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Translating to the language of payers Actuarial analyses of new drug therapies

Gregory Warren, FSA, MAAA Vice President, Pharmacy Actuarial Consulting 303-714-1022 | gregory.warren@optum.com

Why are actuaries important stakeholders?

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Major steps

Formulary design process (for example) The P&T Committee represents just one of the stakeholder perspectives

Set objectives: • Lower drug cost • Increase rebates • Adjust for new brand,

generic and specialty drugs

Evaluate last year’s formulary

Implementation plan: • P&T committee • Business impact

committee (BIC) • Communication plan

Update formularies

• Utilization shifts from various copay tier designs

• Impact of clinical programs

• Expected rebates • Forecast net plan cost

Model decision scenarios

Actuaries touch most of the process “behind the scenes.”

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Actuaries touch most of the process “behind the scenes.”

Pro

cess

Formulary design process (for example) The P&T Committee represents just one of the stakeholder perspectives (continued)

Collaborative and comprehensive evaluation • Analysis of prior auths, step edits, quantity limits • Project potential rebates and net plan costs • Divisional VPs develop recommendations

Final formulary decisions • Impact on member health • Impact on client net plan costs • Impact on sales and marketing • Impact on organizational profitability

Final formulary recommendations Final formulary recommendations from clinical perspective regarding: formulary inclusion/exclusion, copay tier placement and clinical program design

Clinical Team Evaluate clinical effectiveness, design clinical programs

Pharmacy and Therapeutics (P&T) Committee Typically chaired by clinical team leader, consists of mainly practicing physicians

Business Impact Committee (BIC) Often chaired by leader of trade relations, consists of senior leadership

Industry Relations Team Negotiate rebates with manufacturers

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Operations Health care services

Sales, marketing, brand

Information technology Finance/actuarial

Corporate communications

Legal/compliance

Corporate Divisions

• Organizational structures vary by company depending on history, leadership and corporate strategy • The larger the organization, the more likely the product segments contain dedicated services • Cross-division buy-in often required for major decisions, requiring careful organizational navigation

•Medical dir. •Pharmacy dir. •Care mgmt. •Disease mgmt. •Provider contracting

•Wellness programs

•Enrollment and billing

•Customer service

•Claims adjudication

•Member grievance

•Mail in/out

•Sales •Account mgmt. •Broker mgmt. •Brand and advertising

•Product development

•Market research

•Help desk •Hardware and software mgmt.

•System design •Benefit configuration

• IT networks •Business engineering

•Actuarial services

•Underwriting •Finance and accounting

• Investments •Procurement •Disbursement •PMO

Health plan organizational structure (for example) Various stakeholders can perceive value differently

CMO COO CMO CTO CFO

CEO

Product segments

Commercial •Large employer •Small employer • Individual •Exchange

Medicaid and government programs

Medicare

Ancillaries •Dental, vision •Life, disability

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• Health insurance is a promise to pay for health care expenses incurred over a specified period of time

• Both the number and frequency of claims are moving targets, with regular changes including but not limited to: – Charges for services and products – The frequency with which products and services are utilized – The emergence of new products and services

• Accurately predicting the uptake and cost of new products is among the most important issues facing “risk-bearing” entities

• Plans, PBMs, ACOs, and IDNs need to identify and manage the associated financial risks and opportunities

Health insurance context Financial risks must be managed

So what role do actuaries play?

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• Health care actuaries measure and manage financial risks

• Actuaries create models to evaluate the current financial implications of uncertain future events [in terms of per-member-per-month (pmpm) costs]

• Actuaries measure risks in terms of $ – Assume clinical benefits will be reflected in the $ – “Trend” is one of the most important risk factors considered:

Trend represents the anticipated change in the underlying dynamics of cost and utilization from one time period to another

– Pharmacy trends may be more difficult to estimate than other health care categories (e.g., due to volatility in patient demand, physician detailing, pipeline launches)

– Different scenarios are modeled, and among other considerations, will inform the impact of utilization management, rebates and distribution channels

• Actuaries differentiate products (or not) based on the probability and size of $ risks or opportunities – Can a product bend the “trend curve”?

