TABLE OF CONTENTS...Estimated Distribution of Federal Spending* on Health Care, 2015-2024 2 TOTAL...

TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Chapter 1 Medicines in Medicare. . . . . . . . . . . . . . . . . . 7

Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

Chapter 2 Medicines in Medicaid. . . . . . . . . . . . . . . . . . 55

Chapter 3 Medicines in Veterans Affairs . . . . . . . . . . . . 73

Chapter 4 Medicines in 340B . . . . . . . . . . . . . . . . . . . . . 83

Introduction

INTRODUCTION This chart pack features key facts about prescription medicines in four major government programs—Medicare, Medicaid, the US Department of Veterans Affairs (VA), and the 340B program.

Medicare insures many of the nation’s retirees and disabled persons and covers medicines primarily through Part D and B. Payments for medicines in Medicare Part D are negotiated by competing private health plans. Payments for medicines under Part B, which are generally injected or infused by a physician, are based on the average of prices negotiated by doctors and other purchasers. In contrast, Medicaid and the VA use price controls in providing drug coverage to low-income people and veterans, respectively.

Information displayed here has been compiled from a variety of public and independent sources and is intended to serve as a useful guide in conversations about the value of biopharmaceuticals in government programs.

1

Introduction

Sources of Prescription Drug Spending in the United States Together, Medicare and Medicaid account for approximately one-third of outpatient drug spending.

2

Source: CMS¹

*Values may not sum to totals due to rounding. **Includes employer-sponsored health insurance, including federal, state, and local government employee health benefits, administered through private health plans.

Sales

Private Health Insurance**

43.5%

Medicare 27.5%

Medicaid & CHIP 8.3%

Patient Out-of-Pocket

16.9%

Department of Defense (Includes TRICARE) 1.8%

Other Third Party 0.9%

US Prescription Drug Spending, 2013*

Veteran's Affairs 1.0%

TOTAL $271.1 BILLION

Introduction

Federal Spending on Health Care Over the next decade, total sales of brand medicines are projected to be 9% of federal spending in Medicare, Medicaid, VA, and TRICARE.

3

Source: Avalere Health³ *Values may not sum to totals due to rounding. **Excludes administration and distribution costs

Estimated Distribution of Federal Spending* on Health Care, 2015-20242

TOTAL $13.7 TRILLION

2% Other Health Care Professionals

19% Physicians

2% Generic Drugs

42% Hospitals

6% Home Health

7% Nursing Homes

1% Durable Medical Equipment 9%

Brand Drugs** 11% Other

Notes and Sources

Introduction

Notes and Sources 1. Centers for Medicare & Medicaid Services. National health expenditures table 19: type of expenditure and program, calendar year 2013.

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccounts Historical.html. Updated December 2014. Accessed April 2015.

2. These figures do not include prescription drugs used during inpatient hospital stays or drugs provided through Medicaid managed care plans. The Medicaid figure does not include the state share of Medicaid drug spending but does contain a portion of physician-administered medical benefit drugs. The Medicare Part B estimate does not include payments for drugs that are part of bundled payment systems (eg, dialysis) or for medical benefit drugs provided to Medicare Advantage enrollees. The figure for Part D includes spending by Medicare Advantage plans that offer drug coverage and spending on the Retiree Drug Subsidy (RDS). Finally, the figures do not include the impact of any beneficiary premiums for Medicare Parts B and D, which would reduce the net impact to the federal government.

3. Avalere Health. Federal spending on brand pharmaceuticals. http://avalere.com/expertise/life-sciences/insights/access-avaleres-latest-research-on-brand-name-prescription-drug-spending. Published March 2015. Accessed May 2015.

5

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountshttp://avalere.com/expertise/life-sciences/insights/access-avaleres-latest-research-on-brand-name-prescription-drug-spendinghttp://avalere.com/expertise/life-sciences/insights/access-avaleres-latest-research-on-brand-name-prescription-drug-spendinghttp://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html

1 • Medicare

MEDICINES IN MEDICARE

7

Medicare is the government program that insures many of the nation’s retirees and disabled persons. The following sections contain information on prescription drug coverage under Parts D and B, which provide payment for the majority of medicines under the Medicare program.

Outpatient prescription medicines are generally covered by Medicare Part D, which was implemented in 2006 to provide prescription drug coverage. Part D is administered by private plans using a competitive bidding system, which achieves savings and helps preserve incentives for continued innovation in biopharmaceutical research and development.

Injected or infused vaccines and medicines that are administered or purchased by physicians are generally covered by Medicare Part B, similar to the “medical benefit” provided under commercial insurance plans.

1 • Medicare

Medicare’s retail pharmacy benefit is called Part D, and Medicare’s medical benefit is called Part B.

8

As Is Common With Commercial Insurance, Medicare Covers Medicines Under Two Benefits

Source: McDonald R1

1 • Medicare—Part D: 101 9

*Does not sum to 100% due to rounding. LIS is low-income subsidy. Total Part D and Medicare enrollment is based on 2012 intermediate estimates. **Includes Veterans Affairs, Indian Health Service, Federal Employees Health Benefits Program, and TRICARE for Life †Includes Retiree Drug Subsidy (RDS)

Sources of Outpatient Drug Coverage for Seniors and the Disabled Medicare Part D plans covered about 35.7 million beneficiaries out of 52.3 million total Medicare enrollees in 2013, either through Medicare Advantage or stand-alone Prescription Drug Plans.

Source: Kaiser Family Foundation2

Prescription Drug Coverage Among Medicare Beneficiaries, 2013*

3.2M 6%

13.4M 26%

24.4M 47%

All Other**

Part D LIS Enrollees

Part D Non-LIS Enrollees

Employer Subsidy†

11.3M 22%

1 • Medicare—Part D: 101

Part D Share of Medicare Expenditures

10

Medicare Part D drug spending, including brand and generic, made up 10.9% of Medicare spending in 2014.

*Not including outlays for mandatory administration. Medicare Advantage (Part C) expenditures are apportioned among Parts A, B, and D according to type of service. Does not sum to 100% due to rounding Source: CBO3

PART D: Prescription Drugs,

10.9%

PART B: Physician and Other

Professional Services,

43.9%

PART A: Hospitals,

45.4%

TOTAL $597 BILLION

Medicare Spending,* 2014


Part D Standard Benefit in 2010

11

From 2006 to 2010, prior to implementation of the Affordable Care Act, Part D’s standard coverage included a deductible, an initial benefit, a “coverage gap,” and then catastrophic coverage for those with the highest drug spending. Beginning in 2011, beneficiaries receive a 50% discount on brand drugs while in the coverage gap.

*Indexed annually to program growth Source: CMS4

Structure of Part D Defined Standard Benefit, 2010


Phaseout of Coverage Gap in Part D Began in 2011

12

Beginning in 2011, beneficiaries receive a 50% discount on brand drugs while in the coverage gap, at a cost to brand manufacturers of $41 billion over 10 years (2012-2021).5

*Under the defined standard benefit in 2016 (for non-low-income enrollees), thecoverage gap occurs between the initial coverage limit of $3,310 in total drug spendingand an estimated $7,515 in total drug spending, where catastrophic coverage begins.7 Sources: PwC5; HHS6; CMS7

Declining Brand Cost Sharing in the Coverage Gap*

42M, 90%

Standard Deductible,**

35%

0%

25%

50%

75%

100%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

❶ Biopharma companies provide a 50% discount on brands,immediately reducing the gap by two-thirds starting in 2011.

❷ The gap was furtherreduced starting in 2013 due to increased plan coverage.

❸ Starting in 2020, enrollees pay 25%cost sharing in the gap, same as pre-gap cost sharing in a standard plan.

Since 2010, 9.4M Medicare beneficiaries have saved over $15B on prescription drugs as a result of coverage gap discounts—an average savings of about $1,598 PER BENEFICIARY.6


Leading Therapy Classes in Part D

13

Ninety-two percent of Part D enrollees filled at least one prescription in 2011; Part D enrollees filled an average of 4.3 prescriptions per month.8

*Number of prescriptions standardized to a 30-day supply Sources: MedPAC8; PhRMA analysis of data from MedPAC9

Top-10 Therapeutic Classes of Drugs Under Part D by Volume (2012)9

Volume of Part D Prescriptions, Millions*

Percentage of Part D Prescriptions

1 Antihypertensives 171.4 10.5%

2 Antihyperlipidemics 163.8 10.0%

3 Beta Adrenergic Blockers 104.4 6.4%

4 Diabetic Therapy 102.6 6.3%

5 Antidepressants 93.1 5.7%

6 Diuretics 85.8 5.2%

7 Peptic Ulcer Therapy 83.9 5.1%

8 Analgesics (Narcotic) 76.1 4.6%

9 Calcium Channel Blockers 71.4 4.4%

10 Thyroid Therapy 60.2 3.7%

Top 10 Total 1,012.7 61.9%

Total, All Classes 1,639.9 100.0%


*Impact of Part D on good refill adherence (≥80% of days covered); numbers are unadjusted descriptive statistics

Part D Expanded Coverage and Improved Treatment Adherence for Seniors As a result of Part D, 90% of Medicare beneficiaries have comprehensive drug coverage, and previously uninsured patients with heart failure are more likely to be adherent to their heart treatment regimens. Better adherence improves health and saves money on hospitalizations.

Sources: PhRMA analysis of data from The Lewin Group and CMS10; Donahue JM, et al.11


*In comparing results across studies, magnitudes vary due to differences in data and methodology.

