2012 Health Meeting June 13-15, 2012

2012 Health Meeting June 13-15, 2012 Session #89 TS: Specialty Drugs Michael Einodshofer, RPh, MBA Raulo S. Frear, Pharm.D. Jason Bradley Gomberg, FSA, MAAA, FCA Moderator Ashlee Mouton Borcan, FSA, MAAA Primary Competency Results-Oriented Solutions

Plan Cost Society of Actuaries Site of Care Optimization for Specialty Infusions Specialty Pharmacy Market $75B $80B market 15% 20% trend Cost ~40X traditional Rx On average over $2,000/ 30 day Rx 50% Medical and 50% Pharmacy Benefit 50% top 100 drugs by 2016; 8 of top 10 drugs Over 50% late-stage products in pipeline Next five years about 25% - 33% of pipeline drugs will require professional administration. Sources: 1. IMS data report. 2. PBM trend reports from Medco, Caremark and ESI Cost. 3. Based on avg Walgreens traditional prescript ion costs. 4. Based on actual claims through Walgreens specialty central fill. 5. Evaluate Pharma Publication 2010. 6. EMD Serona Digest 2011. 2 1

Plan Cost Understanding Medical Benefit Savings Opportunities 4 Primary Components Four key focus areas Site of care optimization Physician office specialty drug distribution Clinical management Fee schedule and contract management 3 Site of Care Optimization A straightforward solution to address outpatient hospital infusion costs while increasing quality and member satisfaction 4 2

Plan Cost Polling Question #1 Many specialty drugs require a provider to administer the drug. Examples include Remicade and Tysabri which each can cost between $15,000 and $90,000 or more per year. Administration can occur at different sites of care such as the physician office, outpatient hospital, or home infusion. Has your organization analyzed cost variance for the same drug administered at different sites of care? 1. YES 2. NO 3. What s a site of care again? 5 Question - What is Site of Care Optimization? Top 3 answers according to Google: Website optimization services??? UBC product lifecycle optimization??? Katrina, the Tsunami, and point of care testing optimization??? Answer: An emerging cost-saving discipline that leverages cost variance within different healthcare locations that provide essentially the same healthcare services. Common locations for infusion include the physician office, the patient s home, an infusion suite, or the outpatient hospital. 6 3

Plan Cost Site of Care Optimization to Manage Medical Pharmacy Costs Site of Care Optimization Move the patient from high cost of care delivery settings to lower cost of care alternate treatment sites (aka ATS ) A somewhat unique lever to manage drug spend No perfect parallel to traditional pharmacy spend management Higher Cost (Outpatient) Lower Cost ATS (MDO, Infusion Centers, HIT) Provides the opportunity for client to keep coverage the medical benefit OR convert to pharmacy claims. 7 Polling Question #2: Remicade, an infused specialty drug used for various inflammatory disorders, is very often the #1 infused drug by allowable amount for a commercial payer. What is the average annual dollar savings available to a payer if a member utilizing Remicade is shifted out of the outpatient hospital facility to an alternate treatment site? Assume drug dose and frequency of administration remain constant. 1. $500 2. $5,000 3. $12,000 4. $19,000 8 4

Plan Cost What is Site of Care Optimization? Site of care optimization can be used to help moderate costs within areas such as infusion, radiology, and laboratory services Specialty infusion site of care optimization Moving infusions from high cost sites of care (typically outpatient hospital) to alternate treatment sites while maintaining the same drug, dose and dosing frequency can generate savings of 20% 60% savings per infusion 1 1 Data based on internal analysis on 5,371,227 commercial managed care lives from 1/2008 through 12/2010 9 Site of Care Optimization - Overview Maximizing opportunities at the outpatient hospital site of care Reduce costs by transferring non-self administered drugs to the most cost-effective and clinically appropriate site of care Shift from outpatient hospital to alternative sites Move patients from high cost/high risk setting to low cost/low risk setting Achieve higher provider and member satisfaction Typical drug related medical benefit costs by site of care* Home Infusion 10% 40% All Others (ER, ESRD, etc.) 5% 45% Infusion savings by shifting site of care can exceed 60% Patient s drug, dose, frequency and prescribing physician remain unchanged. Outpatient Hospital *Based on Walgreens internal analysis Physician Office 10 5

