HC Industry Environmental Scan 2016-2030

1. HC Industry Environmental Scan 2016-2030 Presentation By: William Roth January 8th, 2016

2. Seeing Topics From Multiple Dimensions

3. 22 2 55 JAMA Study 2013, Merritt Hawkins 2014

4. What Do We Want To Know – How It Fits (Or Doesn’t) • Product landscape: brands, generics, biosimilars, consumer goods, private label, pricing pressure, access of science, approval of science • Payer landscape: government reach and influence, increasing premiums, OOPs, and deductibles, restriction, Kaiserfication • Consolidation: power of big 3 anything, vertical consolidation, drivers and impacts • Globalization: strengthening business models, economies of scale • Societal trends: consumerism, waste removal, democratization, “uberization”, decline of paternalism, ubiquitous digital information • Applied technology and data – digitization of patient and provider – quantum computing, multi-dimension, patient views, mega-cohorts, telehealth, digital doctors • Innovation – regenerative, precision, testing, AI, robotics, e-health • Political trends: balance individual and society, dealing with speed

5. Agenda • Preamble and Paradigm Setting • Broad industry overview – setting the context • Grounding ourselves in one another’s viewpoints • Future trends and likely impacts

6. Preamble and Paradigm Setting

7. HC Chessboard – Viewed Holistically, Not in Parts

10. Understanding And Empathizing • Business model – how was it created - unmet • Valuing one another – why was it created • Abundance of opportunity • Misalignment – that’s my job • Getting my piece – that’s my money • Saving your place – that’s my chair • Goal may just be to blow it up • Alignment 1+1=3

11. Where It’s Been - Story Of Healthcare Insurance HHS NIH CMS OIG Medicaid & Medicare Vets & Insurance AMA OBRA BBA MMA DRA ACA 1847 1945 1965 1980s 1990s 2000 2005 2010 2015 2018 2020 All of the 1990-2000s moves supported with logic from CBO, HHS, CMS HC insurance completely disconnected from personal responsibility Costs spiraling out of control. Need for accountability for population health at macro and micro levels. Data, technology and accountability Clinton has HC Czar Series of reform – BBA – long term care – MMA – add Part D (plant the Trojan Horse) and reform Part B – DRA – reform generics Long Term care screamed but CMS was successful Clinics complained but were not organized – sequestration as well Retail responded with coordinated effort HC as cash business AMA fought against any form of “contract activity” Intro to MCOs and HMOs HC insurance as workers benefit to entice returning soldiers to business Prosperity with political gain Birth of Medicaid and Medicare But the actuaries were wrong Knew we made a mistake as early as the 70s. From 1960 to 1970 per capita HC consumption doubled. Series of reforms – PPS, DRGs, etc

12. Economics – Top 11 GDP Countries Source: World Bank and Wikipedia May 2015

13. Healthcare Cost Containment is a Mandate Global Economy Change Drivers Demographics Technology PublicPayers CommercialPayers Change Agents Regulators Employers Consumers Change Reactors PharmacyChannels DistributionChannels HealthcareManufacturers Providers

14. Where It’s Going - Targets For Spend Reduction Source: Healthcare Economist 2014

15. Broad View Of Industry – Setting Context

16. Brands/Generics Channel Integration Consumer Empowerment Government as Payer Industry Trends and Impacts 2015-2020 Providers, Channels & IntegrationChannels are reinventing themselves. Lines are more blurred then ever before. Product MixThe shift in mix and the associated economics will drive immediate and profound change. Payer Mix/ Reimbursement ChangeGovernments objective is cost control. Historically the systems was transactionally focused to make themselves money. Technology, Data, and Service Vendors With Payer visibility (EMR, etc) and the ability to influence the Provider and the Patient and to link technology to monitor and manage both, these serve as the great enablers of change

17. Growth Forecasts For Specialty Pharmaceuticals $190B Pharmacy$190B Medical Source: BFG Analysis on IMS 2014 Rx Sales

18. Patent Cliff $114B 2010-2020 Generics are a losing industry come 2017 Source: 2012 Medco Patent Cliff Report and USPTO . 2012-2020 Impact by Manufacturer shows only manufacturers with >$1B impact

19. Retailers Will Be Hurt By Their Love of the Generic Wave Steady State Patent Cliff

20. If They Don’t Change – Retailers will be Generic Pill Houses Source: BFG estimates based upon IMS Health, Medco patent expiry, proprietary client data analysis,

21. Retail, Specialty And What Is Needed In-Between

22. Product Mix and Key Facts • Generics do not currently couple with support programs • Declining brands are on auto-pilot with 10% price increases • Specialty products are 3% of population and can be targeted and managed by plan sponsors – think about # of patients per employer, per state, etc