Actuaries (some basics)

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Context Strategy Tactics

Unique knowledge of the actuarial services for health care

We offer unique knowledge of the actuarial culture, roles, language, methods, and value drivers within various health care, risk-bearing entities Our offerings are ultimately designed to enhance the relevance and impact of strategies and tactics designed for risk-bearing stakeholders:

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We have been engaged in multiple translational engagements in the past year

Translating to language of payers Variety of translational and modeling engagements

Gain early insight into payer budget expectations for pipeline products, to strengthen negotiation position and optimize access and margin (NPH product)

Apply actuarial modeling through Formulary Design Modeling (FDM), Payer Addressable Burden (PAB) modeling and Client Return-on-Investment (ROI) Modeling to create overall financial value proposition for life sciences companies to use with financial/actuarial stakeholders within health plans and PBMs

Educational workshop series providing insight into the changing business dynamics of health plans and PBMs, the roles actuaries and financial analytics play in those organizations and how life sciences companies can better reach these stakeholders with their financial value propositions

Provide multiple actuarial perspectives on the methodologies and assumptions upon which budget impact models and internal long-range planning financial models are built and differences from how health plans, PBMs and/or ACOs might build models for similar purposes

Craft risk/gain-share agreement designs to optimize access and margin and actuarially model array of potential results to both mitigate and exploit associated risk

Health technology pipeline

Actuarial modeling

Evolving Healthcare Ecosystem Series (actuarial workshop)

Actuarial review of life sciences’ models

Risk/gain-share agreements

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Optum actuarial consultants educational workshop highlights:

Evolving health care eco-system series outline: Payer and provider actuarial perspectives for life sciences organizations

Health plan economics

Health plan mechanics and value assessment

Impact of the Affordable Care Act

Risk adjustment and population health management

Providers’ journey through the Affordable Care Act

The evolving role of “quality”

Inside health plan pricing and plan design decisions

How health plans and pharmacy benefit managers (PBMs) interact and assess pharmaceutical value

Effect of changing insured population demographics

Evolution of payers in the new health care eco-system

Emergence of Accountable Care Organizations (ACOs) and risk-bearing providers

Qualitative and quantitative sides of “quality”

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• Web-based tool that provides insight into payers’ forecasts of costs of pipeline products

– Access to supporting documentation – Updated quarterly by Optum – User technical support – Includes consulting to enable optimal business application of insights

• Beginning 18 to 24 months prior to launch

• Annual subscription per therapeutic area or for all therapeutic areas

• Access to customized models enabling sensitivity analyses that show variability of resultant per-member-per-month (pmpm) pharmacy costs due to changes in key input variables

Health technology pipeline Gain early insight into payer budget expectations for pipeline products, to strengthen negotiation position and optimize access and margin

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• Provides a formal actuarial review of model to identify differences from actuarial and financial analytics approaches to similar modeling inside health plans, PBMs and ACOs

• May be applied to: – Budget impact models – Cost-effectiveness models – Long-range planning financial models

• Identifies opportunities to holistically meet the needs of health plan and PBM decision-makers, including:

– Traditional P&T committee members – Clinical/medical decision-makers inside health plans, PBMs and ACOs – Actuaries and financial decision-makers

• Recommended during the development or refinement of models

Actuarial review of life sciences models Provide multiple actuarial perspectives on the methodologies and assumptions upon which budget impact models and internal long-range planning financial models are built and differences from how health plans, PBMs and/or ACOs might build models for similar purposes

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Our actuarial modeling engagements have begun as stand-alone “translational” projects but can now be seen as important sequential phases in assessing, building and delivering financial value propositions to actuarial and financial analytics decision-makers in health plans, PBMs and ACOs.

Actuarial modeling

Payer ROI

modeling

Payer addressable

burden modeling

Actuarial go-to-market assessment

Formulary design

modeling

Risk-share agreement

design and

modeling

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Main Condition

Comorbidity

Episodes of care define the opportunity for products to “bend the cost curve” based on the total costs of care and the pharmacy versus medical cost mix.

Example output Payer addressable burden-based on episodes of care

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Considers dozens of scenarios of product coverage, utilization management, rebates, insurance type, and market dynamics in order to anticipate likely stakeholder levers and decisions

Example output Formulary design modeling

Middle scenario High scenario Low scenario

Election rate High High Low

Pricing tier Non-preferred brand Specialty tier Non-preferred brand

Step therapy Neither Company 1 Company 2

Market share for Company 2 Equal 90% 10%

Rebate % (Company 1/ Company 2) 13.5% for both 7%/25% 20%/7%

Year 1

Commercial pmpm $0.96 $1.01 $0.22

Estimated Medicare pmpm $2.89 $3.04 $0.65

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InputsPerformance Measure Option 1Distribution LognormalGap Method 15+Confidence Interval 95%

