Preserve the Benefit: An Overview of DoD Pharmacy Economics and Policy January 9, 2007

1. Preserve the Benefit: An Overview of DoD Pharmacy Economics and Policy January 9, 2007 Thomas A. Bacon, Lt Col, USAF, BSC Director, DoD Pharmacy Utilization Management TRICARE Management Activity

2. Learning Objectives • Understand the DoD Pharmacy program objectives • Describe the efforts to control the pharmacy benefit costs since 1994 • Describe current initiatives to preserve the pharmacy benefit while increasing the quality

3. DoD Pharmacy Program Objectives • Uniformly, consistently, and equitably provide cost-effective drug therapy to meet patients’ clinical needs • Provide a World-Class Pharmacy Benefit with a seamless interface between all three points of service • Bottom line – Preserve the Benefit

4. DoD Pharmacy Health Policy/Economic Focus • To preserve the DoD pharmacy benefit we must manage the Total Cost • Total Cost = Volume x Price • Total Cost = Direct care + Purchased care • Direct care = Military Treatment Facilities (MTFs) • Purchased care = Retail (TRRx) + Mail Order (TMOP) • Total Cost = (Ingredient cost – rebate) + Dispensing fee – Co-pay

5. Total Cost • FY 2002 • Total Cost = $3.01B • Cost / beneficiary = $347 • FY 2006 • Total Cost = $6.17B • Cost / beneficiary = $672 • FY 2010 (projected) • Total Cost = $10.60B

6. Volume • Eligible beneficiaries have increased • FY02 = 8.6M • FY06 = 9.2M • Pharmacy Benefit Users have increased • FY02 = 5.7M • FY06 = 6.7M

7. Volume • Are all pharmacy users created equal? NO • As a rule, older patients require more health care therefore more dollars • Patients age 65 and older on average cost approx. $1,000 per person per year more than patients younger than 65 years old • FY06 (Retired and family members) > 65 = 1.8M or 19% of DoD pharmacy users

8. Volume • Keys to remember • The FY01 National Defense Authorization Act extended retail and mail order benefits to all DoD beneficiaries age 65 and over as of 1 April 2001 • TRICARE Reserve Select (Apr 2005) Included all Guard and Reserve (plus family members) brought on active duty for > 90 days • As “other health insurance” (OHI) costs are shifted to the employees from their employers more and more DoD eligible beneficiaries will drop OHI and become DoD pharmacy benefit users • 66% of eligibles used the benefit in FY02 versus 73% in FY06

9. Volume Summary • We have little ability to (nor do we want to) manage the number of beneficiaries (like our civilian counterparts) • We cannot selectively insure the healthy or young • We cannot shift our > 65 year olds to Medicare Part D • We cannot charge patients based on their benefit use • We cannot cap our expenditures to FY 2006 numbers • We are asked to sustain the benefit for all beneficiaries

10. Price • Ingredient Cost • Varies by point-of-service • Example: Top 50 Branded Drugs (by cost) MTFs $169 vs. TMOP $178 vs. TRRx $376 • Varies by drug • Brand vs. generic • Generic vs. generic • Varies by therapeutic class • Varies by disease state

11. Efforts to Manage Price • Points-of-service • Mail Order (FCP & FSS apply) • Demonstration Project: 1994-1996 • National Mail Order Pharmacy Program (NMOP): 1997-2002 • TRICARE Mail Order Pharmacy Program (TMOP): 2003-present • Comprehensive TMOP Marketing Program: 2006 • TRICARE Retail Pharmacy carve out: 2004 • Created transparency of pricing and consolidated benefit management under one contract • Met legal criteria for access to federal pricing under the Veteran’s Healthcare Act 1992 (Federal Court ruled against DoD in 2006)

12. Efforts to Manage Price • Drug Management • Defense Supply Center Philadelphia (DSCP) contract negotiation and compliance • DoD/VA Joint Contracting 1998-present • Mandatory Generic Policy: NMOP 1996 and Retail 1999 • Formulary • Basic Core Formulary: 1999 (MTFs only) • Uniform Formulary: Implemented 2004 (all points-of-service; DoD P&T; 3 tiers; prior authorization; quantity limits) • DoD Pharmacoeconomic Center: Therapeutic class reviews, Economic/contract analysis for tier placement, Data analysis/reports, PACER development

