A Post-Election Exchange and Expansion Update

1. A Post-Election Exchange and Expansion Update Health Policy Implications Artia Advisor 2-7-13

2. Exchange Update • States are moving forward at differentiating paces while HHS extends deadlines Artia Advisor 2-7-13

3. HHS Has Extended Deadlines HHS to determine if states have complied with the provisions to establish an exchange Final deadline to submit exchange blueprints Exchanges must be self-sustaining Revised Deadline to submit Exchange Blueprint, Declaration Letter, and Application Original deadline to select a benchmark plan and declare intent Exchanges become operational; Required standards must be in effect Jan. 1, 2015 Jan. 1, 2014 Nov. 6, 2012 Dec. 14, 2012 Jan. 1, 2013 Feb. 15, 2013 • HHS will approve or conditionally approve the state-based exchange blueprints by January 1, 2013. Both declaration letters and blueprints will be accepted on a rolling basis until the final deadline of February 15, 2013. • Even despite these extensions, many state lawmakers remain concerned that these deadlines, in conjunction with the delayed release of guidance and regulation from HHS, are extremely prohibitive in allowing sufficient time to deliberate and choose the most appropriate implementation pathway. Artia Advisor 2-7-13

4. Exchange Options for States • For those states that elect not to establish an exchange, HHS is required to establish an exchange on behalf of the state or in those states where HHS determines an exchange will not be operational by January 1, 2014. Emergency services Hospitalization Mental health and substance abuse services • Qualified health plans (QHPs) which will participate in the exchange markets must include items and services within at least the following 10 categories: Ambulatory patient services Rehabilitative and habilitative services and devices Prescription drugs Laboratory services Preventive and wellness services and chronic disease management Maternity and newborn care Pediatric services Artia Advisor 2-7-13

5. “One Drug Per Class” Issue • HHS previously indicated that it “does not intend to adopt the protected class of drug policy in Part D” and may consider a proposal that would permit EHB plans to cover only one drug in a particular category or class. • In the proposed rule, HHS referenced comments from various stakeholders such as patient advocacy groups and manufacturers who stated significant concerns that such a policy would not provide comprehensive or sufficient drug coverage • The proposed rule also referenced an Avalere study which showed that many plans are already offering more comprehensive coverage than a “one drug per class” policy Immunosuppressants Antidepressants Antipsychotics Part D “all or substantially all” policy Anticonvulsants Antiretrovirals Antineoplastics Artia Advisor 2-7-13

6. HHS’ Rulemaking Process Will Yield Further Guidance • As part of the regulatory process for setting up exchanges and implementing other provisions of the ACA, the Administration is tasked with releasing guidance, or regulations, to states and health plans who are affected by the provisions. • These regulations are issued in the form of proposed rulemaking, a process through which the federal agency (in this case, the Department of Health and Human Services) issues its intended approach towards the provisions of the law in the form of a proposed rule. This is followed by a period for stakeholder comment and agency review of these comments, before HHS releases a final rule. • On November 20, 2012, HHS released a proposed rule which will regulate the provision of minimum coverage of essential health benefits (EHBs) to be offered in plans participating in the individual and small group markets. • Of importance to Salix, this guidance included HHS’s intended approach to defining adequate provision of prescription drugs as one of the ten required EHB’s. Artia Advisor 2-7-13

7. Rule Proposes Broader Coverage for Rx Drugs • A plan must cover the greater of: • One drug in every category and class, or • The same number of drugs in each category and class as the EHB-benchmark plan • QHPs will report drug list to the Exchange, an EHB plan operating outside of the Exchange must report its drug list to the state, and a multi-state plan must report its drug list to the Office of Personnel Management (OPM). • This reporting will take U.S. Pharmacopeia (USP) reporting format • Drugs must be “chemically distinct,” i.e. cannot offer brand-name drug and its generic to satisfy requirements • HHS proposes that plans “have procedures in place to ensure that enrollees have access to clinically appropriate drugs that are prescribed by a provider but are not included on the plan’s drug list” Artia Advisor 2-7-13

8. State Exchange Statusas of 1-4-13Kaiser Artia Advisor 2-7-13

9. Key Characteristics of Established State Exchanges *Description of Hawaii’s Interim Board, which will be replaced on June 30, 2012. The ultimate Board of Directors will include eleven members. **Although Utah’s exchange doesn’t have a formal governing board, the state has created an executive steering committee to adviseexchange staff on operations and transparency issues and a Defined Contribution Risk Adjuster Board to manage risk sharing mechanisms. Artia Advisor 2-7-13

10. Medicaid Expansion Update • In light of the Supreme Court ruling, many states will opt out or delay expansion Artia Advisor 2-7-13

