Medicare Part B CAP Dead ?…

1. Medicare Part B CAPDead ?… GTCbio September 10, 2007

2. Or On Life Support?

3. CAP Overview • Medicare’s direct supply program for physician office drugs and biologicals (“drugs”) • Alternative to physician buy and bill • Began operating July 1, 2006 • Optional; physician annual election • >180 drugs/biologicals

4. Operated by BioScrip • Only vendor to accept CMS terms • Payment to BioScrip = ASP + 4.4% (Testimony of Richard Friedman, Exec Chairman of BioScrip, to Subcommittee on Health of the House Committee on Ways and Means. July 13, 2006) • Anecdotal info that CAP program is not adding much leverage to BioScrip negotiations with manufacturers • Revenue for 2Q 2007 = $9.2 mil

5. Little or No Savings to CMS • Potential savings = 1.6% [ASP + 6% minus ASP + 4.4%] minus operating costs • CAP volume in 2007 ($37 mil. est) represents ~0.4% of the total 2005 Part B drug spend ($10 bil reported)

6. Little or No Savings - 2 • The $37 mil in CAP spending would be ~$37.5 mil if reimbursed under buy and bill – actual savings of $0.5 mil before accounting for program operating costs

7. Incentives to Enroll • For some medical practices, reduction in Medicare reimbursement from 85% AWP (2004) to 106% ASP (2005) makes drugs an expense rather than a profit center • Some practices are refocusing attention away from drug treatment to more profitable procedures

8. Incentives - 2 • Quarterly adjustment of ASP and 6 month “lag” make drug margin hard to predict • Anecdotal info that an increasing number of patients cannot/do not pay coinsurance, become bad debts

9. Why Is CAP Unattractive to Most Physicians? • Oncologists still profit from office administered drugs • June ‘07 OIG study found that 9/12 sampled oncology practices could purchase drugs at or below ASP+6%

10. Why Is CAP Unattractive? - 2 • Private payers typically reimburse at 80% AWP, although that is changing • Some smaller, regional payers moving toward ASP + and requiring direct supply for non-chemotherapy drugs • Medicare volume often needed to lower net acquisition cost • Volume-based price reductions

11. Why Is CAP Unattractive? - 3 • As drugs become more expensive, profit increases • 2% of $500 is higher than 2% of $300 • Physician GPOs growing in popularity • CAP costs $ to administer but there is no payment for it

12. Why Is CAP Unattractive? - 4 • CAP vendor may refuse to supply drug to physician if patient has unpaid past due coinsurance • Physician must cooperate with CMS post-payment review

13. Minimal Market Impact • 2,450 physicians elected CAP as of 2 Q 2007(Aug 2 2007 BioScrip press release) • Fewer than 10% are oncologists • Most popular specialties are allergy, rheumatology, ophthalmology • Average size of physician practice = 3.5 (Medicare’s Competitive Acquisition Program – Stats Reveal Who’s In/Who’s Out and Why. Oncology Business Reviewwww.oncbiz.com; no date) • New election period began Aug 1 • Final numbers not yet released • BioScrip projects 35% increase

14. Alternatives to CAP • Physicians refer patients to hospitals • Hospitals joint venture with physicians to expand infusion services

15. CAP in 2008 - 2009 • BioScrip contract expires in ’08 • CMS report to Congress due July ‘08 • With 4.4% gross margin in a market of ~3,000 physicians, how much room exists for a second vendor?

16. CAP in 2008 – 2009 cont’d • If private insurance chemotherapy reimbursement holds near current level, not much incentive for oncologists to elect CAP … • Unless payment drops to ASP+5% for 2009

17. CAP Expansion • CAP for certain DME, prosthetics, orthotics and supplies • CMS to announce winning bidders in December • Program scheduled to begin April 2008

18. Summary • CAP has had minimal impact on the Part B drug market and generated little or no savings for Medicare • There are few incentives for physicians to elect CAP and several significant disincentives

19. Summary - 2 • Volume discounts coupled with private insurance reimbursement create disincentives for some physicians to choose CAP • CAP will grow in scope only if Medicare or private insurance payments fall

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