting these drugs from an upfront deductible would largely eliminate the impact of the deductible • If formulary design and pharmacy management are fully effective, brand drugs should fall into one of two categories • Drugs which provide necessary additional therapeutic value for members relative to available generics • Drugs for which there are no generic treatment alternatives • The latter drugs include categories such as: • Antineoplastic agents • Immunosuppresants • Antiretroviral agents • Asthmatic inhalers • Exempting these brand drugs from a deductible would add about $1-$2 PMPM

8. Key Classes

9. Design Considerations • Generic drugs provide a very high ratio of therapeutic value to cost • While an upfront deductible of $250 is permitted under MCC regulations, generic coverage can be provided on an affordable basis without an upfront deductible • Applying a $250 deductible to both brand and generic drugs rather than brand only reduces costs by less than $1 PMPM • Even if generic utilization is increased to 75%, the cost of brand drugs will be over 60% of total drug spend • Drug utilization is highly skewed • Less than half of members use brand drugs • 20% of these members generate about 70% of brand drug costs • An upfront deductible on brand drugs will probably be needed to: • Keep premium affordable • Keep cost sharing affordable for high utilizing members

10. Illustrative Plan Costs

11. Comparison to Bronze Drug Prices • Tufts benefit • Deductible: $250 • Copays • Generic: $20 • Brand: $50 • Premium*: $19.76 (8.7% added cost) • Estimated premium: $16 - $21 without deductible on generics • Blue Cross Blue Shield benefit • Deductible: None • Copays • Generic: $15 • Brand: $30 • Premium*: $33.87 (13.8% added cost) • Estimated premium: $29 - $34 • Implications • Initial premiums are likely to be at high end of estimated range • As experience evolves, premiums are likely to increase modestly over first few years * 37 year old individual

12. Recommendations • Encourage use of therapeutically-based formularies and pharmacy management programs • Cover tier 1 drugs (generics) and brand drugs in the following select classes without an upfront deductible • Antiasthmatic inhalers • Antineoplastic agents • Antiretroviral agents • Immunosuppressants • Allow up to $1,000 deductible on other tier 2 and tier 3 drugs • Allow co-pays or co-insurance for brand drugs