Managed Care contracting in an ASP World

1. Managed Care contracting in an ASP World John E. Hennessy Executive Director Kansas City Cancer Center

2. What do we know? • We have challenged “worse”, and we got it…almost. • ASP +6% seems about as close to floor as we can get • Only 3% of transitional payments for administration left to be stripped • Demonstration project for 2005; 2006?

3. What do we know? • Most commercial payors still don’t know what ASP is; the prescription drug business is still AWP driven. • 2005 Admin codes use G-codes, which commercial payor systems do not like. • This means that the 2004 compensation models are much more likely to be administerable than 2005.

4. What do we know? • On the surface, the managed care business seems more desirable than Medicare • This may depend on fee schedules and specialty pharmacy involvement • So the supply of interested parties—both physicians and hospitals—may be increasing for managed care payors

5. What do we know? • Employers continue to favor choice over cost containment, but continue to put the economic burden of that choice on employees • Uninsured populations are growing • Underinsured—including employed and Medicaid—may be the biggest risk

6. What do we know? • Here come the middlemen • Disease Management companies playing the margins on drug costs, earning a “percent of savings” • Specialty pharmacies offering “rollback pricing”

7. What don’t we know? • Fall out from MMA • Retirements, closures, mergers…still to early to tell • When will hospitals realize that they are at equal or greater risk on drug reimbursement • Drug pricing in 2005…increases? How will drug prices increase? • What is in the market basket? (examples, Iressa, Abraxane)

8. What don’t we know? • The future of HSAs. • HSAs are far more favorable for the types of new patients we see in oncology, than are FSAs • Auto-debit features would dramatically reduce providers’ cost of collection • Benefit limits…already exist for BMT…but are high costs drugs next on the horizon

9. What does it all mean? • Lots of moving parts for everyone in 2005 • Predictability is always better than uncertainty…for both buyers and sellers • Demand for cancer services will grow…demand for diagnostic and chemosensitivity and other “predictive” tests

10. “Thanks, Edison…what are we supposed to do with all of this knowledge?”

11. Strategies versus Tactics • All of the strategic thinking in the world can be made valueless by poor tactics • Fundamentally, managed care negotiations are a game of chicken • You must be able to pull the trigger

12. The Prisoner’s Dilemma • Ultimately, both parties are better off by cooperating, • But each party could enhance its position relative to the other by not cooperating, while the other does • Both parties lose big if neither cooperates

13. The Prisoners Dilemma…translated • Both parties win if the future is predictable and sustainable • Both parties lose if patient care relationships are severed • However, either party can put an unbearable economic burden on the other that would shield short term gains

14. Strategic positioning for success • Describe the model for success using “The 4 P’s” • Product • Place • Promotion • Price

15. Product • Solo practitioner medical oncology only practice is very undesirable from a payor standpoint • High cost to administer; more likely to be low tech • No peer review • Consolidated practices are attractive to payors

16. Product • Multi-modality practices become more of a threat to payors, but also carry greater market presence • Adding XRT, diagnostics • Product enhancements that are beneficial and non-threatening: genetic counseling; physician extenders; social workers; etc

17. Place • You need to be someplace where nobody else is, or have dominant position in a key market, or be in many key markets • Again small practices are at great risk here • Place--or recognition of place by payors, patients, and referring physicians—may be very dependent on promotion

18. Promotion • If no one knows who you are you won’t be missed • Your practice needs to be recognized as part of the fabric of the community…something that the community will not allow to be missing • Not necessarily advertising, but unprompted recognition tells you that you have made it as an institution

19. Price • Give your self some room • Your “list price” should have plenty of room to create “savings” for negotiators • (have a cash payment policy, that treats cash patients like managed care plans—offering them a discount based on 100% compliance rather than mere numbers of patients) • Be prepared to negotiate, not capitulate • That means risk not just bravado

20. “Yeah, thanks Mr. Trump, but how do I translate that into my world?”

21. Tactics • Rally the troops • You need not merely a strategic plan for managed care contracting, but a tactical plan as well. • You absolutely need all physician/owners on board with any negotiation: one contact with health plan, not each doctor conducting his own negotiation

22. Tactics • You MUST consolidate contracts…one for the Tax ID number • Physicians’ employment agreements should not permit physicians to sign individual deals…only the corporate entity • Health plans will roll over on this, but you must push

23. Tactics • Find the healthplan’s Achilles Heel • Do they understand ASP or AWP? • Do they understand the transitional payment element of administration codes in 2004? • Can they administer the new G-codes? • How much attention are they paying to imaging?

24. Tactics • Understand your own business • You need to know what you are selling, both units and price • You will want to have the tools that allow you to evaluate the impact of differential compensation on different lines of business • How will your market basket fare in 2005

25. Tactics • You must clearly understand how to swap admin codes against drug reimbursement…how do increases/decreases in each line of business impact your bottom line. • The greatest managed care opportunity is to inequitably rob Peter to pay Paul

26. Tactics • Look to broaden you product line to create margins in new lines of business where margins in existing lines disappear • Imaging • Diagnostic testing • Non-oncology infusions • Genetic testing

27. Tactics • Pull the trigger…be prepared to and do terminate contracts as a standard course of renegotiating. • No specific intent to not participate—in fact you can be very open about your intention being to renegotiate.

28. Tactics • Negotiate insured versus non-insured business • More employers are self-funding and renting networks; the payors who rent these networks are more concerned about costs for their insured business than rental business. We offer greater discounts on insured business in exchange for limited discounts for rental business, which allows an aggregate increase in payor yield

29. Fundamentals • Get organized • Analyze • Take Action • Negotiate…be flexible where you can but keep your needs in mind • Remember the Prisoners Dilemma—a cooperative result with both parties winning is the best outcome

30. Sample managed care results in Q3 & Q4 2004 • National Payor…terminated contract…3 year contract preserving 2004 admin codes and AWP as payment base, trading AWP $$ for admin $$ • National Payor…terminated contract…2 year contract… implementing 2004 admin codes and maintaining AWP as payment base • National Payor…terminated contract…3 year contract… implementing 2004 admin codes and maintaining AWP as payment base

31. Next steps • What three things are you going to do this week to follow up on this call? • Questions?