State Drug Purchasing in a New World:The New WorldInvitational Summit for State PolicymakersOctober 8, 2004Philadelphia, PennsylvaniaStephen W. Schondelmeyer, Pharm.D., Ph.D. Professor and Director, PRIME Institute, University of Minnesota

OverviewDynamic MarketDollars (Drug Prices)Discounts (and Rebates)Drug PurchasingDisruptionsDirectionsWhat will be covered? Ds precipitated by Part D

Dynamic MarketChange at All LevelsManufacturer (rebates under new rules & new competition)Wholesaler ( chargebacks & discount contracts, rebates by-pass) Pharmacies (further loss of cash pay customers)Patients ( cost-sharing, complex programs, more price sensitive)Payers ( cost shifting, drop spouses & retirees, direct from mfg discounts)PBMs & PDPs ( need for transparency, assumption of risk) Many Moving PartsNew Business ModelsTransparency & Intense Scrutiny

Are Drug Prices

Still an Issue?

Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC (Feb 4, 2004) and AARP Prescription Drug Program.Wholesale Price per Day of Therapy forNorvasc 5 mg tab (Pfizer): 1997 to 2004WholesalePrice $/DayAWP / DayWAC / Day

Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC (Feb 4, 2004) and AARP Prescription Drug Program.% Change inWholesale Price per Day of Therapy forNorvasc 5 mg tab (Pfizer): 1997 to 2004Percent Change in Price ($/Day)AverageAnnualPercentChangePercent Change vs.Previous MonthCPI All ItemsLess Energy

Recent Drug Price Increases: Jan 31, 2004 vs Jan 31, 2003 (Average Wholesale Price)Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.% Change in Price 2004 v 2003Consumer Price Index All Items 2.2%

Recent Drug Price Increases:Jan 31, 2004 vs Jan 31, 2003(Average Wholesale Price)Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.% Change in Price 2004 v 2003Consumer Price Index All Items 2.2%

Rx Price Impact AWP Increases Result in: Cash Pay Consumers Employer Health Plans State Medicaid & SPAP Programs Medicare Part B & Discount Card State & Federal EmployeesWho pays more when AWP increases?

Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC and Penn. PACE program annual reports.Top Drugs Most Used by ElderlyBrand Price Inflation & CPI All:1998 to 2004National ElectionsMedicare Discount CardAnnual %ChangeBrand InflationCPI All ItemsDrug FirmDiscount CardsAWPWAC

DiscountsCurrent Focus on:% Discount (rarely describe from what?)Retail pharmacy priceGetting More RebatesShould Focus on:Defining Starting Point for DiscountActual Net PriceWho Is Getting Reverse & Perverse Incentives?

Do Bigger Discounts

Mean Lower Net Price?

Dont Count on It.Beware of Pricing Games !

Actual AWPs Listed in Price Database Celebrex Cap 100 mg (Jan 1, 2003)Source: Compiled by PRIME Institute, University of Minnesota from data found in PriceChek PC (Facts & Comparisons, Inc), January 1, 2003$/Unit15 Re-Labeler Products With Inflated AWPOrig AWPAWP Inflation vs Original AWP

3 Originator NDCs withSame AWP2% to 77%

Drug Purchasing: State StrategiesState as Regulator [ME, most developed countries]Utility Model: Drugs as Public GoodState as Wholesaler [certain EU countries, untested in US]Controlled Distribution: State Liquor Stores State as Importer [IL, WI, MN & others, esp., border states] Importation from Canada & EU: Free Trade ApproachState as Subsidizer [PA, NY, NJ many others]Welfare Program Model: Medicaid or Food StampsState Pharmacy Assistance Programs: Coordination with MedicareState as Prudent Purchaser [IA market, OR ref prices]Market-based Competition: Competitive BiddingPayment-Limits Model: Set Maximum Payment / Reference PriceMulti-State Purchasing or PBM: Competitive BiddingState-wide Purchasing: Combine all state programs (Medicaid, SPAP, State hospitals & mental health facilities, prisons, state employees & retirees, county & local employees, colleges & universities, state retired teachers, public health clinics, etc.)