13. Efforts to Manage Price • Federal Pricing • Federal Pricing Initiative for TRICARE Retail Pharmacy (TRRx): 2006 (under legal review) • Proposed legislation for TRRx Federal Pricing: 2006 (Congress rejected the proposed legislation) • Implementation of Voluntary Agreements for TRICARE Retail Pharmacy Rebates (VARR): 2006

14. Efforts to Manage Price • Dispensing fees • Retail is able to keep dispensing fees relatively low because they make up margin in the ingredient cost • Ingredient cost at TMOP is FCP / FSS therefore administrative costs and profit is incorporated in the dispensing fee • MTF = $8 (estimate) / prescription • Co-pays • TRICARE Senior Pharmacy: 2001 (2 tiers) • Uniform Formulary: 2004 (3rd tier added) • Efforts to increase beneficiary cost share (2006) by increasing co-payments was rejected by Congress and a freeze was placed on co-pays until late 2007

15. Price • Keys to Remember • Inflation • Product mix • Brands going generic – decrease cost • Brand medications that treat diseases better or more safely than before (ex. Biotech drugs) – increase cost (based on narrow point-of-view)

16. Total Cost = Direct Care + Purchased Care • Direct Care (MTFs) • 49% of workload (30-day equivalent in Sep 06) • 25% of the cost (Prime Vendor data) • Purchased Care (TMOP & TRRx) • TMOP • 14% of workload (30-day equivalent in Sep 06) • 12% of cost (PDTS data) • TRRx • 37% of workload (30-day equivalent in Sep 06) • 63% of cost (PDTS data)

17. Purchased Care Usage • Base Realignment and Closure (BRAC) • MTF closures led to a significant increase in the numbers of DoD beneficiaries utilizing the retail pharmacy point-of-service • FY01 NDAA opened TMOP & TRRx to Seniors • 11 Sep 2001 – War on Terrorism • Addition of Guard and Reserve (plus families) • Lack of MTF staff due to deployments have pushed patients to the Managed Care Support Contractors and the retail venue

18. Total Cost = Direct Care + Purchased Care • Direct care (MTFs) • Advantages • Costs • Restrictive formulary • Tighter control of provider staff • Disadvantages • Not convenient • Location not based on beneficiary demographics • Restrictive formulary • Lack of capacity in some locations • Manpower issues (deployment & recruiting)

19. Efforts to Manage DoD Pharmacy Benefit • DoD Pharmacy Board of Directors: 1997 • Pharmacy Benefit Redesign Project: 1998-1999 • Pharmacy Resource Reallocation Project: 2000 • Advances in Medical Practice: 2000 • Pharmacy Data Transaction Service (PDTS): 2001 • Pharmacy Commercial Off the Self (RxCOTs) award: 2004 (Centricity)

20. Current Congressional Requirement • Demonstration project: Selected over-the-counter drugs place on Uniform Formulary • Program to begin May 2007 • At least 2 venues and at least 5 sites in each TRICARE region • Length: Shorter of two options • At least as long as current pharmacy contracts • Five years • Report to Congress NLT 2 years after implementation • Costs and benefits of the demonstration project • Recommendations on whether permanent authority should be provided

21. Current Strategies to Manage the Benefit • Contain growth at retail point-of-service • Educate and market the benefits of mail order to our beneficiaries • Expand the VARR program ASAP • TRICARE Pharmacy (T-Pharm): 2007(?) • Managed Care Support Contract (T-III): 2008(?) • Expand utilization management efforts

22. TMA Pharmacy Utilization Management • Data Integrity • PDTS, M2, Prime Vendor • Data Analysis Point-of-Contact • Supply to Congress, DoD leadership, TMA Directorates, Contractors, and Audit agencies • Review analyses accomplished by outside sources • Develop pilots & measure outcomes • Polypharmacy pilot • Provider profiling pilot • Educate beneficiary groups on Pharmacy benefit • Keep abreast of healthcare policy and research

23. Long Term Strategies • E-Pharmacy Initiatives • Contain growth & costs at retail point-of-service • Pay MTF pharmacies for the ingredient cost plus a dispensing fee (Prospective Payment System) • MTF Commanders should look at pharmacy as a revenue source rather than a cost center • Will result in more open MTF formularies – less need for patients to utilize retail network • Expand number of military pharmacies • On base and off base • Full service formularies

24. Wildcards? • Congress • Republican to Democratic power swing • 2008 Elections • Unified Medical Command • Lobbyists • PHARMA • Military Beneficiary Groups • National Association of Chain Drug Stores

25. Questions?