Cognizant Technology Solutions

Basics of PBM Industry

An Introduction to PBM L0

PBM CoE 2009

Table of Contents
1. Introduction ____________________________________________________________ 4 2. History of PBM__________________________________________________________ 8
2.1 2.2 2.3 Origin of PBMs ____________________________________________________________ 8 Evolution of PBM Industry__________________________________________________ 9 Evolution of PBM Services ________________________________________________ 11

3. PBM Services __________________________________________________________ 15

3.1 3.2 PBM Administrative Services ______________________________________________ 15 PBM Clinical Services _____________________________________________________ 28

4. Overview of PBM Financials and Pricing _________________________________ 46

4.1 4.2 Contract based pricing ____________________________________________________ 47 Pricing ___________________________________________________________________ 48

5. PBM Relationships _____________________________________________________ 52

5.1 5.2 5.3 5.4 PBM Relationships with Retail and Mail Pharmacies _________________________ 52 PBM Relationships with Pharmaceutical Manufacturers _____________________ 54 PBM Relationships with Plan Sponsors ____________________________________ 55 PBM Ownership Models ___________________________________________________ 57

6. Pharmacy Benefit Management- Regulatory Compliance __________________ 59 7. PBMs and Medicare Part-D Program _____________________________________ 63
7.1 7.2 7.3 Medicare Part D: An Overview ____________________________________________ 63 Selection of PDP Providers ________________________________________________ 63 Role of PBMs _____________________________________________________________ 64

8. Medicaid Pharmacy Benefits Management _______________________________ 68 9. The Role of IT in PBM Industry __________________________________________ 69
9.1 9.2 9.3 The Need for IT ___________________________________________________________ 69 IT Dependency ___________________________________________________________ 69 Benefits of IT _____________________________________________________________ 70

9.4 9.5 9.6 9.7 9.8 9.9

IT Services in PBM Industry _______________________________________________ 70 eHealth __________________________________________________________________ 73 EDI in PBM Industry ______________________________________________________ 75 Data Warehousing ________________________________________________________ 76 Health Informatics ________________________________________________________ 78 Advanced Pharmacy Systems _____________________________________________ 79

10. 11. 12.

NCPDP Standards in Prescription Process _____________________________ 80 URAC Accreditation for PBMs _________________________________________ 84 TRICARE Pharmacy (Tpharm) _________________________________________ 85

1. Introduction
PBMs - At a glance: Pharmacy benefit managers (PBMs) have emerged as the national standard for the administration of prescription drug insurance in the United States. Today, in an environment of rising drug costs and utilization, PBMs provide pharmacy benefits to nearly 210 million Americans, While they emerged in the mid-1980s as entities that processed prescription drug claims, they have expanded to provide a wide range of services, typically including developing and managing drug formularies and pharmacy networks and providing drugs through mail-order and specialty pharmacies. The PBMs ability to reduce costs, provide national pharmacy access, and administer benefits that are customized to meet the needs of a wide range of clients in a highly automated environment all attribute to the success of the industry. Background: Pharmacy benefit managers provide services to health plan sponsors to help manage prescription drug benefits. PBMs initially emerged in the mid-1980s as prescription drug claims processors. In the early 1990s, they began to expand services and currently offer a wide range of services designed to manage pharmacy costs. In addition to processing claims submitted by pharmacies, these services include drug formulary development, pharmacy network development and management, mail-order and specialty pharmacy services, rebate negotiation, therapeutic substitution, disease management, utilization review, and support services for physicians and beneficiaries. See Exhibit 1 for an explanation of each of these services. Pharmacy Benefit Managers Provide a Variety of Services to Health Plan Sponsors Type of Service Pharmacy Claims Processing Description Verifies beneficiary eligibility and plan benefits and pays pharmacies for filling prescriptions.

Drug Formulary Development

Identifies which preferred and non-preferred drugs to include in health plan benefits, develops rules for generic substitutions, and establishes copayments and/or deductibles. Establishes a network of pharmacies from which beneficiaries can purchase their prescriptions.

Pharmacy Network Development and Management

Mail-Order and Specialty Pharmacy Services

Provides beneficiaries with the option to obtain prescriptions by mail and at specialty pharmacies for prescriptions to treat complex and chronic diseases that are not dispensed at retail pharmacies.

Rebate Negotiations

Lowers the cost of drugs by negotiating discounts with manufacturers for formulary placement and volume.

Therapeutic Substitution

Ensures that, when clinically appropriate, physicians prescribe drugs that are on health plan sponsors drug formularies.

Disease Management

Provides health education to beneficiaries to help them better manage specific medical conditions, such as diabetes or asthma. Reviews beneficiary drug usage and recommends ways to lower costs, including switching a prescribed brand-name drug to a generic or less expensive brand-name drug. Provides education to physicians and beneficiaries on appropriate prescribing and prescription use, general health and wellness, and patient compliance.

Utilization Review

Support Services for Physicians and Beneficiaries

Source: OPPAGA interviews and analysis of Pharmacy Benefit Managers (PBMs): Tools for Managing Drug Benefit Costs, Quality, and Safety; Health Policy Alternatives, Inc.; August 2003. Health plan sponsors contract with PBMs to provide various services. For example, a large health maintenance organization that prefers to oversee formulary development and disease management inhouse may only contract for a few services, such as claims processing and pharmacy network management. Another sponsor might prefer to contract for a full array of services, including most or all of the services described in Exhibit 1. Payments for these services are established in contracts between health plan sponsors and PBMs. For example, contracts will specify how much health plan sponsors will pay PBMs for brand-name and generic drugs. These prices are typically set as a discount off the Average Wholesale Price for brandname drugs and at a Maximum Allowable Cost for generic drugs, plus a dispensing fee. Contracts also generally include fees for processing claims submitted by pharmacies (usually based on a rate per claim) and fees for providing services such as disease management or utilization review. In addition, contracts generally specify whether and how the PBM will pass manufacturer rebates on to the health plan sponsors. The contracts can also include performance guarantees, such as claims processing accuracy or amount of rebates received. Currently, approximately 70 PBMs operate in the United States and manage prescription drug benefits for health plan sponsors. One industry stakeholder estimates that PBMs manage prescription drug benefits for approximately 95% of health insurance beneficiaries nationwide. The largest PBMs include CVS Caremark Inc, Medco Health Solutions, Inc, Express Scripts; and Walgreens Health Initiatives, Inc; What role do PBMs play in the prescription drug industry? PBMs are sometimes referred to as the middlemen in the prescription drug market because they act as intermediaries between health plan sponsors (Payers) and drug manufacturers and pharmacies. As shown in Exhibit 2, PBMs negotiate with drug manufacturers and pharmacies on behalf of plan sponsors (Payers). These negotiations include provisions for cash placed on health plan sponsor formularies (lists of approved drugs for prescribing) and the volume of these drugs that are used by health plan beneficiaries. PBMs also contract with pharmacies on behalf of plan sponsors (Payers) to establish how pharmacies will be reimbursed for prescriptions they dispense to health plan sponsor beneficiaries.

The clients of a PBM are primarily major employers, insurers and managed care organizations. The client works with the PBM to decide the pharmacy benefit (i.e., insurance coverage for prescription medication) that it will offer, including the drugs that will be covered, the beneficiarys cost sharing requirements, and the pharmacy network. The client then retains the PBM to administer the pharmacy benefit for its members or employees. The consumers enroll with the Payers in their prescription drug program. The consumers fill prescriptions at the PBMs network pharmacies and the pharmacy dispenses the drug. One of the primary reasons clients retain PBMs, is that PBMs reduce the cost of offering a pharmacy benefit. PBMs do this by automating administrative services, obtaining discounts on drugs (ingredient cost), and managing drug utilization. For example, PBMs: Reduce administrative cost by using a highly automated environment to electronically process claims at the point of service (e.g., pharmacy where prescription is dispensed). Over 99% of pharmacy claims are processed in this manner, at an average cost of $.30 to $.40 per claim. Reduce ingredient cost by obtaining pharmacy-pricing discounts from dispensing pharmacies, and rebates from pharmaceutical manufacturers. These discounts are obtained under contracts, and shared or passed on to clients. The cost of prescriptions, which average around $60.00, can be reduced as much as 30% to 35% by a PBMs programs.

Manage utilization and favor lower cost medications by using clinical services that influence the behavior of the physicians, pharmacist and patient. Over the last 10 years the PBM industry has grown dramatically, and undergone several major restructuring trends. These trends include: Explosive growth of the PBM industry into the mid-1990s as managed care organizations, insurers and later self insured employers sought to reduce the cost of their pharmacy benefit by contracting with PBMs to receive manufacturer rebates and pharmacy network discounts; Acquisition of several leading PBMs by manufacturers in the early 1990s (Merck- Medco, SmithKline Beecham-DPS, and Lilly-PCS). These acquisitions were the result of manufacturers concern over losing access to the lives managed by the PBM, and were partly prompted by the proposal of healthcare reform under the Clinton Administration. Since the number of lives covered by the PBM drove up the premium paid by the manufacturer, PBMs took on additional lives in an effort to become an attractive acquisition candidate. To do this, PBMs lowered their claims processing fees and rebate retention rates, and in some cases assumed risk for the cost of the pharmacy benefit. As a result of these actions the industry took on unprofitable business. In the mid-1990s, the business matured and manufacturers realized they were not receiving the expected value from their PBM acquisitions or rebate payments. Most manufacturers increased the performance criteria for PBMs to earn rebates. PBM profits, already hurt by the acquisition frenzy in the early 1990s, were further impacted by the reduction of rebates from manufacturers. As a result, PBMs introduced expanded services that differentiated them as clinical and pharmaceutical cost managers and began to scrutinize their unprofitable clients. In the late 1990s through the present, the PBM industry has been restructuring to restore profits. Lilly and SmithKline Beecham divested their PBMs, and the industry has seen consolidation as the leading PBMs seek to achieve economies of scale and improve profitability, as well as increase their negotiating power with manufacturers and retail pharmacies. The most significant consolidations include Advance Paradigms acquisition of PCS, and Express Scripts acquisitions of ValueRx and DPS. The industry now appears to be stabilizing, and is focused on managing costs and utilization for its clients.

2. History of PBM
Most health plan sponsors employers, HMOs, insurance carriers and others provide a prescription benefit as part of overall health insurance coverage. Because of the increasing size and complexity of pharmacy benefits, many plan sponsors contract with companies known as Pharmacy Benefit Managers (PBMs) to administer the process for them. PBMs are third-party administrators of prescription drug benefits. They handle such administrative tasks as collecting funds from health plan sponsors and using those funds to pay providers, processing claims; answering questions posed by pharmacists, doctors and health plan participants; and negotiating with drug companies. They operate mail order pharmacies which they force an increasing number of plan participants to use. PBMs have become a dominant, rapidly growing force in the pharmacy industry.

Three PBMs control about half of Americas prescription drug transactions: Medco, Express Scripts and Caremark. They have become a lightning rod for controversy because of business practices described below. Moreover, while PBMs represent themselves as prudent managers of drug benefits, prescription drug benefit costs to health plans are doubling every five years. At the same time, the major PBMs enjoy robust profits. Their business model yields incredibly high margins, largely at the expense of their customers, their recipients and their pharmacy providers.

2.1 Origin of PBMs

Pharmacy Benefit Managers initially were formed in the 1960s when prescription drug benefits became available to employees, retirees and their dependents. The first significant medication benefit began in 1970 under a collective bargaining agreement between the United Auto Workers and vehicle manufacturers. At the outset, PBMs were simply pharmacy third-party administrators, manually processing paper claims for a per claim fee. PBMs came into being four decades ago, when employmentbased health benefits were gaining wide adoption. They trace their roots to the following four sources.

Prescription Drug Cards In the 1960s companies emerged to offer add-on prescription drug benefits to private health insurance plansmost notably, those for unionized workers. Card holders could fill prescriptions at participating pharmacies for nominal copayments. Pharmaceutical Card System (PCS) is commonly identified as the innovator of this concept.

Mail-service Pharmacies Around the same time cards appeared, specialized pharmacies were established to dispense medications for chronic conditions by mail. Mail service offered discount pricing because of low overhead and the convenience of home delivery. An early leader was PAID Prescriptions, the progenitor of todays Medco Health.

Third-party Drug Claims Administrators Companies such as Argus were created to fill a need for low-cost processing of drug claims. With the typical drug claim originally being quite small relative to a hospital or physician claim, insurers outsourced processing to specialists to keep processing costs for drug claims about the same in percentage terms. Today the cost of processing a drug claim is about thirty to forty cents, less than 1 percent of claim value. Health Insurer Pharmacy Benefit Department Some top health insurers and managed care firms have separately branded their in-house pharmacy benefit units. Most remain with the original parentsfor example, WellPoint Pharmacy Management, Aetna Pharmacy Management, Anthem Prescription, and PacifiCares Prescription Solutionsbut serve other customers, too. Sometimes insurer-owned PBMs are spun out as separate companies: United Healthcares Diversified Pharmaceutical Services (DPS) was acquired in the early 1990s by a pharmaceutical manufacturer and later was absorbed by Express Scripts, a company that itself was created inside New York Lifes managed care unit. Notwithstanding their different origins, todays PBMs have all developed comparable full-service capabilities. Much of the buildup of capability and capacity has come via consolidation. There are now an estimated forty to fifty companies of meaningful size in the PBM field, although three firms dominate: Caremark Rx, Medco Health Solutions and Express Scripts.

2.2 Evolution of PBM Industry

As HMOs emerged in the early 1990s, they sought to clamp down on drug costs within their networks. So they started restricting their formularies, or lists of prescriptions they would cover. And they began hiring outside companies (pharmacy benefit managers) to play a two-step supply-chain game. First, the PBMs obtained volume discounts from companies that made the drugs the insurers still did cover. Second, they pressured doctors and pharmacists to herd patients onto those medications. Taking cash from both the drug companies and the insurers, PBMs grew into extremely powerful, profitable middlemen. By January 2006, the three largest PBMs Medco Health Solutions, Caremark (which has announced a merger with CVS) and Express Scripts (which is also seeking to merge with Caremark) were processing prescription benefits for more than 150 million patients and generating combined revenues of $89 billion. And over the past year, PBMs have been able to extend their business model into the Medicare population. That's because the government doesn't run Part D directly, the way it operates Medicare's hospital, physician and home health care programs. Instead, beneficiaries join private drug plans, which buy pharmaceuticals, dispense them and get reimbursed by Medicare, and those plans are using PBMs to obtain drugs and set formularies. PBMs offer pharmacy management services similar to those of an internal pharmacy department, but these services are on a contract basis and a grander scale. Why did PBMs develop if HMOs were

capable of developing their own internal programs? It is important to differentiate the types of MCOs and purchasers of pharmacy benefits that became customers of PBMs. Typically, staff and group model HMOs with owned medical centers and in-house pharmacies operate their own pharmacy benefit management programs without using PBMs (although some may use the claims-processing services of PBMs). However, when staff and group model plans add an independent practice association (IPA) or network model component, they may use a PBM to manage the community network, mail service and other management components. Therefore, customers of PBMs are generally those that do not own their own pharmacies but rely on a community pharmacy network or mail service for delivery of the prescription benefit. These customers are typically IPA and network HMOs, PPOs, POS plans, managed in-demit programs, state Medicaid programs and self-insured employer groups. As a result of the growing need for cost-efficient pharmacy benefit management within managed care, self-insured employer programs, and Medicaid programs, PBM membership grew rapidly. The PBM industry began to evolve when managed care principles, such as co-pays and provider networks were applied to the pharmacy benefit in an effort to control costs. Growth in the PBM industry was driven by manufacturer rebates, manufacturer acquisition of PBMs, and self-insured employers seeking to reduce drug costs. Recently, the industry has focused on clinical services and consolidation in an effort to improve margins, as well as negotiating power with retail pharmacies and manufacturers. The evolution of the PBM industry as a managed care entity can be categorized into four major phases as depicted in the diagram below:

Diagram 1: The Four Major Phases

Phase I: Inception (1980 1990) This Phase marks the beginnings of the PBM industry as managed care organizations carved out the pharmacy benefit, and mail service. Pharmacy claims processing companies emerge; Phase II: Dramatic Growth (1990 1994) In this Phase there was a rapid growth in enrollment of managed care clients, penetration of the employer segment, emergence of rebates and manufacturer acquisitions of PBMs; Phase III: Scrutiny and Saturation (1994 1998) Manufacturers divest PBM operations, rebates begin to diminish, and a large percent of the privately insured population contracts with PBMs; Phase IV: Consolidation and Repositioning (1998 Today) Industry consolidates to improve margins and market power and to realize economies of scale, while facing increased pressure to manage clients drug spending and comply with new regulations. Pharmacy Benefit Managers (PBMs) have evolved over the last three decades from basic claims administrators to more complex organizations offering a wide range of prescription drug management tools. The below diagram further explains the evolution of PBMs from small business offering single services such as Claims Processing or Mail Order Pharmacy to a Total Health Management Company offerings Advanced Services such as Evidence Based Formulary or Disease & Specialty Care Management. PBMs have evolved into a potent industry that has changed the face of pharmacy and made the large PBMs extremely profitable. The following are some pointers to illustrate this. PBMs now manage about 75% of all drug claims. Claims processing is fully automated. Pharmacies submit claims directly from in-store computers and they are processed online by the PBMs, typically in less than five seconds. In most cases, the pharmacy receives payment from the PBM about a month after the prescription is filled. While there are about 100 PBMs, three dominate the industry and manage over half of all retail prescriptions. The growth of PBMs has had a profound effect on the economics of retail pharmacy. PBMs have used their marketplace dominance to ratchet down reimbursements, resulting in significant savings to health plan sponsors at the expense of drug retailers. All of the large PBMs are huge, publicly traded firms. There has been considerable consolidation.

2.3 Evolution of PBM Services

While PBMs continue as pharmacy claims processors for plan sponsors, they have evolved into something more. Some years ago they decided to act as principals in managing prescription claims, to enable them to show top-line revenue for these claims. Accordingly, many believe the PBMs now act as fiduciaries. But PBMs, as a rule, refuse to accept this responsibility because acknowledging this

expanded role would sharply curb many of their highly profitable business practices. This issue is at the forefront of much of the litigation aimed at PBMs. Diagram 2: Evolution of PBM Services

PBMs typically offer the following capabilities, with different PBMs excelling in different areas. Pharmacy Networks PBMs contract with retail pharmacies to fill members prescriptions. Pricing typically entails two components: an ingredient cost, usually set at a discount from the most commonly used benchmark price, the average wholesale price (AWP) for brand-name drugs or the maximum allowable cost (MAC) for generics; and a dispensing fee, meant to compensate the pharmacy for its effort in filling the prescription. The larger PBMs all contract with about 9095 percent of the nations nearly 60,000 retail pharmacies. Mail Service Most PBMs offer the option of mail service for maintenance prescriptions that do not need to be filled instantaneously. A growing trend among employer-based plans is to mandate mail service for long-term prescriptions or to strongly encourage its use through cost-sharing incentives. The top PBMs all run their own mail-service operations, which are highly mechanized to speed processing and minimize labor costs. Claims Administration PBMs pay claims on behalf of plan sponsors and tell pharmacies how much cost sharing to collect from beneficiaries. Some 9899 percent of pharmacy claims today are paperless, because of the early adoption of standards for claim formats and drug product identification through the National Council for Prescription Drug Plans (NCPDP).

Formulary Management Working through quasi-independent panels known as pharmacy and therapeutics (P&T) committees, PBMs define lists of drugs approved for reimbursement by their clients. Formularies are set with both clinical appropriateness and financial factors in mind. Where multiple therapeutically equivalent drugs exist in a class of drugs, the P&T committee may designate which drugs are to be preferred. Preferred drug lists often underpin benefit plan designs, whereby low-cost generic drugs demand the least beneficiary cost sharing, preferred brand-name drugs require mid-level cost sharing, and non preferred drugs have high cost sharing. Manufacturer Price Negotiation PBMs negotiate with drug makers for the prices of all of the drugs they manage. This is true even though PBMs do not actually take possession of many of the drugs their enrollees consume: those dispensed in retail pharmacies. Deals usually are structured to generate rebates from manufacturers based upon either the total volume of drugs purchased or, for drugs in competitive therapeutic categories in which a PBM may identify one drug as preferred, a percentage share of the market. PBMs profit in part by keeping a share of the rebates. Large PBM clientshealth plans and self-funded employersincreasingly demand that PBMs pass more of the rebates through to them. PBMs deals with manufacturers may also net administrative fees for the PBM, such as for acting as the rebate conduit between the manufacturer and the ultimate customer. Utilization Review PBMs may use their databases and real-time claim-payment technology to check for medication problems at the point of dispensing: for example, adverse interactions between two or more drugs prescribed to a patient, or over- and underuse, as when a beneficiary refills a prescription too early or too late. When a problem is found, the PBM may alert the dispensing pharmacist or the prescribing physician(s). The same data sets also allow PBMs health plan clients to profile physicians prescribing patterns. Medication Therapy Management Some PBMs also employ techniques to improve the quality or cost, or both, of pharmaceutical care. Tools may include prior authorization requirements for selected drugs known to be prescribed widely for offlabel uses or to be costly compared to therapeutically similar alternatives; consumer education, such as mailers discussing the conditions indicated by the drugs received by beneficiaries; physician education, conveying evidence that counters pharmaceutical manufacturers detailing; compliance and persistency programs meant to make sure that patients actually take their medications; and disease management programs, which enroll patients having targeted chronic conditions and help them manage those diseases to avoid flare-ups. Electronic Prescribing Not yet widely adopted but strongly encouraged by MMA provisions, electronic prescribing allows physicians to write prescriptions directly into computers or wireless handheld devices. The device shows current information on patients eligibility, coverage, and formulary limitations, which may help in choosing the most appropriate drug that, will cost the patient and the payer the least. The prescription can be transmitted instantly to the patients chosen participating pharmacy and to the PBM for payment at the same time. The major PBMs have created an electronic prescribing utility, RxHub, to distribute formulary and medication history information. Similarly, the top pharmacy chains have created a mechanism called SureScript to transmit prescriptions between physicians and pharmacies.

Service Enhancements With the market for PBM services largely saturated, PBMs are growing via service enhancements. A recent industry thrust has been into higher-margin specialty pharmacythat is, drugs used by small numbers of seriously ill people who require costly, often hard-to-deliver medications via injection or infusion. Many such drugs are physician-administered and are already covered under Medicare Part B. Traditionally physicians purchased these drugs and then billed payers, including Medicare, at prices well above the acquisition cost. To control costs, some health plans now buy directly from specialty pharmacies, which then deliver the drugs to physicians offices.

3. PBM Services
PBMs may provide administrative services, clinical services, or both types of services to their clients, and may manage the retail pharmacy, mail pharmacy, or integrated (mail and retail) benefit.

3.1 PBM Administrative Services

PBMs Administrative services include client services, pharmacy network administration, mail pharmacy, claims adjudication, member services, and manufacturer contracting and rebate administration.

Client Services
Client services include benefit administration, eligibility administration, and reporting.