Plan Cost Industry Statistics Supporting Site of Care Optimization (Drug cost only Commercial Plan) The top 25 infused drugs cost 110% more when billed from an outpatient hospital instead of an alternate treatment site 1 Drug cost savings of approximately $38 million per 1 million lives can be achieved for a commercial plan if the top 25 infusions and injections are moved from the outpatient hospital to an alternate treatment site $8.5 million savings on non-chemotherapy drugs within top 25 Impacting less than 0.1% of covered lives Approximately $19,000 of savings per patient annually Administration fees are also typically 50% - 100% higher at the outpatient facility 1 Data based on internal analysis on 5,371,227 commercial managed care lives from 1/2008 through 12/2010. 11 Site of Care Optimization Industry Data - Outpatient Hospital Non-chemo drugs Code Drug ATS rate Outpatient hospital rate J1745 J2323 INFLIXIMAB INJECTION NATALIZUMAB INJECTION Chemo drugs $63.4/unit $3134/claim $8.35/unit $2424/claim $129.04/unit $5790/claim $13.30/unit $3748/claim Code Drug ATS rate Outpatient hospital rate J9035 J2505 BEVACIZUMAB INJECTION INJECTION, PEGFILGRASTIM 6MG $59.61/unit $1867/claim $2,881.83/unit $2886/claim $128.87/unit $10,328/claim $5,297.60/unit $5501/claim Percent (per unit) difference 103.27% 59.35% Percent (per unit) difference 116.17% 83.83% Data based on internal analysis on 5,371,227 commercial managed care lives from 1/2008 through 12/2010. 12 6

Plan Cost Site of Care Optimization Savings Each patient that shifts site of care can create material economic value and INCREASE member satisfaction. Walgreens client data large MCO Code Drug Total Patients Avg Annual Savings per impacted member Total Annual Savings J1300 Eculizumab Inj 4 $98,500 $394,000 Site of care optimization can impact a low number of patients but deliver high economic value to the payer or employer Patients with potential site of care optimization savings of greater than $300,000 have been identified within client data. Lower coinsurance and more convenient setting are well received by patients leading to higher satisfaction. 13 Traditional PBM PA Edit Savings vs. Site of Care Optimization Savings Typical prior authorization program for branded traditional drug Cost per 30 day Rx: $210 Avg fills per year 7 Estimated annual cost per utilizing member: $1,470 # of members denied to achieve savings of $394,000 268 MCO PA denial rate 20% # of members subjected to PA to achieve savings of $394,000 1,340 14 7

Plan Cost Estimated Savings Estimate for Sample Client 15 Site of Care Optimization In Reverse Highmark preparing for reimbursement change Pittsburgh Business Times by Kris B. Mamula Date: Friday, August 13, 2010, 12:50pm EDT A billing change being considered by the University of Pittsburgh Medical Center will triple the cost of chemotherapy without improving the quality of care, Highmark President and CEO Dr. Ken Melani said Friday. UPMC has indicated to Highmark that it is considering shifting chemotherapy billing for four oncology practices to a hospital outpatient setting from physician's offices, resulting in significantly higher reimbursement without affecting care. These oncology groups provide the majority of cancer treatment in the region. The hospital is allowed to make the billing change under terms of a long-term contract between the insurer and hospital network. Highmark s long-term contract with UPMC expires June 30, 2012. "They have every legal right to make a move," Melani said, "but it's an ethical issue." "Nothing will change clinically," he added. "It's a financial change. Dan O'Malley, Highmark's market president for the western region, estimated the billing change will cost the insurer $120 million annually, which ultimately will have to be borne by all ratepayers in the form of higher premiums. http://www.bizjournals.com/pittsburgh/stories/2010/08/09/daily39.html 16 8