11. Implications of Supreme Court Ruling • States now have more options regarding how they will expand their Medicaid population. States may have the option of applying the expansion to sub-populations within their existing Medicaid program, while others are choosing not to participate altogether. • CBO has estimated that 6 million less individuals will receive coverage in 2014 as states opt-out of Medicaid expansion. CBO projects that 3 million of these will likely fall into exchanges while the other 3 million will be left uninsured. 3M uninsured 3M 3M eligible for exchange subsidies 17 million = Medicaid ExpansionPre-SCOTUS 30 million= Total Uninsured Post-SCOTUS Artia Advisor 2-7-13

12. Artia Advisor 2-7-13

13. Other Policy Drivers Artia Advisor 2-7-13

14. The Individual Mandate The Supreme Court Ruling: Constitutional Unconstitutional Unconstitutional The Individual Mandate Moves Forward • The penalty will be calculated as the greater of either: • 1. a percentage of the “applicable income,” defined as the amount by which an individual’s household income exceeds the applicable filing threshold for the applicable tax year, or • 2. a flat dollar amount assessed on each taxpayer and any dependents • The Congressional Budget Office’s ten-year estimate of tax revenue generated from the individual mandate: $117 billion Artia Advisor 2-7-13

15. Medicare Advantage Enrollment Continues to Grow • Medicare Advantage Enrollment has grown by 10% in 2012 (~27% of Medicare population) • The MA program continues to be a popular government funded program despite recent activity by Democrats to modify the program. • The new five-star rating system by CMS uses benchmarks and quality measures to rate plan performance. • MA plans may find mechanisms to save money while continuing to meet program requirements. MA plans may look to vendors for savings by restructuring formularies or cost-sharing. Source: Kaiser Family Foundation, Medicare Advantage 2012 Data Spotlight: Enrollment Market Update http://www.kff.org/medicare/upload/8323.pdf Artia Advisor 2-7-13 15

16. Regulatory Focus HHS and CMS’s renewed focus on value-based purchasing and quality Artia Advisor 2-7-13

17. Incoming Tidal Wave of Regulations from HHS Following Obama’s re-election, federal agencies are expected to issue the following regulations and guidance to facilitate implementation of Affordable Care Act (ACA) provisions: Artia Advisor 2-7-13 17

18. Medical Device Tax On June 7, 2012 the House passed H.R. 436, the Health Care Cost Reduction Act of 2012 by a vote of 270-146. There were 37 House Democrats who supported the measure.33 Republican Senators have signed on to a similar repeal bill, S. 17, by Sen. Orrin Hatch (R-UT). Artia Advisor 2-7-13

19. Value-based Purchasing Programs • Value-based purchasing links provider payments to quality measures and performance by healthcare providers. • This form of payment is designed to hold providers accountable for both cost and quality. • The ACA establishes a value-based purchasing program in Medicare for hospitals and requires the development of similar programs for skilled nursing facilities, home health agencies, and ambulatory surgical centers, and the testing of pilot programs for other providers • Payment Bundling National Pilot Project • Under the ACA, HHS is required to establish a national, voluntary pilot program for integrated care of Medicare beneficiaries with “applicable conditions” around a hospitalization • Hospital Value-Based Purchasing Program • The Hospital Value-Based Purchasing Program will pay approximately 3,500 hospitals across the country for inpatient acute care services based on care quality Value-based purchasing (VBP) programs reflect CMS Triple Aim Artia Advisor 2-7-13 19

20. The Increasing Influence of Quality Organizations Artia Advisor 2-7-13

21. The Work of Quality Organizations is Interconnected Although each of these organizations have a distinct direction and focus there are some overlaps in responsibility and organizational structure. Prior to the enactment of the ACA; AHRQ was responsible for CER, moving forward PCORI will lead this function for the private public partnership while AHRQ will continue to serve as the governmental organization for CER and quality Similarly URAC and NCQA both accredit health plans and want to play a role in at the governmental level in certifying the QHPs. NCQA has also expressed interest in accrediting ACOs NQF governs the quality benchmarking process and will continue to work with NCQA and physician groups to create new quality metrics. Ultimately, organizations such as AHRQ and PCORI will lead efforts to collect clinical data while URAC, NCQA, and NQF will leverage that data to create quality standards, measurements, and benchmarks that will drive the definition of value and set new parameters for provider reimbursement models. Artia Advisor 2-7-13

22. The Big Picture These policy drivers will work together to influence the health care delivery system and life sciences companies Artia Advisor 2-7-13

23. Where ACA Makes A Difference for Payers The number of consumers potentially affected by these reforms is significant, and the window of action for stakeholders will not remain open for long. Artia Advisor 2-7-13

24. Managed Care 2.0: It’s Different this Time Around • The U.S. System is unsustainably expensive • $8,000 per capita cost • 40% higher than every other country in the world • Cost growth 3X GDP • Old, sick baby boomers coming • Without change, the system will go bankrupt • 2. ACA actually increases cost pressures • Expansion of coverage • MLR floors • Fewer levers to drive selection of lower-cost members Imperative for Reducing U.S. Healthcare Spending • Private sector experiments are working • Investments in HIT are driven by incentives supported by government • Integrated systems—Kaiser, Intermountain, Geisinger—have shown traction on getting better quality for less cost the system will go bankrupt • 4. The largest payers in the system – the state and federal governments- are out of money • Protracted economic slowdown, draining state and federal coffers • Public sentiment is more hostile; large public indebtednes system will go bankrupt Artia Advisor 2-7-13

