Government Price Reporting – Operational Challenges and Solutions

1. November 16, 2004 Government Price Reporting –Operational Challenges and Solutions 4.02 Pharmaceutical Price Reporting Issues, Challenges, and Solutions Ben Barrameda CPA, JD Senior Manager, Life Sciences & Health Care Regulatory Deloitte & Touche LLP Jody Ann Noon RN, JD National Practice Leader, Life Sciences & Health Care Regulatory Deloitte & Touche LLP

2. Historical Perspective • The government pricing requirements have been in place since the inception of the Medicaid Drug Rebate Program in 1990. In 1992, the Veterans Health Care Act required additional pricing requirements. • Enforcement has intensified in recent years. Recent settlements involving allegations of false or fraudulent price reporting include the following:

3. Today – • Governmental Price Reporting is a monumental challenge due to – • Numerous legal & contractual requirements that have varied price calculations • Complex business processes with many types of customers & transactions • A variety of business IT systems that do not integrate • Information that is required but unobtainable

4. Manufacturers must calculate and report BP and AMP to CMS within 30 days of the end of each quarter for all outpatient drugs covered under the manufacturer’s rebate agreement with CMS. Manufacturers must pay rebates to each State Medicaid agency within 30 days of receiving Medicaid Utilization information for the covered drugs paid for by the Agency in the quarter. Pricing Requirements • Medicaid Rebate Program • Best Price (BP) • Average Manufacturers Price (AMP) • Unit Rebate Amount (URA)

5. Manufacturers must calculate and report non-FAMP to the Dept of Veterans Affairs (VA) within 30 days of the end of each quarter for all drug products covered under the manufacturer’s Pharmaceutical Pricing Agreement with the VA. Manufacturers must calculate and report non-FAMP for all covered drug products by November 15 of each year for the one-year period ended September 30. Manufacturers may not charge more than the FCP for covered drug products purchased by Federal Agencies and State homes represented by the VA. Pricing Requirements • Veterans Affairs • Non-Federal AMP (non-FAMP) • Federal Ceiling Price (FCP) • Federal Supply Schedule (FSS)

6. Manufacturers must calculate and report ASP to CMS within 30 days of the end of each quarter for all Medicare and Part B drugs and biologics covered under the Medicare Prescription Drug, Improvement, and Modernization Act and the Social Security Act. ASP will be used to calculate payment allowances to manufacturers for covered drugs and biologics effective January 1, 2005. Pricing Requirements • Medicare Modernization Act (MMA) • Average Sales Price (ASP)

7. Manufacturers may not charge Federally-qualified health centers and other entities enrolled in the 340B Programmore than AMP reduced by a rebate percentage calculated for the preceding calendar quarter for outpatient drugs covered under State plans for medical assistance. Pricing Requirements • Public Health Service Act (PHSA)

8. Complex Business Process Drug Purchaser Pharmaceutical Manufacturer Drug Sales Customer Order and Sales FCP, PHS Prices for VA, PHS Sales Adjustments/Credits Contract Management Payment per Contract Government Price Reporting Chargeback Processing Government Prices Reported to CMS, VA Chargeback Payment Incentives & Rebates Rebates Payment URA for Calculation of State Medicaid Drug rebates Claims Processing

9. Complex Business Process - Sales • All U.S. sales (and Puerto Rico for non-FAMP) • All products participating (practically all) • All distribution channels • All rebates and discounts given • All adjustments to transactions (e.g. shipment in error, picking error, damaged shipments, etc.) • All other marketing incentives given to induce sale (e.g. non-bona fide grants)

10. Complex Business Process – Accounts Receivable & Accounts Payable • Sales are recorded in period that they occur • Chargebacks are recorded when they are received and may have 15–45 days of lag time. Chargeback adjustments are received up to 6-8 months later • Rebates are recorded when they are paid – usually with 2-3 quarters of lag time • Returns are recorded when received – as much as 1 year of lag time • Other adjustments may come with several quarters of lag time (e.g. volume discount adjustments, disputed items, etc.)