Part D Implementation Improved Enrollees’ Access to Medicine and Reduced Out-of-Pocket Costs Peer-reviewed and academic literature confirms Medicare Part D substantially reduced out-of-pocket costs and increased access to medicines for seniors.*

Sources: Joyce GF, et al.12; Duggan MG, Scott Morton F13; Lichtenberg F, Sun SX14; Yin W, et al.15; Ketcham JD, Simon K16


Part D Reduced Costs and Improved Access to Medicines for Beneficiaries Previously Without Coverage and for Disabled Beneficiaries

16

*Cost figures are before coverage gap discounts as enacted in the Affordable Care Act. Source: Amundsen Group19

Beneficiaries Who Gained Drug Coverage Under Part D17

Disabled Beneficiaries18 Under Age 65 Who Gained Drug Coverage Under Part D

2005 Before Part D

2007 After Part D

Average Out-of-Pocket Cost per Patient per Month* $73 $42

$31 in Monthly

Savings

$23 in Monthly

Savings

2005 Before Part D

2007 After Part D

Average Out-of-Pocket Cost per Patient per Month* $50 $27


Part D Costs Less Than Initially Projected

17

Total Part D costs are 45% lower than the initial 10-year cost estimate.

Sources: CBO20; IMS Institute for Healthcare Informatics21

Congressional Budget Office Projections and Tallies of Total Part D Spending for 10-Year Period 2004-2013 ($ Billions)20

$0

$100

$200

$300

$400

$500

$600

$700

$800

2004 Estimatefor 2004-2013

2014 Estimatefor 2004-2013

$769.9

$421.1

The bids are coming in, and the pricing is coming in better than anticipated, and that is likely a reflection of the competition that's occurring in the private market.

– Peter Orszag, Former CBO Director21

“ “

$348.8B less


Source: PhRMA analysis of data from CMS22 *All original projection estimates are rounded to the nearest dollar.

Average Beneficiary Premiums Are Far Below Original Estimates According to the Centers for Medicare & Medicaid Services, “[t]hese very modest increases in premiums . . . are going to make medications more affordable to Medicare beneficiaries.”

Average Monthly Part D Beneficiary Premium, 2006-2015

42M, 90%

$37 $40

$44 $47

$50 $53

$56 $61

$64 $60

$23 $22 $25

$28 $29 $30 $30 $30 $31 $32

$0

$10

$20

$30

$40

$50

$60

$70

$80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Original Projection* Actual


Beneficiary Satisfaction With Part D

19

Several surveys show that about 90% or more of Part D enrollees are satisfied with their coverage and indicate that their coverage works well.23,24

Sources: KRC Survey for Medicare Today23; MedPAC24


Seniors Rate Part D Highly on Many Measures

20

Beneficiaries report that their plans are affordable and work well.

Sources: KRC Survey for Medicare Today25; CMS26

Seniors and people with disabilities are benefitting from steady prescription drug premiums and a competitive and transparent marketplace for Medicare drug plans. 26

– Marilyn Tavenner, CMS Administrator, 2011-2015

“ “ 78%

81%

85%

86%

90%

92%

93%

Plan Covers All Medicines

Total Out-of-Pocket Costs Are Reasonable

Monthly Premium Is Affordable

Copays Are Affordable

Plan Has Good Customer Service

Understand How Plan Works

Plan Is Convenient to Use

July 2014 Ratings


Source: KRC Survey for Medicare Today27

*Excludes nonrespondents **Dual eligibles are those enrolled in both Medicare and Medicaid. Duals not choosing a Part D plan are autoenrolled in a plan. †Limited income is defined as less than $15,000.

Satisfaction With Part D Is High Among the Most Vulnerable Beneficiaries Dual eligibles and beneficiaries with limited incomes exhibit the highest satisfaction rate with their drug coverage.

86%

95% 92%

81%

13% 1% 8%

19%

All Seniors WithMedicare Rx

Dual Eligibles** Limited Income† Individuals WithDisabilities

Satisfied

Not Satisfied

Satisfaction of Selected Groups of Part D Enrollees, 2014*

1 • Medicare—Part D: Choice and Competition

a

22

Competition in Part D Promotes Access and Helps Control Costs

Source: PhRMA analysis of data from MedPAC28

Mechanisms to PROMOTE ACCESS

• Plans compete for enrollees based on benefits, quality, and price.

• Beneficiaries have a choice among plans to best meet their needs.

• Enrollees can switch plans each year during open enrollment.

• Premium and cost-sharing subsidies assist low-income beneficiaries.

• There are no limits on the number of prescriptions.

• Defined standard benefit and formulary rules set minimum plan requirements.

Mechanisms to CONTROL COSTS

• Plans are paid based on competitive bids submitted each year.

• Plans and manufacturers negotiate discounts for covered medicines.

• Plans attract enrollment through lower premiums and quality of coverage.

• Plans use tiered formularies, tiered copays, and other utilization management tools.

• Rebates and discounts are passed on to beneficiaries and the government.


Large, powerful purchasers, who may represent as many as 63 million to 125 million covered lives,29 negotiate discounts and rebates on drugs in Part D. The Medicare Trustees report rebates are often as high as 20%-30% on brand medicines,30 helping to drive plan savings, which sponsors use to reduce costs for beneficiaries.31

23

Beneficiaries Save Through Plan Competition and Manufacturer Negotiations

Sources: AIS29; Medicare Trustees30; GAO31


Illustrative Pharmaceutical Lifecycle

24

New pharmaceutical medicines face competition after a relatively short period on the market. Over time, brand drugs lose patent protection and generic drugs are introduced, achieving significant cost savings for the Part D program. Savings free up program resources for the next generation of medical advances from innovators.

*For brand medicines with more than $100 million in annual sales in 2008 dollars, which account for 97% of sales of the brand medicines analyzed Sources: PhRMA32; Grabowski H, et al.33; Tufts CSDD34

DRUG DEVELOPMENT

FDA Approval Generics Enter

Market

Average time to develop a new medicine

AT LEAST 10 YEARS

Average time on market before generic entry

12.6* YEARS

BRAND DRUG LIFESPAN GENERICS

Most brand drugs face competition

from other brands


The prescription drug lifecycle is projected to save the Part D program $56 billion between 2006 and 2014.

25

The US Prescription Drug Lifecycle Generates Savings for Part D

Source: Kleinrock M35 *IMS estimate based on analysis of medicines with anticipated loss of patent protection, 2011-2014

$28.5

$27.5

$0

$10

$20

$30

$40

$50

$60

Estimated Cumulative Savings, 2006-2014

Billi

ons

Drugs Expected to Lose Patent Protection 2011-2014*

Drugs That Lost Patent Protection 2007-2010

Estimated Savings = $56B

Estimated Cumulative Savings 2006-2014


Since 2006, the daily cost for the top-10 therapy areas in Medicare Part D has fallen by nearly half, and projections show that the daily cost of therapy will drop again by more than a third by 2017.

26

The US Prescription Drug Lifecycle Promotes Innovation and Affordability

Source: Kleinrock M36

*The 10 therapeutic classes most commonly used by Part D enrollees in 2006 were: lipid regulators, angiotensin-converting-enzyme inhibitors, calcium channel blockers, beta blockers, proton pump inhibitors, thyroid hormone, angiotensin II, codeine and combination products, antidepressants, and seizure disorder medications.

Daily Cost of Top-10 Therapeutic Classes* Most Commonly Used by Medicare Part D Enrollees


Four out of Five Part D Prescriptions Are Generic

27

Before Part D, seniors used generic drugs at low rates, with about 54% generic utilization in 2005. Since Part D’s inception, generic utilization has steadily increased to 84% in 2013.

*Part D went into effect on January 1, 2006. Sources: PhRMA analysis of data from IMS Health Vector One National Audit37; Medicare Trustees38

Share of Brand and Generic Prescriptions

Generic 84%

Brand 16%

Generic 54%

Brand 46%

2005 (Prior to Part D*)37 2013 (in Part D)38


Beneficiaries Have Choice of Plans

28

Part D beneficiaries have 24 to 32 stand-alone Prescription Drug Plan (PDP) options in each state. Three-fourths of beneficiaries indicate that having a variety of plans to choose from is important to them.39

Sources: KRC Survey for Medicare Today39; Kaiser Family Foundation40

Number of Stand-Alone PDPs per State (2015)40


The Medicare Plan Finder, available on Medicare.gov, allows beneficiaries to enter their individual drug lists and find out which plans cover their medicines and their expected out-of-pocket costs for the year. Beneficiary choice of plans is a key feature of Part D’s competitive structure.*

29

Medicare Plan Finder Is a Tool for Beneficiaries to Help Make Part D Plan Selections Each Year

Source: Medicare.gov41 *It is important to know what is and is not reflected in Plan Finder drug prices to ensure the information is not interpreted in a misleading way. For example, Plan Finder drug prices may not reflect all negotiated rebates, and therefore do not reflect actual payments to manufacturers.

OPEN ENROLLMENT The annual open enrollment period is from October 15 to December 7 each year.

STAR RATINGS Plans are rated overall out of 5 stars, and Plan Finder provides information on how plans are performing on specific dimensions, such as customer service and patient safety.

1 • Medicare—Part D: Adherence and Outcomes

Due to a growing body of evidence, in 2012 the Congressional Budget Office (CBO) began recognizing reductions in other medical expenditures associated with increased use of prescription medicines in Medicare that were not taken into account when CBO originally estimated Part D's cost.