Benefit Administration
Benefit administration is the administration of drug benefit designs. It includes setting up and maintaining drug coverage and exclusions, setting limits on drug coverage, and defining member cost sharing requirements (co-pays). Benefit plan designs specify the prescription drugs that are covered. A drug benefit plan typically covers ethical pharmaceuticals. Ethical pharmaceuticals are drugs approved by the Food and Drug administration (FDA) for treatment of specific disease states specified by the FDA. Ethical pharmaceuticals require prescriptions. Cosmetic and lifestyle are generally excluded from the drug benefit (members pay for excluded medications themselves). Biotech injectables, infused medications, and other medications dispensed at an inpatient setting are typically covered under the medical benefit, and not included in the drug benefit. Clients may maintain several drug benefit plans. This allows them to offer different coverage for populations with different needs (e.g. exempt, non-exempt, retirees and their dependents). Clients can vary benefit design by employee type, such as exempt versus non-exempt or part-time versus full-time. Clients may extend pharmacy and medical benefits to qualified retirees. Typically, retirees cost sharing requirements and coverage limits differ from active employees. Coverage is typically extended to members and dependents of active employees. Dependents are typically defined as a members spouse and their children. Coverage of children can vary by age and whether or not the child is in college. Beyond a defined age limit, children are no longer considered dependents and are excluded from coverage under their parents pharmacy benefit. Benefit plans also specify how members share the cost of their drug benefit with their employer or group (co-pays, co-insurance, and deductibles). These cost sharing arrangements are often used to encourage members to select generics or lower priced drugs. Co-pays are fixed amounts that members pay for every prescription. Co-pays can vary depending on whether the prescription is dispensed from a mail pharmacy or retail pharmacy, whether a brand or generic is dispensed (i.e. a two-tier structure), and whether the drug is featured on the formulary (i.e. a three-tier structure). Coordination of benefit (COB) programs the practice of coordinating coverage for members eligible for more than one pharmacy benefit are not typically administered by PBMs because the cost savings have proven insufficient to warrant the administrative cost and burden to the member. COB programs typically require members to submit paper claims to their primary insurer. Once the primary insurer has paid and provided an explanation of benefits, the member is then required to submit a paper claim to the secondary payer for any outstanding amount. Most clients functioning in the secondary payer capacity

choose to pay whatever out-of-pocket expenses the primary payer has not covered, but some apply their own co-pay amounts. Most of the leading PBMs offer a COB program. As stated above, none of these programs are administered on a real time basis (e.g., at the time a claim is submitted from the point of service for adjudication), but rather rely on paper claims. There is typically an added administrative charge for COB programs. In one of the Industry reports, several leading PBMs have stated that there appears to be increasing interest in COB, as clients look for ways to stem the rising costs of drugs. In general, clients with the richest benefit plans (e.g., broad drug coverage, low co-pays) and employees eligible for drug benefits elsewhere, stand to benefit the most from implementing a COB program While some drug benefit plans still use a single co-pay structure (e.g. $5$10) for all prescriptions, some use a two-tier differential copay structure that differentiates branded drugs from generics. Under this structure, members pay lower co-pay amounts (e.g. $5 $15) for generic drugs and higher co-pay amounts ($10$25) for branded drugs. In addition, most drug benefits plans include a three-tier co-pay structure that differentiates branded, generic, and non-formulary. Under this structure, members not only pay differential co-pay for brand ($10$25) versus generic ($5$15), but also pay higher co-pay for using non-formulary drugs ($15$50). Non-formulary drugs are usually branded drugs for which the PBM does not receive manufacturer rebates. In the spring of 2000, 80% of pharmacy benefit plans offered three-tier co-pays, a significant increase from 36% in the spring of 1998.61 Some clients also use a fourth co-pay tier for lifestyle and/or biotech drugs. Clients often require a 50% co-insurance for drugs in this tier, thereby requiring the member to pay one-half the cost of the drug. (The most restrictive plan designs only cover formulary-listed products, and typically require a generic be dispensed if available. Non-formulary drugs are excluded from the benefit. These plans are favored by HMOs that have assumed risk for the cost of their members drug benefit. Co-pays are usually comparable for mail and retail, even though retail pharmacies typically fill a 30-day supply of prescriptions. Mail pharmacies fill a 90-day supply of the same prescription for the same co-pay or one that is only modestly higher (typically twice retail); the overall cost to the member is generally onethird lower through the mail pharmacy. This encourages the member to use the mail pharmacy, where deeper discounts off the ingredient cost are found than in retail pharmacies, thereby reducing the cost of the pharmacy benefit. Co-insurance - members pay a fixed percentage of the cost of each prescription. Typically, the coinsurance percent (usually 20%) is fixed irrespective of the type of drug dispensed (brand, generic, or non-formulary). However, many clients are moving toward differential co-insurance based on the category of drug. For example, members pay 10% for generics, 20% for branded and 30% for non-formulary. This type of cost sharing has been a traditional feature of indemnity programs, but not widely used in PBM administered plans. Deductiblesthe amount of money a member has to pay out-of-pocket before the drug benefit program beginsmay be used in conjunction with co-insurance and co-pays. For example, some drug benefit plans include a $50 annual deductible. The member is responsible for all drug costs equal to $50 or less. Once annual drug cost exceeds $50, the member only pays the relevant co-pay or co-insurance. Pharmacy costs are often included as part of a members total medical benefit. Clients may establish maximum annual benefit limits on the amount they will pay for medical (and pharmacy) costs per year (e.g. $1 million).

Eligibility Administration

Client services include enrollment and eligibility administration services that assist clients in registering their members and dependents for the drug benefit. PBMs generally do not register members and their dependents for their drug benefit. The clients handle this process, as well as the collection of member premiums, and provide the PBM with enrollment and eligibility information. Key information a PBM receives from its clients for an eligible member includes name, unique identifier, age, sex, date of birth, and benefit plan. An eligibility file is created from this information, which is used to verify the members eligibility for coverage during claims adjudication. Enrollment activity for the PBMs peaks in June and December, as these months are typically the enrollment periods prior to the beginning of a clients new benefit plan year. Eligibility updates are provided on an ongoing basis for major life events (marriages, births, and deaths), and to account for new and terminated employees. PBMs typically require several weeks to map and load a new enrollment file, and one or two days to administer eligibility changes. Currently, no industry standard exists to support enrollment or eligibility maintenance processes. PBMs receive enrollment information in a variety of formats, including floppy disk, magnetic tape, and hard copy. Although PBMs generally require the same information (e.g., name and date of birth), each PBM has developed its own standard. In addition, clients often provide this information in their own formats, requiring the PBM to map the data into the eligibility file used during claims adjudication.

Reporting
As an aspect of client services, PBMs provide their clients monthly, quarterly, and annual reports that focus on drug utilization, drug cost, and service issues. The client and the PBM, to anticipate and manage utilization trends and costs, use these reports and combine them with information about trends in drug development (new drugs on the market, patent losses, etc.). Monthly reports provided to clients typically include standard cost, utilization, and performance indicators. These include claims data such as total drug cost, total ingredient cost, total cost sharing, total cost savings from generic and therapeutic substitution programs and denied claims, and reports that list the top pharmacies by cost, top prescribers by cost, and top drugs by cost. Quarterly executive summary reports often provide trend data that includes member demographics, plan cost sharing averages, average ingredient costs, brand/generic dispensing rates, retail network performance, and mail pharmacy performance. Annual reports typically summarize the plans performance during the year, and often include a statistical summary of cost, utilization, and service indicators. In addition, these reports provide a more detailed analysis of the effectiveness of specific programs, such as maximum allowable cost (MAC) pricing and utilization and formulary management programs. PBMs will provide ad-hoc or customized reports to clients for an additional cost. PBMs typically charge per hour fees for computer programming and other resources required for producing these reports.

Client Service Support

PBMs assign a client service team to support their largest clients (smaller clients are typically assigned an account coordinator). The client service team is the primary contact for the client to coordinate enrollment, benefit set up, and administration, member communications, and issue resolution. Client service teams can be dedicated or non-dedicated. Dedicated teams exclusively service specific clients for an additional cost; non-dedicated teams provide general support to many clients.

Pharmacy Network Administration

Pharmacy network administration maintains the PBMs extensive network of pharmacies. This includes network development, network contracting, reimbursement, and pharmacy audits.

Network Development
To fill their members prescriptions, PBMs develop and maintain a network of chain and independent retail pharmacies, supplemented by mail and specialty pharmacies .PBMs offer their clients a choice of a standard pharmacy network, or a customized network. A standard network provides national coverage, and is the network frequently selected by clients. A customized network allows a client with regional or unique needs to receive deeper price discounts than the PBM offers through its standard network, but at some inconvenience to the members. In general, the deeper the discount, the fewer the pharmacies that are willing to participate in the network and the farther a member will have to travel to get a prescription filled. Pharmacy networks are designed to provide good access to retail pharmacies at the lowest cost. The more restrictive a network (less access), the better the discounts. In some cases PBMs can reduce the number of retail pharmacies in the network by 20%, obtain better pricing, and yet still meet their contractual obligations regarding pharmacy access typically 15 miles from a members home in urban and suburban areas. Most PBMs require their network pharmacies adhere to the policies and procedures of the PBM, such as: Reasonable hours of operation, Promotion of generic substitution, Adhering to a pricing formula, and Submission of U&C charges.

Additional requirements typically include: Submission of electronic claims, using the latest NCPDP format; Active membership in the National Association of Boards of Pharmacy (NABP) (The numeric identification number assigned to the pharmacy is verified by the NCPDP); State licensure of the pharmacy and pharmacists, with the licenses clearly displayed at the pharmacy; Evidence of a valid tax ID number and an active DEA number; Proof of professional liability insurance; Demonstration that all prescriptions are dispensed in accordance with applicable state laws; Maintenance of a customer signature log; and No claims, settlements or judgments outstanding.

Network Contracting and Reimbursement

PBMs contract with pharmacy chains at the national level and with independent pharmacies directly, or through Pharmacy Services Administrative Organizations (PSAOs). PSAOs are group purchasing organizations for smaller, independent pharmacies. PSAOs improve contracting efficiency for independent pharmacies, and allow them to contract with PBMs at discount rates that are comparable to those received by larger, retail chains. Key terms of these contracts include the pharmacy reimbursement rates and timing, the PBMs right to audit, and minimum performance requirements, such as generic dispensing rates. Pharmacies are reimbursed (with the cost passed onto PBM clients) the ingredient cost of the drug dispensed plus a dispensing fee, less the members co-pay by the PBMs. As a result, the PBM is not at risk for the cost of the drugs. Retail pharmacies are reimbursed either every week or every other week. At the time of claims adjudication, the claims processing systems sets the amount the pharmacist will be reimbursed. PBMs typically guarantee an overall pharmacy network reimbursement rate for their clients, and separately negotiate reimbursement rates to pharmacies that allow them to meet client commitments. The actual rates the PBM receives will vary by pharmacy chain and network. The PBM may contract with certain pharmacy networks for deeper pricing discounts and lower dispensing fees than it is obligated to provide its clients. In other cases, the pharmacy discounts are less favorable relative to the contracted rates a PBM receives from its clients. If the PBM is successful, it retains the margin while meeting its contractual obligations.

Pharmacy Audits
PBMs retain the right to audit retail pharmacies participating in their PBM network. This enables the PBM to monitor, deter, and recover fraudulent or erroneous claims. The right to audit is stipulated in the contract the pharmacy holds with the PBM. Studies have found that approximately 3% of claims submitted to PBMs from retail pharmacies are fraudulent, and 2% are claims for which payment should have been denied. Audits of retail pharmacies are a standard service PBMs provide their clients. Pharmacies with higher than normal abuse indicators are typically targeted for an onsite audit. PBMs use a variety of utilization and cost reports to identify likely abusers and then target them for audit. Indicators of abuse include high average prescription price, high refill percentages, and high volumes and utilization. Audits can be categorized into off-site, which includes desk-top and real-time, and on-site. Desktop audits identify and detect patterns of abuse using statistical probabilities for 2030 key indicators. Examples of these indicators include the brand to generic dispensing ratio and the average pills dispensed per script. Desktop audits are used to monitor the pharmacy network, and prioritize pharmacies for on-site audits. Real time audits enable PBMs to quickly identify erroneous or fraudulent claims and mitigate the potential for overpayment. For example, a pharmacy that submits two prescriptions for the same drug at the same time as opposed to one prescription could receive a phone call questioning whether this should be submitted as one prescription, thereby reducing the dispensing fees paid and co-pays collected. Real time audits save the PBM the time and expense of an on-site audit, and have a sentinel effect on the pharmacy network; they also act as a safeguard against wider fraud and abuse. Criteria for real time audits are built into the claims adjudication process. Claims selected for audit are routed to the retail pharmacy operations group, from which the outbound phone call is placed.

On-site audits are limited to pharmacies suspected of heavy abuse. These audits are expensive for the PBMs, and often require the use of outside auditors and consultants. During an on-site audit, the prescription records maintained by the pharmacy are reviewed and compared to the information provided via the claims processing system. A research conducted on some of the leading PBMs found that they each perform 30,00040,000 desktop audits and 500 1,500 field audits annually. These audits resulted in the annual removal of between 5 and 15 retail pharmacies from the PBMs network, and the recovery of millions of dollars from false or erroneous claims. Most of the PBMs sent the recoveries back to their clients; however, some of the PBMs retained a portion of the recovered monies to cover their costs. Details regarding PBM audits and results are considered proprietary and confidential to the PBMs.

Mail Pharmacy Operations

Most pharmacy benefit plans offer a mail pharmacy service as a way to promote cost savings and improve access. The cost savings and convenience of mail pharmacies are particularly attractive to seniors with chronic conditions that require long term medications. Since there is a delay in receipt of medications via mail pharmacies, mail pharmacies are appropriate for long-term medication for chronic illnesses. PBM Ownership of Mail-Order Pharmacies A PBM that owns a pharmacy (whether retail or mail) is considered vertically integrated. A vertically integrated PBM may have a greater ability to influence which drugs are dispensed under the plans it administers than a non-vertically integrated PBM. If plan sponsor contracts with PBMs do not properly align the incentives of PBMs with those of the plans, this lack of alignment could create a conflict of interest. Potential conflicts of interest should be rare, The economic literature on vertical integration suggests that it can lower costs. First, integration can reduce transaction costs. In addition, it also avoids double markups (or what economists call double marginalization) in which two independent, vertically related firms each have some ability to charge above marginal cost. PBMs own most mail order pharmacies, allowing the PBM to promote cost savings for its clients and members, increase formulary control, and drive compliance. A PBM that owns a mail-order pharmacy may have an incentive to charge a lower overall price for the product than two independent entities setting prices optimally. Members may be encouraged (through the co-pay) or required to use mail pharmacies when appropriate. Mail pharmacies also enable PBMs to promote cost savings for their clients through logistic and fulfillment of economies of scale: economies of scale include lower acquisition cost due to volume purchasing, larger dispensing quantities, and therapeutic substitution programs. The pricing discounts offered through mail pharmacies are larger and the dispensing fees lower than those offered through retail pharmacies. Mail pharmacies also provide the PBM an opportunity to intervene with therapeutic substitution programs before a prescription is filled, thereby facilitating the use of less expensive medications. Mail order pharmacies typically dispense a 90-day supply of drugs at two-thirds the co-pay for three 30day supplies at retail. For example, consumers who use mail pharmacies will often pay $10 for a 90-day supply for a generic drug, but will pay $5 per prescription or a total of $15 for three 30-day prescriptions at retail pharmacies.

Mail pharmacies also offer members the convenience of direct delivery to home or another desired location. For seniors that have more than one address, the mail pharmacy helps eliminate the need for the paper claims that may result from using a non-network pharmacy in remote locations. In addition, members can easily request refills via the phone or Internet. Mail-Order Pharmacy Process: The major processes in a mail pharmacy are receipt, translation, therapeutic substitution, and fulfillment. Receipt: In the typical mail-order program, the member mails their prescription and co-pay, along with the necessary forms, to the mail pharmacy. The mail pharmacy receives and opens the mail, and deposits the co-pay into a banking account. Co-pay remittances are typically restricted to money orders, credit cards, or checks. This first process is commonly called receipt. Translation: The next step in the process is translation. Here the prescription is entered into the claims processing system for adjudication. If the prescription is illegible, the mail pharmacy will call the prescriber for confirmation. Therapeutic Substitution: Once in the claims processing system, the prescribed drug is evaluated to determine whether a less expensive drug within the same therapeutic class can be substituted. If a substitute is available and clinically appropriate for the member, the prescriber is contacted and asked if a switch can be made. Claims for which drugs have been switched are re-adjudicated. Fulfillment: Once the drug to be dispensed has been determined, the mail pharmacy can then pick, pack, and ship the order. This process is called fulfillment. State-of-the-art mail pharmacies rely heavily on robotics to automate this process. The larger PBMs fill between 10 and 60 million mail prescriptions annually, with very low error rates (less than 0.01%). On average, the members receive their prescription in about 10 days. Prescriptions are typically mailed by an overnight delivery service. Prescription refills follow a similar process. Prescriptions can be refilled over the phone or via the Internet. In addition, members can request that refills be mailed to a different address than the original prescription. Nonetheless, some have alleged that a conflict of interest arises when PBMs both administer the pharmacy benefits for a client and sell drugs to a clients members via the PBMs owned mail-order pharmacy. These self-dealing arrangements purportedly would provide PBMs an opportunity to manipulate drug dispensing at their mail-order pharmacies to enhance their own profits at the expense of plans and members through the three business practices discussed above (lack of generic substitution and dispensing, interchange to more expensive brand products, and repackaging of drugs into more expensive units). One study concluded on the basis of high level data and theoretical calculations that self-dealing could cost the U.S. Government and Medicare beneficiaries up to $30 billion during the period 2004-2013.

Claims Adjudication service

One of the key services PBMs provide is the online adjudication of drug claims commonly referred to as claims processing. This process examines the members eligibility and drug coverage to determine the pharmacys reimbursement and members co-pay. In addition, edits are applied to ensure the clinical appropriateness of the drug dispensed, and to drive appropriate utilization. In general, claims are processed at the PBMs corporate location. However, as a result of growth through mergers and acquisitions, a portion of claims may be processed at the legacy companys corporate headquarters site. In general, PBMs own and operate their claims processing systems. At the point of service (POS), which can be the retail or mail pharmacy, the claims adjudication process begins. Upon receipt of the prescription, the pharmacist enters it into the computer along with information from the members drug card. This information is then sent to the PBMs claims processing system via a switch vendor. A switch vendor is an independent company that maintains the mailbox routing information necessary to send a claim from a pharmacy to the appropriate PBM. Leading switch vendors include Envoy Corporation, MedAmerica, and National Data Corporation. Switch vendors typically charge the pharmacy a transaction based fee for their service.

Once the PBMs claim processing system receives the claim, the claim is adjudicated and the pharmacist sent an electronic message confirming the members eligibility and drug coverage, and stipulating the amount the pharmacy is to be reimbursed and the co-pay to be collected. The PBMs paid claims file stores the transaction for reporting and audit purposes.

During claims processing, the information submitted by the pharmacy is checked against the eligibility file to validate the members name, benefit plan, and birth date. Upon confirming eligibility, the prescription is then checked against the benefit design to confirm drug coverage and the relevant co-pay/co-insurance to be paid by the member. The claims processing system also determines the type of network pharmacy submitting the claim (either mail or retail), and then calculates the appropriate reimbursement of ingredient costs and dispensing fee the pharmacy will receive. During the adjudication process, a series of edits are applied to the claim, with corresponding messages sent to the pharmacist. These edits are intended to ensure the clinical appropriateness of the drug dispensed, and to drive appropriate utilization. The edits can be either soft, in which case the pharmacist can override the edit, or hard, in which case the pharmacist must take the appropriate action or the claim will not be reimbursed. Soft edits are advisory messages, which the pharmacists can act on or ignore. Many pharmacists ignore soft edits because of a lack of time and/or incentives to counsel patients or call physicians. An example of a soft edit is a message indicating the dispensing of a non-formulary drug. Hard edits are messages that the pharmacist cannot override, and are an effective way to control a drug benefit. The pharmacists or member assumes the cost of prescriptions filled contrary to a hard edit. Examples of hard edits include, but are not limited to, messages indicating the prescription is being refilled too soon, or that the drug being prescribed is subject to an NDC lock out. A National Drug Code (NDC) lock out is commonly used by PBMs to control the dispensing of drugs marketed under more than one name (e.g. Calan and Isoptin). The PBM typically contracts for rebates with the manufacturer of one of the drugs, and uses an NDC lockout to prevent their members from receiving the non-contracted drug. NDC lockouts are an effective way for a PBM to receive higher rebates for the preferred drug, without clinically impacting their members drug benefit. The PBM industry uses a standard format for the electronic transmission of claims for processing. This standard was created and is maintained by the National Council for Prescription Drug Programs (NCPDP), and is available for a small fee. All PBMs and chain and independent pharmacies use this standard. Nearly all PBMs report that their claims processing systems have an uptime of 9899%, excluding scheduled downtime periods. All PBMs schedule downtime, typically a few hours every week or other week for system maintenance. Approximately 1% of all claims processed are paper claims. Paper claims are appropriate when unique circumstances arise that prevent a claim from being processed electronically. For example, paper claims may be required for new employees who are not in the PBMs eligibility system, or if a member is on vacation in a remote area without a network pharmacy. In the case of a paper claim, the member pays for the drug out-of-pocket and then submits the claim to their health plan for direct reimbursement, minus the appropriate co-pay. Paper claims are entered directly into the claims processing system by the PBM. PBMs charge for the administration of paper claims. Clients typically pay $0.25$0.40 per electronic claim processed. While many PBMs do not charge retail pharmacies claims processing fees, some do charge retail pharmacies $0.02$0.03 per processed claim. For paper claims, clients are typically charged between $1.00 and $1.50 per claim processed. Details regarding the edits and controls applied during claims adjudication are considered proprietary and confidential to the PBMs.

Role of Switching Companies: Organizations known as national pharmacy claims switch vendors (National Switches) evolved to act as a focal point for pharmacy claims that were destined to go to the hundreds of different claims processors that entered the market. These national switches, empowered by the NCPDP standards for pharmacy claims format and content, provided a common phone number, a common communication protocol, a source for a technical support for telecommunication problems, and a consistent level of service and availability to the pharmacy. The national switches also contributed to the growth of pharmacy claims processors and pharmacy benefits managers by allowing them to offer adjudication services without having to support the communication needs of thousands of different pharmacies. Today the national switches offer their services through legacy dial-up communication mechanisms and through these more modern, higher speed technologies. With these high-speed, high-capacity communication technologies, more data can be exchanged between the pharmacist and other parties in the drug distribution process. In addition, the dispensing process is improved; there is access to increased information, improved drug utilization review algorithms, and other pharmaceutical care and managed care initiatives. NCPDP and other standard-setting organizations have used the successful model developed for the submission of pharmacy claims to bring the advantages associated with electronic data interchange to other dispensing processes. The SWITCH also receives transactions from providers and intermediaries as claims pass from providers to adjudicators. Switching companies accept claims, optionally perform format conversions, may perform pre-editing, and then pass the claims to the appropriate processor. The reply from the processor also may pass through the switch on its return to the provider. Providers utilize the services of a switch for a number of reasons, including the following: A processor may not support Dial-Up communications All claims can be transmitted to one central point, the Switch Increased reliability of communications

Member Services
Shortly after enrollment, PBMs provide their members an information packet to help them understand their drug benefit. This welcome packet typically includes: Members drug card Drug coverage Required co-pays Benefit limits List of local network pharmacies Information on how to access their pharmacy network Information on how to use the mail pharmacy, and

Submit a paper claim. PBMs may also provide the member a copy of the formulary. PBMs typically produce the members drug cards, and allow their clients to customize the drug cards with a private label. PBMs operate a member services call center that provides a 24-hour toll-free help line to answer benefit questions, locate network pharmacies, or request additional forms and ID cards. The member services department can provide dedicated or non-dedicated support. PBMs also provide 24-hour toll-free support to pharmacies in their pharmacy network. Pharmacists call the PBMs retail customer service area for assistance in entering the information needed for claims adjudication, requesting prior authorization, and to ask questions that better help the member understand their drug benefit or the pharmacist understand their reimbursement. Typical phone wait time for retail customer service is less than 30 seconds. The call center and customer service representatives providing member support are typically the same staff that supports the retail pharmacy network.

