PBMs, PDPs & MA-PDs:Which Way Is Up?

Bob AtlasTHE SECOND NATIONAL MEDICARE

PRESCRIPTION DRUG CONGRESS November 1, 2005

2

Medicare Plays for PBMs

PBM’s OwnPBM’s OwnStand-Stand-alone alone

PD PlanPD Plan

PharmacyPharmacyManagerManager

Medicare Medicare AdvantageAdvantage

PD PlanPD Plan

Fallback Fallback PlanPlan

ContractorContractor

Insurer’sInsurer’sStand-Stand-alonealone

PD PlanPD Plan

PharmacyPharmacyManagerManager

CMSCMS

PBM at risk

PBM not at risk for underwriting losses

AA

BB CC EE

E off limitsif bid forA or B

PharmacyPharmacyManagerManager

QualifiedQualifiedEmployerEmployerPD PlanPD Plan

DD

3

Largest PBMs, Pre-MMA (Total PBMs ~ 70)

*Includes WellPoint-Anthem merged PBMs. †Figures cannot be summed – probable double counting.

PBM Ownership Lives†

(Millions)

Caremark Rx Publicly traded 80

Medco Health Solutions Publicly traded 60

Express Scripts Publicly traded 50

WellPoint Pharmacy Mgmt.* Insurer – WellPoint 43

PharmaCare Pharmacy – CVS 30

MedImpact Privately held 27

Argus Health Privately held 24

Prime Therapeutics Insurer – 8 Blues 9

CIGNA Healthcare Insurer – CIGNA 9

Aetna Pharmacy Mgmt. Insurer – Aetna 8

Prescription Solutions Insurer – PacifiCare 6

4

Largest PBMs - Participation in Part D

PBMNational PDP

Regional PDPs

MA-PDsOwn (Brand) Partner

Caremark Rx SilverScript Coventry Sub Sub

Medco Health Solutions YOURx - Sub Sub

Express Scripts - - Sub Sub

WellPoint Pharmacy Mgmt. Unicare M’care Rx

PharmaCare (CVS) - Universal Amer. Sub Sub

MedImpact - - Sub Sub

Argus Health - - Humana Sub

Prime Therapeutics - - Parent Blues

CIGNA Healthcare CIGNATURE Rx - -

Aetna Pharmacy Mgmt. Aetna M’care Rx - -

Prescription Solutions PacifiCare - -

Walgreens Health Initiatives -United (AARP)

& WellCareSub Sub

5

PDP Advantages vs. MA-PD

EASIER ENROLLMENT Keep same medical providers Default enrollment of 6.5M duals Obvious choice for 1.2M

nursing home residents Simple take-up for 4.7M

current Medigap enrollees Encouragement from retail

pharmacists – invested in PDPs

6

Medicare Managed Care Got Boost in MMA

MA plan capitations raised 10.6% in 2004 6.6% in 2005 4.8% in 2006

$10B “stabilization fund” for regional PPOs 2007+

Addition of Part D

Mar ‘99 Mar ‘03 Aug ‘05

ContractorsEnrollees(Millions)

4126.6

426

5.9

235

5.1

7

MA Plan Advantages vs. Stand-Alone PDPs

COST SAVINGS POTENTIAL Buy down PD price bid/cost-sharing using medical care savings Spread administrative costs over broader revenue (per head) base Manage Rx usage via leverage with physician prescribers Better odds of normal or favorable population selection

8

Premiums for MA-PDs vs. PDPs

$0 $0-10 $10-20

$20-30

$30-40

$40-50

$50-60

$60-70

>$70 $0 $0-10 $10-20

$20-30

$30-40

$40-50

$50-60

$60-70

>$70

Distribution of Prescription Drug Benefit Premiums*

MA-PDMA-PD PDPPDP

MA-PD Median Premium ~ $21.70 PDP Median Premium ~ $36.66

*Unweighted, based on listings of MA-PDs (N=22,741 plan options including Rx, by counties) and PDPs (N=2,184 plan options, by PDP regions) as shown on CMS website as of October 27, 2005

9

Significance of Biased Selection

$981

$315$63

$2,145

$3,114

$5,319

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

65-74 75-84 85+

Age Cohort and Health Status

Con

stan

t 20

06 D

olla

rs

Good Poor

Average Annual Net Rx Benefit by Age Cohort and Health Status

Source: “Lifetime financial benefit of the new prescription drug law,” Muse and Associates, August 2004