30

Better Use of Medicines Yields Significant Health Gains and Savings on Other Services

Sources: CBO42; Roebuck MC43

Recent evidence suggests Medicare savings due to better use of medicines may be 3 to 6 times greater than estimated by the CBO for seniors with common chronic conditions43:

• High cholesterol: more than 3 times greater • Congestive heart failure: nearly 4 times greater • Diabetes: more than 4 times greater • Hypertension: nearly 6 times greater

Pharmaceuticals have the effect of improving or maintaining an individual’s health . . . adhering to a drug regimen for a chronic condition such as diabetes or high blood pressure may prevent complications . . . taking the medication may also avert hospital admissions and thus reduce the use of medical services.

– CBO42

“

“


Implementation of Part D was associated with a $1,200 decrease in annual non-drug medical spending among enrollees with prior limited or no drug coverage,44 resulting in an overall savings of $13.4 billion in 2007, the first full year of the Part D program.45

31

Non-Drug Medical Spending Declined Significantly After Part D

*Other non-drug figure is a PhRMA estimate of the balance of the total amount and consists of home health, durable medical equipment, hospice, and outpatient institutional services. Sources: McWilliams JM, et al.44; Afendulis CC, et al.45

Average Annual Reduction in Non-Drug Medical Spending in 2006 and 2007, for Beneficiaries Gaining Drug Coverage Through Part D


Shrinking Costs of Part D

32

Estimated 2014 costs for Part D are less than half the initial Congressional Budget Office (CBO) projections, and the savings are even larger after considering reductions in other medical expenditures as a result of increased use of medicines.46

Sources: CBO46-48; Schneeweiss S, et al.49

Estimated FY 2014 Part D Costs

$153B $70B $63.3B

March 2004 CBO Projection

for 201447

April 2014 CBO Estimate

for 201448

April 2014 Baseline Less

Non-Drug Savings49


$0

$10

$20

$30

$40

$50

$60

Billi

ons

$26.9 Billion

$22.4 Billion

Estimated 10-Year Savings to Medicare From Improved Adherence to CHF Medications, 2013-2022

Improving Adherence Could Yield Additional Savings

33

Improving adherence to congestive heart failure (CHF) medicines could yield federal savings of $22.4 billion over 10 years.

Source: Dall TM, et al.50

Savings to Medicare from gaining Part D coverage

Additional savings to Medicare if adherence reaches recommended levels


Researchers found that gaining Medicare Part D prescription drug coverage was tied to an 8% decrease in hospital admissions for seniors overall, with higher reductions for certain conditions.

34

Reductions in Hospital Admissions Following Part D Implementation

Source: Kaestner R, et al.51

51


A recent study found that for Part D enrollees with Parkinson’s disease, higher adherence to antiparkinson therapy and longer duration of use were associated with lower health care utilization and expenditures.

35

Improved Adherence for Parkinson’s Patients Linked With Reduced Health Care Utilization and Expenditures

*Over 19 months Source: Wei YJ, et al.52


Research shows that the phaseout of the coverage gap is making medicines more affordable in the gap and has resulted in patients adhering better to prescribed therapies.

36

Coverage Gap Phaseout, to Date, Has Improved Medication Adherence for Diabetes

Note: Adherence measured as proportion of days covered Source: Zeng F, et al.53

42M, 90%

Standard Deductible,**

35%

Reduced Deductible,

10%

-6.7% -7.4%

In 2010, ADHERENCE to diabetes medications DECREASED in the coverage gap for beneficiaries with partial or no gap coverage.

Partial coverage

No coverage

In 2011, when the 50% discount on brand medicines began, ADHERENCE to diabetes medications in the coverage gap IMPROVED for beneficiaries who previously had partial or no coverage.

Partial coverage

No coverage

6.5%

3.0%


A recent study found that the introduction of Part D significantly reduced depressive symptoms among older adults, and that such gains in mental health grew stronger over time.

37

Part D Improved Health Outcomes, Significantly Reducing Depressive Symptoms Among Seniors

Source: Ayyagari P, Shane D54

Trends in Depressive Symptom Scores for Medicare-Eligible Individuals (65-70 years of age)

1.2

1.24

1.28

1.32

1.36

1.4

2004 2006 2008 2010

Mea

n De

pres

sive

Sym

ptom

Sco

re

Year

Introduction of Part D


Mortality rates dropped and years of life lost were reduced significantly in areas most impacted by the implementation of Part D. The estimates suggest that as many as 27,000 more beneficiaries were alive mid-2007 as a result of Part D implementation.

38

Cardiovascular-Related Mortality Dropped Significantly Following Part D Implementation

Source: Dunn A, Shapiro AH55

1 • Medicare—Part B

Approximately 600 Part B drugs are administered in various locations.

39

Part B Generally Covers Injected and Infused Medicines Across Several Settings

Sources: MedPAC56; Medicare.gov57


Part B Medicines Represent Significant Medical Advances

40

Sources: Nature.com58; FDA59,60; Upchurch KS, Kay J61; Lupus Foundation of America62

BREAKTHROUGHS IN CANCER Monoclonal antibodies are transforming the treatment of cancer and a broad range of other diseases. After many decades of research, there are nearly 20 monoclonal antibodies approved by the Food and Drug Administration to treat cancer. Antibody-based therapy has become an established strategy—and one of the most successful and important—for treating cancer in the past 15 years.58-60

AVOIDING DEBILITATING DISEASE Biologic disease-modifying antirheumatic drugs (DMARDs) have transformed treatment for rheumatoid arthritis (RA) patients in the past 15 years. “Current therapy for RA is such that progression from symptom onset to significant disability is now no longer inevitable, and RA patients can anticipate comfortable and productive lives on medical therapy . . . Patients with RA can now expect to experience a quality of life that previously was unavailable to patients during the 20th Century.”61

REMARKABLE ADVANCE AGAINST A CHALLENGING DISEASE A biologic medicine is providing an important breakthrough for patients with an unpredictable and life-threatening autoimmune disease. “This is a historic day for the millions of people with lupus and their families around the world who have waited more than 50 years for a treatment breakthrough for lupus.”62

– Sandra C Raymond, President and CEO of the National Lupus Foundation of America


AVERAGE SALES PRICES (ASP): • Enacted in Section 303(c) of the Medicare Modernization Act • Intended to reflect the weighted average of all manufacturer sales prices, net of rebates

and discounts (except Medicaid and certain federal and other purchasers) • Includes special rules for certain classes of drugs (eg, durable medical equipment,

infusion drugs, vaccines, biosimilars)

41

Current Part B Drug Reimbursement Methodology Is Average Sales Price + 6%

Note: Due to federally mandated sequestration, ASP was reduced in 2013 by 1.6% and is currently ASP + 4.3%. Sources: MMA63; Holtz-Eakin D, Zhong H64

6% ADD-ON PAYMENT HELPS COVER: • Geographic and provider purchasing variability • Shipping fees • Complex administration • Ongoing patient monitoring and education • Overhead for complex storing and handling requirements • Bad debt and beneficiary copayment collection


Discounts and rebates negotiated by doctors, hospitals, health systems, and other purchasers are factored into the Medicare Part B payment rate (called “Average Sales Price” or “ASP”) and can lead to lower costs to the Medicare program and beneficiaries.

42

In Part B, Beneficiaries Save Through Price Negotiations Between Manufacturers and Providers

Sources: 42 U.S.C. §1395w–3a (2003)65; MedPAC66


The Centers for Medicare & Medicaid Services’ (CMS’s) analysis of the ASP pricing mechanism found that for most higher volume drugs prices changed 2% or less, and prices for 17 of the top 50 drugs decreased.

43

Average Sales Price Is an Effective Pricing Mechanism for Part B

Source: CMS67


Prescription Drug Share of Part B Expenditures

44

Program spending on prescription medicines accounted for about 8% of Part B spending in 2012.

Note: Part B drug spending includes Part B-covered drugs administered in a physician’s office or furnished by suppliers and Part B drugs provided in hospital outpatient departments. It does not include Part B-covered drugs provided to patients with end-stage renal disease in dialysis facilities. Source: PhRMA analysis of data from MedPAC and CMS68

Part B Expenditures, 2012

TOTAL $240.6 BILLION

Physician Services and All Other Part B

Spending

Brand and Generic Drug Spending 8%

92%


Total Part B Drug Costs Have Been Relatively Stable

45

Since 2006, the annual total cost for drugs under the Medicare Part B program has shown little increase.

*2011-2012 are projections. Source: The Moran Company69

Average Sales Price-Based Payments Over Time ($ Billions)*

$0

$6

$12

$18

$24

$30

2006 2007 2008 2009 2010 2011 2012


While the Consumer Price Index for medical care (CPI-M) has increased since 2006, the volume-weighted Average Sales Price (ASP) for Medicare Part B drugs has remained essentially flat.

46

Average Price Growth in Medicare Part B Is Less Than Medical Inflation

Source: The Moran Company70

Weighted ASP vs CPI-M70

0

50

100

150

200

250

300

350

400

450

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

CPI-M

Wei

ghte

d AS

P

Weighted ASP

CPI-M

Weighted ASP Projected

1 • Medicare

Notes and Sources

48

1. McDonald R. Managing the intersection of medical and pharmacy benefits. J Manag Care Pharm. 2008;14(suppl 4):S7-S11.http://www.amcp.org/data/jmcp/JMCPSupp_S7-S11.pdf. Accessed December 2014.

2. Kaiser Family Foundation. Medicare: the essentials. Menlo Park, CA: Kaiser Family Foundation; 2013. http://kff.org/slideshow/medicare-the-essentials. Published July 2013. Accessed January 2015.

3. Pharmaceutical Research and Manufacturers of America calculation of Medicare benefit payment projections based on Congressional Budget Officedata. March 2015 Medicare baseline spreadsheet. http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2015-03-Medicare.pdf.Published March 9, 2015. Accessed May 2015.