11. Rx Business Process – Medicaid Rebates Pharmaceutical Manufacturer Government Price Reporting Pay Medicaid Rebate Bill for Medicaid Rebate Payments Per Contract State MedicaidAgency Price Information Federal Government (CMS) Drug Sales What Can BePrescribed(Formulary) Claims/ Utilization Claims Payment MedicaidPatients Doctors Pharmacies Wholesalers Prescriptions

12. Business Process – Managed Care Rebates Calculations for Government Price Reporting Rebates PBM-Process/Administer Data - Program Changes - Formulary Generate Summary of Claims Filed/Paid HMOs PPOs Networks Insurers Employers Pharma Company Contract Transmit Enrollment Data Remit Rebates Transmit Data Maintain Contract Transmit Claim Summary Formulary; Claims Payment Payment Pharmacies What Can BePrescribed(Formulary) Payment Prescription Patients Medication Prescription Doctors

13. Rx Business Process – Chargebacks Calculations for Government Price Reporting Chargebacks Pharmaceutical Manufacturer Customer/ Patient Contract Price = $18 Wholesale Price = $20 Chargeback (CB) = $2 ($20-$18) Customer Pays Contract Price = $18 Wholesaler Delivers Drugs Wholesaler

14. A Variety of Non-integrated IT Systems • Many of the systems are legacy and/or customized systems that rely heavily on manual inputs • Contracting system • Invoicing System • Chargeback System • Rebate System • Sales ERP System • Financial Reporting System (general ledger) • Accounts Payable System • Government Price Reporting System • Medicaid Rebate System • Sales ERP system • Various Excel spreadsheets • Access database • Medicaid rebate system • Hardcopy (e.g. customer contracts)

15. Unavailable Information • Obtaining class of trade of members of GPOs • Tracing back chargebacks to the original invoice • Tracing back expired products to the original sales invoice • Obtaining units of returned damaged products

16. Action Plan Identify the Current Processes & Technology • Identify the business units & departments engaged in any aspect of the supply chain with respect to contracting, sales & collections • Map all the processes • Identify the systems that support the processes • Identify related policies, procedures and business practices Identify Solutions • Identify alternatives to improve or change the processes and systems • Perform system selection analysis if indicated • Identify areas requiring remediation and/or corrective action (e.g. SOX, Regulatory or Contractual) • Develop a plan and a budget Implement Plan • Purchase & implement new systems • Draft or revise procedures • Conduct training • Conduct testing Source: Deloitte Consulting client and vendor experience and analysis

17. Strategically, core contracting and pricing processes – and enabling systems – are important drivers of revenue, profitability, and ultimately, shareholder value Key Business Goals DRIVERS Revenue Growth Financial Management Business Performance Management Increased Profitability Improved Payment Accuracy Increased Market Share Reduced Operational Costs Reduced Risk Improved Cash Flow Improve access to business information and analytic capabilities Improve account management tools and strategies Improve access to information and analytics Improve automated validation processes Ensure adherence to Sarbanes Oxley requirements Improve account management tools and methods ACTIVITIES Increase focus on high-value and high potential customers Ensure accuracy level of calculations Improve emphasis on account/ relationship development Improve/redesign processes to minimize manual processing, where possible Improve breadth, depth, quality, and timeliness of business information Improve access to business information and analytic capabilities Improve management of contracts and agreements Ensure adequate documentation maintained (audit trail) Improve responsiveness to customer needs (self-service, support) Improve customer experience (self-service, support) Increase focus on risk management and regulatory compliance Increase emphasis on staff develop- ment (user training) Improve account management strategies (including retention, win-back strategies) Improve breadth, depth, quality, and timeliness of business information Focus/refine retention priorities and strategies Improve anticipation and understanding of potential regulatory/ legislation Improve breadth, depth, quality, and timeliness of business information Improve integration of source systems Improve tailoring of offerings to customers Align internal audit practices with business and risk objectives Improve identification and understanding of defection candidates and drivers Improve access to information and analytical capabilities Improve identification of valuable customer relationships Improve security of applications, systems, and data Proactively manage transition points (using notifications, alerts) Develop more comprehensive contract development strategies Source: Deloitte Value Map – Life Sciences

18. Typical Contract Development Process t Develop Develop Provide training n g e n contract training to support i m c i g strategy materials contract r e P S Ongoing evaluation of segment and contract performance n o Prepare i t t Develop Maintain Notify c a contracts for Maintain r a t contract contract wholesalers of r s t customer contracts i n materials membership bid award n o i signature C m d Ongoing support for field and customers A s Process and Process and t n e pay pay incentives m chargebacks and rebates y a P Ongoing processing of payments, reporting QA and support for Finance t Calculate and n e g report m n i n government c r i e r prices v P o G Ongoing dispute resolution, Medicaid invoice payments, quarterly submissions y n Prepare system g o Build reports to i o to store t l a support o m incentives and n contract r h o rebates c f e n T I Ongoing dispute resolution, Medicaid invoice payments, quarterly submissions Contract Development Process - Sample

