340b Program Background

1. 340b Program Background

2. General Overview • What is the 340b program • Recent legislative changes and the impacts • What it means for Indian Tribes • What is means for pharmacies and PBMs

3. What is the 340B Program? Federally-sponsored provision added to VHCA in 1992: Designed to provide affordable drug access to at-risk populations via Qualified Entities (QE): Includes Disproportionate Share Hospitals (DSH), Critical Access Hospitals (CAH), Federally Qualified Health Centers (FQHC) The 340B business model: Targets low-income/indigent families and individuals Allows QE’s to receive drugs at heavily discounted prices (average 51% of wholesale price) Generates revenues for QE’s via the price spread between 340B and network pricing Specified a 1:1 ratio of QE to specific contracted pharmacy (typically in-house) Prior to PPACA, 340B was a niche with limited access, specific eligibility and operational requirements: Mandatory segregation of 340B versus non-340B drug inventories Physical drug inventories must be on-site and maintained separately from non-340B drugs Only available to employees of qualified entities and eligible patients of record of QE-employed providers Separate records for claims processing, patient files and data increased the difficulty for hospitals to participate The 340B Discount 340B Program Overview 3

4. 340B Program Size, Impact and Importance 340B market has experienced significant growth in patient encounters due to a number of factors: High unemployment + poor job market have driven millions of consumers to Federally Qualified Health Centers State and Federal administration significantly increased funding for community healthcare to increase access In 2010, 340B qualified entities had approx. 260 M outpatient encounters averaging of 2.2 scripts/patient encounter HCR modified a number of 340B rules to increase access and coverage for the eligible 340B population: Expanded list of qualified entities across the DSH and Federally Qualified Health Centers Recently expanded eligible entities: Children’s Hospitals, American Indian Tribes, Ryan White AIDS Centers, plus others Revised the QE-to-contracted pharmacy ratio from 1:1 to 1:Unlimited Allowed for “virtual” versus “physical” inventories of 340B drug supplies Resulting market impact of HCR implementation: 340B drug purchases were over $6 billion in 2010 Script volumes have experienced tremendous growth and is expected to continue 2010 total estimated 340B script volume was over 566 million scripts, or 17.2% of the total estimated US script volume By 2012 340B script volume is projected to double to 1.1 billion (per McKesson 2010) Projected 340B Script Volume Growth of Contracted Pharmacy Arrangements 1,100M 566M 2012 2010 4

5. 340B Market – What’s the Attraction? Continued growth of Qualified Entities (QE): Currently over 15,000 QE’s across the US and US territories, up from 14,000 QE’s in 2010 California alone has over 10% (1,500) of all QE’s DSH, Critical Access Hospitals and Federally Qualified Health Centers facilities represent over 80% of all qualified entities 340B program does not discriminate; anyone who meets eligibility requirements can access 340B drug prices Program is difficult to understand and even harder to administer, manage: Competition is fragmented and no large competitors currently in this space A number of companies provide consulting services and/or program administration, management 340B may not be compatible with standard PBM business models Growth in this market would likely increase attraction by various companies Significant increase reported in RFP’s containing 340B requirements: Entities are looking for ways to increase their revenue RFP’s are being received from 340B QE’s plus prospective clients looking for added capabilities Majority of Public Sector and Medicaid RFP’s (80-100%) include 340B requirements Many RFP’s show lack of knowledge on 340B specifics and qualifications; many RFP requestors do not qualify for 340B Potential market risks for future considerations: Changes in legislation may impact 340B program and discounts: OptumRx believes there is no current legislative activity significantly impacting the 340B market Increased access and participation may drive Pharma to reconsider participation and/or pricing: This is a Federally sponsored program; unsure whether Pharma will object to small % of their overall sales Trend shifts towards Specialty drug development may cause shift in program design 5

6. 340B Market – Implications for Tribes? • Ability to take advantage of 340b pricing without a tribal pharmacy • No rebates paid on 340b drugs • Tribes need contract with wholesaler and have agreements with each pharmacy they intend to fill 340b scripts with • May want to consider a 340b-facilitation vendor to handle: • Patient eligibility verification • Virtual inventory control • Automated reporting and auditing requirements • Even though eligible by Tribal status, still need to register with Health Resources and Services Administration (HRSA): Office of Pharmacy Affairs (OPA) • http://opanet.hrsa.gov/opa/default.aspx

7. 340B Market – Implication to Pharmacies/PBMs? • Limited or no “spread” revenue on 340b drugs • Pharmacies may charge a large dispense fee • PBMs may require an administration fee (for full pass-through of the 340b discount) • Few, if any, PBMs currently engaged in “340b verification” processes