4. Centers for Medicare & Medicaid Services. What is the donut hole? The Medicare Blog. http://blog.medicare.gov/2010/08/09/what-is-the-donut%C2%A0hole. Published August 9, 2010. Accessed May 2015.

5. PwC Health Research Institute. Implications of the US Supreme Court ruling on healthcare. Published June 2012.

6. US Department of Health and Human Services. Since 2010, 9.4 million people with Medicare have saved over $15 billion on prescriptiondrugs. Press release. http://www.hhs.gov/news/press/2015pres/02/20150224a.html. Published February 24, 2015. Accessed February 2015.

7. Centers for Medicare & Medicaid Services. Announcement of calendar year (CY) 2016 Medicare Advantage capitation rates and MedicareAdvantage and Part D payment policies and final call letter. http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2016.pdf Published April 2015. Accessed May 2015.

8. Medicare Payment Advisory Commission. Report to the Congress: Medicare payment policy. http://www.medpac.gov/documents/reports/mar14_entirereport.pdf. Published March 2014. Accessed December 2014.

9. Pharmaceutical Research and Manufacturers of America analysis based on Medicare Payment Advisory Commission data. Data book: healthcare spending and the Medicare program. www.medpac.gov/documents/publications/jun14databooksec10.pdf. Published June 2014.Accessed December 2014.

10. Pharmaceutical Research and Manufacturers of America analysis based on The Lewin Group. Beneficiary choices in Medicare Part D and planfeatures in 2006. Falls Church, VA: The Lewin Group; September 2006. Drug coverage data obtained from the following sources: Centers forMedicare & Medicaid Services, Current population survey; Kaiser Family Foundation State Health Facts Sheets; and National Conference ofState Legislatures. PhRMA analysis based on data from CMS. Medicare Advantage, CMS, Cost, PACE, Demo, and Prescription Drug PlanContract Report—Monthly Summary Report, data as of January 2011, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MCRAdvPartDEnrolData/Monthly-Contract-and-Enrollment-Summary-Report-Items/CMS1243099.html?DLPage=6&DLEntries=10&DLSort=1&DLSortDir=descending. Accessed May 2012.

http://www.amcp.org/data/jmcp/JMCPSupp_S7-S11.pdfhttp://kff.org/slideshow/medicare-the-essentialshttp://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2015-03-Medicare.pdfhttp://blog.medicare.gov/2010/08/09/what-is-the-donut%C2%A0holehttp://www.hhs.gov/news/press/2015pres/02/20150224a.htmlhttp://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2016.pdfhttp://www.medpac.gov/documents/reports /mar14_entirereport.pdfwww.medpac.gov/documents/publications/jun14databooksec10.pdf

1 • Medicare

Notes and Sources

49

11. Donohue JM, Zhang Y, Lave JR, et al. The Medicare drug benefit (Part D) and treatment of heart failure in older adults. Am Heart J.2010;160(1):159-165.

12. Joyce GF, Goldman DP, Vogt WB, Sun E, Jena AB. Medicare Part D after 2 years. Am J Manag Care. 2009;15(3):536-544.

13. Duggan M, Scott Morton F. The effect of Medicare Part D on pharmaceutical prices and utilization. National Bureau of Economic Researchworking paper w13917. Published April 2008.

14. Lichtenberg F, Sun SX. The impact of Medicare Part D on prescription drug use by the elderly. Health Affairs. 2007;26(6):1735-1744.

15. Yin W, Basu A, Zhang JX, Rabbani A, Meltzer DO, Alexander GC. The effect of the Medicare Part D prescription benefit on drug utilization andexpenditures. Ann Intern Med. 2008;148(3):1-14.

16. Ketcham JD, Simon K. Medicare Part D’s effects on elderly drug costs and utilization. National Bureau of Economic Research working paper14326. Published September 2008.

17. Patient cost excludes premiums but includes all patient contributions to drug costs, such as copayments, coinsurance, and any amountsapplied to the deductible.

18. “Disabled beneficiaries” refers to individuals younger than 65 who qualify for Medicare based on a determination of disability. Analysis doesnot include the Medicare-Medicaid dual eligible population, which had drug coverage in 2005 under Medicaid.

19. Amundsen Group analysis for Pharmaceutical Research and Manufacturers of America of Verispan longitudinal data. May 2008.

20. Pharmaceutical Research and Manufacturers of America analysis based on Congressional Budget Office data. Medicare Part D baselines for2004-2014.

21. Orszag P, as quoted in CBO lowers 10-year cost estimate of Medicare prescription drug benefit. January 30, 2007. Cited by: Aitken M,Berndt E. Medicare Part D at age five: what has happened to seniors’ prescription drug prices? Parsippany, NJ: IMS Institute for HealthcareInformatics; July 2011. http://www.imshealth.com/ims/Global/Content/Home%20Page%20Content/IMS%20News/IHII_Medicare_Part_D2.pdf.

22. All prior projection estimates are rounded to the nearest dollar. Original projections are taken from the 2004 Medicare Trustees report(p 164), which projected premiums for 2006-2013. Prior projection for 2014 is taken from the 2005 Medicare Trustees report (p 156). Priorprojection for 2015 is taken from the 2006 Medicare Trustees report, table V.C2 (p 165). Actual average premium figures taken fromCenters for Medicare & Medicaid Services. Medicare prescription drug premiums to remain steady for third straight year. Press release.https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2012-Press-releases-items/2012-08-06.html. Published August 6,2012. Accessed October 2012.

http://www.imshealth.com/ims/Global/Content/Home%20Page%20Content/IMS%20News/IHII_Medicare_Part_D2.pdfhttps://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2012-Press-releases-items/2012-08-06.html

1 • Medicare

Notes and Sources

50

23. Medicare Today. Seniors' opinions about Medicare prescription drug coverage: 9th year update. Washington, DC: KRC Research; 2014.http://www.medicaretoday.org/MT2014/KRC%202014%20SURVEY/KRC%20Survey%20of%20Seniors%20for%20%20Medicare%20Today%2007-25-2014%20FINAL.pdf. Published July 2014. Accessed January 2015.

24. Medicare Payment Advisory Commission. Report to the Congress: Medicare payment policy. Washington, DC: MedPAC; 2013.http://www.medpac.gov/documents/reports/mar13_entirereport.pdf?sfvrsn=0. Published March 2013. Accessed December 2014.


26. Centers for Medicare & Medicaid Services. Medicare prescription drug premiums projected to remain low. Press release. PublishedJuly 31, 2014.


28. Pharmaceutical Research and Manufacturers of America analysis based on Medicare Payment Advisory Commission data. Data book: healthcare spending and the Medicare program. Washington, DC: MedPAC; 2014. http://www.medpac.gov/documents/publications/jun14databookentirereport.pdf?sfvrsn=1. Published June 2014. Accessed April 2015.

29. Atlantic Information Services, Inc. Pharmacy benefit survey results: 4th quarter 2012 spreadsheet. http://AISHealth.com. AccessedFebruary 2013.

30. Medicare Trustees. The 2014 annual report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary MedicalInsurance Trust Funds. July 2014:150(footnote 63).

31. Overview of approaches to control prescription drug spending in federal programs: hearings before the Subcommittee on FederalWorkforce, Postal Service, and the District of Columbia, Committee on Oversight and Government Reform. House of Representatives; June24, 2009. Statement of John E. Dicken, Director, Health Care, Government Accountability Office. http://www.gao.gov/new.items/d09819t.pdf.

32. Pharmaceutical Research and Manufacturers of America. Drug discovery and development: understanding the R&D process. Washington,DC: PhRMA; 2014.

33. Grabowksi H, Long G, Mortimer R. Recent trends in brand-name and generic drug competition. J Med Econ. 2014;17(3):207-214.doi:10.3111/13696998.2013.873723. Accessed March 2014.

http://www.medicaretoday.org/MT2014/KRC%202014%20SURVEY/KRC%20Survey%20of%20Seniors%20for%20%20Medicare%20Today%2007-25-2014%20FINAL.pdfhttp://www.medpac.gov/documents/reports/mar13_entirereport.pdf?sfvrsn=0http://www.medicaretoday.org/MT2014/KRC%202014%20SURVEY/KRC%20Survey%20of%20Seniors%20for%20%20Medicare%20Today%2007-25-2014%20FINAL.pdfhttp://www.medicaretoday.org/MT2014/KRC%202014%20SURVEY/KRC%20Survey%20of%20Seniors%20for%20%20Medicare%20Today%2007-25-2014%20FINAL.pdfhttp://www.medpac.gov/documents/publications/jun14databookentirereport.pdf?sfvrsn=1http://www.gao.gov/new.items/d09819t.pdf

1 • Medicare

Notes and Sources

51

34. Tufts Center for the Study of Drug Development. Cost of developing a new drug. Briefing. Boston, MA: CSDD; 2014.http://csdd.tufts.edu/files/uploads/Tufts_CSDD_briefing_on_RD_cost_study_-_Nov_18,_2014..pdf. Published November 18, 2014. Accessed March 2015.

35. Kleinrock M. Cost savings in Medicare Part D: the prescription drug lifecycle. Danbury, CT: IMS Institute for Healthcare Informatics; August 2012.

36. Kleinrock M. Daily cost of Medicare Part D. December 2013 update. Danbury, CT: IMS Institute for Healthcare Informatics; December 2013.

37. Pharmaceutical Research and Manufacturers of America analysis based on IMS Health, Vector One®: National Audit data. Data extracted September 21, 2012.

38. Medicare Trustees. The 2014 annual report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. July 2014:150(footnote 63).