U.S. Outpatient & Total Rx Expenditures: 1988 to 2012ExpenditureIn BillionsRx Expend:All SettingsSOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical Assistance Programs, National Pharmaceutical Council, 1976 to 2002.Rx Expend:Outpatient Only$ 38$143$ 57$642$217$422$319$21019.2%of NHE23.8%of NHE

Drugs Are a

Small Part

of Health Care ?

DisruptionsMedicaid MedicareMoving ~ 50% of beneficiaries to an entirely different drug programLegislative price negotiation PBM negotiation of price or NOTAWP May DisappearMedicaid ChaosWhat will be used for Part D?Private Third Party Contracts ChaosHow Will Medicare Set Rx Payments?Community Mail Order PharmacyNo one to watch mail order prices or fraud & abuse (PBM owns mail order)Shifts Rxs out of communities (esp,, Rural Pharmacies)Marginal Cost Becomes Average Cost (No Where Left to Get Acute Rxs)Re-importationMay get access to Canadian pricesCanada may have U.S. type prices

What Direction in the Future?

Stay Flexible&Stay Focused

What Tools Can Be Used?Better Than Best Price RebatesNot volume, but market share movementSupplemental rebates get better than best price rebatesBest Price is extended to retiree health plans in private marketPreferred Lists (Formulary) & Prior AuthorizationAddress drug overuse & inappropriateCounter-balance Direct to Consumer AdsDisease Management programsEvidence-based Preferences & PaymentCo-Payments Can HelpBut Only If They Are Actually Collectable by PharmacyBalance effect on utilization & outcomesFraud & Abuse of Prescription DrugsOxyContin: Encourage Pain Med Use / Discourage Street MedCard Holder Misuse: Selling Card to Someone Else to Use

Make Sure the ProgramDoes What It Was Intended To Do

-- follow the policy advice of former President Reagan on nuclear disarmament:

Trust and verify!

You may be on the right track

the train will still run over you. but if you are not moving fast enough and moving in the right direction, Will Rogers

PRIME Institute

P R I M E harmaceutical esearch n anagement & conomics University of Minnesota

Medicaid Rx Payment Components: 1980 to 2002 (Constant 2002 $)$ / RxDrug Product PaymentDispensing Fee PaymentRebate AmountSOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical Assistance Programs, National Pharmaceutical Council, 1976 to 1998.

Drug Rebates as a % of Total Drug Expenditures% of Drug Product Cost (AMP)% of Total Drug Expenditures% of MedicaidDrug ExpendituresSource: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 1998 and in HCFA Form 64.

PRIME Institute

P R I M E harmaceutical esearch n anagement & conomics University of Minnesota

Reverse & Perverse Economics PBM Revenue from Drug Firms Creates Conflict of Interest with Clients Expectations Medicare Over-Pays for Office-Based Drugs Doctor Has Incentive to Prescribe Highest Priced Drug Brand Firms Pay Generic Firms Not to Enter Market Cost of Settling Lawsuit Less than Added RevenuePharmaceutical Firms have been able to reverse the economic flow in the Rx market to co-opt major players:

What About Buying Drugs from Canada or on the Internet?

What About Drugs from Canada?May Be CheaperLower Because Drug Company Charges LessDrug Firms Have Threatened Supply Limits in CanadaIs It Legal? Not ExactlyCoordination of Care with OthersPhysician & pharmacist review all medsOther insurance coverage

What Is Meant by Re-importation of Drugs from Canada?What would re-importation allow:Purchase of U.S. made drugs from approved Canadian sourcesPharmacies & wholesalers could buy from approved Canadian sourcesConsumers could buy from approved Canadian internet sitesWhat would re-importation NOT allow:Importation of counterfeits from anywhere in the worldInternet purchases from anywhere, except approved U.S. & Canadian sites

How Many Consumers Would Buy Prescriptions on the Internet --If They Could Buy the Same Medication at Their Corner Drug Store at the Same Price?

Factors Contributing to Change in Medicaid Drug Expenditures:1992 to 2002 (Constant $)Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 199810-year % Change

% of Adults Using Medicationin Previous WeekSource: JAMA, Vol 287, No. 3, Jan 16, 2002, based on adult population survey in 1998-99.% Using MedsIn Previous WeekAny Medication includes:

Prescription drugs Over-the-counter meds (OTCs) Vitamins & Minerals Dietary Supplements Natural & Herbal Remedies Contraceptive Drugs & Devices% of Elderly Using Meds in Previous Week

How to Choose a DirectionClearly DEFINE the problem you are addressingKnow SOURCE of the problems you addressMake sure you TARGET solution to the sourceKnow how you will MEASURE impoact What direction should we go?

