Translating to the language of payers

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1 Translating to the language of payers Actuarial analyses of new drug therapies Gregory Warren, FSA, MAAA Vice President, Pharmacy Actuarial Consulting

2 Why are actuaries important stakeholders?

3 Formulary design process (for example) The P&T Committee represents just one of the stakeholder perspectives Major steps Evaluate last year s formulary Model decision scenarios Update formularies Set objectives: Lower drug cost Increase rebates Adjust for new brand, generic and specialty drugs Utilization shifts from various copay tier designs Impact of clinical programs Expected rebates Forecast net plan cost Implementation plan: P&T committee Business impact committee (BIC) Communication plan Actuaries touch most of the process behind the scenes. 3

4 Formulary design process (for example) The P&T Committee represents just one of the stakeholder perspectives (continued) Process 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 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 recommendations Final formulary recommendations from clinical perspective regarding: formulary inclusion/exclusion, copay tier placement and clinical program design Final formulary decisions Impact on member health Impact on client net plan costs Impact on sales and marketing Impact on organizational profitability Actuaries touch most of the process behind the scenes. 4

5 Health plan organizational structure (for example) Various stakeholders can perceive value differently Product segments Commercial Large employer Small employer Individual Exchange Medicaid and government programs Medicare Ancillaries Dental, vision Life, disability Health care services Medical dir. Pharmacy dir. Care mgmt. Disease mgmt. Provider contracting Wellness programs Operations Enrollment and billing Customer service Claims adjudication Member grievance Mail in/out Corporate Divisions Sales, marketing, brand Sales CEO Account mgmt. Broker mgmt. Brand and advertising Product development Market research Corporate communications Legal/compliance CMO COO CMO CTO CFO Information technology Help desk Hardware and software mgmt. System design Benefit configuration IT networks Business engineering Finance/actuarial Actuarial services Underwriting Finance and accounting Investments Procurement Disbursement PMO 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 5

6 Health insurance context Financial risks must be managed 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 6

7 So what role do actuaries play?

8 Actuaries (some basics) 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? 8

9 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: Context Strategy Tactics 9

10 Translating to language of payers Variety of translational and modeling engagements We have been engaged in multiple translational engagements in the past year Evolving Healthcare Ecosystem Series (actuarial workshop) 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 Health technology pipeline Gain early insight into payer budget expectations for pipeline products, to strengthen negotiation position and optimize access and margin (NPH product) Actuarial review of life sciences models Actuarial modeling 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 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 Risk/gain-share agreements 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 10

11 Evolving health care eco-system series outline: Payer and provider actuarial perspectives for life sciences organizations Optum actuarial consultants educational workshop highlights: Health plan economics Inside health plan pricing and plan design decisions Health plan mechanics and value assessment How health plans and pharmacy benefit managers (PBMs) interact and assess pharmaceutical value Impact of the Affordable Care Act Effect of changing insured population demographics Risk adjustment and population health management Providers journey through the Affordable Care Act Evolution of payers in the new health care eco-system Emergence of Accountable Care Organizations (ACOs) and risk-bearing providers The evolving role of quality Qualitative and quantitative sides of quality 11

12 Health technology pipeline Gain early insight into payer budget expectations for pipeline products, to strengthen negotiation position and optimize access and margin 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 12

13 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 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 13

14 Actuarial modeling 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 go-to-market assessment Payer addressable burden modeling Formulary design modeling Payer ROI modeling Risk-share agreement design and modeling 14

15 Example output Payer addressable burden-based on episodes of care 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. Main Condition Comorbidity 15

16 Example output Formulary design modeling Considers dozens of scenarios of product coverage, utilization management, rebates, insurance type, and market dynamics in order to anticipate likely stakeholder levers and decisions 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 $

17 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 Risk Share Agreement Analysis Payer ROI Model Inputs Performance Measure Option 1 Distribution Lognormal Gap Method 15+ Confidence Interval 95% Pharmacy Claim Cost 120% represented represented as a ratio as of product's cost to competitive drugs Member Cost Share 100% represented represented as a ratio as of product's member cost share to competitive drugs Formulary Rebate % 100% represented as represented as a ratio of product's formulary rebates to competitive drugs Number of Members ` Calculations High Average Low Average competitor products' persistence (weeks): Average product persistence (weeks): Difference in persistence with product (weeks): Annual Medical Claim Savings per Week of Persistence: $301 $303 $306 Difference in Annual Medical Claims with Product: $1,087 $1,053 $1,018 Annual Therapy Class Average Pharmacy Claim Cost: $4,763 $4,763 $4,763 Annual Therapy Class Average Member Cost Share: ($667) ($667) ($667) Annual Therapy Class Pharmacy Plan Cost: $4,097 $4,097 $4,097 Annual 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 $5,716 Annual Product Member Cost Share: ($667) ($667) ($667) Annual Product Pharmacy Plan Cost: $5,050 $5,050 $5,050 Annual 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 Existing Payer Data Days Supply + 15 Annual Payer ROI with Product: 14% 11% 7% Contract guarantee Payer return Payer investment Payer ROI 17

18 Risk-share strategies Structures, balancing risks/opportunities, selling, contracting, reconciliation and risk mitigation Payout risk Shared savings opportunity 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 18 18

19 Potential next steps 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 risksharing 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 19

20 Potential next steps (continued) 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 20

21 Speaker bio 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. 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. 21

22 Thank you. Contact information: Gregory Warren, FSA, MAAA Vice President, Pharmacy Actuarial Consulting Confidential property of Optum. Do not distribute or reproduce without express permission from Optum.

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