39. Medicare Today. Seniors' opinions about Medicare prescription drug coverage: 9th year update. Washington, DC: KRC Research; 2014:42. http://www.medicaretoday.org/MT2014/KRC%202014%20SURVEY/KRC%20Survey%20of%20Seniors%20for%20%20Medicare%20Today%2007-25-2014%20FINAL.pdf. Published July 2014. Accessed January 2015.

40. Kaiser Family Foundation. The Medicare prescription drug benefit fact sheet. Menlo Park, CA: Kaiser Family Foundation; 2014.www.kff.org/medicare/fact-sheet/the-medicare-prescription-drug-benefit-fact-sheet. Published September 2014. Accessed May 2015.

41. Medicare Plan Finder [image]. Medicare.gov Web site. www.medicare.gov/find-a-plan/questions/home.aspx. Accessed May 2015.

42. Congressional Budget Office. Offsetting effects of prescription drug use on Medicare’s spending for medical services. Washington, DC: CBO; November 2012.

43. Roebuck MC. Medical cost offsets from prescription drug utilization among Medicare beneficiaries. J Manag Care Pharm.2014;20(10):994-995.

44. McWilliams JM, Zaslavsky AM, Huskamp HA. Implementation of Medicare Part D and nondrug medical spending for elderly adultswith limited prior drug coverage. JAMA. 2011;306(4):402-409.

45. Afendulis CC, Chernew ME. State-level impacts of Medicare Part D. Am J Manag Care. 2011;17(suppl 12:S).

46. Congressional Budget Office. Offsetting effects of prescription drug use on Medicare’s spending for medical services. Washington, DC: CBO; November 2012.

http://www.medicaretoday.org/MT2014/KRC%202014%20SURVEY/KRC%20Survey%20of%20Seniors%20for%20%20Medicare%20Today%2007-25-2014%20FINAL.pdfwww.kff.org/medicare/fact-sheet/the-medicare-prescription-drug-benefit-fact-sheethttp://csdd.tufts.edu/files/uploads/Tufts_CSDD_briefing_on_RD_cost_study_-_Nov_18,_2014..pdf

1 • Medicare

Notes and Sources

52

47. Congressional Budget Office. March 2004 Medicare baseline. Published March 3, 2004.

48. Congressional Budget Office. April 2014 Medicare baseline. http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2014-04-Medicare.pdf. Published April 14, 2014. Accessed December 2014.

49. Schneeweiss S, Patrick A, Pedan A, et al. The effect of Medicare Part D coverage on drug use and cost sharing among seniors without priordrug benefits. Health Affairs. 2009;28(2).

50. Dall TM, et al. The economic impact of Medicare part D on congestive heart failure. Am J Manag Care. 2013;19:S97-S100.

51. Kaestner R, Long C, Alexander C. Effects of prescription drug insurance on hospitalization and mortality: evidence from Medicare Part D.The National Bureau of Economic Research. http://www.nber.org/papers/w19948. Published February 2014. Accessed May 2015.

52. Wei YJ, Palumbo FB, Simoni-Wastila L, et al. Antiparkinson drug adherence and its association with health care utilization and economicoutcomes in a Medicare Part D population. Value Health. 2014;17(2):196-204. doi: 10.1016/j.jval.2013.12.003.

53. Zeng F, Patel BV, Brunetti L. Effects of coverage gap reform on adherence to diabetes medications. Am J Manag Care.2013;19(4):308-316.

54. Ayyagari P, Shane D. Does prescription drug coverage improve mental health? Evidence from Medicare Part D. J Health Econ.2015;41:46-58. doi: 10.1016/j.jhealeco.2015.01.006.

55. Dunn A, Shapiro AH. Does Medicare Part D save lives? Federal Reserve Bank of San Francisco and the Bureau of Economic Analysis. WorkingPaper 2015-04. http://www.frbsf.org/economic-research/publications/working-papers/wp2015-04.pdf. Published February 2015. AccessedMay 2015.

56. Medicare Payment Advisory Commission. A data book: health care spending and the Medicare program. Published June 2014. AccessedMay 2015.

57. Your Medicare coverage. Medicare.gov Web site. http://www.medicare.gov/coverage/prescription-drugs-outpatient-limited-coverage.html.

58. Monoclonal antibodies currently FDA approved in oncology and their mechanisms of action. Nature Reviews Cancer Web site.http://www.nature.com/nrc/journal/v12/n4/fig_tab/nrc3236_T3.html. Published April 2012. Accessed May 2015.

59. US Food and Drug Administration. New molecular entity and new therapeutic biological product approvals for 2015.http://www.fda.gov/Drugs/DevelopmentApprovalProcess/DrugInnovation/ucm430302.htm. Accessed May 2015.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2014-04-Medicare.pdfhttp://www.nber.org/papers/w19948ttp://www.frbsf.org/economic-research/publications/working-papers/wp2015-04.pdfhttp://www.medicare.gov/coverage/prescription-drugs-outpatient-limited-coverage.htmlhttp://www.nature.com/nrc/journal/v12/n4/fig_tab/nrc3236_T3.htmlhttp://www.fda.gov/Drugs/DevelopmentApprovalProcess/DrugInnovation/ucm430302.htm

1 • Medicare

Notes and Sources

53

60. US Food and Drug Administration. New molecular entity drug and new biologic approvals. http://www.fda.gov/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/DrugandBiologicApprovalReports/NDAandBLAApprovalReports/ucm373420.htm. Accessed May 2015.

61. Upchurch KS, Kay J. Evolution of treatment for rheumatoid arthritis. Rheumatology. 2012;51(suppl 6): vi28-vi36.

62. Sandra C Raymond, as quoted in FAQ about BENLYSTA. National Lupus Foundation of America Web site.http://www.lupus.org/tristate/pages/pages/faq-about-benlysta. Updated April 4, 2011. Accessed May 2015.

63. Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub L No. 108-173, 117 Stat 2066 (2003).

64. Holtz-Eakin D, Zhong H. Medicare Part B drug reimbursement: why change a market-driven system that works well at controlling costs?Washington, DC: American Action Forum; 2011.

65. Social Security Act, Pub L No. 74-271, 49 Stat 620 (1935), §1847(a) as added through Medicare Prescription Drug, Improvement, andModernization Act of 2003, Pub L No. 108-173, 117 Stat 2239 (2003). www.ssa.gov/OP_Home/ssact/title18/1847A.htm. AccessedJanuary 2015.

66. Medicare Payment Advisory Commission. Report to the Congress: impact of changes in Medicare payments for Part B drugs. Washington,DC: MedPAC; 2007. http://www.medpac.gov/documents/reports/jan07_partb_mandated_report.pdf?sfvrsn=0. Published January 2007.Accessed January 2015.

67. Centers for Medicare & Medicaid Services. 2015 ASP drug pricing files. https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Part-B-Drugs/McrPartBDrugAvgSalesPrice/2015ASPFiles.html. Accessed April 2015.

68. Source for Part B prescription figures: Medicare Payment Advisory Commission. A data book: health care spending and the Medicareprogram. Published June 2014. Source for total Part B expenditures: Medicare Trustees. The 2014 annual report of the Boards of Trusteesof the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds; table III.C7, p. 96. Published July 2014.

69. The Moran Company. Trends in weighted Average Sales Prices for prescription drugs in Medicare Part B, 2006-2012. Published December2012.

70. The Moran Company. Trends in weighted Average Sales Prices for prescription drugs in Medicare Part B, 2006-2013. Published June 2014.

http://www.fda.gov/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/DrugandBiologicApprovalReports/NDAandBLAApprovalReports/ucm373420.htmhttp://www.lupus.org/tristate/pages/pages/faq-about-benlystawww.ssa.gov/OP_Home/ssact/title18/1847A.htmhttp://www.medpac.gov/documents/reports/jan07_partb_mandated_report.pdf?sfvrsn=0https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Part-B-Drugs/McrPartBDrugAvgSalesPrice/2015ASPFiles.html

2 • Medicaid

2 MEDICINES IN MEDICAID Medicaid provides health coverage for low-income and disabled individuals and is jointly funded by states and the federal government. Under the Affordable Care Act, states have the option to expand Medicaid to all low-income adults. Each state administers its own Medicaid program within broad federal guidelines. Some states administer pharmacy benefits directly, while beneficiaries in other states receive pharmacy benefits from Medicaid managed care plans. Federal law requires manufacturers to pay rebates on many medicines sold to Medicaid beneficiaries, and often states negotiate for additional discounts. Policies meant to reduce utilization of medicines in Medicaid often result in barriers to access for patients, and have been shown to be associated with poor health outcomes for beneficiaries.

55

2 • Medicaid

Brand Prescription Drugs Account for Approximately 3% of Total Medicaid Spending

56

Note: Professional services include physician and clinic, dental, and other professional services. Administration costs include federal and state administration and net cost of private insurance. Other health, residential, and personal care includes school health, work site, residential mental/substance abuse, some ambulance, and Medicaid home/community waivers.

Source: PhRMA analysis of data from CMS, HHS OIG, and The Lewin Group1

TOTAL $449.4B

Hospital Care 36.4%

Other Health, Residential, & Personal Care

18.4%

Professional Services 13.9% Nursing Facilities

10.4%

Home Health 6.5%

Brand Prescription Drugs 3.3%

Durable Medical Equipment

1.1%

Medicaid Spending, 2013

Generic Prescription Drugs 1.4%

Administration Costs 8.6%

2 • Medicaid

Prescription Drugs Are Projected to Be a Small Share of Medicaid Spending Through 2023 In 2013, Medicaid drug spending, including brands and generics, was $21.2 billion, while total Medicaid spending was $449.4 billion.2

57

Sources: Hartman M, et al.2; CMS3

*Years 2013 and beyond are projections. Other services not shown separately include durable and nondurable medical products, home health care expenditures, other health, residential and personal expenditures, and others. **Prescription drug spending includes brand and generic ingredients, pharmacy, and distribution costs.

