Powers Pyles Sutter & Verville, PC Bill von Oehsen

1. PHARMACEUTICAL DISCOUNTS UNDER FEDERAL LAW: ANALYSIS OF STATE OPTIONSbyBill von OehsenCounselPublic Hospital Pharmacy CoalitionNCSL 2004 Annual Meeting: Health Care Cost Solutions?Examples from the Worlds of Insurance and Prescription DrugsJuly 20, 2004Salt Lake City, Utah Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

2. Overview • Existing federal framework in which federal and state agencies regulate and/or negotiate drug prices • State experimentation in pharmacy assistance programs – multiple models have emerged • Future of state pharmacy programs – which models save the most money Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

3. Existing Federal Framework: Five Federal Drug Discount Programs • Medicaid rebate program - jointly administered by federal and state government (AWP minus 40%) • 340B program - federal grantees (AWP minus 51%) • Federal supply schedule - federal agencies, U.S. territories, Indian Tribes (AWP minus 48%) • Big 4 Federal ceiling price - VA, DOD, PHS and Coast Guard (AWP minus 52%) • VA contract - VA only (as low as AWP minus 65%) A sixth program — establishing a Medicare drug benefit — goes into effect in 2006. Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

4. Existing Federal Framework: Comparison of Federal Prices Private Sector Pricing “Best Price” Source: Data derived from Prescription Drugs: Expanding Access to Federal Prices Could Cause Other Price Changes, U.S. General Accounting Office, GAO/HEHS-00-118, August 2000 and How the Medicaid Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical Market, Congressional Budget Office Papers, January 1996. Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

5. 51.7% Background On U.S. Drug Market: Comparison Of Prices* 100.0% Average Wholesale Price 80.0% 60.5% 49.0% Cash Customers PBM and Other Private Insurance 44.8% Medicaid FSS 340B Market Share VA Free/Nominal 25% 60% 11% 1% 1% 1% 1% Market Share * Chart is based on rough estimates Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

6. Impact of Medicare Drug Benefit:Scenario One* 100.0% Average Wholesale Price Price Reduction for Medicare Patients 80.0% 60.5% New Medicare Business 51.7% 49.0% 44.8% Price Increase for Medicare Medicaid Cash Customers PBM and Other Private Insurance FSS 340B Market Share VA Free/Nominal 25% 60% 11% 1% Market Share 1% 1% 1% * Chart is based on rough estimates Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

7. Impact of Medicare Drug Benefit:Scenario One* Average Wholesale Price AMP After AMP Before “Best Price” After “Best Price” Before 51.7% Cash Customers 49.0% PBM and Other Private Insurance 44.8% 100.0% Medicare 80.0% 60.5% Medicaid FSS Market Share 340B VA Free/Nominal 40% 5% 10% 42% Market Share 1% 1% 1% * Chart is based on rough estimates Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

8. Impact of Medicare Drug Benefit:Scenario Two* 100.0% Average Wholesale Price Price Increase for Medicare Price Reduction for Medicare Patients New Medicare Business 80.0% 60.5% 51.7% 49.0% 44.8% Cash Customers PBM and Other Private Insurance Medicaid FSS 340B Market Share VA Free/Nominal 25% 60% 11% 1% Market Share 1% 1% 1% * Chart is based on rough estimates Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

9. Impact of Medicare Drug Benefit:Scenario Two* Average Wholesale Price AMP Unchanged “Best Price” Unchanged 51.7% Cash Customers 49.0% 44.8% PBM and Other Private Insurance 100.0% Medicare 80.0% 60.5% Medicaid FSS Market Share 340B VA Free/Nominal 5% 38% 9% 45% Market Share 1% 1% 1% * Chart is based on rough estimates Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

10. Existing Federal Framework: Medicaid Rebate Program • Patient uses retail pharmacies participating in Medicaid • Manufacturers and retail pharmacies are required to give discounts prescribed by law • Manufacturer discounts are given to state Medicaid agencies in the form of rebates, since Medicaid is a payor, not a purchaser, of drugs • Medicaid rebate for brand name drugs is “best price” or AMP minus 15.1 percent, whichever is lower, plus an additional rebate if prices rise faster than rate of inflation • California, Florida, Michigan and other states have established supplemental rebate programs using preferred drug lists (PDLs) and prior authorization for non-PDL drugs Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