Stephen W. Schondelmeyer, Pharm.D., Ph.D. Professor and DirectorPRIME Institute, University of Minnesota

Definitions & Status of Key TermsAccessOpportunity to buy an insurance plan (If you can afford it!)Choice & VoluntaryOpportunity to choose whos plan you buyBeneficiary can buy the low cost planPlans can avoid high cost patients (adverse selection)

Definitions & Status of Key TermsTransparencyRetail Price PublishedManufacturer Prices & Rebate Not DisclosedPBM Rebates & Switching Fees Not DisclosedPrivate MarketProgram Delivery Limited to PBMsNo Price Negotiation with Drug Firms

Are Drug Prices

Still an Issue?

Is there anyone who has not needed (or used) a prescription drug?Is there anyone who has never been sick a day in their life?Virtually everyone needs, has used, or will use drugs in their lifetime.

U.S. Outpatient & Total Drug Expend.as a % of GDP: 1988 to 2012Drugs as % of GDPSource: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 2002 and in HCFA Form 64.Rx Expend: All SettingsRx Expend: Outpatient Only

What Tools Can Be Used?Preferred Lists (Formulary) & Prior AuthorizationAddress drug overuse & inappropriateCounter-balance Direct to Consumer AdsDisease Management programsBetter Than Best Price RebatesNot volume, but market share movementUse Pharmacy & Therapeutics CommitteeTiered Co-Payments Can HelpBut Only If They Are Actually Collectable by PharmacyCurrently Pharmacy Bears Cost (25%-75% of copays uncollected)Fraud & Abuse of Prescription DrugsOxyContin: Encourage Pain Med Use / Discourage Street MedCard Holder Misuse: Selling Card to Someone Else to Use

U.S. Outpatient & Total Drug Expend.as a % of NHE: 1988 to 2012Drugs as % of NHESource: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 2002 and in HCFA Form 64.Rx Expend: All SettingsRx Expend: Outpatient Only

Dynamic MarketChange at All LevelsManufacturerWholesalerPharmaciesPatientsPayersPBMsMany Moving PartsNew Business ModelsTransparency & Intense Scrutiny

What is the Source of Drug Spending Growth?

Medicaid Rx Payment Components: 1980 to 2002 (Current Dollars)$ / RxDrug Product PaymentDispensing Fee PaymentSOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical Assistance Programs, National Pharmaceutical Council, 1976 to 1998.$7.06$12.01$57.63$17.72$27.06$48.97

Factors Contributing to Change in Medicaid Drug Expenditures:1992 to 2002 (Constant $)Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 199810-year % ChangeTotal Drug Expenditures 303% current $ 215 % inflation adjusted $

Discount Cards & DiscountsWhat is a discount?Lower net price at the time of purchase.Lower price that is based on market forces.What is NOT a discount?Rebates not passed on to the end payer.A $600 subsidy; it helps but is not a discountA generic price already available in market

Recent Drug Price Increases:Jan 31, 2004 vs Jan 31, 2003(Average Wholesale Price)Source: Compiled by the PRIME Institute, University of Minnesota from data found in First Databank PriceChek PC, February 2004.% Change in Price 2004 v 2003Consumer Price Index All Items 2.2%

Dynamic Market

Drug Purchasing

Role of Coverage & Price is the equivalent of writing a blank check to pharmaceutical firms.Coverage without consideration of price-- Stephen W. Schondelmeyer PRIME Institute, 2002

Dollar Spent

(Drug Expenditures)

Discounts

Dollar Charged

(Drug Prices)Are Drug Prices Still an Issue?

Source: Compiled by the PRIME Institute, Univ. of Minnesota from data found in PriceChek PC and Penn. PACE program annual reports.Top Brand Drugs Most Used by ElderlyWholesale Cost / Year: 1997 to 2004WholesaleCost $/YearBrand Drugs

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