23. Overview Of Specialty Pharmaceutical Marketplace

24. Specialty Drug Areas By Benefit Design

25. Specialty Drugs By Site Of Care

26. Reimbursement Considerations – Government Driving Down ACA BBA MMA DRA Reinforce and control Control LTC Control Biotech Control Generics Lowered and contained rates of reimbursement to LTC Contained reimbursement on biotech spend Lower and contain excessive margin on generics vs brands Reinforce all of the former, lower MD reimbursement for lack of performance 1997 2003 2006 2011 Transcending bi-partisan activities – HHS and CMS with the support of the CBO and GAO have identified and executed on opportunities to better control the system and relative costs

27. Traditional Co-pay Tier Designs Migrating To Co-Insurance, Closed Designs & Exclusion Formularies • Medicaid Expansion and the launch of Healthcare Exchanges increased the number of insured population in 2015 by 28.1 million (11.7M in HIX, 16.4M in Medicaid expansion) • Formulary benefit designs in Commercial, Medicare Part D and HIX plans are trending to 4/5 tier formularies with all preferred and non-preferred brands in the 4th tier or higher with co-insurance co-pays • Co-pay differentials between generic and brand tiers depend on the price of the product, ranging from $20 - $100 or more For Illustration Purposes Only Definitions based on Tier Co-pays: Open (<$15 differential), Restricted ($15-25 differential), Closed (>$25 differential) Source: Blue Fin Group sourced industry information and analysis

28. Consolidating Payer System Applies Pressure To Channels Total U.S. Insured Lives Source: Summary information from CBO estimates, Kaiser Family Foundation, Health Leaders InterStudy

29. Government as Payer – Doing What Others Couldn’t • Under Patient Protection and Affordable Care Act of 2010, patients were herded into health insurance plans – half to govt and half to private • While it wasn’t expected until 2020, Government now covers 50% of lives • Rise of plan sponsors Medicare: Seniors and disabled Medicaid and State-Child Insurance Program (SCHIP): Low income Tricare, VA: Military Indian Health Services: Native American Indians Source: “Health Insurance Coverage: Early Release of Estimates From the National Health Interview Survey, 2014”http://www.cdc.gov/nchs/data/nhis/earlyrelease/insur201412.pdf and Kaiser Health of Healthcare 2015

30. Payer Decision Tree – Think Like A Payer Plan Sponsor Influence the provider with therapeutic pathways – preferred products Health Plan/MCO 50% Medical or Pharmacy Benefit* Medical Director Attempts to influence the consumer directly with out-of-pocket economics PBM Often a value prop is to medical but pharmacy has to pay Pharmacy Director “Take care bringing a medical benefit story to a pharmacy director – unless it reduces pharmacy spend, it increases it – Healthplans and Plan Sponors will need to weigh in – Medical and Pharmacy still don’t talk”

31. Market Access Motives By Payer Player Kaiser Family Foundation and BFG analysis 2015

32. Commercial Deficiencies Patient knows where to go Payer Access PA, SE, Tier, Blocks Pharmacy or PS Hub reeducates adherence monitors reports outcomes Provider confident of drug and access Lose 5% Lose 20-40% Lose 20-40%

33. Business Problem For Payers (And The Dilemma) • Payer needs to show immediate removal of healthcare spend • PBM’s only have control of drug spend • PBMs/MCOs set hurdles to gain access – PA, SE, OOPs, blocks • SPP as revenue generator • Control more drug spend • Move from OAAs to SAAs • Do not understand (or care about) business issue around the ineffectiveness of the SPP model • Need to understand issue and effective models Cost Containment SAAs & Outcomes New Model Reality: buy & bill products work because abandonment and adherence are lower

34. Business Challenges For Patient/Caregivers • Make it about the money • Health Insurance like car insurance • Out of pocket – premiums, deductibles, copays and coinsurance

35. Manufacturers Solution Patient Services Hubs Or Resource Centers

36. Fixing The Broken Commercial Delivery System Retail Pharmacy IHN 3 No support for BI/BV, copay, no re-education and no adherence support+ 50% abandonment issue - 25% adherence issue Specialty Pharmacy 1 2 4 Patient presents in a Specialty Area(ie Rheumatology) HCP prescribes a self-administrated product – leaves with an Rx for Enbrel If economical for SPP, basic support for BI/BV, copay, minimal re-education and some adherence support+ 40% abandonment issue - 20% adherence issue Mfgr Patient Services • Problem for Others • Providers – losing all value and increasing the risk • Patients – do not realize the care they expect from IHN • Manufacturers – loss of revenue and drug viewed as either troublesome to Rx or doesn’t work • Payers – really Plan Sponsors – higher overall cost of care 5 • Problem for the IHN • Lost revenue $$$Value to external pharmacy • Risk for IHN – if patient cannot gain access or be compliant – readmitted – lowering reimbursement rates 8 7 If made aware of PS, support for BI/BV, copay, re-education and no adherence support- 10% abandonment issue - 10% adherence issue IHN/AmbulatorySpecialty Pharmacy 6 IF ambulatory services, support for BI/BV, copay, re-education and dedicated adherence support- 5% abandonment issue 0% adherence issue