Pharmacy Claim Cost 120% represented as Member Cost Share 100% represented as Formulary Rebate % 100% represented as

Number of Members 25000

`Calculations

High Average LowAverage competitor products' persistence (weeks): 14.53 14.53 14.53Average product persistence (weeks): 18.14 18.00 17.86Difference in persistence with product (weeks): 3.6 3.5 3.3

Annual Medical Claim Savings per Week of Persistence: $301 $303 $306Difference in Annual Medical Claims with Product: $1,087 $1,053 $1,018

Annual Therapy Class Average Pharmacy Claim Cost: $4,763 $4,763 $4,763Annual Therapy Class Average Member Cost Share: ($667) ($667) ($667)Annual Therapy Class Pharmacy Plan Cost: $4,097 $4,097 $4,097Annual Therapy Class Formulary Rebates: ($953) ($953) ($953)Annual Therapy Class Net Payer Cost: $3,144 $3,144 $3,144

Annual Product Pharmacy Claim Cost: $5,716 $5,716 $5,716Annual Product Member Cost Share: ($667) ($667) ($667)Annual Product Pharmacy Plan Cost: $5,050 $5,050 $5,050Annual Product Formulary Rebates: ($953) ($953) ($953)Annual Product Net Payer Cost: $4,097 $4,097 $4,097

Difference in Annual Net Payer Cost with Product: ($953) ($953) ($953)

Outputs

Annual Payer ROI with Product: 14% 11% 7%

Days Supply + 15Existing Payer Data

Example output Payer ROI modeling estimates the incremental financial “investment” and “return” of specific products relative to their competitors

Models for various client types utilizing “proxy client data” from Optum databases, with sensitivity testing of various population and assumption scenarios

represented as a ratio of product's cost to competitive drugs represented as a ratio of product's member cost share to competitive drugs

represented as a ratio of product's formulary rebates to competitive drugs

Contract guarantee

Payer “return”

Payer “investment”

Payer “ROI”

Risk Share Agreement AnalysisPayer ROI Model

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1. Use ETGs to group historic episode costs

2. Actuarially project future episode costs

3. Apply study outcomes to episode costs to calculate guaranteed savings

4. If actual savings are less, reimburse payer

5. If actual savings are more, share in the excess

Payout risk

Shared savings opportunity

Risk-share strategies Structures, balancing risks/opportunities, selling, contracting, reconciliation and risk mitigation

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1. Risk-share design Develop risk-share strategies based on concepts and value quantification outlined in the Payer ROI Model • Identify trends in risk-sharing arrangements generally and specific

to particular therapies

• Identify risk-sharing best practices by analyzing the Optum risk-sharing database, which includes more than 180 publicly available sources

• Develop processes to manage the selling, contracting, reconciliation and risk mitigation of prioritized strategies

• Identify likelihood of success with various agreement structures, guarantee metrics/levels, and the associated financial risks and opportunities

• Engage Optum Technical Expert Panel (TEP) of payers and other stakeholders to screen the risk-sharing agreement design

Potential next steps

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2. Support pilot Support pilot with a key account providing assistance with negotiation, implementation, management and reconciliation

3. Implementation plan Develop the negotiation and implementation plan for taking the risk-share agreement to market more broadly

4. Negotiation strategy and support Ongoing analytics and strategic support throughout communications with payers regarding formulary positioning, pricing and contracting

Potential next steps (continued)

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Greg Warren, FSA, MAAA Vice President, Pharmacy Actuarial Consulting

Greg has worked as a health care actuary for 20 years, providing strategic and financial risk guidance to payers, providers and employers in the public and private health care markets. His expertise includes actuarial projections as well as analytical and financial reporting for Medicare, Medicaid and commercial health plans, government entities, accountable care organizations, self-funded employers, pharmacy benefit managers, pharmacies and life sciences companies.

Speaker bio

Greg has led the client reporting, business analytics and sales finance areas of a Fortune 50 company operating some of the largest retail, mail and specialty pharmacy operations in North America and has had executive responsibilities in a large pharmacy benefit manager overseeing the finance, underwriting, actuarial, client reporting, business analytics and pharmacy network relations functions.

Thank you. Contact information: Gregory Warren, FSA, MAAA Vice President, Pharmacy Actuarial Consulting 303-714-1022 | gregory.warren@optum.com

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