19. Middle of Class Best in Class Basic System Technology SolutionsFunctional Capability Spectrum Contract Management Module Government Pricing Module Incentives & Rebates Module Chargebacks Module • Contracts Library • Workflow Capability • Standard templates • Extensive analytical tools • “What if” scenarios • Rule based notification broadcasting • Rule based automatic alerts throughout contract lifecycle • User generates all reports • Customer self service • Automatic validation • Integrated Credit/Check generation process • Customer self-service capabilities • Sales force self-service capabilities • User generates all reports • User friendly template creation process • EDI interfaces for input/output • All transactions are handled by system (no manual processes) • Settlement process is integrated • Sophisticated analytical tools (e.g. “what if” scenarios) • Customer self-service • User generates all reports • Fully automated. Government prices are automatically calculated with minimal manual review • Audit trails are built-in. Fully supports compliance requirements (e.g. SOX) • Extensive analytical tools (e.g. “what if” scenarios) • Automated reconciliations • EDI interfaces (input/output) • User generates customer reports • Integrated settlement process • Basic analytical tools (e.g. contract profitability) • Standard templates • Some notification capabilities • Reporting requires IS support • Automatic submission of chargebacks • Validation is not integrated and time consuming • No self-service capability • Reporting requires IS support • User templates are available but requires expert assistance to use • Some analytical capabilities • Settlement process is not integrated • Complex transactions are processed manually • Reporting requires IS support • Some system integration. Some government prices are fully automated • Canned reports available to users • Some audit trails • Captures basic contract information and supports ERP sales system • No analytical capability • No standard templates • Manual submission of chargebacks • No systematic validation • No reporting capability • Manual uploads • Few templates; complex transactions are performed manually • No analytical capability • Systems are fragmented and manual processes are extensive • No analytical capability • Few audit trails • Ownership is defined but accountability is still issue Source: Deloitte Consulting client and vendor experience and analysis

20. Middle of Class Best in Class Basic System Technology SolutionsFunctional Capability Spectrum Change Management Architecture General Interfaces • Web based MVC Architecture • Service oriented architecture • Object oriented programming language • Rules based and configuration driven changes • Compliance with standards • Business Process driven integration • BPM capability • Standards based – BPEL, WSDL,XML • Plug and play with canonical messages format • Standards based message format • Process driven EDI capability • Available Knowledge base • Workflow driven process • Well defined SLA with the users • Audit controls and documentation • Historical analysis and rollbacks • Planned releases based on release numbers • Load balancing and H/A • Session management and Transaction recovery capability • Search engine capability • Web based architecture with thin client • N Tired architecture • Modular division of functionality • Use of standard programming languages • Enterprise Application Integration technology • Synchronous and Async capability • Publish/subscribe architecture • Application specific message formats • Basic EDI capabilities • Automated error handling • Database to log problems • Proper analysis for changes • Planned releases • Defined process for assignments • H/A • More Configuration based changes • Monolithic application architecture • Mainframe driven • Highly customized with proprietary language • Non modular/tired architecture • Point to Point interfaces • Proprietary message formats • Batch/File based interfaces • Proprietary communication • Manual error handling • Manual change management • Ad hoc process for changes • Ad hoc release management • No prioritization • No audit control and history tracking • No High availability • More than 85% change requests need changes to code • Need of specialized resources

21. Jody Ann Noon RN, JD Principal National Practice Leader Life Science and Health Care Regulatory Practice Deloitte & Touche LLP jodynoon@deloitte.com (212) 436-2558 As an RN, JD, Jody utilizes her past experience practicing law to assist life science companies to develop systems to comply with complex legal and regulatory requirements. Jody has experience working with the OIG Compliance Guidance, the federal False Claims Act, Anti-kickback Statute, Medicare & Medicaid requirements, Physician Self-Referral Law (Stark) and Privacy requirements. Ben Barrameda, Esq., CPA, MBA Senior Manager Life Science and Health Care Regulatory Practice Deloitte & Touche LLP bbarrameda@deloitte.com (212) 436-3555 Ben is a senior manager in Deloitte’s Life Science and Health Care Regulatory practice, and he is one of Deloitte and Touche’s leading pharmaceutical pricing practitioners. Ben has over 15 years of experience in providing dispute consulting and litigation support, due diligence, internal investigations, developing, implementing and monitoring corporate compliance programs, audit, control, financial modeling, and business processes.