Manufacturer Contracting
PBMs contract with the manufacturers of branded drugs to receive rebates and administrative fees, in return for the preferential treatment and increased market share of these drugs. Manufacturers pay rebates and administration fees to PBMs, because PBMs can influence the drugs that their members use. At a minimum, to be eligible for rebates and administration fees, manufacturers typically require PBMs to include the contracted drugs on the formulary with no restrictions; the manufacturers may also require PBMs to increase market share for their specific drugs above the national average. Additional requirements may exist -- such as restrictions concerning competitor products or the implementation of promotional programs (e.g. PBMs sending mailings to physicians and members encouraging the use of a specific product). -- Depending on the drug and the manufacturer. Generic drug manufacturers do not enter into these types of contracts because the PBM does not influence which generic brands are carried at the retail pharmacy. Rebates and administrative fees are commonly paid as a percent of the drugs wholesale acquisition cost (WAC)which represents the manufacturers sale pricewith rebates typically ranging from 515% of WAC, and administration fees from 13%. Rebates greater than 15% are rare, since manufacturers may set a new Medicaid Best Price, and are then required to rebate Medicaid claims at this level. Rebates and administration fees are paid monthly or quarterly. Once a rebate claim is received, the manufacturer has 3090 days to process and pay the rebate. The allocation of rebates to the client is dependent on the clients contract with the PBM. Some clients receive all or a fixed percentage of the rebates collected. Other clients may receive a guaranteed rebate the PBM is obligated to provide. PBMs are increasingly contracting with manufacturers for various rebate levels typically open, incented, and closedby type of drug benefit used by the client. For example, open formulary clients with limited control over the drug benefit might be offered a 3% rebate while a closed formulary client is extended a 7% rebate. PBMs also typically contract for pricing discounts and/or rebates for generic products (and some multisource branded drugs) stocked in their mail pharmacies. These pricing concessions are reflected in the mail pharmacy pricing that the PBMs offer their clients.

Patient Assistance Program

Some pharmaceutical companies offer medication assistance programs to low-income individuals and families. These programs typically require a doctors consent and proof of financial status. They may also require that you have either no health insurance or no prescription drug benefit through your health insurance. Patient assistance programs (PAPs) are programs set up by drug companies that offer free or low cost drugs to individuals who are unable to pay for their medication. These programs may also be called indigent drug programs, charitable drug programs or medication assistance programs. Most of the best known and most prescribed drugs can be found in these programs. All of the major drug companies have patient assistance programs, although every company has different eligibility and application requirements. Companies offer these programs voluntarily; the government does not require them to provide free medicine How do patient assistance programs work? An individual gets an application for the drug company program that has the medicine the patient needs. Information on medication available through patient assistance programs and the company programs offering these drugs may be found on the websites. Many application forms are available on websites and can be filled out directly on the computer or printed out. Some companies programs require that a physician or heath care advocate (someone working in a physician's office or in a clinic) get the form by calling the program. Many times in these cases, the patient assistance program will screen for eligibility before sending out the form. The form that is sent will have a patient specific identification number on it. After the form is filled out and submitted to the company, the drug company will decide whether the patient is eligible to receive the medication for free. If the patient is eligible, the medication may be sent to the patient's home, the physician's office or a local pharmacy depending on the program. Some, but not all, companies send letters letting patients and/or physicians know whether the patient has been approved for their patient assistance program. What are the eligibility requirements for patient assistance programs? Eligibility varies program by program. Generally, individuals must have incomes under 200% of the Federal Poverty Level, cannot have prescription coverage from any public or private source and must be a U.S. resident or citizen. Some companies require that the patient has no health insurance. Role of PBMs in PAP PBMs manage patient assistance programs and earn a fee from the manufacturer for administrative and pharmacy services for the delivery of certain drugs free of charge to doctors for their low income patients. PBMs through their specialty and home delivery operations distribute pharmaceuticals in for patients covered under Patient assistance programs. Medicare Doughnut Hole and Patient Assistance Program The term "donut hole" (or "doughnut hole") refers to a coverage gap within the defined standard benefit under the Medicare Part D prescription drug program. Under the defined standard benefit package, there is a gap in coverage between the initial coverage limit and the catastrophic coverage threshold. Within

this gap, the beneficiary pays 100% of the cost of prescription drugs before catastrophic coverage kicks in. Before reaching the doughnut hole in the Medicare Part D program, patients pay the first $250 for their prescriptions, and then 25 percent of their drug costs for the next $2,000. After that point, plan beneficiaries are in the doughnut hole coverage gap until their out-of-pocket costs reach $3,600. During this time, beneficiaries pay 100 percent of their prescription costs. Upon reaching the $3,600 out-ofpocket limit, Medicare Part D will begin covering a beneficiary's prescription drugs again. Many drug manufactures offer free or reduced-cost prescription drugs to low income Part D enrollees in the donut hole. Remember that drugs patients receive from a PAP may not count towards patients out ofpocket costs.

3.2 PBM Clinical Services

PBMs use a variety of clinical services to help their clients control the cost and utilization of their drug benefit. These services can influence the choice of prescriber, pharmacist, or patient, and can be performed prospectively, concurrently, or retrospectively. Clinical services are intended to work in concert with each other, and with the clients drug benefit. The most common clinical services used by PBMs include formulary management, therapeutic substitution, utilization management, and disease management. Some PBMs also offer consulting services and emerging clinical management programs to their clients. PBMs use a variety of methods to engage patients, physicians and pharmacists in clinical services. Telephone calls, written correspondence and faxes are the most common methods. In some cases emails and face-to-face meetings (academic detailing) are used. In addition, pharmacies are routinely sent electronic messages during claims adjudication.

Formulary Management
Formulary management is the process of developing and maintaining a list of preferred drugs, with the intent of promoting cost-effective clinical care. A drugs position on a formulary is typically a prerequisite for that drug to be eligible for rebates. PBMs use a variety of tools to manage pharmacy benefits, but the formulary is the centerpiece around which the other tools work. The PBM or the client may manage the formulary.

Development of Formulary System The prescription formulary was developed initially as a management tool. Early on, hospitals realized the need for an inpatient formulary. Without a listing of approved medications, there was no way a hospital pharmacy could control its inventory and ensure that physicians would have an adequate and consistent supply of medication for their day-to-day needs. In 1950, the Joint Commission on Accreditation of Hospitals (JCAH) encouraged formation of a Pharmacy and Therapeutics (P&T) committee and the development of a formulary system. By 1965, a P&T committee was required by JCAH before a hospital could receive accreditation. As early as 1969, the Task Force on Prescription Drugs realized that while "the use of a formulary is not a guarantee of high-quality medical care, rational prescribing, effective utilization review, and control of costs... the achievement of these objectives in a drug program is difficult, if not impossible, without it." With the shift of health insurance toward managed care, insurers began to look at ways to control the utilization of the pharmaceutical benefit. At the time, most plans had experience with formularies for inpatient settings but not for ambulatory patients. The first approach was to have one unified formulary that would be applicable to both inpatient and outpatient care. The MCOs soon realized that the most efficacious product for an inpatient setting would not necessarily be the most appropriate therapy for outpatient use. Quite often the cost difference between pharmaceuticals purchased in the hospital and the same drugs purchased in a community pharmacy was tremendous. The cost of medication varied so widely that an inexpensive medication in the hospital could be extremely expensive when purchased at a retail pharmacy. So even though the same formulary might not have worked for both environments, cost savings had been proven in hospitals and increasing prescription drug costs made formularies a necessity for managing costs in the outpatient setting.

In addition to listing approved products, a formulary system should contain an educational component, organizational policies on prescribing, and procedures for the use of certain medications. It should also contain a drug use evaluation (DUE) process and, when appropriate, a drug utilization review (DUR) component. Finally, the system must have a procedure for prior authorization to use non-formulary medication when medically necessary. A formulary is a continually updated list of branded (and generic) drugs favored by the PBM (or its clients). Formularies often contain relative cost indices for comparable drugs, highlight preferred brands, and include treatment protocols, usage guidelines, and other clinical information. Formularies are typically distributed to primary care physicians, but patients and pharmacists may also receive them. Electronic messages are often sent to pharmacists during claims adjudication indicating products that are nonformulary. Formularies are typically produced yearly or every other year, with quarterly updates distributed during the interim. The P&T Committee The cornerstone of the formulary system is the Pharmacy and Therapeutics committee. PBMs use an independent Pharmacy and Therapeutics (P&T) committee comprised of pharmacists, clinicians and physicians from different specialties. Most P&T committees evaluate the drugs in particular therapeutic categories for clinical effectiveness and safety. In addition to evaluating all drugs currently on a PBMs national formulary, most P&T committees evaluate therapeutic class reviews and new drug monographs compiled from various public and private sources The P&T committee of the MCO can then take this formulary, along with the clinical and financial research provided by the PBM, and develop its own subset or custom formulary. Substantial public information is available about the efficacy of various prescriptions drugs in each therapeutic class. Based on this and other information, a plan sponsor can decide whether to accept a PBMs national or preferred formulary or to negotiate a custom formulary for its members. The documents of several PBMs indicate that plans can customize certain aspects of a PBMs formulary. The starting point for these formularies, however, is the PBMs national or preferred formulary list developed by the PBMs P&T committee. The PBMs or the clients Pharmacy and Therapeutics (P&T) committee decides which drugs are included on a formulary, with the intent of discouraging the use of marginally cost-effective drugs. Given the constant introduction of new drugs and the multiplicity of drugs in the same therapeutic categories, P&T committees meet regularly to keep the formulary current. The first consideration of these committees is the clinical effectiveness and safety of a drug. However, when multiple drugs exist with similar clinical results, issues such as cost-effectiveness and maximizing manufacturer rebates determine which drugs are included on the formulary. Some P&T committees classify drug for formulary purpose as include in formulary, exclude from the formulary, or optional. The P&T committee then ranks the drugs classified as optional on clinical effectiveness. Some PBMs claim that the P&T committee does not consider financial information, whereas others may consider the market share of the optional drugs and the likely customer reaction if the PBM excludes the drug(s) or prefers certain drugs. P&T committees consider the availability of both generic substitutes and therapeutic alternatives when deciding which drugs should be included in the formulary and where they should be placed within various tiers on the formulary. After the rankings are complete, the PBM decides which drugs to include on its preferred formularies. Tiered Formulary

A tiered formulary is one in which a members co-payment varies by the tier on which the drug is listed. On a typical 3-tier formulary the members co-payment would be the lowest for the first-tier, which includes generic drugs; somewhat higher for the second-tier, which usually includes preferred brand drugs with no generic equivalent; and highest for the third-tier, which includes non-preferred brand drugs or those brand drugs with a generic equivalent. Some plan designs include a fourth tier for drugs not included on the PBM formulary and for so-called lifestyle drugs, e.g., drugs to combat hair loss. The member would pay the entire cost of the fourth-tier drug, but it might be at a discounted price negotiated by the PBM for its members. The ascending rates of the co-payments are designed to create an incentive for the enrollee to choose the lowest cost, yet clinically effective, alternative. Similarly, a plan design may include co-payment differentials depending on whether the prescription is filled at the mail-order or retail pharmacy. Tiered formularies increased from 29% of covered workers in 2000 to 57% of covered workers in 2002, with three-tier formulary designs dominating.

Formulary Types Any P&T committee must first decide what type of formulary to administer. Formularies can be described as open or closed. In addition, the committees can mandate the use of generic drugs, request substitution, and designate who can prescribe and how much. Open Formulary - An open formulary is a list of the drugs preferred, but not mandated, by the PBM. Under this structure, all drugs are reimbursed regardless of formulary status. An incented formulary applies three-tier co-pays (e.g., generic, formulary brand, and nonformulary brand) or other financial incentives to influence patients to use formulary products. Closed Formulary - A closed formulary is a limited list of drugs chosen by the P&T committee. Only medications on this closed list will be covered by the prescription drug plan. A closed formulary limits reimbursement to formulary drugs, and may require generics be dispensed when available. Non-formulary drugs typically require prior authorization (based on medical need) to be reimbursed. Closed formularies generally offer several choices in each therapeutic category. When developing a closed formulary, the P&T committee must also set up protocols for obtaining authorization to use a non-formulary medication. Such authorization may require only a letter of medical necessity from the prescribing physician or it may mean documenting treatment failure with the formulary medication before authorization is granted. Closed systems require more effort than open systems, in that the physician must choose a product from a limited formulary and pharmacists often must contact the prescriber to adjust the prescription when the medication ordered is not on the formulary. Compared to open formularies, however, closed formularies contribute to more rational and objective pharmacotherapy, produce high rates of prescriber compliance, foster proper generic utilization, assist in driving performance- or market share-based contracts with pharmaceutical manufacturers, and may offer incentives to prescribers and pharmacists for certain interventions. Techniques to Ensure Formulary Compliance PBMs utilize various techniques to ensure formulary compliance, including generic substitution, therapeutic interchange, step-therapy and prior authorization protocols and reference based pricing. The latter two are more recent techniques used by PBMs. As mentioned above, in deciding which drug to include in the formulary (and their placement within various tiers on the formulary), the following two practices are followed:

(i) (ii)

Generic substitution and Therapeutic interchange

Generic Substitution Generic Substitution is the dispensing of a bioequivalent generic drug product that contains the same active ingredient(s) as the brand drug and is, among other things, chemically identical to the brand product in strength, concentration, dosage form and route of administration. Generic simply means that the drug is not sold as the brand name. The use of generic drugs is now widely accepted and they are commonly prescribed by physicians and dispensed at hospitals. While manufacturing generic drugs, the drug companies use the same active ingredients and are shown to work the same way in the body, they have the same risks and benefits as their brand name counterparts. Generic drugs are as safe as effective as the brand-name medications. In other words, their pharmacological effects are exactly the same as those of their brand-name counterparts. An example of a generic drug, one used for diabetes, is metformin. A brand name for metformin is Glucophage. (Brand names are usually capitalized while generic names are not.) A generic drug, one used for hypertension, is metoprolol whereas a brand name for the same drug is Lopressor. Many people become concerned because generic drugs are often substantially cheaper than the brand-name versions. They wonder if the quality and effectiveness have been compromised to make the less expensive products. The FDA (U.S. Food and Drug Administration) requires that generic drugs be as safe and effective as brand-name drug. Both brands and generics are of the same quality, as their facilities have to meet the same rigorous productions standards of Good Manufacturing Practice (GMP). Generic drugs are considerably less expensive than the brand-name originals, because generic manufacturers do not carry the investment costs for the development of a new pharmaceutical. The price of the generics is 30%80% lower than the price of the equivalent brand product. Generic medications provide a major benefit to the society, as they ensure access to quality, safe and effective medicines. Increasing the range of generic medications is essential for the healthcare. The healthcare systems save much money by promoting the use of cost-effective generics. About 50% of all prescriptions in the United States, and more than 40% of all prescriptions in Canada are filled with generic drugs. Generic substitution generally occurs without prior physician authorization when a consumer presents a prescription for a brand drug and the pharmacist fills the prescription with a generic version of the drug product. Indeed, many states legally require generic substitution when a generic drug is available. In contrast, dispense as written (DAW) orders on prescriptions for brand drugs require the pharmacist to dispense the brand drug for which the prescription is written rather than a generic substitute. With DAW orders, neither pharmacists nor PBMs have the discretion to substitute a generic drug for a brand drug unless they contact, and persuade, the physician and/or patient to allow generic substitution. Therapeutic Interchange Therapeutic interchange is the substitution of one drug in a therapeutic class for another drug in the same class. Therapeutic interchange occurs when a pharmacist substitutes a therapeutically equivalent, but chemically distinct, drug product for the drug product specified on the members prescription. There are two types of interchanges. The first type involves brand drug-to-brand drug interchanges. For example, a patient presents a prescription for the cholesterol-lowering drug Crestor, but the PBM, after obtaining physician approval, fills the prescription with Lipitor instead. The second type of therapeutic interchange refers to interchange of a generic version of a therapeutically similar brand drug for the prescribed brand

drug (e.g., generic Prozac is dispensed for a prescription for Zoloft). Brand name is the name under which a new innovator drug is developed and marketed. When a pharmaceutical company develops a new medication, they obtain patent for it. Brand-name drugs are usually given patent protection for more than 20 years. The patent protects the company investments (including research, development, marketing etc.). When the patent expires, other companies can introduce its generic version. Prior physician authorization is required before a pharmacist is allowed to interchange one brand-name drug for another. PBMs institute therapeutic interchange programs to encourage plan members to use formulary products or preferred formulary products. The formulary works in concert with the members drug benefit to determine which drugs are covered and the members co-pay. Drug formularies vary in their degree of influence and are classified as open, or closed. Step-Therapy and Prior Authorization Large PBMs and small or insurer-owned PBMs have used step-therapy and prior authorization programs to lower prescription drug costs and increase formulary compliance. Step-therapy refers to plan designs that will pay for certain more expensive drugs only if a physician first prescribes one or two less expensive prescription or over-the-counter drugs prior to prescribing a more expensive single-source drug from the same therapeutic category. Prior authorization refers to the requirement that the physician or patient receive prior approval from the PBM before certain non-preferred drugs will be reimbursed by insurance. Prior authorization often involves a clinical justification for the use of drugs that are prone to misuse or are especially costly. If a plan allowed the PBM to institute step-therapy programs, the PBM could require that a physician try two different generic non-steroidal anti-inflammatory drugs prior to prescribing a more expensive branded product such as a Cox-II Inhibitor used for inflammation and associated pain. The PBM could implement a step-therapy program by issuing point-of-service message that tell the pharmacist that insurance coverage is blocked for certain National Drug Code (NDCs) or that certain NDCs require prior authorization before the plan will pay for the prescription. Some PBMs are considering step-therapy programs for other therapeutic categories and drugs, including ACE Inhibitors, Proton Pump Inhibitors, Hypnotics, SSRIs, Enbrel (antirheumatic), and non-sedating antihistamines.

Reference-Based Pricing Some PBMs are exploring the use of reference-based pricing, which would cap the amount they will pay for a drug within a specific therapeutic class. According to one PBM, approximately a dozen therapeutic classes, representing 40% of the total amount spent on drugs are composed of several drugs that are similar in terms of safely and effectiveness, but vary significantly in price. Some PBMs are developing a reference-based drug formulary that will establish a reimbursement level for each therapeutic class. For example, a member could pay a small co-payment for products that are priced at or below the reference price. If a product is more expensive than the reference price, the member pays the difference between the product and reference prices. Control of formularies gives PBMs tremendous influence with drug companies. The manufacturers typically compete and pay a combination of rebates and fees to secure most favorable placement on a formulary. Drug manufacturers typically grant the following to the PBMs: Access rebates for placement of products on the PBM's formulary; Market share rebates for garnering higher market share than established targets; Administrative fees for assembling data to verify market share results; and Other fees and grants.

Therapeutic Substitution Programs

Therapeutic interchange/substitution refers to situations in which a pharmacy dispenses a preferred drug rather than the prescribed drug. There are two types of interchanges. The first type involves brand drugto-brand drug interchanges (brand-to-brand). For example, a patient presents a prescription for the cholesterol-lowering drug Crestor, but the pharmacy, after obtaining physician approval, fills the prescription with Lipitor instead. The second type involves brand drug-to-generic drug interchanges in which a generic drug that is therapeutically equivalent, but chemically distinct, from the prescribed brand drug is interchanged (brand-to-different generic). For example, with the prescribing physicians approval, generic Prozac is dispensed for a prescription for Zoloft. Therapeutic substitution programs are typically operated in mail pharmacies to encourage physicians and patients to switch to lower cost comparable drugs. Therapeutic substitution programs are used for two reasons: The P&T committee may have identified one drug as superior, and not a therapeutic equivalent to the other drugs in a particular therapeutic category; or The PBM has a contract with a manufacturer for rebates making one drug more cost effective than other drugs in the same therapeutic category. Therapeutic substitution requires the prescribers permission, because the substituted drug may have different side effects and drug interaction profile than the drug originally prescribed. Prescribers are contacted via auto-fax or by phone. The patients permission is also typically requested, but not required, prior to substitution. For members that object, the PBM usually provides the originally prescribed drug at no extra charge. Most PBMs focus their substitution programs on new prescriptions received in their mail pharmacy, as opposed to refills or retail prescriptions. PBMs target new scripts in the mail pharmacy due to the high cost of chronic-illness medications, and the amount of time needed to switch the drug. Most PBMs fill prescriptions received by their mail pharmacy within 72 hours. Also, it is easier to conduct Therapeutic Substitution at mail than at retail because, at mail, the customer has no expectation of receiving the prescription immediately. Thus, the mail-order pharmacist can obtain the prescribing physicians permission for the interchange without the pressure of the patient standing at the pharmacy counter waiting for the medication. Given the time required to administer therapeutic substitution programs, and the acute nature of most drugs dispensed in a retail setting, retail pharmacists do not typically engage in this practice. PBMs also target new scripts due to the low success rate of repeatedly contacting a prescriber after they have denied the initial request, as well as the risk of switching a patient that has been successfully maintained on a drug for an extended time. Some PBMs have attempted to develop therapeutic substitution programs for retail pharmacies. With these programs, PBMs provide a financial incentive for the pharmacist to contact the physician and request a substitution, with additional monies paid if the product is switched. The incentives are typically paid in the form of higher dispensing fees. The time needed to contact physicians and the acute nature of many of the medications dispensed make administering retail therapeutic substitution programs problematic.

Utilization Management
PBMs use a variety of utilization management programs to lower drug costs and drive appropriate utilization. These programs include prior authorization, drug utilization review (concurrent and retrospective), academic detailing, and patient education. Prior Authorization Certain drugs require prior authorization before they are covered under the drug benefit. Prior authorization is the pre-approval of a drug by the PBM before a pharmacy can dispense it. Currently, prior authorization of prescriptions is used only for a few chosen drugs. These are drugs that are very expensive and have major off-label uses not approved by the Food and Drug Administration, such as growth hormones, or drugs that require medical justification before coverage is approved, such as Viagra and Cox-2 Inhibitors. Before authorizing prescription of one of these drugs, the benefit manager asks the physician about diagnostic tests, symptoms, and other clinical measures that would establish the appropriateness of the drug according to evidence-based protocols. According to a recent study by ScottLevin the 10 therapeutic classes with the highest number of plans requiring prior authorization include antifungal, migraine treatments, select pain medications, antidepressants, cholesterol reducers, alphablockers, antiulcer/ulcer combinations, calcium channel blockers, sympathomimetic antiasthmatics, and macrolides.