37. The Role of the Channel Is Evolving – Virtual Staff Model Kaiser VA Control of Prescriber(ie Strict formulary with mandated internal eRX) AcuteNon-Fed PBM Clinic Influence on Prescriber (ie reward, penalty or relationship with a prescriber) LTC SPP GPO Retail/Mail Distributors Influence on Patient Control of Patient

38. Vertical Integration – Health Systems Become HMOs • Control of the provider and patient – importance to the payer • Relevance to the manufacturer –viewed as the top of the food chain • It’s all about the money in a game of musical chairs • Payer either influences, controls, or integrates/owns Everybody else is in the middle Patient Payer

39. “ASP in Practice” – Sign Of Amp-based FULs • Prior to 2005, Medicare Part B drugs were reimbursed at AWP – 15% • Medicare Part B reimbursement transitioned to ASP basis beginning Q1 2005 • Scenario presented below is for illustrative purposes only 2004 2005 $120 AWP $120 AWP-15% = $102 $100 $100 WAC ASP + 6% ($79.50) $75 ASP $75 ASP + 4% ($78) Purchase Price $70 $70

40. Gross to Net Optimization – Avoid Discounts Gross Pricing Strategy Managed Care Rebates/Admin Fees Product Positioning Strategy Medicaid Rebates GovernmentStrategy Medicare Part D Rebates Chargebacks* Payer Strategy Co-pay Assistance Field Sales Strategy Cash and Channel Discounts Returns, Allowances & Credits Channel Strategy Net *GPO admin fees based on manufacturer interpretation

41. Mergers And MegaChannels

42. Industry At A Glance

43. Future State and Applied Concepts

44. Macroeconomic Trends • James Canton – Future SMART – nano, neuro, bio, quantum – rise of AI, robotics and learning machines, human longevity 2X+ • George Friedman – Next 10-50-100 years - population impacts – rise and fall of countries based upon ability and will to see and change the future, economics and societal meme shifts – flattening of the world – ubiquitous levels of connectivity – rise of the millennials – awareness shift from the individual to society - impacts that technology will have on societies • Matt Ridley – Rational Optimist - innovation has been a consistent theme of man since our inception – something is always ending – something is always beginning

45. Major Change Drivers • Patient data • Genetic data • Behavioral data • Cohort data • Integrated and longitudinal data • Use of Data (Voice of Truth) • Health Analytics • Bundles and Value-based • Future of innovation • Personalized Medicine • Regenerative Medicine • Rise of the Kaiser Model • Democratization • Growth of specialty • Decline of brands • End of the Generic Wave • Biosimilars • 3 Types of payers • AMP based FULs • CPIU and price increases • Rise of the Plan Sponsor • Site of Care maneuvering • Distribution fragmentation • Pharmacy fragmentation • Rise of the IHS • IHS as the new MCO

46. Health Insurance Applied And Consumed Differently Innovation, access and programs are being rationalized in sub-segments

47. Reimbursement Going to Become Incredibly Complex ClinicalPathways Financial Incentives for Outcomes HIT with data to support preferred outcome Source: McKesson ACO White Paper 7.2012

48. Data Evolution - Integrated Care Journey Overview Where We Are and Pending Where We Need to Be Outcomes Journey Care Journey Enhanced Rx Journey 101 201 301 401 Rx Journey Patient monitoring wearables and self-diagnostics Pharmacy, Case Mgmt, Claims, Labs, and EMR Systems Pharmacy and Case Mgmt Systems Integrated and Automated Pharmacy Systems

49. Data Evolution – Potential Role of Channel and Services Risk for Disease • What do they know? • Can they share? • Will they share? • Can we act on it? • Will it be meaningful? Confirmed Disease Considering therapy HCP approved therapy MCOs Attempted to gain access to therapy IHN/SPPs Patient Services On therapy, compliant, outcomes Physician Clinics SPPs • How can we “optimize the radar”? • Enhance our visibility and influence with services and channel design? PBMs Retail

50. Data Evolution – Hierarchy of Needs 3D Function 1. Right click on to the object. 2. Select “Format Shape ...” 3. Select “3-D Rotation”’ Compatible with: 3D Funktion 1. Rechtsklick auf das Objekt 2. Wähle “Form formatieren...” 3. Wähle “3D-Drehung” Kompatibel mit: Deutsch Considering Testing Interacting with patients not meeting health goals, current therapy might be failing Risk For DiseaseIdentifying and interacting with patients at risk for disease Access Granted to My productSupport patient’s insurance and financial journey PowerPoint 2007 PowerPoint 2007 PowerPoint 2010 PowerPoint 2010 Broader Patient MixIdentify patients that are progressing in disease and that have been identified as mutation + . On A 1L or Competing TherapyInteracting with patients on a pre-cursor therapy On My TherapyInitiated, trained, timely, compliant, data to that effect Manufacturer must do the basics well before progressing