Total Medicaid Spending and Spending by Selected Service, 2007-2023 (in Billions)*

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Total Medicaid SpendingHospitalsPhysicians and CliniciansNursing HomesPrescription Drugs**

2 • Medicaid

Medicaid Price Controls As a condition of a drug being covered by Medicaid, drug manufacturers pay a rebate to the states and the Centers for Medicare & Medicaid Services based on a statutory formula.

58

Sources: CBO4,5; The Menges Group analysis of CMS data6 *Certain brand medicines are subject to a different rebate percentage.

Price Controls in Medicaid Are Manifested Through the Rebate Program

2 • Medicaid

“Average Manufacturer Price” Is Not the Average Price Received by Manufacturers

59

Source: PhRMA analysis of data from Medicaid.gov and CBO7

• Average Manufacturer Price (AMP) is defined in statute and is used to calculate Medicaid rebates.

• While originally intended only for use in the rebate calculation, over time AMP has also become a metric for pharmacy reimbursement and has been redefined to reflect the price paid by retail community pharmacies.

• AMP excludes many manufacturer sales, discounts, and rebates. For example, it excludes prices paid by mail order pharmacies, physicians, clinics, or hospitals and rebates received by Managed Care Organizations and pharmacy benefit managers.

• This definition results in AMPs that are higher than the average price manufacturers actually receive.

• Excluding many manufacturer rebates and discounts from the definition of AMP results in higher Medicaid rebates because AMP is the critical component of the formula.

2 • Medicaid

Medicaid Rebates Before ACA

Medicaid Rebates on Prescription Medicines Are Increasing Substantially Under the Affordable Care Act Independent analysts estimate that the Affordable Care Act (ACA) will increase the Medicaid prescription drug rebates brand manufacturers pay by $48 billion over 10 years (2016-2025).8

60

Source: PwC Health Research Institute8

Note: The graphic is illustrative only.

Base rebate increased from 15.1% to 23.1%

Medicaid rebate extended to Managed Care Organizations

Medicaid eligibility expands

Average Manufacturer Price definitional changes cause further rebate increase

2 • Medicaid

Initial Medicaid Costs for Medicines Greatly Overstate Costs Net of Rebates On average, about 60% of the initial cost of brand medicines is returned to states through rebates.

61

*Includes statutory rebates and supplemental rebates negotiated by states and Medicaid MCOs or their pharmacy benefits managers. Source: The Menges Group9

$41.00

$100.00 Initial cost of a brand medicine

How rebates dramatically lower costs for states:

Cost to Medicaid of brand medicine net of manufacturer rebates

Rebates from manufacturers repay Medicaid for about half of their initial ingredient costs for medicines. In addition to the rebate amount required by law, states and Managed Care Organizations (MCOs) often negotiate for additional rebates. Manufacturers may pay these rebates to obtain favorable placement for their medicines on preferred drug lists or managed care formularies.

- $59.00 Manufacturer rebates returned to Medicaid*

2 • Medicaid

Medicaid Rebates Apply to More People Under ACA Drug purchases by beneficiaries in Medicaid Managed Care Organizations became eligible for statutory rebates in 2010. Beginning in 2014, the Medicaid expansion allowed states to expand Medicaid to more adults, further increasing the number of people whose prescriptions are eligible for rebates.

62

Source: PhRMA analysis of data from CBO, CMS, and Kaiser Family Foundation10 *Point-in-time measurement

0

10

20

30

40

50

60

2009 (Pre-ACA) 2015 2020

Mill

ions

of I

ndiv

idua

ls*

24M

24M

14M

14M

14M

Medicaid Beneficiaries

Receiving Fee-for-Service Pharmacy Benefits

Inclusion of Managed Care Lives

Expansion of Medicaid

Eligibility

Rebates Could Apply to as

Many as 28 Million

More People 10M

26M

2 • Medicaid

Control Over Pharmacy Benefit in Medicaid Varies In many states, Managed Care Organizations (MCOs) cover and set Medicaid pharmacy benefits for some or all beneficiaries, while in others, state government administers benefits directly or determines the drug list that plans must use. In some cases, benefits can be administered by either entity, depending on type of therapy.

63

Source: Avalere Health13

*Denotes a partial carve-out state11

**Denotes states that require MCOs to adhere to state-generated drug lists12 †Vermont enrolls beneficiaries in an MCO; however, since it is state-run enrollment it is counted as fee-for-service.

Among Non-Dual Enrollees With Medicaid and Children’s Health Insurance Program (CHIP) Prescription Drug Coverage, Percentage Receiving Drug Benefits Through an MCO by State, 2015

2 • Medicaid

States Limit Access to Prescription Medicines in Medicaid Nearly all states use preferred drug lists (PDLs),* and 16 states limit the number of prescriptions that beneficiaries can fill each month.

64

Source: Kaiser Commission on Medicaid and the Uninsured and Georgia Department of Community Health14

*Even though every state is guaranteed sizable statutory discounts on all medicines, states may also define a list of Medicaid-covered medicines (ie, PDLs) with Centers for Medicare & Medicaid Services approval. Patients seeking access to medicines not on the PDL must obtain prior authorization. In some cases, exceptions to script limits are made for individuals with certain conditions or other special circumstances.

2 • Medicaid

Restrictive State Medicaid Preferred Drug Lists May Reduce Adherence and Lead to Poor Outcomes In Alabama, 51% of patients discontinued statin therapy after preferred drug list (PDL) restrictions were imposed, compared to 39% in the previous period.

65

Source: Ridley D, Axelsen K15 *In comparison, another state (North Carolina), which did not institute a PDL, experienced no significant change in therapy discontinuation during the same period.

Therapy Discontinuation Rates Before and After PDL Implementation in Alabama*

39%

51%

0%

10%

20%

30%

40%

50%

60%

Before PDL After PDL

% o

f Med

icai

d Pa

tient

s W

ho D

iscon

tinue

d Th

erap

y

Access restrictions may deter patients, especially vulnerable low-income patients, from adhering to important therapies, which could ultimately drive up long term medical costs.

– David Ridley and Kirsten Axelsen

“ “

2 • Medicaid

Patients Facing Access Restrictions Incur Greater Medical Spending Non-elderly Medicaid patients facing formulary restrictions* for antipsychotic medications were 7% to 13% more likely to be hospitalized and had higher medical costs than patients in states without formulary restrictions.

66

*Restrictions examined: prior authorization, step therapy, and quantity limits Source: Seabury SA, et al.16

$10,952

$12,344 $13,299 $13,735

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Schizophrenia Bipolar Disorder

Without Formulary Restrictions With Formulary Restrictions

Medicaid Total Annual Medical Expenditures, Per Patient (2008)

2 • Medicaid

Increased Use of Medicines Reduces Other Medicaid Costs Similar to the Congressional Budget Office’s findings in Medicare, increased use of medicines among Medicaid patients decreases other Medicaid costs.17 This pattern is seen across Medicaid populations.

67

Note: All results are statistically significant (p

2 • Medicaid

Increasing Prescription Drug Cost Sharing for Medicaid Patients May Lead to Higher Total Medicaid Costs For patients with very low incomes, even small increases in cost sharing can reduce access to needed care, which can lead to poor outcomes and increased program costs.

68

*Outcomes were measured during 6-month periods before and after a copay increase in Georgia. Impact estimates are adjusted to reflect changes in a similar state with no change in copays over the same period. “Rx days” is the number of prescriptions multiplied by the number of days supply over a 6-month period. Source: Subramanian S19

Increased Drug Copayments in Georgia’s Medicaid Program Led To:*

8% Higher Probability of

ER Visit

$2,288 Higher Costs

2 • Medicaid

Notes and Sources 1. Pharmaceutical Research and Manufacturers of America analysis based on data from Centers for Medicare & Medicaid Services, National

health expenditures, 2013; US Department of Health and Human Services, Office of Inspector General, Higher rebates for brand-name drugsresult in lower costs for Medicaid compared to Medicare Part D, August 2011; and The Lewin Group, Potential federal and state-by-statesavings if Medicaid pharmacy programs were optimally managed, February 2011.

2. Hartman M, Martin AB, Lassman D, Catlin A, the National Health Expenditure Accounts Team. National health spending in 2013: growthslows, remains in step with the overall economy. Health Affairs. 2015;34(1). http://content.healthaffairs.org/content/early/2014/11/25/hlthaff.2014.1107. Accessed January 2015.

3. Centers for Medicare & Medicaid Services. National health expenditure projections 2013-2023. Baltimore, MD: CMS; 2014.http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html. Published September 2014. Accessed April 2015.

4. Congressional Budget Office. Letter to Senate Finance Committee Chairman Chuck Grassley (R-IA). June 21, 2005.

5. Congressional Budget Office. How the Medicaid rebate on prescription drugs affects pricing in the pharmaceutical industry. Washington, DC:CBO; 1996. www.cbo.gov/sites/default/files/cbofiles/ftpdocs/47xx/doc4750/1996doc20.pdf. Accessed January 2015.