Drug Utilization Review Drug Utilization review is a review program that evaluates whether drugs are being used safely, effectively and appropriately. DUR is a technique used by prescription drug program administrators and PBMs to manage drug utilization. PBMs are often the only source of information for an enrollees total set of prescribed medications because all network pharmacy purchases of prescribed drugs for an individual are held in one centralized electronic file. This is especially important when enrollees are prescribed medications by more than one physician or when enrollees use more than one retail pharmacy to purchase their prescriptions. To assure appropriate utilization of prescriptions, as well as compliance with the benefit design, PBMs perform drug utilization review (DUR) at the point of sale (concurrent DUR) and sometimes will also conduct retrospective DUR. Prospective/Concurrent DUR This involves reviewing each prescription for an individual patient before it is dispensed to identify drugrelated problems such as Drug-drug interactions (DDIs) Drug-disease contraindications (when disease information is available or using surrogate indicators) Refill too soon/excessive utilization Drug-age conflicts

Drug-gender conflicts (e.g., drug pregnancy advisories) Therapeutic duplication or other potential adverse drug events At the point of sale, concurrent DUR involves a series of edits, or criteria, that are applied to a prescription drug claim comparing information about the enrollee with the drug to be dispensed and information in the database about other medications that the enrollee is taking. The DUR criteria and decision algorithms are generally developed in consultation with the PBMs P&T Committee. Real-time computer link-ups between the pharmacy and the PBM inform the pharmacist almost instantly whether there are any DUR concerns before dispensing the medication. If a specific drug therapy is determined to be inconsistent with the PBMs criteria and standards for appropriate utilization, specific actions may be taken. Actionable DUR edits at the point of sale require resolution by the pharmacist, and may include contacting the physician (e.g., to discuss any potential drug-drug interaction) or educating the enrollee. Common concurrent DUR edits are: drug-drug interaction, drug-age (i.e., is the drug or dose appropriate for a patient at a specific age?), and drug-gender (i.e., is a male being prescribed a contraceptive?). Some PBMs, especially those that are part of an integrated health care system, may also have information on an enrollees medical condition allowing a drug-condition edit (i.e., is the drug appropriate for someone with diabetes?). Retrospective DUR This involves examination of drug use after the drug has been dispensed or post-drug therapy. This Uses algorithms to identify patterns of noncompliance with clinical guidelines for drug dispensing. Links clinical alerts to member profiles and sends data to prescribing providers to improve therapeutic outcomes. May focus on specific drugs and/or diseases programs. May advocate member interventions Should direct PBM how to proceed when it uncovers possible fraud and abuse by members or prescribing providers. Retrospective drug utilization review (RDUR) is the systematic analysis of prescribing patterns and utilization based on past claims data. These programs assist PBMs in identifying physician-prescribing patterns, identification of pharmacy fraud and abuse, and inappropriate or dangerous utilization patterns of members. For example, a PBM may find as a result of retrospective DUR that a particular physician is prescribing a brand name drug while most others in the area are prescribing the generic equivalent. Retrospective DUR also can be used to educate physicians about a particular drug when new clinical information becomes available (e.g., that a particular drug has been discovered to present serious risks for some patients with certain underlying conditions). The communications from PBMs to the physicians are typically via mail, fax transmissions, or phone calls. RDUR programs can help PBMs better target patient and physician education programs and disease management programs. Academic Detailing and Patient Education PBMs make educational materials on specific diseases and wellness available to their members. These materials range from simple monographs to Web-based, interactive programs. Typical education topics include diabetes, thyroid conditions, heart disease, and asthma. PBMs have developed clinical consulting

and academic detailing programs in an effort to influence physicians prescribing patterns. Detailing is the practice of directly promoting drugs to physicians, a practice commonly used by manufacturers to promote new branded products on the market. PBMs have modified these programs to educate physicians about their prescribing patterns and to focus on the cost-effectiveness of alternative drugs. AdvancePCS (acquired by CVS Caremark) had developed an academic detailing program that focuses on physicians prescribing habits, comparing them relative to their peer group. Focusing on high cost therapeutic categories, pharmacists meet with physicians to educate them about their utilization patterns and discuss cost saving strategies.

Disease Management Programs

People with chronic conditions generally use more health care services, including physician visits, hospital care, and prescription drugs. Increase in the number of people living longer with chronic conditions coupled with rising health care expenditures have spurred health plans, employers, and the government to look for ways to reduce health care use and costs. Disease management is one approach that aims to provide better care while reducing the costs of caring for the chronically ill. Disease Management is a coordinated system of preventive, diagnostic, and therapeutic measures intended to provide cost-effective, quality healthcare for a patient population who have or are at risk for a specific chronic illness or medical condition. PBMs use disease management programs as a proactive tool to control overall healthcare costs for members with dominant, chronic conditions. Approximately 75% of PBMs offer disease management program to their clients. The goal of disease management programs is to maximize the cost-effectiveness of drug therapies and outcomes, while minimizing the total cost of treating the disease. Disease management programs may result in higher drug costs due to increased compliance and persistency, but are touted as lowering the clients overall healthcare expenditure. Most PBMs offer disease management programs for common conditions such as asthma, diabetes, and congestive heart failure. Manufacturers often support these programs, because they tend to increase drug utilization. Nurses and pharmacists, hired by the PBM, administer these programs. These clinicians engage in an ongoing dialogue with the patient concerning their condition, the diseases progress, and the patients compliance with their treatment regimen. Members are often sent education material and tools to help them remain compliant. Members are required to sign-up for these programs with the client billed for the service, or in some cases through a shared savings arrangement. PBMs charge for these services in a variety of ways that typically include: Per employee per month basis (approximately $2 PEPM); Per participant per year (PPPY) basis (approximately $600 - $650 PPPY); Per prescription basis (approximately $0.01/Rx) for each selected program (e.g., congestive heart failure, hypertension). Services billed in this manner are intended to identify patients that may benefit from the initiation of additional medications to their drug regimen, as recommended in national guidelines and medical literature, with an overall goal of reducing total health care spending (e.g., medical and drug). Per case per year (PCPY) basis for patient care management (approximately $300 PCPY) for selected diseases (e.g., diabetes, asthma). Patient care management is intended to help patients

improve their health through lifestyle changes, drug education, and the optimal utilization of medical services. Disease management programs amount to additional costs to clients, beyond the PBMs standard service offering.

Consulting Services to Payers and Employers

PBMs offer consultation and financial modeling to assist their clients in selecting benefit plan designs that meet their needs for member satisfaction and cost control. The most common benefit design options being offered to PBM clients are:

Financial incentives and reimbursement limitations on the drugs covered by the plan, including drug formularies, tiered co-payments, deductibles or annual benefit maximums. Generic drug utilization incentives. Incentives or requirements to use only certain network pharmacies or to order certain maintenance drugs (i.e. therapies for diabetes, high blood pressure, etc.) only for home delivery. Reimbursement limitations on the amount of a drug which can be obtained in a specific period. Utilization management programs such as Step Therapy and Prior Authorization that focus the use of medications according to clinically developed algorithms. The clients choice of benefit design is entered into PBMs electronic claims processing system, which applies the plan design parameters as claims are submitted and enables their clients and PBMs to monitor the financial performance of the plan.

Use of Internet and Physician Connectivity

PBMs have also expanded their services to the Internet offering clinical information for patients, Physicians, and other care givers via their websites. Members using a PBMs mail pharmacy can have their prescriptions filled or refilled directly over the Internet. In addition, some PBMs have developed strategic alliances with Internet pharmacies, which enables members to purchase OTCs and other health and beauty related products via Internet links to these sites. As an example of PBMs use of the Internet, Medco Health Solutions websites offers personalized service to its members. The site is organized into four sections: My Page includes a message center, service alerts, refills reminders, important benefit information, and client specific messaging; My Health offers personalized health content based upon the members preferences and/or the clients preferences; My Benefits includes information regarding the members benefit design, co-pays, and formulary; and My Prescriptions enables members to refill and renew prescriptions.

Another recent focus of some PBMs is physician connectivity. PBMs are developing systems, operated through hand held devices that connect PBMs, prescribers, and pharmacists. These systems provide the physician access to formularies, the Physicians Desk Reference and drug utilization review edits at the time of prescribing. Once the prescription is written, it is transmitted electronically to the pharmacist. Through this technology, PBMs hope to help physicians prescribe preferred medications, thereby improving formulary and clinical compliance. The PBMs also hope to reduce dispensing errors through incorrect pharmacist translation. Ultimately, physician connectivity is intended to reduce costs while increasing physician, pharmacist, and PBM productivity. In February, 2001, AdvancePCS (acquired by CVS Caremark), Express Scripts, and Medco Health Solutions announced an agreement to form RxHub LLC, to develop an electronic exchange that allows physicians using electronic prescribing technology to link to pharmacies, PBMs, and the health plans of their patients. Today, RxHub delivers a universal, standardized communication framework that links prescribers, pharmacies, PBMs and benefits plans for the purpose of sharing prescription benefit information and exchanging prescriptions electronically.

Emerging Clinical Management Programs

Emerging clinical management programs offered by PBMs include contracting with specialty pharmacies, as well as the use of the Internet as a portal for member and physician education and to provide pharmacy related services and physician connectivity. Specialty Pharmacy While annual spending on traditional prescription drugs remains in the single digits, spending on specialty drugs continues to increase at double-digit rates. The estimate for 2006 U.S. specialty drug spend was $54 billion, which was 20% of overall prescription drug spending, with an increase to 26% nearly $100 billion by 2010. PBMs have been developing relationships with specialty pharmacies or have developed their own specialty pharmacy operations in order to provide more comprehensive services to clients and members. Specialty pharmacies dispenses high cost, low volume drugs that target specific patient populations with chronic, potentially life threatening diseases such as HIV/AIDS, multiple sclerosis, cystic fibrosis and cancer. These drugs typically require infusions or injections administered by a health-care professional, and are very expensive ranging from $10,000 - $200,000 per year. Specialty pharmacies contract directly with manufacturers to deliver products to patients, physicians, and specialized clinics. In addition, they typically handle insurance billing and offer customer service, which includes reimbursement counseling and 24-hour pharmacist assistance. Specialty pharmacies use several strategies to address the challenging characteristics of specialty drugs. These strategies include: Availability of specialty medications and supplies for administration Experienced and knowledgeable clinical-support teams Patient-care coordination and compliance monitoring Coordination of home-care services Clinical pharmacy management of disease-specific programs Pharmacy and medical benefit billing and reimbursement Combined pharmacy and medical benefit specialty-drug utilization management

Formulary management support services Most specialty drugs are used to treat chronic diseases that affect less than 3% of the general population. Thus, the volume of specialty-drug use is relatively low when compared with the use of traditional drugs. Additionally, many of the specialty drugs currently available are not available through open distribution channels. Due to lowered treatment prevalence or limited supply of the drugs, pharmaceutical manufacturers may control access to their specialty products by using specified distributors. These distribution factors, combined with the typically high acquisition and inventory carrying costs associated with specialty drugs, make specialty drug distribution impractical for traditional distribution channels such as retail pharmacies. Specialty pharmacies focus on the supply and distribution of specialty drugs; therefore, they have immediate inventory of specialty drugs and the supplies needed for proper administration. Specialty-drug distributors work with manufacturers and wholesale distribution channels to ensure continuous supplies and to leverage volume, resulting in discounts that can be passed to clients. Some of the Specialty Pharmacy Distribution services being offered by PBMs include: Delivery of injectible biopharmaceutical products to patients homes, physician offices, Associated patient care services Distribution of pharmaceuticals and medical supplies to providers and clinics Third party logistics services for contracted pharma clients Bio-pharma services including reimbursement and customized logistics solutions Distribution of pharmaceuticals to low-income patients through pharmaceutical manufacturersponsored and company-sponsored generic patient assistance programs Distribution of pharmaceuticals requiring special handling or packaging Distribution of sample units to physicians and verification of practitioner licensure

Patient-Care Coordination Patient-care coordination is the process that oversees multiple aspects of therapy for patients receiving specialty drugs. Because specialty-drug treatment may change frequently, patient-care management includes monitoring for: Adequate home or office inventory levels of the drugs Adherence to prescribed drug regimens Continuity of care Coordination of home-care services Patient assessment screening surveys Ongoing prior authorization requirements Eligibility or benefits changes Patient-care coordinators work in conjunction with licensed clinicians to provide comprehensive clinicalmanagement services. By providing patient-assessment screening surveys at each refill, patient-care coordinators assist the clinical team in identifying high-risk patients and adverse clinical events at routine intervals.

Specialty Pharmacists Specialty drugs have unique handling and administration needs that require knowledgeable management. Therefore, specialty pharmacies recruit healthcare professionals who have experience with the treatment of patients using specialty drugs. Similar to physicians who require specific educational backgrounds to specialize in the treatment of diseases such as hepatitis and multiple sclerosis (MS), healthcare professionals who manage specialty drugs also require specialized, ongoing training to maintain high levels of expertise. Standard training for pharmacists does not specifically address the handling requirements of specialty drugs. Additionally, the majority of pharmacists do not encounter these drugs in general practice. Specialty pharmacists, however, undergo extensive education in all aspects of specialtydrug management.

Specialty Clinical Management In addition to pharmacist specialization and training, specialty-drug management frequently extends beyond the pharmacy and the physicians office, since patients will often require home-healthcare services to support in-home injection training or ongoing infusion services. Therefore, specialty pharmacies need to be able to provide coordination of nursing services in the home setting. Many times the need for nursing care may be a one-time, education and training home visit not a long-term need. Separating drug delivery from nursing care often decreases costs by limiting higher-than-necessary levels of care. Clinical pharmacy oversight can often be provided by telephone, reducing the need for acute in-home services. Thus, specialty pharmacies use a multidisciplinary team of experienced registered nurses and social workers, in addition to trained pharmacists, to support the complex management requirements of chronically ill patients receiving specialty medications. This team of licensed clinicians provides clinical management, including the following interventions: Medication self-administration oversight Clinical assessment and patient monitoring Disease state and medication education Side-effect management Physician consultation Drug utilization evaluation and poly-pharmacy review Therapeutic interchange and formulary management Care coordination with other healthcare providers Psychosocial support Community resourcing These services bring the added value of disease-management concepts to pharmacy, with critical pathway management and targeted, proactive clinical interventions at specific intervals throughout treatment to optimize clinical outcomes. Ongoing, objective measurement of clinical-outcomes indicators specific to the disease and its treatment is paramount to quantifying the success of care-management strategies. For example, in the treatment of rheumatoid arthritis (RA) with specialty medications such as Enbrel or Humira, the key measurements of response to the treatment are improved joint mobility and functional capacity, which can both be measured objectively at established intervals. By evaluating clinical measurements, specialty pharmacies can document and provide treatment outcomes to clients.

A high rate of adherence with specialty-drug regimens is often critical to both short- and long-term outcomes. For example, therapy adherence of greater than 80% is linked directly to positive treatment outcomes for patients with hepatitis C. Specialty-pharmacy programs, such as patient-care management and clinical oversight by experienced healthcare professionals, increase adherence rates among specialty pharmacy patients when compared with patients receiving drugs from other distribution channels. Billing, Reimbursement and Data Management for Specialty Drugs Coverage for specialty drugs may be provided under the medical benefit, the prescription-drug benefit or both. Due to these complex coverage issues, specialty pharmacies must be prepared to manage multiple types of billing and reimbursement, ranging from electronic adjudication using the National Council for Prescription Drug Programs (NCPDP) format to more traditional paper claims. The higher cost of specialty drugs leads to other billing-related issues that include coordination of benefits and prior authorization requirements. To be successful, specialty pharmacies must also support these additional reimbursement needs. Due to the long duration and high cost of therapy generally required to treat chronic disorders, the availability of adequate health insurance is a continual concern for chronically ill patients. Generally, the payor, such as an insurance provider under a medical benefit, is contacted prior to each shipment to determine the patients health plan coverage and the portion of costs that the payor will reimburse. Reimbursement specialists review matters such as preauthorization or other prior approval requirements, lifetime limits, pre-existing condition clauses, and the availability of special state programs. By identifying coverage limitations as part of an initial consultation, PBMs assist the patient in planning for alternate coverage, if necessary. From time to time, PBMs negotiate with payors to facilitate or expand coverage for the chronic diseases served. In addition, PBMs accept assignment of benefits from numerous payors, which substantially eliminates the claims submission process for most patients. Historically, drugs were primarily reimbursed by the patients health insurance plan through a medical benefit. This has evolved where, based on the type of drug dispensed, an increasing percentage of transactions are reimbursed through a prescription card benefit, which typically results in accelerated reimbursement. Combined prescription- and medical-benefit billing requirements in a specialty-pharmacy setting also create unique opportunities for comprehensive specialty-utilization management. Working with client sponsors, specialty pharmacies have designed programs that supervise appropriate utilization of specialty drugs and ensure medical necessity of ongoing treatment, regardless of benefit coverage. For example, to manage the treatment of RA, clients need to consider all of the specialty RA drugs. Although most self-injected specialty drugs for RA (Humira, Enbrel and Kineret) usually are currently covered as a prescription-drug benefit, another specialty drug used to treat RA, Remicade, an infused agent, is more likely to be covered under medical benefits. Requiring prior authorization on the prescription-drug benefit side could increase the use of these drugs on the medical benefit side if medical benefits are not also managed. By distributing all four products through a specialty pharmacy, however, the client can evaluate all the specialty-drug treatments for appropriateness prospectively regardless of benefit coverage not only when they are started, but also periodically during therapy. Formulary Development and Management for Specialty Drugs With the multifaceted benefit structure and the clinical complexity of managing step therapy, specialty pharmacies with their expertise and delivery model can support clients to drive performance and cost savings to client formulary offerings. More specialty drugs are entering the market with multiple

indications. Additionally, some therapy classes now include several specialty drugs. Both factors allow for development of formularies for certain specialty disease states and drugs. Specialty pharmacies are positioned not only to provide formulary administrative and consultative services, but also to align the payers cost-containment objectives with optimal therapy. Formulary management for specialty drugs, similar to traditional oral medications, requires management oversight to maximize penetration and performance from the formulary offering. In analyzing all the services required to manage specialty drugs and the required services provided by specialty pharmacies to meet this need, it is evident that not all distribution channels are set up operationally to handle the unique challenges of specialty drugs inherent service requirements.

Medication Therapy Management

Medication Therapy Management (MTM) is an emerging service that is approached from various perspectives and fulfills multiple needs in the marketplace. MTM programs focusing on medication therapy problems show improved clinical and financial outcomes. Disease Management and MTM contribute to various pieces to the healthcare puzzle. These services provide synergies that otherwise would not be realized with the same impact if applied separately. When DM, case management and MTM are adopted separately, they create misalignment for payers and confusion for patients. Technology plays an integral role in the success of MTM. The future of Healthcare becomes brighter as MTM becomes commonplace. The healthcare synergies created by adoption of collaborative care continue to drive positive clinical, economic and humanistic outcomes for all involved.

Definition Eleven national pharmacy organizations created a definition for MTM services, and defined MTM as follows: Medication Therapy Management is a distinct service or group of services that optimize therapeutic outcomes for individual patients. Medication Therapy Management Services are independent of, but can occur in conjunction with, the provision of a medication product. Medication Therapy Management encompasses a broad range of professional activities and responsibilities within the qualified Healthcare providers scope of practice. These services include but are not limited to the following, according to the individual needs of the patient: Performing or obtaining necessary assessments of the patients health status. Formulating a medication treatment plan; Selecting, initiating, modifying , or administering medication therapy; Performing a comprehensive medication review to identify, resolve, and prevent medicationrelated problems, including adverse drug events e. Documenting the care delivered and communicating essential information to the patients other primary care providers; f. Providing verbal education and training designed to enhance patient understanding and appropriate use of his/her medications; g. Providing information, support services, and resources designed to enhance patient adherence with his/her therapeutic regimens; h. Coordinating and integrating medication therapy management services within the broader healthcare-management services being provided to the patient. a. b. c. d.

The 2003 Medicare Modernization Act (MMA) mandates all Medicare Part D plan sponsors to offer MTM services to beneficiaries who meet threshold requirements. Eligible patients in this program must: Have multiple chronic diseases (number of diseases quantified by the plan sponsor) Have multiple covered Part D medications (number of medications quantified by the plan sponsor) Incur annual costs for Part D medications exceeding a specified level decided by the Secretary of Health and Human Services Medication Therapy Management Services The American Pharmacists Association and the National Association of Chain Drug Stores Foundation developed a MTM Core Elements Service Model, which includes a workflow diagram depicting how the patient care process integrates with MTM service delivery. The overall goal is to include the pharmacist throughout the process of medication management and engage patients in self-managing their medications. In the model, the medication therapy review is followed by an intervention and/or referral to an appropriate team member. The patient is empowered by being provided with Collateral that includes a personal medication record and a medication-related action plan, which the pharmacist then used to document and communicate any future activity, including communication with others involved with the patients care.

There are variations in delivering the service model but the core elements remain the same. The dynamic components are twofold: active involvement of the patient and the ability to collaborate with other healthcare providers who interact with the patient. As you can see in the center of the above figure, referrals, interventions, and collaboration with providers take place within the model. Overall, the goal is to effectively integrate MTM services into patients overall health care by facilitating transitions of care to ensure a seamless process. MTM services are made available to patients from both private and public sector payors, including selfinsured employers, state Medicaid programs, and Medicare. Because MTM services are required for

targeted beneficiaries in the Medicare Part-D benefit, the evolution of MTM under Part D is being followed closely. To date, MTM program providers have used various delivery methods, including face-to-face visits, telephonic interventions, and educational mailings, or a combination of those methods. Case Study Health Net Medication Therapy Management Program Helps Chronically Ill Medicare Members Improve Prescription Drug Use About Health Net Health Net, Inc. is among the nation's largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company's health plans and government contracts subsidiaries provide health benefits to approximately 6.7 million individuals across the country through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net's behavioral health subsidiary, MHN, provides mental health benefits to approximately 6.9 million individuals in all 50 states. The company's subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs. Health Net Pharmaceutical Services (HNPS), the pharmacy benefit management subsidiary of Health Net, Inc., in March 2009 released the results of a study showing that its Medication Therapy Management (MTM) Program in 2008 reached 90 percent of Health Nets eligible Medicare Part D members. According to the Centers for Medicare and Medicaid Services (CMS), the national participation rate in similar free, voluntary MTM programs was 65 percent. As a result of the programs success, CMS recently selected Health Net as one of only 10 Medicare Part D sponsors to participate in a pilot program to perform indepth analysis on MTM outcomes. Health Nets innovative program helps its Medicare Part D members who have multiple chronic diseases and multiple chronic medication prescriptions to improve how they take their drugs and potentially decrease their pharmacy expenses. In 2008, Health Net enrolled approximately 90,000 members in its program. Of the more than 162,000 drug related problems (DRPs) identified, the pharmacists intervened in approximately 50,000 to increase taking medication regularly, 45,000 to explain potentially adverse drug interactions, 44,000 to reduce cost of care, 20,000 to fill gaps in care with their doctor, and 3,000 to stop duplicate drug therapy. Our program provides a comprehensive approach for effective and safe medication treatments that lead to positive medical outcomes and economic value for our members, said Virginia E. White, Pharm.D. FCSHP, senior vice president and chief clinical officer of HNPS. It presents an entire picture of a patients health because we not only involve the member but the many individuals who may help them their caregivers, physicians and pharmacists as well as our pharmacists and care coordinators. HNPS MTM Program Overview HNPS pharmacists review up to 5,000 member profiles weekly for potential Drug Related Problems (DRPs) including noncompliance, gaps in therapy, drug interactions, and contraindications, as well as opportunities to reduce members out-of-pocket costs by taking generics or formulary alternatives to treat their cholesterol, blood pressure, diabetes, allergies, acid reflux, and other ailments. The pharmacists send letters with this information to encourage members to call HNPS and speak with one of its MTM pharmacists, and to bring the letters to their next doctor appointment. The pharmacists also discuss the DRPs with their colleagues at Managed Health Network (MHN), Health Nets behavioral health subsidiary, for potential psychosocial intervention. Serving as health coaches, the pharmacy and behavioral health

clinicians talk with members about MTM and mental health services available to them. These issues range from addressing mental health concerns to physician searches, adult day care, weight loss, and smoking cessation. HNPS chose to go beyond the minimum CMS guidelines to help provide the peace of mind to more members that they are safely taking the right prescription drugs for their medical conditions. In addition to integrating MHNs behavioral health services into the program, HNPS chose to widen eligibility criteria to members with three or more diseases who take five or more drugs, and changed from opt-in to opt-out membership to extend services to more members. HNPS pharmacists also built an internal, web-based software application to review members drug history profiles, maintain records and generate communications. The applications ease of use, accuracy and efficiency has enabled HNPS to offer services beyond minimum CMS requirements. CMS requires all insurers offering Part D plans to also offer a free and voluntary MTM program to their eligible members who have multiple chronic diseases, take multiple drugs and are likely to incur at least $4,000 in annual pharmacy costs. Since 2006, HNPS has collaborated with QIOs representing 12 states and the District of Columbia, sharing its pharmacy claims data to help them ensure effective and safe medication treatments for the elderly.