11. Existing Federal Framework: 340B Program • Eligible entities include high-Medicaid acute care hospitals owned by or under contract with state or local government; community health centers; ADAPs; AIDS, TB and STD clinics; and other HRSA grantees • Manufacturer discounts are applied “up front” (340B entities are purchasers not payors) and are calculated using the Medicaid rebate formula; but 340B pricing is better because (1) sales do not involve retail pharmacies thereby avoiding retail mark-ups and (2) 340B providers regularly negotiate sub-ceiling prices • Use of drugs limited to “patients” of 340B covered entity • To avoid duplicate discounts by manufacturers, (1) states must forego rebates on drugs purchased through 340B and dispensed to Medicaid recipients and (2) 340B entities must pass their discounts through to states by billing at discounted rates Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

12. Existing Federal Framework: Federal Ceiling Price • Available only to the Big 4 (VA, DOD, PHS and Coast Guard) • Manufacturer up-front discount for brand name drugs is non-federal AMP (non-FAMP) minus 24 percent • FCP discounts are comparable to 340B pricing except they extend to inpatient drug prices but not generic drugs • Big 4 are permitted to negotiate sub-ceiling prices Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

13. Existing Federal Framework: Federal Supply Schedule • Prior to enactment of FCP program, virtually all federal agencies, including the Big 4, purchased their drugs through FSS • FSS pricing is only available to federal agencies, U.S. territories, tribal governments, and others • In contrast to the FCP and 340B programs, FSS prices are negotiated rather than prescribed by law • “Most favored customer” price is starting point in negotiations to obtain below-market prices Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

14. Existing Federal Framework: VA Contract Program • FCP program allows the Big 4 to negotiate sub-ceiling prices • VA has been particularly successful using a national formulary and a competitive bidding process to select one or a limited number of contractors to supply drugs within specified therapeutic classes • Because the VA is vertically integrated, compliance with the national formulary is easier to achieve • According to a 1999 GAO report, these national contract prices were about 33 percent below FSS which is about 65 percent below AWP • VA and DOD are collaborating on purchasing to increase volume Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

15. State Experimentation in Pharmacy Assistance Programs • State subsidy/rebate programs • Pharmacy plus/1115 waivers • Supplemental rebates • Mandatory pharmacy discounts • Partnering with 340B providers • Medicaid sole source contracts • Bulk purchasing • Reimportation • Other initiatives Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

16. State Models: State Subsidy/Rebate Programs • Most common state model – in 31 states according to NCSL; 23 are operational • Virtually all are for seniors only, so most will be folded into the Medicare benefit when it goes into effect in 2006. Several states now allow or require use of transitional assistance subsidy available through Medicare drug discount card program in combination with state programs. • Similar to Medicaid drug rebate program except no federal funding; these programs are generally funded by state revenue, patient co-pays and deductibles, pharmacy discounts, and manufacturer rebates • Best price exemption allows below-market pricing from manufacturers through the payment of rebates Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

17. State Models: Pharmacy Plus/1115 Waivers • States can apply for 1115 waivers to expand Medicaid eligibility for pharmacy benefit only • CMS has developed a model 1115 waiver application called “Pharmacy Plus” to simplify the application process • Creates two additional funding sources for states: manufacturer Medicaid rebates and federal matching funds. State efforts to rely solely on these two funding sources (with no state funding) have been successfully challenged in court by industry. • Another benefit is the best price exemption which allows states to negotiate supplemental rebates without affecting a manufacturer’s Medicaid rebate obligation • According to NCSL, six states (IL, IN, WI, SC, FL, MD) have received waiver approvals and another nine states are seeking waivers (as of November 2003) Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

18. State Models: Supplemental Rebates • Manufacturers pay a second rebate to have their drugs included on the state’s preferred drug list (PDL) and to avoid prior authorization requirements for non-PDL drugs • States can use this approach to obtain supplemental rebates for drugs purchased for Medicaid recipients (CA, FL), non-Medicaid patients (ME), or both (MI) • According to NCSL, 12 states have established supplemental rebate programs and another 16 states have passed supplemental rebate laws • Because coverage for dual eligibles will be transferred to Medicare drug benefit in 2006, states will lose half or more of their Medicaid volume which, in turn, reduces their leverage in negotiating supplemental rebates; multi-state purchasing is potential remedy Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

19. State Models: Mandatory Pharmacy Discounts • Pharmacies are prohibited from charging above specified prices • For example, California prohibits pharmacies from charging Medicare beneficiaries more than Medi-Cal prices • According to NCSL, 20 states have created or authorized pharmacy discount programs; a majority of these states also have a subsidy/rebate program • Savings are relatively small and come from pharmacies rather than manufacturers Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