Plan Cost Site of Care Preferences Payer Survey Treatment efficacy Provides the poorest treatment efficacy Provides the greatest treatment efficacy Provides the poorest cost efficacy Cost efficacy Provides the greatest cost efficacy Physician s office 17% 34% Physician s office 15% 20% Hospital outpatient department 49% 13% Hospital outpatient department 77% 5% Infusion clinic 6% 40% Infusion clinic 4% 36% Home care 29% 14% Home care 5% 39% Physician s office Percentage of payers Ability to manage/track costs Provides the poorest ability to manage/track costs Provides the greatest ability to manage/track costs 21% 27% Percentage of payers Will your organization actively try to shape/influence site-of-care dynamics? Will not try (1) or Will probably not try (2) Will probably try (4) or Will try (5) Fall 2010 n = 103 Mean 3.50 22% May or may not try (3) 19% 58% Hospital outpatient department 54% 13% Fall 2009 n = 99 Mean 3.17 47% May or may not try (3) 19% 34% Infusion clinic 7% 41% Percentage of payers Home care 17% 24% Source: dsn specialty pharmacy, Summer 2011 Waste Management Payers value specialty pharmacy for mitigating waste, cutting costs by Alaric DeArment Percentage of payers 17 Benefit Design Influence on Member Behavior Case Study Misaligned incentives between patient and payer $42,000 $8,250 Plan Cost Acute Care Setting $42,200 $9,075 $825 $200 Patient Co-pay Total Cost Walgreens Specialty Care Center 42 y/o female with chronic condition Receiving infusion of high-cost specialty medication in the acute care setting Payer informed patient preferred site of care would be an alternate treatment site. Patient referred to Walgreens Patient preferred to receive treatment in acute care setting due to lower copay when compared to alternate setting. Potential total savings realized could have been ~ 80% however, due to misaligned incentives, patients out of pocket increased ~ 400% 18 9

Plan Cost Polling Question #3 Based on the data presented today, how relevant is this savings from an actuarial perspective? 1. Relevant, I anticipate having discussions within my organization on this topic. 2. Interesting, but I don t see this gaining traction within my organization. 3. Not relevant, because the savings isn t material enough to warrant further discussion. 4. Not applicable 19 Infusion Suites as an Alternate Treatment Site Different types of suites available Sites of care for patients with chronic illnesses requiring administration of infusion and injectable medications Lower cost, more convenient alternative to hospital outpatient departments Physicians are beginning to move away from providing these services in office Payers are looking for cost effective site of care management for patients 20 10

Plan Cost Walgreens Specialty Care Centers Treatment room Community pharmacy specialty care center 21 11

5/30/2012 Specialty Pharmacy: Health Plan Implications Raulo S. Frear, Pharm.D. General Manager Definition Specialty pharmaceuticals are generally high-cost (<$600.00 /claim or /month s supply) medications, and usually exhibit one or more of the following characteristics: Prescribed for people with complex or chronic medical conditions, Are injected or infused, however, some may be taken by mouth; Have unique monitoring, storage or shipment requirements; and Require additional education and support from a health care professional. 1

5/30/2012 RegenceRx Statistics Generics Brands Specialty Total Members 1,159,972 1,159,972 1,159,972 Utilizing Members 482,009 217,520 18,872 TotalRxs 2,217,204 580,742 38,652 Ingredient Cost/Rx $ 21.63 $ 169.05 $ 910.36 Plan Paid/Rx $ 16.31 $ 125.03 $ 859.67 Cost PMPM $ 15.15 $ 28.49 $ 10.13 Member Cost Share 31.4% 26.8% 5.8% Source: RegenceRx Commercial Utilization Report, 4Q2011 Express Scripts Key Metrics PBM Adjudicated Claims 2011 by PMPY Spend Source: 2011 Express Scripts Drug Trend Report 2

5/30/2012 Specialty Drug Trend 2011 (Actual) 2014 (Projected) Source: 2011 Express Scripts Drug Trend Report Selected Pipeline Medications for Inflammation PIPELINE MEDICATION LAUNCH BEING LAUNCHED FOR? PHARMACY/ MEDICAL tofacitinib(po) 2012 Rheumatoid Arthritis Revenue forecast:$1.7 billion in peak sales by 2017. FDA decision in August 2012. Pharmacy apremilast(po) 2013 Psoriasis, Psoriatic Arthritis. Inhibits inflammatory cytokines. Pharmacy fostamatinib(po) 2013 Oral SYK (spleen tyrosine kinase) inhibitor for RA. Pharmacy Aubagio(PO) 2012 Relapsing Remitting Multiple Sclerosis Pharmacy dimethyl Fumarate (PO) 2012 Relapsing Remitting Multiple Sclerosis. $2.1 billion in peak sales by 2018. Pharmacy laquinimod(po) 2013 Relapsing-remitting multiple sclerosis. May have issues with liver toxicity. Pharmacy Lemtrada(IV) 2013 Relapsing Remitting Multiple Sclerosis. Currently approved for CLL Medical 3