4. Overview of PBM Financials and Pricing

PBMs derive revenue from clients, manufacturers, and in some cases pharmacies, while administering the financials and pricing of drug benefits. In general: Clients are charged an administrative fee for services like claims processing. PBMs may also charge a small transaction fee for claims processing to the pharmacies participating in their network. PBMs reimburse dispensing pharmacies for the ingredient cost plus dispensing fees less co-pay for drugs dispensed to members, and then pass this cost on to clients. PBMs receive rebates and administration fees from manufacturers. PBMs typically retain the administrative fee, and share the rebates with their clients. PBMs may receive additional money from manufacturers for the sale of data, maintaining clinical programs, or other services. Clients may be charged for clinical management programs, or other custom services such as ad-hoc reporting or providing dedicated customer service teams. PBMs may also make a small profit from their mail pharmacy operations. One of the primary reasons clients retain PBMs, is that PBMs reduce the cost of offering a pharmacy benefit. PBMs do this by automating administrative services, obtaining discounts on drugs (ingredient cost), and managing drug utilization. As shown in the table below, the average prescription costs $59.17 in an unmanaged market (e.g., fee for service). Through a PBM this cost is reduced to $38.96, or 34% less than the fee for service cost.

Table - FFS versus PBM Cost Savings 1. Based on internal documents for an actual client. 2. AWP (Average Wholesale Price) estimated at $54.79

3. FFS cost estimated at AWP + 8%. 4. AWP is a blended number based on a 65/35 brand to generic ratio. 5. Retail discount is a blended number based on a 65/35 brand to generic ratio. The average branded retail discount was assumed at 14% off AWP, and the average generic retail discount assumed at 50% off AWP. Retail discount assumed at 27%. 6. Ingredient cost equals AWP less average retail discount (27%) 7. PBM cost per prescription is net of total rebates/savings per claim.

4.1 Contract based pricing

The flow of money and pricing between PBMs and their business partners varies according to the type of contract. There are three types of contracts PBMs hold with their clients: fee-for-service, shared savings, and capitated. Fee-For-Service Contracts Fee-for-service contracts are the most common pricing arrangements PBMs have with their clients. Under these contracts, PBMs are paid for the administrative services they provide (claims processing). The PBM retains the manufacturer-paid administrative fees and, depending on the client, some percentage of the rebates. With this type of contract, the PBM does not assume risk for the cost of drugs dispensed (ingredient cost); this cost is passed through to the clients. PBMs contract with their clients and pharmacy network for retail pricing for branded and generic drugs, for drugs dispensed from a mail pharmacy, and in some cases, specialty pharmacies. Pharmacists are reimbursed the discounted ingredient cost, plus a dispensing fee. Ingredient cost is typically the lower of average wholesale price (branded), maximum allowable cost (generic), or usual and customary (price-charged cash-paying customers). The member also pays pharmacists co-pay. Certain PBMs guarantee clients an overall price (e.g., AWP 12% + $2.50 dispensing fee), and then manage the pharmacy network based on negotiated prices, which on average are comparable to the prices guaranteed to clients. In some cases, the PBMs may generate a small profit off their network pricing. PBMs receive claims processing fees from clients on a per transaction basis for a bundled package of services that typically includes: basic administrative and clinical services, such as claims adjudication, drug utilization review (DUR), member communications, member ID cards, provider directories, standard reports, fraud protection, and on-site claim audits. PBMs may also charge separate administrative fees for additional services not included in the bundled package such as prior authorization, disease management, and customized reports. These additional services are paid either on a per transaction basis or as a quarterly/monthly flat fee. Risk Sharing (Shared Savings) Contracts PBMs also maintain shared savings arrangements with clients. An effective way to manage pharmacy cost is through a shared savings arrangement, where the client and the PBM share the savings. These arrangements provide incentives for both sides to collaborate and run the pharmacy benefit program effectively. Under these arrangements, PBMs guarantee clients minimum rebates, generic prescription dispensing rates, and discounts from average wholesale prices. Failure to meet these targets triggers financial penalties for the PBM. In return, PBMs expect clients to sign long term contracts in order to realize potential reductions in utilization and costs. Under shared savings contracts, the flow of revenue

and drug pricing is similar to fee-for-service contracts. However, PBMs will reconcile on a quarterly/monthly basis any drug costs savings with the client. Capitated Contracts Capitated pricing, tested by the PBM industry in the early-1990s, is essentially nonexistent today since PBMs generally lost money through these arrangements. In a capitated pricing arrangement, the PBM agrees to assume financial risk for a clients drug spending. Capitation is a set dollar amount, established by analysis of pharmacy claim data, used to cover the prescription costs for a member. The amount is usually a per member, per month (PMPM) rate; the client is responsible for monthly payments to the PBM. With this type of contract, the PBM functions in a capacity similar to that of an insurer. As a result, PBMs assuming risk are required to have an insurance license. Under a capitated arrangement, the PBM receives a PMPM payment from the client. This payment (or premium) is expected to cover the PBMs cost of providing pharmacy benefits to the clients members, as well as the administrative and clinical services provided by the PBM. If the PBM is able to effectively control utilization and spends less than the PMPM payment (plus any overhead allocation), then it enjoys the profits. However, PBMs that manage large volumes of patients with catastrophic illnesses may, in fact, lose money. This type of contract is risky, given unpredictable factors such as the release of new branded drugs, escalating drug prices, direct-to-client (DTC) advertising and higher prescription utilization rates. In addition, PBMs do not have risk arrangements with physicians; nor can they benefit from the tradeoff of drugs versus medical costs. PBMs have only indirect influence on drug volume, such as physician interventions or through increases to member co-pays. Also, pharmaceutical manufacturers have not been willing to underwrite the risk of PBMs that enter capitated arrangements.

4.2 Pricing
The three main services provided by PBMs to its clients are: Transaction processing, including managing the eligibility files, benefit information and payment transactions connected with an Rx. Network and formulary management, such as negotiating with both pharmaceutical companies and pharmacies over pricing, and ensuring that the most cost-effective drugs and most appropriate therapies are available to the member. This includes techniques such as generic substitution, pre-approval, step therapy and compliance programs--all of which tend to add administrative complexity to the current prescribing infrastructure. Mail-order pharmacies, which typically supply lower-cost 90 day supplies of chronic medications to the member PBMs derive the majority of their revenue from clients and manufacturers. PBMs typically receive an administrative fee -- on a per-claims basis -- from their clients that covers the majority of services they provide. In addition, the PBM retains the administrative fees paid by manufacturers and a portion of the rebates. PBMs pass the cost of the drug benefit to their clients. PBMs may also have a shared savings arrangement with clients, where the client and the PBM share the savings. These arrangements provide incentives for both sides to collaborate and run the pharmacy benefit program effectively. Administrative Fees (Claims Processing)

PBMs charge their clients an administrative fee based on the number of claims processed. Client administrative fees are approximately $0.30 - $0.40 per processed claim. This fee typically covers the PBMs administrative services, as well as basic clinical services like formulary management, therapeutic substitution, and utilization management. PBMs may charge additional fees for dedicated client or member service teams, ad-hoc reporting, special clinical programs (e.g. disease management, prior authorization, etc.) customized educational material, or other services. Major insurers or HMOs that have outsourced their drug benefit to a PBM typically charge their clients for PBM services on a per member per month (PMPM) basis, and may list the PBM services as a separate charge or combined with their medical administrative charge. Major insurers or HMOs do not sell PBM services as a stand-alone product. Pharmacy Reimbursement and the Cost of Pharmaceuticals Pharmacies are reimbursed by the PBMs (as a pass through from clients) for the ingredient cost of the drug dispensed plus a dispensing fee, less the members co-pay or co-insurance. Ingredient cost is based on the lowest of three calculations, depending on the drug dispensed: AWP, maximum allowable cost (MAC), or usual and customary (U&C). Reimbursement rates vary depending on the network. Ingredient cost for branded drugs under patent is typically reimbursed at AWP minus a discount percent (usually 12 15%). AWP for all pharmaceuticals is calculated and maintained by the third party data vendor Medispan/First Databank. Dispensing fees for branded drugs are typically $2.00$3.00 per prescription. Ingredient costs for generic drugs are commonly based on MAC pricing typically 5060% below AWP. MAC prices are typically set at the regional or Metropolitan Statistical Area (MSA) level to reflect variations in cost of living across the country. PBMs can either set the MAC prices themselves, or use the MAC prices set by HCFA for Medicaid beneficiaries. PBM-set MAC prices are usually higher than those set by HCFA to encourage pharmacies to participate in their network. Compared to the HCFA MAC, the PBM MAC also covers more drugs and is updated more frequently. Some PBMs offer higher dispensing fees for generics to encourage the pharmacist to substitute a generic equivalent for a branded drug. Dispensing fees for generics are typically $2.00$3.00 per prescription. To ensure their clients receive the lowest possible price for drugs, pharmacies are contractually obligated to limit their reimbursement to the price they would charge a cash-paying customer. This price is called usual and customary (U&C), and is determined by the pharmacy. For example, if a retail pharmacy charges a cash-paying customer $20 for a drug, the retail pharmacy cannot invoice the PBM for an ingredient cost greater than $20, regardless of the AWP discount or MAC price in effect for that drug. For example, the member has its prescription filled for Drug ABC at a retail pharmacy, and pays the required $10.00 co-pay. The pharmacy is then reimbursed $14.25 for the ingredient cost (AWP discount) of the drug plus the dispensing fee, less the co-pay [AWP ($25) 13% + a dispensing fee ($2.50) co-pay ($10)]. For generic drugs, the member pays $5.00 co-pay to the retail pharmacy. Given that the MAC price for this drug is set at $6.00, the retail pharmacy is reimbursed $4.00 [MAC ($6.00) + dispensing fee ($3.00) co-pay ($5.00)]. Pharmacies do not typically receive discounted pricing (or rebates) on branded drugs. In some cases, generic manufacturers will provide pricing incentives to pharmacies based on volume, market share, or exclusivity. Retail acquisition cost for branded drugs is typically 20%-25% below average wholesale price (AWP), which is the wholesalers mark-up from WAC (wholesale acquisition cost). In some cases, retail chain distribution centers may pay WAC.

Medicaid Dispensing Fees Dispensing fees are fees that are part of the overall formula for prescription reimbursement and are paid to the pharmacy for the act of performing administrative tasks related to the processing and filling of a prescription. For example, a typical Medicaid reimbursement formula would be as follows: Drug Ingredient Fee + Dispensing Fee Patient Copayment = Total Prescription Reimbursement These dispensing fees encompass a wide range from approximately $0.50 to $2.00 in a Medicaid managed care plan, or $1.75 or $11.46 per prescription in a traditional Medicaid fee-for-service plan. Each state sets the Medicaid fee-for-service dispensing fee under state administrative law; however, each participating state managed care plan is not bound by state law and can set the fees at any level. All participating pharmacies must accept that managed care rate of reimbursement even if it is significantly lower than the Medicaid Fee-for-Service rates. Rebate Administration and Payment The rebate is a payment from a pharmaceutical company to a PBM for driving more volume to its branded product by putting it higher on formulary PBMs contract with the manufacturers of branded drugs to receive rebates and administrative fees. Rebates are usually shared with clients; administrative fees are retained by the PBM. Manufacturers pay administrative fees to PBMs for administering formulary rebate contracts. These fees range from 1% - 3% of WAC (WAC is the cost to the wholesaler for buying the drug from the manufacturer and is typically used as the reference price for calculating rebates and administration fees). Typically, manufacturers pay rebates and administrative fees for all contracted products dispensed to qualified members. The amount of rebate shared with the client is a negotiable point and can range from 100% for very large clients to zero for small clients. For example, the WAC for a drug ABC is $20. After all claims for drug ABC have been submitted by the pharmacy for reimbursement for an entire month or quarter, the PBM submits a claim to the manufacturer for payment. For the current period and assuming an incented formulary, the PBM achieved 20% market share, which makes them eligible for a 10% rebate in addition to the 2% (say) administrative fee for all prescriptions processed by the PBM. Typically, manufacturers pay higher rebates when the market share of a drug exceeds the market share in the unmanaged market (e.g. national market share). In some cases, manufacturers rebate differently depending on the clients degree of control over pharmacy benefit. For example, closed formulary clients might receive better rebates than open formulary clients for the same market share. PBMs typically pass rebates through to their clients and retain 100% of administrative fees. Continuing with the previous example, the PBM received a $2.00 rebate and a $0.40 administrative fee for each prescription from the manufacturer. The PBMs contract with their clients stipulates that the PBM will pass through 80% of the rebates to the client. In some cases, PBMs may guarantee their clients a rebate/claim. Overall, the PBMs receive access rebates and market-share rebates, but the proportion of each type varies with each pharmaceutical manufacturer arrangement. The majority of both the access and the market-share rebates are shared with clients. They also earn administrative fees from pharmaceutical manufacturers for services rendered in connection with rebate agreements. The revenue types and their description are explained in the table below:

Revenue Type Access rebates from pharmaceutical manufacturers

Description Rebate amount is negotiated depending on formulary placement of the applicable drug, and competing drugs in its class. Rebate amount depends on the demonstrated impact of the PBMs programs on particular brands. Service fees for administrative tasks such as aggregating members, performing market share analysis used to calculate rebates, and consolidating billing to clients. These fees are contracted for independently with each manufacturer. Fixed amount per filled prescription paid by the PBM to an employer client. Allows rebate amount to be figured out by number of prescriptions

Who Gets It PBM gets the money and passes it on to clients.

Market share rebates from pharmaceutical manufacturers.

PBM gets the money and passes it on to clients.

Administrative fees from pharmaceutical manufacturers

PBM gets the money and keeps it.

Fixed rebate per Rx

Employer clients get this money from PBMs.

It is estimated that administrative fees represent about 1% of the total drug spend of the year. PBMs may differ in the way they charge their clients: 1. Some of the PBMs treat rebates from pharmaceutical companies as the property of its clients, meaning they belong to the plan sponsor (e.g., managed care organization or employer group). They account for the portion (which can range from 0%-50%, but less than 20% in total) of the rebate that it keeps as revenue. 2. Some PBMs offer its customers a fixed rebate per branded script. This offers the client a fixed cost and PBM a nice profit. In accounting for rebates, they count the total rebate amount in total gross revenues, and then take a reduction to total gross revenues for the amount of the rebate that is passed on to customers. The entire rebate amount is an offset to cost of goods sold. As long as the accounting procedures are understood, this method provides more information to observers and analysts than does the previous method. 3. In some cases, PBM receives market-share rebates from manufacturers, and also uses a proprietary "bid grid" that allows manufacturers to bid on the rebates they will provide to the PBM's clients. This system allows the rebate to reflect the exact placement of a drug (and its competitors) on the client's formulary. This allows clients to adjust their formularies and co-pay structure for maximum rebates, while balancing the particular demands of their membership or employees. Once the rebate is negotiated, they guarantee clients a fixed rebate per prescription.

5. PBM Relationships
Relationships that a PBM Must Establish to Manage Pharmacy Benefits A PBM must establish a network of retail pharmacies so that consumers with prescription drug insurance can fill their prescriptions without traveling long distances. Often, retail pharmacies compete to be part of the retail pharmacy network for a particular PBM. In addition, PBMs may contract with pharmaceutical manufacturers to obtain various payments as compensation for managing the dispensing of the manufacturers drug product. Pharmaceutical manufacturers compete to ensure that their products are included on the list of authorized drugs managed by the PBM (the formulary). PBMs then package these services together to offer a pharmacy management product to their clients - plan sponsors. Indeed, some call PBMs the middlemen among plan sponsors, pharmaceutical manufacturers, and retail and mailorder pharmacies.

5.1 PBM Relationships with Retail and Mail Pharmacies

Retail pharmacies are on the front line of providing health care services to consumers when the pharmacist fills the consumers drug prescriptions. Because of the variety of drugs that consumers may request at any given time, retail pharmacies must stock a wide range of brand and generic drugs. They purchase these drug products directly from pharmaceutical manufacturers or from drug wholesalers. The arrows in Figure 1 show the dollar flows between retail pharmacies and drug manufacturers/ wholesalers. Figure -1

PBMs must establish networks of retail pharmacies that will fill prescriptions for the plan sponsors members. Most PBMs contract with 90% to 95% of the retail pharmacies in the regions they serve. Retail pharmacies receive revenue from two sources for filling PBM administered prescriptions: (a) the consumer (copayment or coinsurance amount); and (b) the PBM (reimbursement of the dispensed drugs ingredient cost plus any dispensing fee associated with filling the prescription, less the copayment). To become part of a PBMs network, retail pharmacies often compete over the discounts they will offer to PBMs on the reimbursement amounts for ingredient costs and dispensing fees for prescriptions that they fill. The price at which the PBM will reimburse a retail pharmacy for a given drug is stated as a discount from a measure of list price plus a dispensing fee for the pharmacy. For brand drugs, the average wholesale price (AWP) as stated by the wholesaler or manufacturer is used as a basis for the discount. AWP is not

the actual price that wholesalers or pharmaceutical manufacturers charge or the amount retail pharmacies pay to acquire drugs; rather it is more like a sticker price in the automobile industry. For example, the price formula might be AWP minus 12% of AWP plus $2.00. For generic drugs, the discount is even greater than for brand drugs, e.g., AWP minus 50% of AWP plus $2.00. Instead of using the AWP for generic drugs, some PBMs use a maximum allowable cost (MAC) to reimburse the retail pharmacy. MAC prices for generically equivalent drugs are based on the AWPs of competing generic drug manufacturers. The federal government issues a MAC price schedule (the Federal Upper Limit (FUL)) for generic products that have three or more manufacturers or distributors. Some PBMs utilize the FUL schedule, while others calculate a maximum allowable cost based on their own formulae, which utilize the AWPs of competing generic drug manufacturers. Each PBM can have its own MAC list and some even maintain more than one MAC list. Retail pharmacies may compete over the discounts from the reference price (AWP or MAC) they will offer a PBM depending on the type of plan sponsors and the number of members covered by the PBM. Retail pharmacies generally will offer higher discounts to be in a more exclusive network, because each retail pharmacy will fill a larger percentage of prescriptions if fewer retail pharmacies are in the PBMs network. A PBM may have several networks, which differ in their exclusivity, that it offers its clients. The bold arrows in Figure 2 show the dollar flows between the PBM, the retail pharmacy, and a plan member. The lighter arrows show the relationships between the retail pharmacy, drug wholesaler, and pharmaceutical manufacturers already shown in Figure 1. Figure 2

In addition to including retail pharmacies in their pharmacy networks, most PBMs also offer mail-order pharmacy services. The three large independent PBMs (Caremark, Express Scripts and Medco Health) own the mail pharmacies they use to serve their plan sponsor clients Small or insurer-owned PBMs and retailer-owned PBMs either own mail pharmacies or contract with other mail-order pharmacies owned by another PBM or retail pharmacy. Some PBMs have used a competitive bidding process to choose the mail-order pharmacy they will use to serve their clients. The bold arrows in Figure 3 show the dollar flows between PBMs, members, and mail-order pharmacies not owned by the PBM, as well as dollar flows between mail pharmacies and drug wholesalers/pharmaceutical manufacturers.

Figure 3

Figure 3 shows that retail and mail-order pharmacies are often competitors, because both seek to fill the prescriptions of plan sponsors members.

5.2 PBM Relationships with Pharmaceutical Manufacturers

PBMs also establish relationships with Pharmaceutical manufacturers, who compete to have their drugs placed on a PBMs formulary. A formulary is a list of approved or preferred drugs for the plan. Prescription drugs that are on formulary often have lower member copayment amounts, thereby providing incentives to members to seek prescription drugs that are on formulary to lower their out-of-pocket costs. Thus, formulary status can drive the sales of manufacturers drug products. Formulary compliance is the extent to which members use drugs on the formulary. The level of formulary compliance demonstrates the ability of the PBM to steer enrollees to drugs on the formulary. PBMs strive for high formulary compliance, because high compliance enables a PBM to show the manufacturers that the PBM can induce use of formulary products and increase their products market shares. Most PBMs contract with Pharmaceutical Manufacturers for payments that are based on the formulary or on the particular drugs share of the drug products sold to a plans members. Pharmaceutical manufacturers use formulary payments to obtain formulary status, and/or they use market-share payments to encourage PBMs to dispense their drugs, especially in crowded therapeutic classes in which there are many similar drugs. Both payments are often specified as a percentage of the drugs wholesale price (e.g., a percentage level of 10% means the manufacturer will pay the PBM 10% of a measure of the drugs wholesale price multiplied by the quantity dispensed). PBMs receive payments from pharmaceutical manufacturers even though PBMs do not take physical possession of drug products that are dispensed through retail pharmacies. Industry participants generally refer to these payments as rebates. This report will use the term pharmaceutical payment, rather than the term rebate, because pharmaceutical manufacturers make these payments to PBMs and not to the entity that actually purchased the drug.

PBMs contracts with pharmaceutical manufacturers also may provide for administration fees, data sharing fees, and promotional programs under which the PBM can earn additional revenues. PBMs are often the central repository of claims data that can be used for studying utilization trends, prescribing patterns, and outcomes. Some PBMs sell this aggregated, non-identifiable data, or studies based on the data, to pharmaceutical manufacturers. The bold arrow in Figure 4 shows the dollar flows between the manufacturer and the PBM.