20. State Models: Partnering with 340B Providers • Every state has 340B providers, especially community health centers, disproportionate share hospitals and state and local health departments • Because 340B entity pharmacies bill state Medicaid programs at rates below Medicaid net reimbursement rates (including rebates), states are encouraging provider participation in 340B as a way to reduce Medicaid drug costs • Texas recently partnered with UTMB to give the state correctional population access to 340B pricing, saving over $10 million per year • Similar approaches are being explored to extend 340B pricing to other state-funded populations: mental health, long term care, state employees, etc. Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

21. State Models: Medicaid Sole Source Contracts • Requires CMS approval of a 1915(b) waiver because patient choice is being restricted • Utah has successfully implemented this model by contracting with University of Utah’s home care division to serve hemophiliacs on Medicaid requiring factor product • This model can be applied to other expensive drugs that lend themselves to mail order distribution Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

22. State Models: Bulk Purchasing • States purchase or pay for drugs through different agencies: Medicaid, corrections, health departments, state employees, mental health facilities, substance abuse facilities, schools, etc. • Bulk purchasing concept is to consolidate purchasing using a common PDL to reduce prices • States are pursuing bulk purchasing across states lines in order to increase volume; e.g. National Medicaid Pooling Initiative (MI, VT, SC, NV, AK, NH) and Rx Issuing States for employees (MD, MO, NM, WV) • Multi-state purchasing may be the best solution for states seeking increased volume to compensate for loss of dual-eligible business Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

23. State Models: Reimportation • Drug reimportation is explicitly prohibited under the Prescription Drug Marketing Act except when the drug is imported by the drug’s manufacturer • FDA has chosen not to enforce this prohibition with respect to individuals and their physicians who bring into the U.S. small quantities of drugs for “personal use” • Legislation to legalize reimportation was passed by Congress in 2000 and more recently in the Medicare Modernization Act but has never been implemented by the FDA. Interest is growing in Congress to override FDA opposition. • According to NCSL, eight states introduced bills addressing reimportation in 2003 Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

24. State Models: Other Initiatives • Formation of buyer’s clubs, similar to the Medicare drug discount card that was recently launched by CMS • Establishing “clearinghouses” to facilitate patient and provider access to manufacturer patient assistance programs • Regulation of PBMs and drug company “detailers” • Regulation of drug company marketing and advertising, and labels and packaging on retail pharmaceuticals • Reuse or recycling of pharmaceuticals Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

25. Existing Federal Framework: Comparison of Federal Prices Private Sector Pricing “Best Price” Source: Data derived from Prescription Drugs: Expanding Access to Federal Prices Could Cause Other Price Changes, U.S. General Accounting Office, GAO/HEHS-00-118, August 2000 and How the Medicaid Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical Market, Congressional Budget Office Papers, January 1996. Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

26. Future State Efforts: Getting the Best Price How the VA does it: • Element one: best price exemption • Element two: mandatory discounts • Element three: subceiling negotiation Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

27. Future State Efforts: Getting the Best Prices Shaded area = supplemental rebates or subceiling discounts Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

28. Future State Efforts: How Do the Models Compare? Pharmacy Discounts Medicaid Sole Source Bulk Purchasing Buyers Clubs Step One: Best Price Step Two: Mandatory Discount Step Three: Subceiling Negotiation Pharmacy Discounts Medicaid Sole Source Bulk Purchasing Buyers Clubs Step One: Best Price Exemption Step Two: Mandatory Discount Step Three: Subceiling Negotiation “Best Price” State Subsidy/Rebate Model Reimportation P R I C E Medicaid Rebate Pharmacy Plus/1115 Waivers 340B Partnering Medicaid Supplemental Rebates 340B Subceiling Negotiation Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

29. Future State Efforts: Where Are States Going? State Mental Employees Prisons Schools Health AMP Rebates or Upfront Discounts Best Price P R I C E S State Pharmacy Assistance Programs and 340B Partnerships In-State Medicaid Out-of-State Medicaid Supplemental Rebates/Subceiling Pricing Powers Pyles Sutter & Verville, PC Bill von Oehsen (202) 466-6550 William.vonOehsen@ppsv.com

30. The Inside Source on the Public Health Service 340B Drug Discount Program www.drugdiscountmonitor.com For more information, contact Jared Bloom at jbloom@drugdiscountmonitor.com or (202) 349-4244.