25. Steady State Financial Impact of Key Reform Issues Artia Advisor 2-7-13

26. Timeline of Key Health Reform Activities Pharmaceuticals: Annual industry tax on brand-name pharmaceutical manufacturers increases to $2.8 billion Cuts to Hospitals: Secretary must reduce the annual inflation update to Medicare payments for outpatient hospitals by 0.3% Medicare Advantage: Deadline for private plans that participate in Medicare Advantage to begin spending at least 85% of plan revenue on medical costs Exchanges: Deadlines for states wishing to establish partnership Exchange to submit blueprints to HHS Payment Reform Payment Methods: Deadline for the Secretary to establish a pilot program seeking alternative payment methods for Medicare based on quality and efficiency of care Insurers: $8 billion industry tax levied on health insurers (increase in subsequent years) IPAB: Deadline for 15-member Independent Payment Advisory Board to develop recommendations to reduce payment spending, to be submitted to Congress and the President (1/15) Delivery System Reform Exchange: Exchange plans must consider all enrollees as part of a single risk pool Health Information Technology Physician Value-Based Payment: Initial Performance Period for determining payment modifiers begins Hospitals: Start date for 11 cancer hospitals to report on quality measures, as established by the Secretary Taxes/Fees Essential Benefits: As defined by law and the Secretary, all exchange plans must cover an “essential health benefits package” Bundling: Establishes a national voluntary pilot program starting with 10 conditions to bundle payment for episodes of care delivered by disparate providers, such as hospitals, physicians, long-term care, and post-acute providers Expansion: States must expand eligibility to all individuals under 64 with family incomes at or below 133% FPL; newly eligibles will be funded by the federal government through 2016 Individual Mandate: Individuals are required to purchase qualified health insurance or pay a fine or a percentage of taxable household income, whichever is greater (changes to fine and % in subsequent years) Reimbursement: Start date for state requirement to pay primary care physicians who provide Medicaid patients certain services (evaluations, management, and immunizations) at a rate equal or greater to the current Medicare rate Exchange: Exchange plans must offer at least one “silver” and “gold” plan to cover 70% and 80% of projected expenses for enrollees. Companies selling those plans may also offer a “bronze (60%) and “platinum” plans (90%0. These plans must be sold at the some price in or outside the exchange. States: Deadline for HHS to provide regulations for states to allow health insurers to sell products across state lines Pharmaceuticals: Deadline for the Secretary to disseminate regulations to standardize prescription drug information formats (3/23) ‘14 Exchanges: Deadline for states to declare intention to establish a state-based exchange and submit blueprint (12/14) DEC 2012 Operating Rules: Deadline for the Secretary to adopt standardized operating rules for insurers around health claims, enrollment/disenrollment, plan premium payments, and referral certification and authorization transactions FEB 1 MAR 1 JULY 1 OCT 1 MAR 1 JULY 1 JAN 1 JAN 1 CMMI: Deadline for the Secretary to report to Congress on the activities of CMMI DEC 31 ‘13 Artia Advisor 2-7-13

27. Timeline of Key Health Reform Activities Employers: Start date for states to allow employers with 101+ employees to purchase insurance through the exchange Payment Reform Delivery System Reform Pharmaceuticals: Annual industry tax on brand-name pharmaceutical manufacturers increases to $4 billion Cost-Sharing: Deadline for Medigap Part C and Part F plans to implement cost-sharing standards requiring nominal cost-sharing to encourage the appropriate use of physician services Health Information Technology Insurers: For 2019 and subsequent years, industry tax will be indexed to the rate of premium growth of the prior year Taxes/Fees Cuts to Hospitals: Start date for the Secretary to reduce the annual inflation update to Medicare payments for outpatient hospital services by 0.75% for 2017-2019 Exchange: Deadline for state exchanges to be self-sustaining and not rely on federal subsidies Pharmaceuticals: Annual industry tax on brand-name pharmaceutical manufacturers increases to $3 billion Pharmaceuticals: Annual industry tax on brand-name pharmaceutical manufacturers increases to $4.1 billion Pharmaceuticals: Annual industry tax on brand-name pharmaceutical manufacturers reduced to $2.8 billion (2019 and beyond) Eligibility: Start date for states to begin paying a percentage of the cost of Medicaid coverage for newly eligibles; the federal taxpayer will pay the remainder of the cost (percentage changes in subsequent years) Spending: Start date for the Secretary to begin implementing cuts in Medicare spending, as recommended by IPAB, unless Congress enacts legislation to block implementation AUG 1 JAN 1 JAN 1 JAN 1 JAN 1 JAN 1 ‘16 ‘17 ‘18 ‘19 ‘15 Artia Advisor 2-7-13