6. The Menges Group analysis based on Centers for Medicare & Medicaid Services data. Financial management report, FY2012-2013.Medicaid.gov Web site. http://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Data-and-Systems/MBES/CMS-64-Quarterly-Expense-Report.html. Accessed January 2015. In 13 states, the rebate amounts reported on the CMS-64 reports forFFY 2014 did not fall within a range believed to be credible given the statutory Medicaid rebate parameters. In these states, FFY 2014rebate amounts have been estimated by The Menges Group such that all states’ rebates fall within a range of 40%-62% of initial (prerebate)Medicaid payments to pharmacies.

7. Pharmaceutical Research and Manufacturers of America analysis based on Medicaid.gov, provisions of the Patient Protection and AffordableCare Act, Pub L No. 111-148, 124 Stat 119, §2501 (2010):487-504,www.healthcare.gov/law/resources/authorities/title/ii-role-of-public-programs.pdf, Accessed September 2012; and Congressional BudgetOffice, Director Douglas Elmendorf, Letter to the Honorable Paul Ryan (R-WI), November 4, 2010.

8. The 2012 PwC estimate of $40 billion cost grew to $48 billion to reflect growth in Medicaid spending as estimated by the Centers forMedicare & Medicaid Services. The increased Medicaid rebates that PwC reports do not include the cost of paying those larger rebates forindividuals who will newly receive Medicaid coverage under the Affordable Care Act. PwC Health Research Institute. Implications of the USSupreme Court ruling on healthcare. August 2012.

69

http://content.healthaffairs.org/content/early/2014/11/25/hlthaff.2014.1107http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.htmlwww.cbo.gov/sites/default/files/cbofiles/ftpdocs/47xx/doc4750/1996doc20.pdfhttp://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Data-and-Systems/MBES/CMS-64-Quarterly-Expense-Report.htmlwww.healthcare.gov/law/resources/authorities/title/ii-role-of-public-programs.pdf

2 • Medicaid

Notes and Sources 9. The Menges Group. Medicaid pharmacy costs, FFY2013 and FFY2014. https://www.themengesgroup.com/Medicaid-Pharmacy-

Rebates.html#.VYMhmvlVhBe. Published March 31, 2015. Accessed May 2015.

10. Pharmaceutical Research and Manufacturers of America analysis based on the following data sources: Congressional Budget Office,Insurance coverage provisions of the Affordable Care Act—CBO’s March 2015 baseline, table 2; Centers for Medicare & Medicaid Services,2009 Medicaid managed care enrollment report, Data as of June 30, 2009; CMS, 2010 Medicaid managed care enrollment report data as ofJuly 1, 2010; CMS, Dual eligible enrollment as of June 30, 2009 table; CMS, Dual eligible enrollment as of July 1, 2010 table; Kaiser FamilyFoundation, Comprehensive Medicaid Managed Care Organization acute care benefit carve-outs, October 2010; Congressional BudgetOffice, March 2009 baseline: Medicaid, June 2009; CBO, March 2011 baseline: Medicaid, March 2011; and CBO, March 2012 baseline:Medicaid, March 2012. https://www.cbo.gov/sites/default/files/cbofiles/attachments/43900-2015-03-ACAtables.pdf.

11. Denotes a partial carve-out state—a state in which certain classes of drugs are not included in the drug benefit provided by Managed CareOrganizations (MCOs) but are provided directly by the state. Drugs commonly excluded from MCO contracts as partial carve-outs includemental health, hemophilia, substance abuse, and HIV/AIDS products.

12. Denotes states that use Managed Care Organizations (MCOs) to cover some or all beneficiaries (including drug benefits), but require MCOsto adhere to a state-generated drug list. In these states, MCOs have minimal control over drugs’ formulary placement and utilizationmanagement; accordingly, these lives are counted here as fee-for-service. Louisiana currently allows MCOs to set their own formularies butplans to adopt a unified formulary approach by September 2015.

13. Avalere Health Medicaid Managed Care Enrollment Model. Updated April 30, 2015. Note: Numbers represent projections for year-end2015. Avalere assumes these states do not expand coverage through 2015: AK, AL, FL, GA, ID, KS, LA, ME, MS, MO, MT, NE, NC, OK, SC, SD,TN, TX, UT, VA, WI, and WY.

14. Preferred drug list information as of 2014. Kaiser Commission on Medicaid and the Uninsured. Medicaid in an era of health & deliverysystem reform: results from a 50-state Medicaid budget survey for state fiscal years 2014 and 2015. October 2014. Data on monthlyprescriptions limits from the Kaiser Commission on Medicaid and the Uninsured Medicaid Benefits Online Database. 2012.http://medicaidbenefits.kff.org/service.jsp?yr=5&cat=5&nt=on&sv=32&so=0&tg=0. Accessed January 2015. Data for Georgia updated fromGeorgia Department of Community Health. Georgia Medicaid fee-for-service pharmacy program frequently asked questions. https://dch.georgia.gov/sites/dch.georgia.gov/files/related_files/site_page/GA_Medicaid_FFS_Frequently_Asked_Questions_rv_11-19-12.pdf.Updated April 19, 2012. Accessed January 2015.

15. Ridley D, Axelsen K. Impact of Medicaid preferred drug lists on therapeutic adherence. Pharmacoeconomics. 2006;24(suppl 3):65-78.

70

https://www.themengesgroup.com/Medicaid-Pharmacy-Rebates.html#.VYMhmvlVhBehttps://www.cbo.gov/sites/default/files/cbofiles/attachments/43900-2015-03-ACAtables.pdfhttp://medicaidbenefits.kff.org/service.jsp?yr=5&cat=5&nt=on&sv=32&so=0&tg=0https://dch.georgia.gov/sites/dch.georgia.gov/files/related_files/site_page/GA_Medicaid_FFS_Frequently_Asked_Questions_rv_11-19-12.pdf

2 • Medicaid

Notes and Sources 16. Seabury SA, Goldman DP, Kalsekar I, Sheehan JJ, Laubmeier K, Lakdawalla DN. Formulary restrictions on atypical antipsychotics: impact on

costs for patients with schizophrenia and bipolar disorder in Medicaid. Am J Manag Care. 2014;20:e52-e60.

17. Congressional Budget Office. Offsetting effects of prescription drug use on Medicare's spending for medical services.https://www.cbo.gov/sites/default/files/cbofiles/attachments/43741-MedicalOffsets-11-29-12.pdf. Published November 2012. AccessedMay 2015.

18. Roebuck MC, Dougherty S, Kaestner R, Miller L. Medical cost offsets from prescription drug use in Medicaid. Presented at: Academy Health2015 Annual Research Meeting; June 15, 2015; Minneapolis, MN.

19. Subramanian S. Impact of Medicaid copayments on patients with cancer: lessons for Medicaid expansion under health reform. Med Care.September 2011;49(9):842-847.

71

https://www.cbo.gov/sites/default/files/cbofiles/attachments/43741-MedicalOffsets-11-29-12.pdf

3 • Veterans Affairs

MEDICINES IN VETERANS AFFAIRS

73

The US Department of Veterans Affairs (VA) serves a special population—veterans with service-related disabilities and, in some cases, their families. The VA administers a smaller drug benefit and serves a smaller population than Medicare and Medicaid. Many veterans use other coverage for their medicines rather than rely exclusively on VA coverage.


VA Price Controls

74

To participate in Medicaid and Medicare Part B, drug manufacturers are subject to statutory price controls for medicines sold to the “Big Four” government agencies: the VA, US Department of Defense, US Public Health Service, and US Coast Guard.

Source: Veterans Health Care Act of 19921

• Pharmaceutical companies are required to sell medicines at the lower of two controlled prices1:

FEDERAL CEILING PRICE (FCP) FCP requires a minimum 24% discount off the “non-Federal Average Manufacturer Price” (non-FAMP). A statutory formula requires additional discounts, if necessary, to prevent the FCP from rising faster than the rate of inflation.

FEDERAL SUPPLY SCHEDULE (FSS) PRICE Manufacturers must disclose to the VA the prices they make available to their commercial customers. On a drug-by-drug basis, the parties identify a customer who purchases the drug at the lowest price on terms substantially similar to the VA. The FSS price must be no greater than the price paid by this “tracking” customer.

• In the mid-1990s, the VA also instituted a national formulary that included closed and preferred classes of medicines. In some instances, for placement of medicines on formulary, the VA requires further discounts below the FCP.


VA Formulary Covers Fewer Drugs Than Part D

75

For 2015, the VA formulary included a lower share of the top 200 Part D drugs relative to stand-alone Prescription Drug Plans (PDPs) and Medicare Advantage Prescription Drug (MA-PD) Plans.

Note: Avalere Health analysis of VA National Formulary data (March 2015) and DataFrame®, a proprietary database of Medicare Part D plan features. 2015 plan data were released in October 2014. PDP and MA-PD Plan coverage data are enrollment-weighted using February 2015 enrollment data. Source: Avalere Health2

Average Coverage of Top 200 Medicare Part D Drugs by VA National Formulary, PDPs and MA-PDs, 2015

163

191 194

0

50

100

150

200

VA National Formulary PDP MA-PD Plans

81.5%

95.5% 97%


Veterans Prefer More Drug Coverage Than VA Offers

76

VA enrollees obtain many prescriptions outside the VA system.

Sources: VA3-7

Enrollees Planning to Use VA System Primarily for Prescriptions3

Prescriptions Obtained Outside VA System4-7

17.3%

11.0%

8.2% 8.3%

0%

5%

10%

15%

20%

2005 2008 2010 2011

17.0%

26.0%

28.6%

25.6%

0%

5%

10%

15%

20%

25%

30%

2005 2008 2010 2011


35% Were Converted to the

VA Formulary

65% Could Not Be Converted to the

VA Formulary*

42% Not Available on the VA Formulary

58% Available on the

VA Formulary

Total Number of Prescriptions Written Of Prescriptions Not Initially Available on the VA Formulary

VA Formulary Excludes Medicines Commonly Prescribed by Community Physicians In a 2003 VA pilot program allowing veterans to use non-VA physicians,8 42% of prescriptions written by community physicians were not available on the VA formulary.