Figure 4

5.3 PBM Relationships with Plan Sponsors

PBMs contract with plan sponsors to provide pharmacy benefit management services to their members. Plans, often with the help of consultants, issue requests for proposals (RFPs) to several PBMs and then evaluate the proposals based on costs and the package of services offered by each bidder. Insurerowned PBMs often compete for these contracts in addition to offering PBM services to their health plan members. The RFPs vary depending upon the attributes of the prescription drug insurance coverage that the plans want to provide to their members. For example, some plans may not require members to make copayments for drugs dispensed by network pharmacies, while others may require varying copayments depending on whether the drug is a generic, a brand, or an off formulary drug and whether it is purchased at a network retail pharmacy, mail-order pharmacy, or out-of-network pharmacy. Plans also consider other factors, including generic dispensing rates, the range of prescription drug choices available to their members, and the price of dispensing fees, drug ingredient costs, and member copayments. In all, plans seek to match PBM services to best meet their objectives in offering pharmacy benefit insurance coverage. PBMs compete on price and non-price dimensions to serve these varying client needs. One survey of plan sponsors using PBM services showed that the financial terms of the bid (such as the reimbursement rate and dispensing fee paid to pharmacies, the manufacturers payments to plan

sponsors based on formulary drugs utilized, mail-order pricing, and administrative fees) often were the key determinants in the selection of the winning bid. This survey also found that plan sponsors were concerned about non-price dimensions of service, such as benefit design, the extent of the retail network, and the quality of mail-order service. The Commission collected data on the amounts that PBMs pay to the plan sponsor to help defray the costs of switching to the PBM at the start of a new contract or bonus amounts to obtain or retain the plan sponsor as a customer.29 The data revealed that large PBMs and retailer-owned PBMs often make these payments, but they usually do not total more than $100,000 per client. There were exceptions. In 2002 and 2003, some PBMs made payments to plan sponsors that ranged between $1.5 and $20 million per client. The Commission staffs review of PBM contracts with plan sponsors suggested that member satisfaction, dispensing accuracy rates, turn-around time at mail pharmacies, wait time for customer service calls, distance to a network retail pharmacy, and timeliness of management reports are also key factors in any contract.30 Most PBM-plan sponsor contracts included performance guarantees (e.g., prescription fill time, call center response time, and generic substitution rates) that required the PBM to make specified dollar payments to the plan sponsor if the PBM failed to meet the guarantees. PBMs often work with plan sponsors to create plan designs with copayments, coinsurance, or deductibles that provide members with incentives to comply with a plan=s formulary. Those incentives range from differential copayments to complete denial of coverage for out-of-network or off-formulary purchases. Plan sponsors and PBMs also may negotiate over incentives for enrollees to use mail-order pharmacies for maintenance medications. The PBMs contract with a plan sponsor covers the amount that the plan sponsor will pay to the PBM for each prescription dispensed at a network retail pharmacy. The PBMs charge to the plan sponsor per prescription is similar in form to the retail pharmacy contract. For brand drugs, it is a discount off AWP plus a dispensing fee and an administrative charge per script, e.g., AWP minus 10% plus $1.50 plus $0.10. For generic drugs, the charge is similarly calculated, but the discount is usually off of the price specified on the PBMs MAC list.34 Some PBMs earn revenues and profits through the spread between the amount charged to a plan sponsor and the amount paid for the drug product, including a dispensing fee if any, to the retail or mail-order pharmacy that dispenses the drug product to the plan member. The bold arrows in Figure I-5 show the dollar flows between plan sponsors, PBMs, and members. Figure 5

Plans may contract for other PBM services. Retrospective drug utilization reviews (DURs) analyze physician prescribing patterns to identify physicians who prescribe high cost drugs when lower cost alternatives are available. Concurrent DURs check for drug interactions to minimize adverse reactions,

early or late refills, or duplicate therapies. Clinical pharmacy management or disease management offers treatment information to, and monitoring of, patients with certain chronic diseases. One insurer-owned PBM noted that it charges a plan sponsor approximately $1.00 per member per month for such programs and guarantees the plan sponsor $2.00 in drug-spend savings per member per month. The actual savings are averaging $3.00 per member per month. This PBM believes clinical pharmacy management programs will be a significant revenue source for PBMs in the future.

5.4 PBM Ownership Models

PBMs can either be independently owned and operated or can be owned by other entities such as Managed care Organizations, Retail pharmacy giants, etc. PBM Ownership should be aligned around maximizing the value of the PBM to its client health plans and the health plans' members and be cost effective in generating revenues

Classification of PBM Ownership Models

PBMs can be classified into two broad categories: (1) Full service PBMs PBMs that own and operate all services they provide to customers. (2) Non-full service PBMs PBMs that may own and operate part of the services they provide to customers, and contract outside vendors for other services. Let us see some of these ownership models with the following examples. Some Independent PBMs present in the market today are Catalyst RX, Innoviant, Medco, MedImpact, and PerformRX. Others are owned by managed care organizations such as Aetna Inc., CIGNA Corporation, First Health, Humana Inc., Prime Therapeutics and Wellpoint Health Networks Inc. Some are owned by retail pharmacies, such as Caremark (owned by CVS), RX America (owned by Longs Drug Stores), Rite Aid Health Solutions and Walgreens Health Initiatives. Wal-Mart Stores, Inc. also recently announced that it may engage in certain activities competitive with PBMs. Also, there exist some specialized providers, such as Argus and SXC Health Solutions that exist. In addition to these, other companies may enter into the business and become increasingly competitive as there are no meaningful barriers to entry.

Change of Ownership in PBM Industry

There has also been much ownership change and consolidation within the PBM industry. For example, PCS Health Systems, Inc. (the PBMs current name), originally an independent company, was purchased by McKesson Drug (a drug wholesaler), then Eli Lilly & Company (a pharmaceutical manufacturer), and finally by Rite Aid chain pharmacy company in 1999. Another example of ownership change occurred with DPS. The PBM developed within the UHC pharmacy department and began offering pharmacy management services to non-UHC health plans. The drug manufacturer SmithKline Beecham purchased DPS in 1994 and it was subsequently purchased by Express Scripts, Inc., an independent PBM in 1999.

Advantages for PBMs Owning a Pharmacy

PBMs can generate significant revenues from the pharmacy network when they have an ownership stake in a pharmacy. Many PBMs have some level of corporate ownership with a pharmacy. When the PBMs benefit programs are structured to promote the use of their own pharmacy, additional profits are

generated from the sale of its drugs. Although an ownership relationship between a PBM and a pharmacy is not an absolute conflict, the potential will always exist for the PBM to provide preferential pricing arrangements to its own pharmacy. In the commercial market, rebates are paid to PBMs almost exclusively on branded products and rebates for generic products are typically offered at the pharmacy level, including to those pharmacies that have an ownership relationship with a PBM.

6. Pharmacy Benefit Management- Regulatory Compliance

The following is the list of various sets of regulatory requirements which are applicable to PBMs in some capacity. Anti-Kickback Laws. Subject to certain exceptions and safe harbors, the federal anti-kickback statute generally prohibits, among other things, knowingly and willfully paying or offering any payment or other remuneration to induce a person to purchase, lease, order, or arrange for (or recommend purchasing, leasing, or ordering) items (including prescription drugs) or services reimbursable in whole or in part under Medicare, Medicaid or another federal health care program. Several states also have similar laws, some of which apply similar anti-kickback prohibitions to items or services reimbursable by non-governmental payors. Sanctions for violating these federal and state anti-kickback laws may include criminal and civil fines and exclusion from participation in the federal and state healthcare programs. Self-Referral Laws. The federal physician self-referral law, known as the Stark Law, prohibits physicians from referring Medicare or Medicaid beneficiaries for designated health services (which include, among other things, outpatient prescription drugs) to an entity with which the physician or an immediate family member of the physician has a financial relationship and prohibits the entity receiving a prohibited referral from presenting a claim to Medicare or Medicaid for the designated health service furnished under the prohibited referral. Generally, PBMs home delivery pharmacies dispense certain outpatient prescription drugs that may be directly or indirectly reimbursed by the Medicare or Medicaid programs, potentially making PBMs subject to the Stark Laws requirements with respect to such pharmacy operations. Possible penalties for violation of the Stark Law include denial of payment, refund of amounts collected in violation of the statute, civil monetary penalties and Medicare and Medicaid program exclusion. The PBMs home delivery services may also be subject to state statutes and regulations that restrict the ability of physicians to refer patients to entities with which they have a financial relationship. These state laws may vary from the federal Stark Law and vary significantly from state to state. Some of these state statutes and regulations apply to items and services reimbursed by private payors. False Claims Act and Related Criminal Provisions. The federal False Claims Act (the False Claims Act) imposes civil penalties for knowingly making or causing to be made false claims or false records or statements with respect to governmental programs, such as Medicare and Medicaid, in order to obtain reimbursement. Private individuals may bring whistle blower suits against providers under the False Claims Act, which authorizes the payment of a portion of any recovery to the individual bringing suit. Some federal district courts have interpreted the False Claims Act as applying to claims for reimbursement that violate the anti-kickback statute or federal physician self-referral law under certain circumstances.

State Fiduciary Legislation. Statutes have been introduced in several states that purport to declare that a PBM is a fiduciary with respect to its clients. Till date only two jurisdictions Maine and the District of Columbia have enacted such a statute. Consumer Protection Laws. Most states have consumer protection laws that previously have been the basis for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to retail pharmacies in connection with drug switching programs. Such statutes have also been cited as the basis for claims against PBMs either in civil litigation or pursuant to investigations by state Attorneys General. Network Access Legislation. A majority of states now have some form of legislation affecting the PBMs ability to limit access to a pharmacy provider network or removal of a network provider. Such legislation may require PBMs or their clients to admit any retail pharmacy willing to meet the plans price and other terms for network participation (any willing provider legislation); or may provide that a provider may not be removed from a network except in compliance with certain procedures (due process legislation). Legislation Affecting Plan Design. Some states have enacted legislation that prohibits managed care plan sponsors from implementing certain restrictive benefit plan design features, and many states have introduced legislation to regulate various aspects of managed care plans, including provisions relating to the pharmacy benefit. For example, some states, under so-called freedom of choice legislation, provide that members of the plan may not be required to use network providers, but must instead be provided with benefits even if they choose to use non network providers. Other states have enacted legislation purporting to prohibit health plans from offering members financial incentives for use of home delivery pharmacies. Legislation has been introduced in some states to prohibit or restrict therapeutic intervention, or to require coverage of all FDA approved drugs. Other states mandate coverage of certain benefits or conditions, and require health plan coverage of specific drugs if deemed medically necessary by the prescribing physician. Such legislation does not generally apply to PBMs directly, but it may apply to certain PBM clients, such as HMOs and health insurers. Licensure Laws. Many states have licensure or registration laws governing certain types of managed care organizations, including preferred provider organizations (PPOs), third party administrators (TPAs), and companies that provide utilization review services. The scope of these laws differs from state to state, and the application of such laws to the activities of PBMs often is unclear. Because of increased regulatory requirements on some of PBMs managed care clients affecting prior authorization of drugs before coverage is approved, PBMs obtain utilization review licenses in selected states through their subsidiary. Legislation regulating PBM activities in a comprehensive manner has been and continues to be considered in a number of states. In the past, certain organizations, such as the National Association of Insurance Commissioners (NAIC, an organization of state insurance regulators), as well as certain state pharmacy boards have considered proposals to regulate PBMs and/or certain PBM activities, such as

formulary development and utilization management. While the actions of the NAIC would not have the force of law, they may influence states to adopt model legislation that such organizations promulgate. Legislation and Regulation Affecting Drug Prices. Some states have adopted so-called most favored nation legislation providing that a pharmacy participating in the state Medicaid program must give the state the best price that the pharmacy makes available to any third party plan. Such legislation adversely affects PBMs ability to negotiate discounts in the future from network pharmacies. Other states have enacted unitary pricing legislation, which mandates that all wholesale purchasers of drugs within the state be given access to the same discounts and incentives. Such legislation, if enacted in a state where one of PBMs home delivery pharmacies is located, could adversely affect PBMs ability to negotiate discounts on purchase of prescription drugs to be dispensed by their home delivery pharmacies. In addition, federal and state agencies and enforcement officials are investigating the effects of pharmaceutical industry pricing practices such as how average wholesale price (AWP) is calculated and how pharmaceutical manufacturers report their best price on a drug under the federal Medicaid rebate program. AWP is a standard pricing benchmark (calculated by a third-party such as First Data Bank or Medispan) used throughout the PBM industry, as a basis for calculating drug prices under contracts with health plans and pharmacies and rebates with pharmaceutical manufacturers. Changes to the AWP standard could alter the calculation of drug prices for federal programs. Further, the federal Medicaid rebate program requires participating drug manufacturers to provide rebates on all drugs purchased by state Medicaid programs. Manufacturers of brand name products must provide a rebate equivalent to the greater of (a) 15.1% of the average manufacturer price (AMP) paid by wholesalers for products distributed to the retail pharmacy class of trade and (b) the difference between AMP and the best price available to essentially any customer other than the Medicaid program, with certain exceptions. PBMs negotiate rebates with drug manufacturers and, in certain circumstances, sell services to drug manufacturers. Investigations have been commenced by certain governmental entities which question whether best prices were properly calculated, reported and paid by the manufacturers to the Medicaid programs. Regulation of Financial Risk Plans. Fee-for-service prescription drug plans generally are not subject to financial regulation by the states. However, if a PBM offers to provide prescription drug coverage on a capitated basis or otherwise accepts material financial risk in providing the benefit, laws in various states may regulate the PBM. Such laws may require that the party at risk establish reserves or otherwise demonstrate financial responsibility. Laws that may apply in such cases include insurance laws, HMO laws or limited prepaid health service plan laws. Pharmacy Regulation. PBMs home delivery and specialty pharmacies are licensed to do business as a pharmacy in the state in which they are located. Most of the states into which PBMs deliver pharmaceuticals have laws that require out-of-state home delivery pharmacies to register with, or be licensed by, the board of pharmacy or similar regulatory body in the state. These states generally permit the pharmacy to follow the laws of the state in which the home delivery service is located, although certain states require that PBMs also

comply with certain laws in that state. PBMs various pharmacy facilities also maintain certain Medicare and state Medicaid provider numbers as pharmacies providing services under these programs. Participation in these programs requires the pharmacies to comply with the applicable Medicare and Medicaid provider rules and regulations, and exposes the pharmacies to various changes the federal and state governments may impose regarding reimbursement amounts to be paid to participating providers under these programs. In addition, several of the pharmacy facilities are participating providers under the new Part D Medicare program created pursuant to The Medicare Prescription Drug, Improvement and Modernization Act of 2003. As a condition to becoming a participating provider under Part D of the Act, the pharmacies are required to adhere to certain requirements applicable to the Part D Medicare program. Federal and state statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the product to be sold, to fill mail orders within thirty days, and to provide clients with refunds when appropriate. HIPAA and Other Privacy Legislation. Most of PBMs activities involve the receipt or use of confidential medical information concerning individual members. In addition, PBMs use aggregated and anonymized data for research and analysis purposes and, in some cases, provide access to such data to third parties. Various federal and state laws, including the Health Insurance Portability and Accountability Act (HIPAA) regulate and restrict the use, disclosure and security of confidential medical information and new legislation is proposed from time to time in various states. The HHS privacy and security regulations under HIPAA impose restrictions on the use and disclosure of individually identifiable health information by certain entities. The security regulations relate to the security of protected health information when it is maintained or transmitted electronically. Other HIPAA requirements relate to electronic transaction standards and code sets for processing of pharmacy claims. PBMs are required to comply with certain aspects of the privacy, security and transaction standard regulations.

7. PBMs and Medicare Part-D Program

7.1 Medicare Part D: An Overview
The Medicare prescription drug, Improvement, and Modernization Act (MMA) of 2003 is said to bring Medicare into the modern age of health insurance by adding the first outpatient prescription drug benefit in its four-decade history. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003 (Pub. L. 108-173). This landmark legislation provides seniors and individuals with disabilities with a prescription drug benefit, more choices, and better benefits under Medicare Formation of MEDICARE Part D Section 101 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established a new voluntary prescription drug benefit. The Centers for Medicare and Medicaid Services (CMS) explained the significance of adding voluntary prescription drug coverage to Medicare in its final regulations to implement this law Congress required that the Medicare prescription drug benefit be implemented by private sector healthcare insurers so that competition could ensure that enrollees receive low prices for prescription drugs. Congress, as well as CMS, anticipates that PBMs will help administer the benefit and that they will use established commercial practices and techniques, to manage the drug benefit.

7.2 Selection of PDP Providers

The MMA authorized CMS to develop a bidding system in which potential prescription drug plan (PDP) sponsors would seek to offer prescription drug insurance to Medicare enrollees. To ensure all senior citizens are covered, CMS divided that United States into 34 geographic areas, in each of which it seeks to have at least two different PDP sponsors offer full risk plans to Medicare enrollees. If this process does not result in two entities offering full risk plans to eligible enrollees in the geographic area, the MMA contains backup provisions to ensure that at least two PDPs are offered to senior citizens. The MMA requires potential PDP sponsors to submit bids that reflect that applicants estimate of its average months revenue requirements to provide qualified prescription drug coverage (including any supplemental coverage) for an eligible individual with a national average risk profile. The bid must include all costs the plan estimates it will incur in each PDP region to provide basic and supplemental benefits, including administrative costs and return on investment. The MMA authorized CMS to review, negotiate, and approve PDP sponsors for each region based on an applicants qualifications and bid submission. CMS must consider various factors, including whether the bid reasonably and equitably reflects the plans revenue requirements and has actuarial support, and whether the plan design (such as the formulary and utilization management tools, including drug exclusions and tiered copayments) is fair and does not discourage enrollment by certain eligible enrollees. Congress authorized CMS to approve as many PDP providers in an area as they meet these qualifications. MMA Requirements for Pharmaceutical Payments Because the MMA anticipates that competition among PDP providers will ensure competitive pricing, CMS does not specify the amounts or percentages of pharmaceutical payments that should be passed

through to Medicare enrollees.CMS anticipates that each PDPs bid will provide for a significant percentage of pharmaceutical payments passed through to Medicare beneficiaries, so that the overall bid is competitive. CMS does specify, however, the types of payments that must be passed through to Medicare for fallback plans (which assume no risk and are not part of the regular bidding process). Regardless of the pass-through for purposes of determining price to the enrollee or Medicare, all PDP sponsors must provide CMS with information concerning all price concessions they receive from manufacturers, including confidential accounting of how they are used. MMA Plan Design Requirements The MMA also required that each PDP contain certain features regarding, for example, formulary development, formulary drugs, and the scope of the retail pharmacy network. CMS regulations require that a PDPs P&T committee develop the formulary and include within each therapeutic category at least two drugs that are not therapeutically equivalent and bioequivalent, with different strengths and dosage forms available for each of those drugs. CMS explained that not all drugs must be on a PDP sponsors formulary. If a category or class includes only one drug, then only that one must be on the formulary. The formulary must also include adequate coverage of the types of drugs most commonly needed by Medicare enrollees, as recognized in national treatment guidelines. The final regulations set forth the acceptable distances within which all plan beneficiaries must live to a network pharmacy, adjusted for urban, suburban, and rural areas. For example, at least 90% of Medicare beneficiaries, on average, must live within 2 miles of a retail network pharmacy in urban areas served by the PDP and within 5 miles in a suburban area; 70% of beneficiaries must live within 15 miles in a rural area. In addition, the MMA allows Medicare beneficiaries to fill prescriptions at a retail pharmacy rather than through a mail-order pharmacy, but they could be charged more for doing so.

7.3 Role of PBMs

On January 1, 2006, the federal government began Medicare Part D as a drug benefit plan with the stated goal of providing seniors with affordable prescription drugs. By some estimates, Medicare Part D is projected to cost $678 billion dollars over the first 10 years and $8.1 trillion dollars over the next 75 years. Healthcare fraud may add an additional 5% to these cost projections. In 2004, the federal government lost about $20 billion dollars to healthcare fraud. Medicare Part D creates a lucrative market for the pharmaceutical industry and a lucrative target for drug pricing fraud to induce improper overpayments of drug benefits by the federal government. Medicare Part D as discussed above requires the federal government to contract with private entities as sponsors of approved Part D prescription drug plans. Most Part D sponsors are managed care organizations (MCOs), such as Blue Cross/Blue Shield, which then contract with pharmacy benefit managers (PBMs), such as Medco Health Solutions, Inc., to provide pharmacy benefit services such as mail order service and access to retail pharmacies. A PBMs main purpose is to control a MCOs costs through negotiated discounts from pharmaceutical manufacturers and reduced reimbursement rates from retail pharmacies. To increase market share and revenues, pharmaceutical manufacturers bargain with PBMs to place their drugs on PBM drug formularies, to market their drugs, and to switch prescriptions to their drugs. In return, the pharmaceutical manufacturers provide PBMs some form of remuneration (for example, a rebate). In some cases, pharmaceutical manufacturers have been accused of artificially inflating their drugs list price (published as the Average Wholesale Price) to help PBMs earn hidden fees from MCOs. MCOs

reimburse the PBMs based on the list price, and the PBMs retain any difference between that list price and the actual cost charged to the PBMs by the drug maker. In the context of Medicare Part D, the federal government has deemed such actions to be fraud and requires Part D plan sponsors to take certain actions that will allow the federal government to achieve better drug prices and reduce program costs. Unfortunately, Medicare Part Ds untested measures will probably fail to adequately meet the governments objectives. Medicare Part D requires prescription drug plan sponsors to disclose all negotiated discounts (i.e. rebates, subsidies, remuneration) to the federal government and to pass along the savings to the government and beneficiaries. The sponsors must disclose the costs actually paid (net of discounts, chargebacks, and average percentage rebates) by the sponsors to retail pharmacies and pharmaceutical manufacturers. This cost information is required to insure that the federal government does not overpay (in the form of direct subsidies and reinsurance) sponsors for the drug benefit. In addition, the government has the right to audit the sponsors financial statements and records to insure compliance with these requirements.

Mail Medicare Challenge for PBM - Risk

For PBMs not owned by insurers, the most formidable challenge presented by the Medicare prescription drug benefit is taking risk as an insurer. PBMs today are not in the business of insurance. Most do not hold state insurance licenses, they do not maintain reserves in the way that insurers do, and they lack the capabilities that insurers have to underwritethat is, to assess risk and set premiums. PBMs also assert that their slim operating marginstypically 13 percentleave them insufficient cushioning to absorb losses should claim costs exceed premium income. There are valid concerns about the risk in a Medicare PDP, a novel concept that entails voluntary individual enrollment in a drug-only insurance plan. Unpredictability. Absent any directly pertinent history, predicting use and costs in a stand-alone drug plan is challenging. Data from existing full-spectrum health benefit plans will be useful but will not be reliable when translated to a single-benefit plan design. Also limiting the ability to forecast use and costs is the ever-changing drug market. Existing drugs may start being used for new indications, whether approved or not by the U.S. Food and Drug Administration (FDA). New drugs, many with very high price tags, come onto the market regularly, and it is uncertain whether some new drugs will fall under Medicare Part B or Part D. This all gives an unstable basis upon which to compute premiums. Lack of control. PDPs will lack contractual relationships with the most forceful drivers of pharmacy benefit costs: physicians who prescribe medications for their patients. PDPs can try to educate physicians, and they can try to influence prescribing behavior through benefit plan and formulary design, but they cannot sanction physicians whom they evaluate as having costly or otherwise inappropriate prescribing patterns. Adverse selection. Enrollment in Medicare PDPs will be voluntary and will be free only to beneficiaries with the lowest incomes. These qualities make the program fertile ground for adverse selection, in which the people most likely to enroll are the ones who know that their costs will exceed the premiums they pay. Congress sought to thwart adverse selection by penalizing any beneficiary who fails to enroll in a PDP when first eligible, but the penaltynow set at 1 percent of premium for each month of delayed enrollmentmay be too low, particularly at the start of the program, to prevent people from signing on late if their medication costs rise in the future. Congress did try to mitigate PDP risk. MMA stipulates that would-be PDPs lacking state insurance licensure can instead satisfy a federal solvency requirement to be defined in regulation. Congress also

designed a less-than-full-risk model that applies in the early years. Under that model the government will share in PDP underwriting lossesand in gains as well. The protections afforded are largest in 2006 2007, then tail down in 20082011, then phase out.

