Part B Drug Payment Reform Experience and Expectations

1. Part B Drug Payment ReformExperience and Expectations August 11, 2005

2. Agenda • Coding developments • Medicare payment • Physician office • Hospital outpatient • Private insurance and ASP • Medicaid reform • Conclusions • Pricing implications

3. U.S. reimbursement planning and problem solving • Payer research; strategic planning • Reimbursement forecasting • Competitive analysis • Advocacy with major payers

4. Industries Served

5. Coding Developments

6. New HCPCS Process • Open, interactive • January 2 application deadline • No waiting for 6 months marketing data • Every application given public hearing

7. Recipe for Good Presentation • Show why existing HCPCS categories do not adequately describe product • Dissimilar function or • Significant therapeutic distinction • No sales pitches, no testimonials

8. Good Presentation –(Cont’d) • Data, data, data • Discuss efficacy and safety in the context of who will benefit by the use of the product • OK to supplement written application with new, additional info

9. CMS Decision Making • Contractors, SADMERC, regional office involvement continues behind the scenes • Private insurer involvement minimal

10. But Does It Matter? • Time will tell; I expect ‘Yes’ • Sometimes they just don’t get it from written application • Opportunity to level playing field when coding change creates competitive disadvantage • Coding and coverage decisions are linked; improving coding process will improve coverage

11. Medicare Physician Office

12. ASP Reimbursement • CMS and Congress are of one mind on ASP: Relevant, reliable, worth the time and money to manage • HHS OIG findings: ASP is 26% lower than AWP for single source; 30% lower for multisource; 68% lower for generics OIG Report No. OEI-03-05-00200, June 2005

13. ASP’s Weakness • It presumes rational, predictable wholesaler markup and small, infrequent manufacturer price changes • Some would argue that is exactly what’s good about ASP – it forces that conduct

14. ASP’s Weakness –(Cont’d) • But what happens when market forces overwhelm the formula? • What happens when ASP is $40/unit and physician’s AAC is $60 or more?

15. The Case of IGIV • Demand for intravenous immune globulin (IGIV) exceeds supply • ‘Secondary’ distributors purchase from wholesalers and apply 20%+ markups

16. The Case of IGIV –(Cont’d) • Physicians who are under water at ASP + 6% refuse to treat, refer to hospital OPD • When hospitals are paid ASP + 8%, will they take the referral?

17. Implications of IGIV Experience • ASP+ not a good long term choice if too many other situations like IGIV create access uncertainty for patients and providers

18. IGIV Experience–(Cont’d) • But if CAP is successful, ASP+ will be sustainable for long haul (validates access with ASP formula) • Additional fine tuning needed for CAP-exempt products

19. CAP Exempt Drugs (Interim Final Rule) • Contrast agents • Controlled substances • Certain vaccines • Drugs used with DME • Leuprolide • Orphan drugs w/o non-orphan use • Clotting factor • IGIV and other immune globulins • Drugs w/o J code

20. Emergency Authority • HHS Sec. can modify reimbursement in case of “public health emergency … where there is a documented inability to access drugs and biologicals, and a concomitant increase in the price … which is not reflected in the manufacturer’s average sales price …” Medicare Prescription Drug, Improvement, and Modernization Act of 2003, sec. 303(e)

21. Refocus on Prevention • Waiting for a public health emergency is the wrong standard – should be amended to prevent an emergency, esp. for CAP exempt drugs

22. Procedure Payments • Cancer quality demo • New infusion payments

23. Infusion Payments Improved • New payments created for • Hydration • Admin of non-chemo drugs during chemo session • Severe reaction management • Chemo treatment planning and • Supervision of chemo drug preparation

24. Payments Improved –(Cont’d) • Chemo drugs and biologic response modifiers billable under chemo infusion codes • Infusion of 15-30 min. can be billed as infusion of up to 1 hour

25. Cancer Quality Demo • Oncologist receives additional $130 for reporting patient info about • Nausea/vomiting • Pain • Fatigue

26. Cancer Quality Demo–(Cont’d) • Sunsets in December unless extended by Congress • CMS estimates that demo is responsible for 15% of 2005 hem-onc revenue from Medicare feesProposed 2006 Physician Fee Schedule at p.341

27. Medicare Hospital O/P

28. HOPPS: GAO Survey • Average purchase prices were • Significantly lower than reimbursement • Usually lower than ASP even before taking rebates into account GAO-05-581R Medicare Hospital Outpatient Drug Prices, June 30, 2005

29. 2006 HOPPS Changes • ASP + 8% replaces previous payments (typically 83% AWP) • ASP + 6% for drug component • 2% for pharmacy overhead in 2006 and 2007 • Orphan drugs included • 2008: Adjust based on 2 year study of actual cost

30. 2006 Changes –(Cont’d) • Out: “Pass-through drugs” • In: SCODs – specified covered outpatient drugs

31. Implications • Generics and brands have same formula • Payment adjusted quarterly rather than annually • No significant (2%) difference in payment among treatment settings • Net impact on hospitals: significant decrease for 11 of top 20 SCODs

32. Comparison of 2005 HOPPS Payment to 2006 Formula for Top 70% of Medicare Spending on SCODs

33. Comparison of 2005 HOPPS Payment- (Cont’d)

34. Functional Equivalence Dies (Again) • “Functional equivalence” applied by CMS in 2002 to stretch LCA concept to Aranesp • Banned by MMA, so CMS applied an “equitable adjustment” to Aranesp based on Procrit cost for equivalent dosage • Equitable adjustment ends in 2006 – replaced by ASP + 8%

35. Treatment Setting Shift? • Some anecdotal reports of physicians sending patients to hospital OPDs for infusions, but we see no evidence of trend • Published reports about IGIV, for example, do not represent what’s happening with other categories of drugs

36. Private Insurers

37. Heading Toward ASP • Feb 2005 survey • 15 private insurers/PBMs • ~100 mil covered lives

38. Survey Findings • AWP – 15% most prevalent payment • 3 plans moving to ASP by 2006 • 4 plans expect payment to be reduced even if they remain with AWP • 6 plans evaluating • 2 plans staying with AWP • Only 3 use NDCs

39. Medicaid

40. Rx Payment Reform in 2006 • Reform is high priority for fall Congress • 3 proposals • Administration • National Governors Assn. • HHS OIG

41. Administration • ASP + 6% • Replace best price calculation with flat rebate higher than existing 15.1% basic rebate

42. Governors • Unclear endorsement of switch to ASP • Dispensing fee not linked to Rx price • Increase rebate • Substitute front-end discount for rebate payment • Include authorized generics in rebate • Keep Best Price

43. HHS OIG • ASP or AMP based formula

44. Conclusions

45. Conclusions • Coding for new product requires more planning and prep but has better/quicker chance for success • New coding process allows you to use competitor’s application to shed light on your issues

46. Conclusions –(Cont’d) • Congress and CMS like ASP results • ASP reduces provider profit by 25%+ on brand products • ASP endurance depends in part on CAP success

47. Conclusions –(Cont’d) • Because ASP does not account for middleman markup, HHS Sec. “emergency powers” should be expanded to prevent rather than only react

48. Conclusions –(Cont’d) • Hospital pharmacy revenue will see major declines in 2006 (Medicare & Medicaid) and 2007 (private insurers) • ASP will be widely adopted by private insurers and Medicaid

49. Conclusions –(Cont’d) • Drug profit becoming less significant to provider; procedure profit is the improving opportunity • CAP delay will slow but not diminish specialty pharmacy’s march to become the power customers

50. Part B Pricing Implications