77

*VA pharmacists worked with community physicians to convert prescriptions to the VA formulary. Results are through week 20 of the pilot program. Source: Dr. Jonathan Perlin, Deputy Under Secretary of Health, VA9

Of Prescriptions Written for Veterans by Community Physicians . . .


Many VA Enrollees Supplement Their VA Drug Coverage With Part D or Private Insurance Nearly 7.9 million veterans were enrolled in the VA health care system in 2011; nearly 1.5 million were also enrolled in Medicare Part D, and 2 million had private drug insurance.

78

Source: VA10

19%

24%

0%

5%

10%

15%

20%

25%

30%

Medicare Part D Private Rx Coverage

Percentage of VA Enrollees Reporting Other Sources of Drug Coverage, 2011


Treatment Adherence Improved for Veterans After Enrolling in Part D Beneficiaries whose primary drug coverage was through the VA in 2003 and through Part D in 2006 reported lower rates of non-adherence to therapy after enrolling in Part D.

79

Source: Safran DG, et al.11

Beneficiaries Reporting Non-Adherence to Rx Therapy

22.5%

11.8%

16.9%

7.0%

14.5%

4.8%

0%

5%

10%

15%

20%

25%

VA, 2003 Part D, 2006

Cost-Related Non-Adherence

Didn't Fill Rx 1+ Times

Taking Smaller Doses of Rx

Primary Rx Coverage Source, Year


Notes and Sources

81

1. Veterans Health Care Act of 1992, Pub L No. 102-585, 106 Stat 4971, §603(a)(1) (November 1992).

2. Avalere Health. Coverage of top 200 Part D drugs from the Centers for Medicare & Medicaid Services’ Part D prescriber 2013 nationalsummary table in the VA national formulary, Medicare Prescription Drug Plans (PDPs), and Medicare Advantage Plans with prescription drugcoverage (MA-PDs). http://avalere.com/expertise/managed-care/insights/a-recent-avalere-analysis-found-that-the-va-national-formulary-covers-fewer. Published June 2015. Accessed June 2015.

3. US Department of Veterans Affairs. 2011 survey of veteran enrollees’ health and reliance upon VA. Washington, DC: US Departmentof Veterans Affairs; 2012:57.




7. US Department of Veterans Affairs. 2011 survey of veteran enrollees' health and reliance upon VA. Washington, DC: US Departmentof Veterans Affairs; 2012:76.

8. The transitional pharmacy benefit was a temporary program to help veterans who were unable to schedule an initial primary careappointment with a VA doctor within a 30-day period. Under the program, VA would fill prescriptions from private physicians until a VAphysician examined the veteran and determined an appropriate course of treatment. The VA reported that 8,298 veterans had prescriptionsfilled through the program.

9. Department of Veterans Affairs providing certain veterans with a prescription-only health care benefit: hearing before the House ofRepresentatives, Subcommittee on Health of the Committee on Veterans’ Affairs (Serial No. 108-34):15. March 30, 2004. Statement ofDr. Jonathan Perlin, Deputy Under Secretary for Health, US Department of Veterans Affairs.


11. Safran DG, Strollo MK, Guterman S, Li A, Rogers WH, Neuman P. Prescription coverage, use and spending before and after Part Dimplementation: a national longitudinal panel study. J Gen Intern Med. 2009;25(1):10-17.

http://avalere.com/expertise/managed-care/insights/a-recent-avalere-analysis-found-that-the-va-national-formulary-covers-fewer

PHOTO TO BE INSERTED

4 • Medicines in 340B

4 MEDICINES IN 340B

83

The 340B program was created in 1992 to help vulnerable or uninsured patients served by safety net facilities. The program requires pharmaceutical manufacturers to provide steep discounts to certain types of clinics and hospitals as a condition of their drugs being covered by Medicaid.

Many clinics qualify for 340B based on receiving certain federal grants. These grants typically require 340B clinics to use revenue from the program to improve services to the vulnerable patients they serve. Hospitals and their satellite clinics qualify based on a range of criteria that are not tied to obligations to reinvest resources into care for uninsured or vulnerable patients.

Hospital participation in the program has increased over time; now about 45% of all Medicare acute care hospitals participate in 340B. The program bears little resemblance to what Congress envisioned in 1992. Its reach has expanded in part through both hospital purchases of community-based physician practices and through prescriptions filled at retail pharmacies, also known as contract pharmacies. The program is projected to nearly double in size, from more than $8 billion in 2014 to more than $16 billion in 2019.


340B: Past and Present

84

1992 340B was envisioned as a small program to address unintended consequencesof the 1990 Medicaid drug rebate statute by reinstating deep discounts that pharmaceutical manufacturers had voluntarily provided to certain clinics and true safety net hospitals.

Early 2000s-Present Insufficient guidance, historically weak oversight, and other factors led todramatic program growth, driven by the participation of large hospitals in the 340B program.

[340B] has expanded beyond its bounds. – Kathleen Sebelius, Former HHS Secretary, 2014

Sources: US Senate hearing on President's fiscal year 2015 health care proposals1; BRG analysis of HRSA OPA 340B Database2

51 151

2,228

0

500

1,000

1,500

2,000

2,500

1992 2002 2015

Hospitals Participating in 340B

“

“

4 • Medicines in 340B 85

How 340B Discounts Work

Source: AIR 340B3


How Entities Qualify to Participate in 340B

86

Sources: MedPAC4,5; HRSA6

Unlike government programs designed to provide insurance coverage, patients do not enroll in 340B. Instead, the 340B designation applies to the hospital or clinic, which may claim steep discounts on outpatient drugs dispensed to all patients regardless of whether the patients are insured or uninsured. A hospital’s satellite or child sites do not have to meet the 340B criteria to obtain discounts, even if all their patients are fully insured.

The key metric determining whether a nonprofit hospital is eligible for 340B is the Dispro-portionate Share Hospital (DSH) percentage. DSH is a calculation based on inpatient admission of low-income Medicare and Medicaid beneficiaries. Congress believed DSH eligibility would target safety net facilities, however, research has since shown that the DSH percentage does not correlate with the amount of uncompensated or charity care a hospital provides or the number of uninsured persons it cares for.4

Clinics, rural facilities, and other entities qualify largely based on the receipt of a federal grant from the Health Resources and Services Administration (HRSA) to support care for vulnerable populations.


Disproportionate Share Hospitals (DSHs) drive 81% of 340B sales volume but only make up 9% of 340B entities.

87

Disproportionate Share Hospitals Are Driving Current Volume and Future Program Growth

Sources: Apexus7; Avalere Health analysis of HRSA OPA 340B Database8

340B Entities Compared to 340B Sales7,8

9%

81%

91%

19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percentage of Total340B Entities

Percentage of Total340B Sales

Grantees and other hospitals

DSH hospitals


Nonpublic hospitals must meet criteria that show they 1) have been formally delegated governmental powers by a state or local government, or 2) have a contract to provide care to low-income or uninsured patients. However, the US Government Accountability Office (GAO) noted that there are no meaningful standards for the second criterion.

88

No Meaningful Standards to Ensure Disproportionate Share Hospitals Are Providing Care to Low-Income Patients

Source: US House hearing on examining the 340B drug pricing program9


• Most 340B hospitals qualify to dispense 340B outpatient drugs based on the share of inpatient days used by low-income Medicare and Medicaid beneficiaries.

• Counterintuitively, as a hospital treats fewer uninsured patients, it generally becomes more likely to qualify for 340B. In particular, the expansion of Medicaid eligibility, which has decreased uncompensated care, has also led to more hospitals qualifying for 340B.

89

Sources: MedPAC10,11

Current Hospital Eligibility Criteria Do Not Match Program Goals

In 2007 the Commission noted that DSH payments were not well targeted at hospitals with high uncompensated care costs. 11

– Medicare Payment Advisory Commission, 2014

“ “

In 2014, 45% of all Medicare Acute Care Hospitals

PARTICIPATED IN 340B10 45% 55%


Sixty-nine percent of 340B hospitals report charity care levels below the national average (3.3%); 24% report levels below 1% of total costs.

90

Most 340B Hospitals Provide Little to Below Average Levels of Charity Care

*The national average charity care rate for all hospitals is 3.3% of total costs. Hospitals are defined as providing 0%-1% of total costs as minimal, 1%-3.3% as below average, 3.3%-5% as slightly above average, and 5%-10% as above average. Source: AIR 340B12

Distribution of 340B Hospitals by Level of Charity Care as a Percent of Patient Costs Provided*

Above Average Charity Care

15%

Below Average Charity Care

45%

Minimal Charity Care

24% 16%

Slightly Above Average Charity Care

69% of 340B hospitals have CHARITY CARE RATES below the 3.3% national average for all hospitals

4 • Medicines in 340B 91

Combination of Vague Rules Defining a Patient and Lack of Enforcement Leads to Program Abuse

Sources: GAO13; OIG14

• The lack of an appropriate patient definition means hospitals can profit from 340Bdiscounts for patients whose prescriptions should not qualify for 340B.

• Without a clear definition of a 340B patient, it is difficult for audits of 340B hospitalsto identify instances where discounts are diverted to prescriptions that are ineligiblefor 340B because the patient does not meet the patient definition.

[There is] a lack of clarity on how HRSA’s patient definition should be applied in contract pharmacy arrangements.

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