Other Medicare Challenges For PBMs

MMA contemplates having Medicare taking advantage of PBMs best capabilities, but the statute does not leave everything up to the vendors. The act contains myriad stipulations about PDPs functionality, some of which mirror the demands that private-sector clients place on PBMs but others of which impose expectations or constraints that PBMs have not seen before. Access, (1) PDPs must cover whole geographic regions with pharmacy networks that match the access standards of the Defense Departments TRICARE program: 90 percent of urban enrollees must have a participating pharmacy within two miles of home; 90 percent of suburban enrollees must have a pharmacy within five miles; and 70 percent of rural enrollees must have a pharmacy within fifteen miles. This rule is not a major barrier for the largest PBMs. In fact, the top PBMs will probably seek new contracts with pharmacies specifically for Medicare, so that they can structure their networks to meet the access standards. The access requirement will present a hurdle for less well established players. (2) The statute also contains an any willing pharmacy provision, meaning that a PBM cannot exclude pharmacies that agree to its terms of participation. This rule could handcuff some PBMs whose strategy is to limit the numbers of pharmacies to extract deeper discounts, although imposing higher copayments for use of less favored pharmacies might be a way around this barrier. (3) The law states that PDPs must allow enrollees to fill ninety-day prescriptionstypical of chronic medicationsat community pharmacies as long as they pay the difference in charges between that and the mail-service cost. This provision diminishes PBMs opportunities to profit from their own mail-service operations; again, though, copayment structures can be used to steer beneficiaries where the PBM wants them to go. Formulary. (1) Medicare PDPs must offer drugs within each therapeutic category and class. The plural word drugs in the statute has been interpreted by the CMS to mean that a PDP must offer more than one drug in each therapeutic category. This feature conceivably limits PBMs ability to move market share to selected manufacturers products and win favorable rebate deals. PBMs do not expect this constraint to limit their bargaining leverage, though, for two reasons. First, any PDP that covers only one drug per category would not attract many enrollees. Second, PDPs will have latitude to define benefit tiers so that even when two or more drugs in a category are covered, the PDP could give richer coverage to just one drug. (2) The statute assigns the United States Pharmacopeia (USP), which must consult with PBMs and other stakeholders, the task of defining therapeutic categories and classes to guide PDPs in structuring formularies. Having the independent USP create guidelines is a way to keep PDPs from skewing formularies away from the drugs needed by beneficiaries with the costliest conditions. Also, the more classes and categories that are createdeach containing a smaller number of drugsthe less latitude PDPs will have in setting up formularies. A draft of the USP plan dated 16 August 2004 listed 146 classes. PBMs reportedly were advocating for there to be no more than 90 classes, whereas pharmaceutical manufacturers were pushing to have more than 200 classes. (3) A PDP must notify the HHS secretary and affected enrollees, physicians, pharmacies and pharmacists of the removal of a drug from its formulary or any change in a drugs coverage status from a preferred to a nonpreferred tier. The CMS had stated that Web-site postings alone will not suffice as notice; written formats also will be required. This requirement poses an administrative burden and cost for PBMs operating PDPs. Exceptions and appeals process. MMA requires a PDP to have an appeals process similar to that required of MA plans. The process must deal with coverage denials based on application of the formulary.

A beneficiary may appeal a denial if the prescribing physician determines that covered drugs in any formulary tier would not be as effective for the individual as a nonformulary drug, or would have an adverse effect for the patient, or both. Appeal rights extend to situations where a drug is on the PDPs formulary but in a nonpreferred tier. Some PBMs worry that the appeals process could become unwieldy, but others think that the volume of appeals will not be large because physicians will resist taking on the unpaid task of helping their patients to appeal. Financial disclosure. MMA requires PDPs to disclose to the HHS secretary the aggregate value of price concessions they receive and pass through in the form of subsidies, lower beneficiary premiums, and lower prices through pharmacies and other dispensers (as when a beneficiary pays out of pocket when there is a gap in coverage). PBMs, which keep a close hold on their financial dealings with drug makers and others, say that they are not troubled by this requirement for disclosure of aggregated information. They successfully fought more granular disclosure requirements that were proposed during the crafting of MMA, and they continue to oppose similar state-level legislative proposals. Marketing. PDPs will have to adhere to the same marketing rules that apply to MA plansrules prohibiting aggressive and deceptive practices. The challenge for PBMs that would offer their own PDPs is not the nature of the rules; it is the mere fact of selling directly to consumers. PBMs normally sell not to individuals but to group buyers such as employers and health plans. So a PBM that offer its own PDP would have to buildor buymarketing capability. A number of PBMs are using the Medicare-endorsed discount drug card program as an opportunity to develop such capability now. Insurer-owned PBMs, meanwhile, are well positioned to team with their parents that do have riskmanagement machinery

8. Medicaid Pharmacy Benefits Management

Medicaid was established as a federally mandated and state-operated program to provide healthcare and related benefits to Americans unable to afford such benefits. In 2006, Medicaid provided health coverage and long-term care assistance to more than 55 million people. This included the provision of Medicaid services to 41 million people in low-income families and nearly 14 million elderly people and persons with disabilities. Impact of the Medicare Modernization Act on States The Medicare Modernization Act (MMA) of 2003 created a significant expansion of the Medicare programs by establishing the new Medicare prescription drug benefit (Part D). The new coverage has major implications for the states Medicaid programs because, for the first time ever, beneficiaries who are eligible for both Medicare and Medicaid (dual eligible) now receive prescription drug benefits not from Medicaid but from Medicare. Medicaid Pharmacy Benefits Design Most state managed care Medicaid plans include pharmacy benefits as part of their contracting, comprehensive medical capitation rates, as is the case in commercial managed care plans. Some states carve out the pharmacy benefit from the capitation rate and reimburse for drugs on a separate fee-forservice arrangement. State Medicaid managed care contracts usually make provisions regarding drug coverage and formulary status that require coverage of similar therapeutic products that are covered under the states fee-for-service formulary. In many states that would include selected non-prescription (over-the-counter [OTC]) medications and prescription drug products. Medicaid Prescription Copayments Most states have small copayments for pharmacy services in the Medicaid program. These copayments vary from state to state per prescriptions and may be dependent on whether a generic or brand name drug is dispensed or whether a preferred or non-preferred drug is dispensed. It is widely recognized that even a small copayment can act as a significant barrier to patient drug therapy adherence in low-income populations. For this reason alone, some states have eliminated the copayment requirement as they do not wish the copayment to be a barrier that prevents a pharmacy from withholding treatment based on Medicaid patients inability to pay the copayment.

9. The Role of IT in PBM Industry

Information is critical for the successful operation of any business or interpersonal interaction, including HealthCare. Corporations require complete, accurate and timely information to make mission critical decisions and review the results of previous decisions. Physicians, pharmacists and other healthcare professionals require information whenever they access a patients medical condition, evaluate the effect of previous treatment, and alter the treatment plan. The healthcare industry needs to recognize that upgrading an information system is neither an option nor an excuse. Rather, new information systems should be enthusiastically viewed as an investment necessary for future survival.

9.1 The Need for IT

In the early 1990s, health care system in US was fragmented and not well connected. Lack of connectedness and continuity among various stakeholders reinforced each segment of the industry to function individually. For example, pharmacies were not interconnected to prescribers or laboratories, and prescribers were not interconnected to payers. The fragmentation of the prescription management made the process expensive, unsafe, inefficient and dissatisfying to the customers. At the time physicians provide care to their patients, their access to critical information was limited by time and resources. Patient medication history, clinical references, and formulary rules were not typically available. Pharmacies faced many issues related to excessive amount of illegible prescriptions, clinical interactions, and formulary restrictions. Pharmacists had to embark on a barrage of phone calls to physicians and insurers. In the case of calls made after office hours, physicians might not return the call until the next business day. Often, a single prescription went through a number of loops among a prescriber, a pharmacist and an insurer before shipment of medication to the intended patient. As the whole process was inefficient, time-consuming and costly, the need for a new system was evident and justified. It was believed that technology could resolve many of these flaws in terms of process improvements and the PBM industry slowly adopted the technological solutions.

9.2 IT Dependency
Pharmacy Benefits Management relies heavily on advancing the current data and information systems to support the growing expectations of internal and external customers, to support core services, and to move pharmacy management into a new generation of advanced program components, including pharmaceutical care and disease management. Dealing with advancements and changes like these has fallen squarely upon the information technology departments to implement new and innovation programs. Our healthcare delivery system has three basic goals: to improve the quality of care, to provide reasonable access, and to provide a fair method of financing care. Success in balancing these goals remains elusive, as quality has been a subjective measurement in the past. Critical to success, therefore, is first finding a way to objectively measure how effectively and efficiently healthcare is being delivered in a changing society. The following questions become very important. In a society where medical technology and clinical knowledge are expending exponentially, how can a medical practitioner be sure to deliver the highest quality care? As increased technology adds significantly to the cost of acre, how do health-plans and other stakeholders measure the value of competing technology such as pharmaceuticals? As the nations largest service industry grows, within a world of rapidly developing information technology (IT), the challenges are formidable. This chapter explores the growing IT needs of managed pharmacy programs and discusses the opportunities and challenges involved in achieving a higher level of IT sophistication.

9.3 Benefits of IT
From a historical perspective, pharmacy information and claims processing systems have evolved significantly in recent years. In the 1970s, pharmacists used typewriters and completed manual claim forms. Today, interactive, online, real-time systems maintain detailed electronic records and permit pharmacists to submit a claim to a payer or payers and have a response back in seconds. This enormous change has resulted from advances in computing, information management and communication. Inclusion of pharmacy benefits as a component of managed health care also has greatly contributed to the adoption of this new information paradigm into the PBM industry. The entire practice of pharmacy has been immutably altered through automation and the introduction of information processing and information management technology into nearly all aspects of the delivery process. Information Technology has paved the way for the development and usage of pharmacy information and claims processing systems. It attributes to pharmacy automation that augments the business and patient care aspects of PBM industry like dispensing and pharmacy claim adjudication. The Internet has made substantial inroads into the delivery, administration, and reimbursement of health care services, as well as into consumer health information. In the 21st century, the Internet will increasingly serve as a low-cost, rapid method for disseminating health information. IT has helped the PBM Industry plan, build and manage network solutions locally, nationally, and globally to: Lower the network's Total Cost of Ownership Maximize the return on investment Gain better control of network resources Acquire specialized design expertise Expedite project implementation Minimize risk & complexity Resolve compliance issues IT Solutions brings together talent, technology, and trust to the PBM industry with a specialized focus on Unified Communications, Data Center, Security, Infrastructure and Mobility solutions.

9.4 IT Services in PBM Industry

Today the Information technology provides a broad range of pharmacy spend management solutions and information technology capabilities. The product offerings and solutions combine a wide range of PBM software applications, application service provider (ASP) processing services, and professional services designed for many of the largest organizations in the pharmaceutical supply chain, such as pharmacy benefit managers, managed care organizations, self-insured employer groups, retail pharmacy chains, and state and federal government entities. All segments of PBM industry recognize the critical need for data, and the evolution of IT in PBM industry is occurring rapidly. However, even though the need for sophisticated IT is recognized, the industry has been criticized for underfunding IT investments. The healthcare industry overall spends only 2 percent of operating expenses on IT, compared with the 6 percent to 8 percent investments by heavy industry, or the 8 percent to 12 percent investment by banking industry. But this trend is changing: PBMs now realize the critical need for and competitive advantage of maintaining sophisticated information systems and are increasing their IT investments. They need to choose between building, owning and maintaining internal information systems or outsourcing their information systems needs.

A model describing the integrated PBM functions is shown below:

The Information technology is assisting PBM industry in many areas. These are described below: Formulary Administration The integrated solutions on formulary development and maintenance fully support PBMs existing formularies and preferred drug lists or collaborate to create best-in-class models supported by formulary predictive modeling and impact analysis. Formulary administration consists of ongoing medical reviews of therapeutic drug classes, continual updating of the formulary, development of plan designs that foster the use of the most cost-effective medications and constant communication with both the Plan Members and their Providers. A formulary is a preferred list of cost-effective drugs, designed to promote the use of clinically appropriate drugs whenever possible. A committee of practicing physicians and pharmacists routinely monitor and make changes to formulary. The Committee evaluates new drugs based on their safety, efficacy and patient acceptability. Only if these attributes prove comparable or superior to existing drugs is the cost of the new drug considered. Then, only if the daily cost of the new drug is less than that of existing drugs is the new drug added to the formulary. The pharmacists at participating pharmacies communicate with patients and their physicians about the use of cost-effective prescription drugs. They routinely monitor pharmacy compliance with the formulary.

Information technology promotes pharmacy benefit designs that enhance compliance with the formulary. This includes the judicial use of financial incentives for Plan Members, which encourages formulary compliance because it benefits the Plan Members. It can administer formularies based on specific plan designs, or can provide PBMs with the tools to maintain their own custom formularies online. They also notify participating pharmacies on-line whether a drug being dispensed to a Plan Member is on organizations formulary. Pharmacist, physician and member-focused intervention protocols provide quality controls to drive generics, preferred drug products and appropriate use. Benefit Plan Design and Management Before getting into the Benefit Plan Design and Management, lets first understand what a Benefit Plan means. A Benefit Plan provides a member with a set amount of money in the form of an annuity. The amount of compensation is typically based on a few factors such as duration of employment with the company and salary history as of retirement. Employees who opt for early retirement will receive a lower monthly amount to compensate for the longer duration of future benefits. Upon determining retirement benefits, the employer must now fund the defined benefit plan. Employers will fund an account in which they will be able to make investments to meet the goals of the eventual monthly payments to the employee. Investment risk and management are at the discretion of the company; however, the retirement benefit to the employee will not be at risk. Actuaries are employed to project future earnings potential and potential investment returns in the investment account. This will allow the employer to understand how much they need to fund the defined benefit plan account with. Designing a plan to customize the need of a member / group is called Benefit Plan Design. The Benefit Plan Design includes the following: Self-insured and fully insured analysis and recommendations Consumer-Driven Health Plan design and implementation Individual benefit plan analysis and recommendations Funding analysis and recommendations The PBMs use information technology to accommodate plan design options required and support an unlimited number of benefit design variations. Some information technology vendors working for PBMs also provide benefit design configuration support, in accordance with mutually developed processes. Benefit designs can be modified and made suitable to the changing need of the PBMs.

Pharmacy Network Management This includes supporting a wide range of retail network options, including supporting existing networks or assisting clients in developing proprietary networks that meet specific geographic access requirements, desired price discounts, or other service requirements. For Medicaid populations, services can include a national Medicaid network with Medicaid maximum allowable cost (MAC) pricing. A network management in pharmacy business would mean establishing an online network with the contracted retail pharmacies of the organization. Automating the network will make the process faster and better.

Drug Utilization Review

Pre-dispensing DUR edit checks are performed on an online, real-time basis between mail and retail pharmacies. All prescriptions are checked for participant eligibility and plan design features and are then compared against previous histories of prescriptions filled by the same pharmacy, by other participating retail network pharmacies and by the mail service pharmacy.

Clinical Services IT contributes technical expertise to augment, develop, deploy and support any additional clinical programs. PBMs also use pre-developed clinical programs, which incorporate complete prescription drug information to reduce the growth rate of prescription drug costs and increase the quality of care and member safety. The approach followed to managing the prescription drug benefit focuses on utilization. Many PBMs even obtain a comprehensive clinical management strategy that addresses potential fraud and abuse, compliance and utilization management, to drive the highest quality of care, with potential ingredient cost savings. Pre-developed clinical programs are structured to meet the regulatory standards of NCQA, as well as those of state and federal agencies.

Automated Mail Order Delivery Implementing Information Technology in home delivery pharmacy brings an easy, cost-effective and convenient way for members to fill prescriptions for maintenance medications. For plan sponsors, home delivery is an important element of an overall strategy for improving patient care and controlling plan costs. An effective home delivery program can save plan sponsors as much as 20% on their pharmacy benefit spend. Home delivery can increase compliance, the use of generics and adherence to formulary structures. It can also help prevent health complications through the use of DUR edits that notify mail facility pharmacists about specific patient conditions or plan parameters. Integration of mail with other services means that all relevant patient and plan information can be accessed through a single system. Therefore plan features such as prior authorization guidelines, refill too soon or drug interaction alerts can be applied to mail service claims. This tight integration maximizes the opportunity for cost savings and improves health outcomes for members.

Web Services Web Services enables PBMs to interact with the claims processing system using a standardized protocol in a secure environment. This method of access can provide them with the freedom to build products, tools and reports that utilize data throughout their enterprises depending on the extent of technology implemented. It can be used by the PBM as appropriate, thus providing far greater flexibility and return on investment. Moreover, PBMs also develop web-portals which invite members to learn more about their prescription benefit programs, medication histories, drug information and related industry news. These web-services save the organization on time and effort and make the process more efficient.

9.5 eHealth
The use of emerging information technology, especially the Internet, to improve or enable health or health care is known as electronic health or eHealth. eHealth is the intersection of medical informatics, public health and business, delivering health services and information through Internet and related technologies. It combines both the clinical and non-clinical sectors of PBM industry and includes individual and population health-oriented tools. In the broader sense, it represents a commitment for networked, global

thinking to improve health care locally, regionally and worldwide by using information and communication technologies.

Origin and Evolution of eHealth The concept of eHealth began with the need to provide and support care from a distance. Call centers were an example of a solution. Many types of call centers are used in the health care industry. The following are examples related to pharmacy. Poison control centers Drug information centers Pharmacy help lines Home care centers As the Internet was evolving in the late 1990s, entrepreneurs and venture capitalists invested heavily in the notion of widespread use of information technology. eHealth companies emerged everywhere and some aided physicians and health care providers with clinical information, billing and office management services while others focuses directly on patients, giving them new access to information about specific problems and disorders. All these ventures used the new Internet medium to deliver products and services that they hoped would revolutionize health care industry. Classic examples of these sites include DrKoop.com, Drugstore.com and PlanetRx.com.

Domains of eHealth There are currently five domains of eHealth, with constant modifications and reinventions. They are content, commerce, computer technology, connectivity and care.

Content This domain is represented by websites providing health related information online. It promises to deliver convenient access to information. An example of a consumer content website is WebMD and that of a professional content website is Medscape. Health on the Net (HON) (www.hon.ch) is a non-profit organization designed to aid non-medical internet users to reliable and valid information on health related issues. Web pages that meet the standards set forth by HON can display its HON code logo, indicating that such high standards are met.

Commerce This domain is based on the principles of eCommerce. This domain is well exemplified by Internet Pharmacies. Internet Pharmacy capabilities are now available for practically every retail chain. At present, traditional brick and mortar pharmacies wither partner with existing Internet pharmacies or create their own web counterparts, which illustrates the increasing importance of business on the Internet. Examples: Retail giant CVS pharmacy acquired the Internet Pharmacy soma.com. Walgreens launched an upgraded, full-service Internet pharmacy to compete successfully in PBM industry.

Computer Technology

This domain is defined as facilitating provision of health services, both clinical and administrative, through computer applications. These technologies promise to improve quality of care, influence prescribing behavior, decrease drug spending and administration burden. Examples include ePrescription, smart cards and electronic medical records. ePrescription is a term that applies to automation of the prescription writing process. Smart cards have an embedded computer chip, which can store patient medical records and insurance information.

Connectivity This domain involves connecting participants in the provision of health care services. Two organizations, RxHub and SureScripts created by pharmacy benefit managers and retail pharmacies, established an electronic system that would connect all parties in the ePrescribing process. Another example extends to the pharmaceutical industry and the practice of physician detailing by pharmaceutical sales representatives. There are attempts to virtually detail physicians by electronically connecting physicians with sales representatives. Yet another example is online patient communities, which allow for peer-topeer and person-to-person messaging, information exchange, emotional support and community building.

Care This domain, also referred to as telemedicine, is directly involved in provision of patient care. Telemedicine uses communication and IT to deliver health care services over large and small distances. It is a process whereby a patient and a health care provider are connected at the point of care in a timely manner. The interaction can take place by telephone, fax, email, internet, biometric sensors, etc. For example, a patient with a heart condition can have the heart electro stimulator adjusted over the internet by a physician located hundreds of miles away. However, the depersonalization of care, along with legal and legislative restriction and provider resistance limit the use of this domain.

9.6 EDI in PBM Industry

Definition Electronic Data Interchange (EDI) is the computer-to-computer exchange of business data in standard formats. In EDI, information is organized according to a specified format set by both parties, allowing a "hands-off" computer transaction that requires no human intervention or rekeying on either end. All information contained in an EDI transaction set is, for the most part, the same as on a conventionally printed document. EDI Standard An important factor that accelerated the adoption of electronic pharmacy commerce was the presence of an accepted electronic data interchange (EDI) standard. This standard permits the submission of pharmacy claims and the adjudication of those claims in a real-time interactive mode. The standard has allowed the pharmacy profession an unparalleled position in electronic commerce when compared to other segments of the health care industry. National Council for Prescription Drug Programs (NCPCP) establishes monitors and maintains standards of information processing for the pharmacy services sector of the Healthcare industry. NCPDP has been involved in the development and evolution of pharmacy data transmission standards and is recognized by the American National Standards Institute (ANSI) as an American Standards Developer in pharmacy electronic data interchange (EDI). This recognition will help

NCPDPs efforts to develop standards for pharmaceutical information processing which will in turn facilitate the information transfer processes involved in pharmaceutical care delivery. EDI standard, which allows communication between pharmacies and hundreds of payers, permits over 95% of all prescription claims to be processed electronically. From an information perspective, the NCPDP communication standard provides a common, comprehensive, well-defined set of data elements to feed the various information systems now present in the pharmaceutical distribution channel. The move to this electronic telecommunication standard was spurred on by the Federal Legislation known as HIPAA (Health Insurance Portability and Accountability Act). This act mandated standard transaction code sets with the intent to simplify the administration of systems handling electronic transmission of health information and to protect confidential patient information. The online transactions submitted by pharmacies to payers are currently being transmitted in the NCPDP 5.1 standard. The legislative bodies have reviewed the updates to 5.1 version and have proposed a new version known as NCPDP D.0 standard. PBMs operate electronic data interchange (EDI) systems that link in with retail pharmacy computer systems and manage Rx claims process. Patients health insurance information is entered into system, and EDI informs pharmacist about benefits and patient copayments/coinsurance requirements. Electronic bill created and reimbursement process then managed by PBM. PBM works with patients insurance carrier for payment, and cedes resulting payment to retail pharmacy. Benefits of EDI PBM Organizations have adopted EDI for the same reasons they have embraced much of today's modern technology-enhanced efficiency and increased profits. Benefits of EDI include: Reduced cycle time Better inventory management Increased productivity Reduced costs Improved accuracy Improved business relationships Enhanced customer service Increased sales Minimized paper use and storage Increased cash flow The EDI capabilities using Internet technology will enhance the ability of all trading partners to communicate and transfer data, so systems will provide more cost-efficient and better quality healthcare services. The pharmaceutical delivery and claims adjudication channel has exploited and adopted emerging computer and communication technology spurred on by new electronic data interchange standards. In just decades, pharmacy systems have evolved from paper-based, manually intensive systems that took long periods of the time to process claims, to sophisticated and powerful electronic recordkeeping systems that can exchange data to adjudicate a claim or gather information for pharmaceutical care in seconds.

9.7 Data Warehousing

The pharmacy systems and technological advances in pharmacy systems, switching, and third-party adjudication programs are integral to patient care and to the cost-effectiveness of pharmacy practice. With the majority of Americans now enrolled in some form of managed care, MCO management

information systems now store unprecedented amounts of data regarding member functions, provider functions, claims administration, clinical management, rebate administration, and financial details. These systems and those discussed above fall under the general heading of online transaction processing (OLTP) systems.