5/30/2012 Selected Specialty Pipeline Medications for Cancer PIPELINE MEDICATION LAUNCH BEING LAUNCHED FOR? Adult Philadelphia chromosome-negative (Ph-) acute lymphoblastic leukemia (ALL) Marqibo (IV) 2012 (vincristinesulfate liposome injection) PHARMACY/ MEDICAL Medical Taltorvic -PO 2012 Soft-Tissue and Bone Sarcomas. Pharmacy pertuzumab Breast cancer, possibly given in (IV) 2012 combination with Herceptin. Medical Zaltrap(IV) 2012 Metastatic colorectal cancer, regardless of K-RAS mutation status. Medical bosutinib(po) 2013 Chronic myelogenous leukemia Pharmacy Actimid(PO) 2013 multiple myeloma and myelofibrosis. Pharmacy Selected Specialty Pipeline Medications for Cancer (cont) PIPELINE MEDICATION LAUNCH BEING LAUNCHED FOR? PHARMACY/ MEDICAL BiovaxID vaccine (SC) 2013 Non-Hodgkin s Lymphoma Medical cabozantinib (PO) 2013 Castration-resistant prostate cancer Pharmacy enzalutamide PO 2013 Oral androgen receptor antagonist. Under investigation for castrationresistant prostate cancer Pharmacy Omapro (PO) 2013 Imatinib-resistant chronic myeloid leukemia (CML) Pharmacy regorafenib (PO) 2013 Kidney Cancer/ Colorectal Cancer Pharmacy 4

5/30/2012 Selected Specialty Pipeline Medications for Hepatitis C, Cystic Fibrosis PIPELINE MEDICATION LAUNCH BEING LAUNCHED FOR? PHARMACY/ MEDICAL Quad (PO) 2012 Locteron (SC) 2013 Four drug combination for the treatment of HIV/AIDS Controlled-release interferon-alfafor hepatitis C Pharmacy Pharmacy Peg-Interferon Lambda (SC) 2013 Interferon-lambda for hepatitis C Pharmacy VX-809 (PO) 2015 Cystic Fibrosis with delf508 mutation. Given with Kalydeco, Positive results from Phase II trial. Pharmacy Rx Benefit Opportunities Rx Plan design 5 tiers, rather than 4 takes advantage of F vs NF designation Mandatory use of preferred vendor contracts Medical benefit medication billed using NDC level retrievable data ideal Required specialty shipment to health systems/hospital outpatient puts member in the middle Move to alternative treatment site w/ndc level data ideal 5

5/30/2012 Medical Benefit Opportunities Medication Cost Integration (MCI) benefit design Lower member financial responsibility at designated (contracted) vendors/networks Out of network/vendor claims Do not accumulate to MOOP Provider may balance bill Coordinate all provider type contracts that allow for medication billing under single team/system DME, HI, HH, Provider Office, Hospital Outpatient Medication Cost Integration Sample Benefit Design Tier Basic -Medications < $ XXX Expanded -Medications > $ XXX Combined deductible and maximum out of pocket Generic $5 10 % Formulary $25 20% Non- Formulary $50 30% 4 6