OLTP and OLAP Systems In a very real sense, the OLTP systems and advances in technology have made it possible to collect billions of prescription records every year. While handling this great volume, todays systems must also effect changes in prescribing and patient drug usage patterns to benefit the affected patients and perhaps reduce the costs of drug therapy and improve overall health care for a particular patient or patient population. Some of these challenges have been met by the advances in the pharmacy management systems and the PBM systems, but further challenges remain. Even more effective clinical and financial systems can be developed, once new challenges and goals are discovered and targeted. To discover these new opportunities will depend squarely upon creating systems that take the online real-time data and present them to clinical pharmacist or other healthcare knowledge worker in a way that advances prospective DUR, disease state management, incentive-based cost management (rebate programs), and other emerging business models. This analysis requires the systems to reduce huge amounts of data to simple, understandable information for decision makers. The challenge is to mine the information to detect fraud, unanticipated facts, discover trends and patterns, and to organize and present the data for other healthcare and benefit professionals. The difference between an OLTP system and an online analytical processing (OLAP) system are straightforward. OLTP systems are efficient operational systems that adjudicate claims and collect data, while OLAP systems transform the data collected by the OLTP systems into decision support tools. These decision support tools then enable the clinical pharmacists to concentrate on the information being gathered and to act upon the data by making changes to OLTP system, by interacting with the affected patient population, the prescribing population, or by designing outcomes studies to further explore health situations. Data Warehousing and Business Intelligence OLAP systems are often called data warehouses or data marts. The graphical presentation of the relational or multidimensional views of these data repositories are often termed decision support systems or executive information systems. A data warehouse is a process whereby data from transaction-based systems are collected, integrated, and delivered to end users expressly to support data or clinical analysis activities. An OLAP system assembles the data, transforms the raw data into a form suitable for analysis, distributes the data, and provides access to the information store. Today, virtually every MCO has some type of data repository and many have several tailored to capitalize on unique opportunities. This idea of extracting the data from disparate systems, transforming it, and delivering it to the end users is popularly known as business intelligence. Simply put, these systems are a home for second hand data for utilization data, customer relationship management (CRMs) data, marketing data, and rebate data. The transformation of all these data from different systems involves checking them for gaps, missing values, business rules, and looking at the data for reasonableness. In addition, the transformation process may add values for the end users, like tagging a utilization record with a disease state. The goal of business intelligence is to deliver the right amount of information and analytical power to fit the user. One of the tenets of business intelligence is the fact that not all users of data have the same sophistication or the same goals. Users can range from dedicated power user like a

data analyst to the casual user or a report consumer. The distribution of these consumers resembles a pyramid with a small number of report authors to a large number of report consumers or readers. The tools employed can range from simple reports to business intelligence tools that require months of training and a strong educational background in mathematics, statistics, and the appropriate clinical disciplines. These are known as power users. Coupled with delivering the right amount of information to the right users is also the ability to secure the information. Allowing for legal and appropriate access to the correct level of information by user class is just another challenge facing business dealing with the technology and information explosion. This security issue is critical to HIPAA and must be considered in protecting the rights of patients, while still permitting the analysis of information critical to the advancement of all the related disciplines. Health Data Management Managed care organizations define key metrics from the data repositories to measure their organizations progress. Examples of key metrics are per-member-per month (PMPM) pharmacy cost, average number of prescriptions per thousand members (Rx/1000 members), and member cost share percentage. This ability to use metrics to score card or present a management dashboard is an important trend in all industries today. OLAP is a key technology putting these informational tools together. OLAP systems are typically run on different computer hardware and software than OLTP systems, so the performance of the operational systems (OLTP) is not affected by OLAP processing. The tuning of the hardware and software systems can be set up specifically to support the unique needs and processing requirements of OLAP. The analytical systems also can integrate data from variety of sources. For example, it is possible to integrate patients drug history information with their medical and lab claims information to get a complete picture of their health state. Forecasting based on the accurate information in these data repositories in an area receiving a lot of attention. Using predictive modeling to provide an organization links to patients needing case management, modeling historical benefit information, and predicting drug costs and rebates is a vital and growing outgrowth of the OLAP systems. This predictive modeling is based on the use of algorithms and supporting technology to focus on appropriate clinical programs to match the population. The processes and programs can be used to identify high risk patients before they reach a crisis and assist with care management. This predictive technology is also being applied to project the future cost of new benefit designs by analyzing copay tiers, deductibles, benefit maximums, and health-care spending accounts to derive new benefit plans to achieve specified objectives. Software tools exist that allow testing of a yet-tobe-tried benefit plan against great volumes of historic data. The success of the plan can be tested before it is introduced into the market place. Other software tools are designed to mine the data or to look for hidden relationships in the data instead of making assumptions about the data. These mining activities can lead to innovative ideas and the discovery of clinical and financial relationships between drug utilization, health state, future patient drug spend trends, and other important measurements. Of course, the key to predictive analytics and data mining is having clean data in the source data repository and the right tools and personnel to exploit the data.

9.8 Health Informatics

Information can be an important force in changing patient behavior, educating physicians, and modifying online transaction-based systems. Using OLAP-powered informational systems in tandem with the claims adjudication engines and transaction systems can empower an MCO to use the pharmaceutical channel to become a quality supplier of healthcare services. The early adjudication systems have evolved from offering simple eligibility verification and basic transaction editing to providing full-fledged pharmaceutical care influencing patient and physician behavior. These systems will probably always manage drug costs

but also will evolve to encompass clinical guidelines developed from analyzing billions of transactions from online analytical systems and offering information to the consumers to make more cost-effective benefit decisions.

9.9 Advanced Pharmacy Systems

Pharmacy systems are now being interfaced with medical systems for single (or integrated) deductible programs. They also are being designed to support and interface with increasingly available patientflexible spending accounts. They are even being interfaced with credit card systems in todays ever increasingly cashless world. These interfaces and programs make it easier for the patient to assume an equitable cost share and obtain needed medications quickly and easily. Continued evolution of these systems will continue to require information technology resources and dedicated pharmacy professionals to design and adapt technology to future challenges of these systems. Recent drivers in the systems design have concentrated on meeting demands of new government programs that favor consumer-driven healthcare benefits and the need to provide seamless integration with other healthcare or finance systems. These drivers have been the largest factors impacting the adjudication systems in recent years. Significant cost pressures due to increases in pharmacy costs have forced information technology staffs to push more data out to the consumer. The new consumer-driven health plans demand that patients have the information to make intelligent decisions regarding their own healthcare dollars. Influences of government policies and programs will continue to have a major impact on the function and expense of the pharmacy information systems. The last few years of government regulations around PART D, HIPAA, and National Provider Indicator (NPI) have resulted in the regulation fatigue for many healthcare information departments. The other driving force to watch is the innovative cost-sharing plans between employers and benefit recipients. The government regulations like HIPAA have forced information technology staffs to redesign their pharmacy systems both in the pharmacy and on the payor side to accept new transaction sets. In the addition to changing transaction sets, the privacy regulations have placed a daunting burden on the system designers. Data must be secure and accesses constantly documented. However, locking down the systems can only go so far before it interferes with business operations. Therefore, a balance must be struck in the organization between operational efficiency and security, while still respecting all patients rights. It is imperative that technology be coupled with new procedures and training on these new regulations throughout all parts of healthcare administrative and provider organizations. Benefits of Advanced Pharmacy Systems Use of these advanced pharmacy informational systems will continue to grow, driven by cost containment, consumerism, new government regulations, new business practices, competition, and technology. Pharmacists will assist in designing innovative benefit plans, analyzing clinical issues from the OLAP systems, and improving patient care prospectively by designing new edits placed in the online transaction systems, and interfacing with the dispensing pharmacy systems. To continue to deliver comprehensive pharmaceutical care, pharmacists will be required to analyze the captured transactions in data warehouses, assist in the engineering of new pharmacy systems, and ultimately shape the future of the pharmaceutical care channel with these advanced pharmacy informational systems.

10.

NCPDP Standards in Prescription Process

NCPDP, located in Scottsdale, AZ, is a not-for-profit ANSI-accredited Standards Development Organization consisting of over 1,500 members who represent chain and independent pharmacies, consulting companies and pharmacists, database management organizations, federal and state agencies, health insurers, health maintenance organizations, mail service pharmacy companies, pharmaceutical manufacturers, pharmaceutical services administration organizations, prescription service organizations, pharmacy benefit management companies, professional and trade associations, telecommunication and systems vendors, wholesale drug distributors, and other parties interested in electronic standardization within the pharmacy services sector of the health care industry. NCPDP began as a small group of ad hoc committee members and has grown into a powerful presence within the pharmacy industry's standards setting environment. NCPDP develops and maintains standards for the pharmacy services sector of the health care industry. It has the highest representation from the pharmacy services sector of healthcare. NCPDP has also been named in federal legislation including HIPAA and MMA. NCPDP standards brought in common transaction format. Some of the benefits of common transaction format are: Common syntax and dictionary Adaptability Reduced system development expense Reduced equipment requirements Reduced errors Evolution of NCPDP Standards:

Prescription Process and the application of NCPDP Before we discuss the NCPDP standards that are applicable to the pharmacy prescription process let us first look at the pharmacy prescription process flow: Figure - The Prescribing Process

The Prescription process is explained below: The member first enrolls with the payer, who can be HMOs, Government programs, etc., for prescription drug program/coverage. Once enrolled, members are issued prescription (Rx) ID cards. The members eligibility data is then sent to the PBM. When a member becomes sick he visits a physician and the physician prescribes certain drugs for treating the patients condition. The physician can prescribe through a hand-written prescription or through electronic prescriptions (ePrescriptions). ePrescription is the computer-to-computer transfer of prescription data between pharmacies, prescribers, and payers. It is not the use of an email or a facsimile transaction. Electronic prescribing functions include messages regarding new prescriptions, prescription changes, refill requests, prescription fill status notification, prescription cancellation, and medication history. The retail pharmacy receives the prescriptions from either the patient or directly from the physicians office (ePrescription). A retail pharmacy POS system verifies the eligibility and coverage details of the patient and drugs with the PBMs and appropriately receives the copay amount from the patient and dispenses the drugs. The pharmacy claim is sent to PBM for adjudication. The PBMs contract with Pharmaceutical manufactures for rebates. The manufacturers distribute drugs to pharmacies through drug wholesalers and distributors.

The NCPDP Standards applicable to the above pharmacy prescription process are shown below: Figure - NCPDP Standards Application In The Prescribing Process

SCRIPT Standard: The SCRIPT standard was developed for transmitting prescription information electronically between prescribers, providers, and other entities. The standard addresses the electronic transmission of new prescriptions, changes of prescriptions, prescription refill requests, prescription fill status notifications, cancellation notifications, relaying of medication history, and transactions for long-term care. Manufacturer Rebate Utilization, Plan, Formulary, Market Basket, and Reconciliation Flat File Standard The NCPDP Manufacturer Rebate Utilization, Plan, Formulary, Market Basket, and Reconciliation Flat File Standard provide a standardized format for the electronic submission of rebate information from Pharmacy Management Organizations (PMOs) to Pharmaceutical Industry Contracting Organizations (PICOs). It is used for data transmission between Processor / PBM and pharmaceutical manufacturer. Formulary And Benefit Standard This NCPDP Formulary And Benefit Standard provides a means for pharmacy benefit payers (including health plans and Pharmacy Benefit Managers) to communicate formulary and benefit information to prescribers via technology vendor systems. It enables the physician to consider the following kinds of

information during the prescribing process, so that he/she could make the most appropriate drug choice for the patient. Information about which drugs are considered to be on formulary, and alternative medications for those drugs not on formulary. Limitations that may impact whether the patients benefit will cover a drug being considered (such as age limits, gender limits, step therapy rules, benefit-specific coverage exclusions, etc.) The cost to the patient for one drug option versus another. Billing Unit Standard: Due to the number of processors, fiscal intermediaries, plan administrators, and Medicaid programs, the billing unit standard was created to promote a common billing unit language for the submission of prescription claims. Telecommunication Standard: NCPDP recommends the use of a standardized format for electronic communication of claims and other transactions between pharmacy providers, insurance carriers, third-party administrators, and other responsible parties. This standard addresses the data format and content, the transmission protocol, and other appropriate telecommunication requirements. Usage of a common transaction format brings advantages to participants in the pharmacy industry. There are significant advantages to both the Originator of the transaction and the Processor of the transaction by adopting this version of the standard, such as: Common syntax and dictionary Adaptability Reduced system development expense Reduced equipment requirements Reduced errors Universal Claim Form: The Universal Claim Form provides a standard format for the paper submission of third party drug claims. The Universal Claim Form does adhere to the data elements found in the Telecommunication Standard and Data Dictionary. Batch Transaction Standard: The NCPDP Batch Transaction Format provides practical guidelines and ensures consistent implementation throughout the industry of a file submission standard to be used between pharmacies and processors, or pharmacies, switches, and processors. The batch file is to be submitted in a non-real-time mode.

11.

URAC Accreditation for PBMs

URAC is the national leader in promoting quality health care with over 20 different accreditation programs across the continuum of care. Many are first-of-their-kind in the industry. The top US health plans hold URAC accreditation, and URAC has accredited hundreds of organizations in all 50 states. URAC's Pharmacy Benefit Management Accreditation demonstrates PBMs commitment to quality and safety. It shows that PBMs contract terms and pricing structures are clear. And it shows that you ensure access to drugs and pharmacies. It's a critical seal of approval for employers, consumers, regulators and URAC offers the only third-party, voluntary accreditation program of this scope for pharmacy benefit management and prescription services industry. All standards were developed by URACs Pharmacy Advisory Committee, which includes a wide range of stakeholders: employers, consumers, pharmacy consultants, health plans, retail pharmacy, pharmacy benefit management organizations, pharmacy professional organizations; labor, and large public purchasing groups. PBMs and Health Plans demonstrate their commitment to quality. And organizations having undergone URAC Accreditation consistently report the value it has brought in improving operations and enhancing regulatory compliance activities. URAC provides the following standards related to the PBM Industry: Pharmacy Benefits Management Drug Therapy Management Specialty Pharmacy Accreditation o The URAC accreditation program design for Specialty Pharmacy is as follows: Module 1: Core Organizational Quality Standards Module 2: Customer Service, Communications, and Disclosure Standards Module 3: Specialty Drug Management Standards Module 4: Pharmacy Operations Standards

Module 5: Patient Management Mail Pharmacy Accreditation o The URAC accreditation program design for Mail Service Pharmacy is as follows: Module 1: Core Organizational Quality Standards Module 2: Customer Service, Communications, and Disclosure Standards Module 3: Mail Drug Management Standards

Module 4: Pharmacy Operations Standards Workers Compensation Pharmacy Accreditation

12.

TRICARE Pharmacy (Tpharm)

TRICARE provides pharmacy benefit to all eligible Uniformed Services members, including TRICARE for Life (TFL) beneficiaries entitled to Medicare Part A and B based on their age, disability and/or end-stage renal disease. Eligible beneficiaries may fill prescription medications at military treatment facility (MTF) pharmacies; through the TRICARE Mail Order Pharmacy (TMOP); at TRICARE retail network pharmacies (TRRx); and at non-network pharmacies. To have a prescription filled beneficiaries need a written prescription and a valid Uniformed Services identification card. To update information and obtain a valid identification card, beneficiaries should contact the: Defense Enrollment Eligibility Reporting System (DEERS). TFL beneficiaries who turned age 65 on April 1, 2001, or later, must be enrolled in Medicare Part B to use the pharmacy program. TFL beneficiaries who turned age 65 before April 1, 2001, are not required to be enrolled in Medicare Part B for the pharmacy program, but are required to be enrolled in Medicare Part B for all other benefits available under TRICARE for Life. TRICARE's mandatory generic drug policy, which has been in place for more than 10 years, requires that prescriptions be filled with a generic product, if one is available. As with most prescription drug plans, beneficiaries enjoy a significant cost savings by asking their doctors to prescribe the generic equivalent of a brand-name drug. In the United States, all generic drugs must undergo Food and Drug Administration (FDA) testing and approval and are considered safe alternatives to brand-name drugs Pharmacy Copayment and Cost-Share Structure The current pharmacy cost-share structure-meaning the percentage or fixed amount that the beneficiary pays toward the cost of the medication-is based on whether a prescription medication is a generic, formulary or non-formulary pharmaceutical. The copayment is the same for all TRICARE beneficiaries (except active duty service members, who receive medications free-of-charge) depending on where the beneficiary chooses to fill their prescription. Active duty service members do not pay cost shares for prescriptions. However, if they are overseas and receive medications through an out-of-network pharmacy, they may need to pay out-of-pocket for the total cost of the medication and then file a claim for reimbursement for the full amount. Beneficiaries may have prescriptions filled in one of four places: at the MTF, through the TMOP, or at one of the more than 54,000 TRRx in the nationwide network. Beneficiaries may also have prescriptions filled at non-network pharmacies, but will pay significantly more and must meet a deductible.

This copayment structure applies to all beneficiaries, regardless of their TRICARE Prime enrollment status. A comparison of the point-of-service copayments and the associated quantity of medication dispensed is noted in the chart below. TRICARE Pharmacy Copayments In the U.S. (Including Puerto Rico, Guam, Virgin Islands) Formulary (brand name)

Place of Service Generic

Non-formulary*

Military Treatment Facility (MTF) Pharmacy TRICARE Mail Order Pharmacy (TMOP) (up to a 90-day supply) Retail network pharmacy (up to a 30-day supply) For those who are Not enrolled in TRICARE Prime: Non-network Retail Pharmacy (up to a 30-day supply) $9 or 20 percent of total cost, whichever is greater, after deductible is met (E1-E4: $50/ person; $100/family; All others, including retirees, $150/person, $300/family) TRICARE Prime: For those who are Not enrolled in TRICARE Prime: $22 or 20 percent of total cost, whichever is greater, after deductible is met (E1-E4: $50/ person; $100/family; All others, including retirees, $150/person, $300/family) TRICARE Prime: $3 $9 $22*** $3 $9 $22*** $0 $0 Not Applicable**

50 percent cost-share after point-of-service 50 percent cost-share after point-of(POS) deductibles ($300 per person/$600 service (POS) deductibles ($300 per

per family deductible)

person/$600 per family deductible; 50 percent cost-share)

Note: Beneficiaries using non-network pharmacies may have to pay the total amount of their prescription first and file a claim (DD Form 2642) to receive partial reimbursement. Beneficiary Cost Share at all other overseas locations (May Vary by Location - See Note 1) Active Duty family members **** Active Duty Servicemembers Global Remote Overseas No copay 0% Prime Overseas Standard Overseas Retirees and family members

50%

25%

25%

**MTFs are prohibited by law under the Code of Federal Regulations from carrying non-formulary medications. ***If medical necessity is established for a non-formulary drug, patients may qualify for the $9 cost share for up to a 30-day supply in the TRRx or a 90-day supply in the TMOP program. ****After applicable deductibles have been met. Please Note: This Information was obtained from the following link as on May 2009 http://www.military.com/benefits/tricare/tricare-pharmacy/tricare-pharmacy-program#1 MTF Pharmacy Prescriptions may be filled (up to a 90-day supply for most medications) at an MTF pharmacy at no cost to the beneficiary, if the medication is on the MTF formulary. Beneficiaries should contact their local MTF to find out what is on the formulary and for specific details about filling and refilling prescriptions at the MTF pharmacy. They can use the TRICARE Formulary Search Tool to find out what medications must be made available at all full service military pharmacies (called the Basic Core Formulary), and they may visit the MTF locator to find the closest MTF. With no copayment, the MTF pharmacy is the best value to the beneficiary.

TRICARE Mail Order Pharmacy (TMOP) TMOP is administered by Express Scripts Inc. (ESI) and is available for prescriptions that beneficiaries take on a regular basis. For the beneficiary, it is the more cost-effective way to receive prescriptions compared with using retail pharmacies. Beneficiaries may receive up to a 90-day supply for most medications. Prescription refills may be requested by mail, phone or online. Beneficiaries who have prescription drug coverage from another health insurance plan may not use TMOP unless the medication is not covered under the other plan, or unless the beneficiary exceeds the dollar limit of coverage under the other plan. To use TMOP, beneficiaries simply register with TMOP by completing the registration form available online at www.express-scripts.com/TRICARE. They should follow the instructions on the ESI Website to submit the form. Beneficiaries should then mail their health care provider's written prescription and the appropriate cost share to ESI. New prescriptions may also be faxed or phoned in by the provider. Within 10-14 days, the medications are sent directly to the beneficiary. Beneficiaries may also contact the TRICARE Service Center for assistance. TRICARE Retail Pharmacy Program (TRRx) Beneficiaries in the United States and its territories (Guam, Puerto Rico, U.S. Virgin Islands) may use an expanded, nationwide network of more than 54,000 retail pharmacies to fill prescriptions. By using a pharmacy in the ESI network, beneficiaries no Medical Necessity TRICARE understands that patient-treatment decisions are between the patient and the doctor. Within a therapeutic class, if the physician feels that it is medically necessary for the patient to receive the nonformulary medication instead of the formulary medication, then the physician should call the Tpharm Contractor, prior to the patient obtaining the initial prescription or refill, in order to first obtain medical necessity approval by Tpharm Contractor. In order for medical necessity to be established, one or more of the following must occur: Use of all formulary medications is contraindicated, and the use of the non-formulary medication is not contraindicated. The patient must experience, or would be likely to experience, significant adverse effects from the formulary medication, and the patient is reasonably expected to tolerate the non-formulary medication.

The formulary medication has resulted in, or is likely to result in, therapeutic failure, and the patient is reasonably expected to respond to the non-formulary medication. The patient has previously responded to the non-formulary medication, and changing to a formulary medication would incur an unacceptable clinical risk. There is no alternative pharmaceutical agent on the formulary.

References:
Books:

1. Managed care Pharmacy Practice, by Robert P. Navarro 2. The ABC of PBMs, by National Health Policy Forum 3. Managed Care Pharmacy Practice book Author Robert P. Navarro 4. Managed Healthcare an Introduction 3rd Edition of Academy for Healthcare Management 5. The managed health care handbook By Peter Reid Kongstvedt - Pages 424, 425 6. Handbook of Pharmaceutical Public Policy By Thomas R. Fulda, Albert I. Wertheimer Pages 259, 262, 273 7. HCFA Study of the Pharmaceutical Benefit Management Industry 2001, PricewaterhouseCoopers LLP - http://www.cms.hhs.gov/reports/downloads/cms_2001_4.pdf

Online Journals/Articles: 1. http://www.amcp.org/data/jmcp/update_v5_565-573.pdf 2. http://www.ftc.gov/be/healthcare/docs/V920017%20CA%20Pharmacy%20Services.PDF 3. http://www.ftc.gov/reports/pharmbenefit05/050906pharmbenefitrpt.pdf - PBM Ownership of MailOrder Pharmacies Federal trade commission report August 2005 4. http://findarticles.com/p/articles/mi_m0NKV/is_1_4/ai_97592327/pg_1?tag=artBody;col1 5. http://www.imakenews.com/seroper/e_article000671706.cfm?x=b11,0,w 6. http://www.ftc.gov/reports/pharmbenefit05/050906pharmbenefitrpt.pdf - Pharmacy Benefits Managers: Ownership of Mail-Order Pharmacies, Federal Trade Commission report August 2005 7. Annual Report 2007- Express Scripts Inc. 8. Annual Report 2007- Medco Inc 9. http://www.law.uh.edu/healthlaw/perspectives/2006%5C(JV)PartDFinal.pdf 10. http://content.healthaffairs.org/cgi/content/full/hlthaff.w4.504/DC1 - The Role Of PBMs In implementing The Medicare Prescription Drug Benefit-By Robert F. Atlas.

11. http://findarticles.com/p/articles/mi_m0NKV/is_12_3/ai_95399767
12. http://www.moneymanagement.com.au/Articles/Advice-pricing-switching-tofeeforservice_0c03d283.html 13. http://www.thehealthcareblog.com/the_health_care_blog/2006/02/pbms_more_on_th.html

Websites: 1. http://www.badfaithinsurance.org/reference/LMCOPBM/0010a.htm 2. http://www.express-scripts.com/industryresearch/industryreports/specialtytrendreport/2004/ 3. http://www.medicinenet.com/script/main/art.asp?articlekey=46204 4. http://www.managedcaremag.com/archives/0209/0209.pbms.html 5. http://www.cms.hhs.gov/MMAUpdate/ 6. http://www.rxhub.net/index.php?option=com_content&task=view&id=28&Itemid=39 Website of RxHub, LLC 7. http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=200903040051 95&newsLang=en 8. www.x12.org 9. www.NCPDP.org 10. http://www.ncpdp.org/pdf/Eprescribing_fact_sheet.pdf
11. http://www.ncpdp.org/PDF/Basic_guide_to_standards.pdf

http://www.military.com/benefits/tricare/tricare-pharmacy/tricare-pharmacy-program#1