5/30/2012 Rx/Medical UM Opportunities Formulary Management Utilization Management Medication Policies coordinated across therapeutic classes Step therapy & Prior authorization Quantity limits & Waste management Pathways Rebate negotiation Preferred vendor (pricing) contracts/site of Care optimization Site of Care Optimization Analysis Results Non Chemo at Outpatient Hospital Code Drug Current Allowed Repriced Allowed Savings Available J1745 Infliximab Inj $4,933,204 $3,292,480 $1,640,717 (33.3%) J2323 Natalizumab Inj $2,945,859 $2,429,637 $516,239 (17.5%) J1300 Eculizumab Inj $660,833 $463,863 $196,970 (29.8%) J2353 Octreotide Inj $617,071 $523,639 $93,424 (15.1%) J1569 Gammagard Liq Inj $512,368 $248,249 $264,123 (51.5%) J0129 Abatacept Inj $396,198 $319,492 $76,703 (19.4%) J0180 AgalsidaseBeta Inj $347,429 $257,970 $89,463 (25.8%) J2796 Romiplostim Inj $339,585 $286,630 $52,962 (15.6%) J1566 J0585 Immune Globulin, powder Injection, onabotulinum $301,518 $144,721 $156,797 (52%) $280,229 $230,113 $50,106 (17.9%) Total $11,334,294 $8,196,794 $3,137,504 (27.7%) 2011 Walgreen Co. All rights reserved. 14 7

5/30/2012 Site of Care Analysis Member Savings Non Chemo at Outpatient Hospital Code Drug Total Patients Avg Annual Savings per impacted member Total Annual Savings J1745 Infliximab Inj 927 $3,539 $3,281,000 J2323 NatalizumabInj 238 $4,338 $1,032,000 J1300 Eculizumab Inj 5 $78,800 $394,000 J2353 Octreotide Inj 68 $2,748 $186,864 J1569 GammagardLiq Inj 76 $6,950 $528,200 J0129 AbataceptInj 165 $930 $153,400 J0180 AgalsidaseBeta Inj 7 $25,560 $178,900 J2796 Romiplostim Inj 11 $9,628 $105,900 J1566 J0585 Immune Globulin, powder 24 $13,100 $313,600 Injection, onabotulinum 703 $143 $100,300 Total 2,224 $14,574* $6,274,000 2011 Walgreen Co. All rights reserved. 15 Questions??? 8

Specialty Trend Outlook Session 89 TS SOA Health Meeting June 2012 Presented by Jason Gomberg, FSA Actuary June 15, 2012 Agenda Biologic Overview Biosimilar Opportunities Coupon Programs Case Study Hepatitis C 2 June 15, 2012 [Enter presentation title in footer] May 30, 2012 1

Biologic Overview Traditional Generic Drug versus Biologic Traditional generics Identical Chemically Easy to manufacture Clear pathway Therapeutic equivalentsts Biologic Impossible to recreate exact copy Require cell-lines for production Manufacturing patent issues Immunogenicity issues Enbrel Biosimilar Term used to describe officially-approved subsequent versions of innovator biologic products 3 June 15, 2012 Challenges-Approval Process Draft guidance released February 9, 2012 Risk based Totality of Evidence Drug by drug Stepwise approach Prove drugs are highly similar to reference product Differences allowed for inactive components Conduct fingerprint like analysis of therapeutic protein product Interchangeable Produce same clinical result in any given patient European differences Allows justifications of product differences on case-by-case basis Require post-marketing monitoring just like innovator 4 June 15, 2012 [Enter presentation title in footer] May 30, 2012 2

Biosimilar Opportunities Total 4% to 5% of total healthcare spend 2010 Commercial Population Biologic Estimated Cost PMPM Biologic Drug Medical Benefit Drug Benefit Total Enbrel $0.01 $1.70 $1.71 Remicade 1.36.08 1.44 Humira.01 1.30 1.31 Copaxone.01.94.95 Avastin.84.00.84 Neulasta.73.09.82 Avonex.00.70.70 Rituxan.54.01.55 All Other 2.99 3.32 6.31 Total $6.49 $8.14 $14.63 Source: Milliman 2010 proprietary data for a large, multi-payer commercial population. 5 June 15, 2012 Biosimilar Opportunities 12-year exclusivity 12-year in US Exclusivity Expiration for 2010 Historical Biologic Drug Cost of $14.63 PMPM 2011 2012 2013 2014 2015 2016 PMPM $8.79 $0.15 $1.06 $2.37 $0.36 $1.50 Percentage 60.1% 1.0% 7.2% 16.3% 2.4% 10.2% Cumulative % 60.1% 61.1% 68.3% 84.6% 87.0% 97.2% Source: Milliman 2010 proprietary data for a commercial population. Exclusivity is not a barrier for biosimilar market in US However, physician / existing patient acceptance is 6 June 15, 2012 [Enter presentation title in footer] May 30, 2012 3

Biosimilar Cost Savings IMS Health estimates cost savings between 20% and 30% of brand cost Similar to global market to date Plan designs may or may not drive higher utilization Lower copays lead to higher utilization typically Demand curve is more inelastic for high cost patients though New patients more likely to use Many existing patients likely to be grandfathered 7 June 15, 2012 Biosimilar Projected Savings 4 scenarios for 10,000 life employer group Scenario 1: 100% acceptance, 30% discount, $50 copay Scenario 2: 75% acceptance, 25% discount, $50 copay Scenario 3: 50% acceptance, 25% discount, $0 copay Scenario 4: 25% acceptance, 20% discount, $0 copay Scenario 1-4 Savings (PMPM) Assumption 2014 2015 2016 Scenario 1 $ 2.13 $ 2.63 $ 3.61 Scenario 2 $ 1.37 $ 1.69 $ 2.33 Scenario 3 $ 0.83 $ 1.11 $ 1.45 Scenario 4 $ 0.36 $ 0.48 $ 0.62 8 June 15, 2012 [Enter presentation title in footer] May 30, 2012 4

Coupon Programs 9 June 15, 2012 Coupon Programs Pharmaceutical manufacturers provide member cost sharing assistance Done at point of sale in pharmacy Not in claim system Some examples: Enbrel Pay up to $750 / month limiting member to $10 After 6 months, limit member to $10 / month Avastin Covers 80% of cost over $100 $4,000 / year maximum value Verbally ask if you make under $100,000 / year Not allowed in Medicare, other government programs and state of MA and VT 10 June 15, 2012 [Enter presentation title in footer] May 30, 2012 5

Coupon Program Perspective PBM / Health Plan Undermines formulary management Eliminates member out of pocket cost Further reduces consumerism Pharma Perspective Helps consumer afford drugs Improves adherence and effectiveness Popular with physicians and consumers Compare ROI of rebates versus coupons 11 June 15, 2012 Coupon Programs Health Plan Strategy Close formulary Only for drugs with alternatives Not popular with doctors Consumers want access Prior authorizations Barriers do not eliminate problem Negotiate higher rebates Lobby states to copy MA and VT Work with pharma Put in income level cut-offs Only cover cost sharing other than deductibles 12 June 15, 2012 [Enter presentation title in footer] May 30, 2012 6

Hepatitis C 13 June 15, 2012 Hepatitis C Case Study Hepatitis C At least 3 million Americans infected 1 Estimate 22% of patients diagnosed 2 Two new drugs approved May 2011 Incivekand Victrelis Cost to treat condition increase of 300% Improvement of clinical outcomes Health plan may get benefit in 20 years when member does not need a liver transplant 1 Centers for Disease Control and Prevention (CDC), NHANES III, 1999-2000, 2001-02, 2003-04, 2005-06. http://www.cdc.gov/nchs/nhanes.htm. 2 Consequences of Hepatitis C, Milliman, Inc., May 2009 14 June 15, 2012 [Enter presentation title in footer] May 30, 2012 7

Hepatitis C Case Study (cont.) Incivek and Victrelis impacts Only for genotype 1 75% of patients Require genetic testing to eliminate unnecessary utilization Utilization increase Improved viral response rate Add on to current therapy Reduce therapy duration New therapies in development and expected in 2014 What other disease classes exist that can have a $2.00 PMPM impact from a single launch? 15 June 15, 2012 Projecting Specialty Trends Communication with Pharmacy Department essential Determine if new therapy is replacement or add-on Determine if new therapy changes class dynamic First oral agent Diseases with pent up demand Will other established drugs chase new price Genetic testing What is being done to limit access of expensive drugs Understand new plan design impacts Tier placement Rebate implications 16 June 15, 2012 [Enter presentation title in footer] May 30, 2012 8

Questions? [Enter presentation title in footer] May 30, 2012 9