PBMs offer a valuable service, but no one outside the industry truly understands what they do or how they make money. This slide deck puts an end to this now. One can't permanently fix a problem (rising PBM cost) without first knowing how it was created.

1. “Uncovered: The #1 Way to Significantly Cut
Employer Paid Prescription Drug Costs
Without Impacting Current Benefit Levels”
TransparentRx, LLC
By
Tyrone D. Squires, MBA
Managing Director
Confidential and Proprietary

2. Payment for the PBM Service
n PBM service / claims processing
– Very valuable service
– PBM deserves a reasonable return
Confidential and Proprietary
– Key Issue
» Hidden cash flows to traditional PBMs (Pharmacy Benefit Manager)
that make up for artificially low (10-50 cents/Rx) administration fees
– Purchasers generally DO NOT know the actual cost of their PBM
service
» PBM cash flows go “under the radar” of purchasers
» PBM industry claims transparency
n Does not appear to include disclosure of cash flows we will describe

3. HHooww DDoo TTrraaddiittiioonnaall PPBBMMss MMaakkee MMoonneeyy??
% o f P r o f i t s
Confidential and Proprietary
5 0 %
4 0 %
3 0 %
2 0 %
1 0 %
0 %
1 0 %
A d m i n . F e e s
2 1 %
R e t a il M a r k u p
2 2 %
M a i l M a r k u p
4 7 %
M a n u f a c t u r e r R e v e n u e
P h a r m a c y B e n e f i t M a n a g e m e n t I n s t i t u t e , L P

4. Cash Flows in the PBM Industry
(Traditional vs. Transparent PBMs)
n Fully Transparent and 100% Pass-Through PBMs charge a realistic and
fair administration fee for their service
– No other cash flows
– Generally good value
n Traditional PBMs charge a very low administration fee, but augment the low
fee with “additional revenues” from other sources. These are hidden cash flows:
» Differential Pricing
» Spread Pricing – ingredient costs and dispensing fees
» PBM owned mail order pharmacy – Excessive markups
» Contract Language: discount guarantees, MAC lists and rebates
» Repackaging
§ Plan sponsors are generally unaware of these hidden cash flows
– Well over 90% of all plan sponsors are unaware
§ Most sponsors don’t know what they don’t know
Confidential and Proprietary

5. P h a r m a c y B e n e f i t M a n a g e m e n t I n s t i t u t e , L P
Courtesy of Pembroke Consulting, Inc.

6. How does the “Spread” arise??
n The drug pricing “standard” which forms
the basis of the discounted prices…
– Is not necessarily standard
» There is variation in the “standard” price
– Is many times a grossly elevated price
» Particularly with generic drugs
– Is known as Average Wholesale Price (AWP)
» We call AWP “ain’t what’s paid”!
Confidential and Proprietary

7. Generic Drug Pricing
n Generic drugs have two prices
1. The AWP price
» This is grossly higher than the drug’s actual
acquisition cost in the supply chain
2. The “Maximum Allowable Cost” (MAC) price
» Relatively close to the actual acquisition cost
An example will demonstrate the fluctuation
in AWP for generic drugs…
Confidential and Proprietary

8. AWP Fluctuation of
Generic Prozac 20 mg
Manufacturer AWP Price / 100 Capsules
Source: AmerisourceBergen 10/21/10
Aurobindo $ 266.81
Mylan $ 266.55
Sandoz $ 266.52
Teva $ 266.81
Prozac Lilly (originator) $ 630.00
Maximum allowable
cost (MAC)
Confidential and Proprietary
$ 25.20

9. Differential Pricing
Billing terms AWP - 50% to plan sponsor:
AWP = $266.00 - 50% discount = $133.00 / 100 tab
Payment terms to pharmacy:
MAC price = $ 25.00 / 100 tab
Spread to PBM $108.00
($133.00 billed - $25.00 paid)
Confidential and Proprietary

10. Ongoing research on the “spread”
n Ongoing research / consulting / auditing practice
n Nearly one million prescription claims
n It has been estimated that the average dollar amount
of the spread nationally is approximately $22.00!
n More examples in the “Spread” in the following
slides
Confidential and Proprietary

11. Employer 1 Spread Pricing
Confidential and Proprietary
Drug Name,
Strength and
(Quantity)
Transparent PBM
Billed Sponsor
Traditional PBM
Billed Sponsor
Employer
Savings
Paid
Pharmacy
(Spread)
Atenolol 25mg (30) $.67 $3 $2.33 $2 ($1)
Fluoxetine 20mg (30) $1.28 $18 $16.72 $12 ($6)
Fosamax 70mg (4) $80.18 $92 $11.82 $92 ($0)
Lotrel 10-20mg (30) $104.70 $126 $21.30 $126 ($0)
Norvasc 5mg (30) $53.66 $68 $14.34 $68 ($0)
Pacerone 200mg (60) $25.00 $51 $26 $28 ($23)
Tamoxifen Citrate
20mg (30)
$6.26 $51 $44.74 $26 ($25)
Timolol Maleate
0.5% (10)
$1.76 $17 $15.24 $8 ($9)

12. Employer 2 Spread Pricing
Confidential and Proprietary
Drug Name,
Strength and
(Quantity)
Transparent PBM
Billed Sponsor
Traditional PBM
Billed Sponsor
Employer
Savings
Paid Pharmacy
(Spread)
Allegra-D 12hr 120mg
(60)
$121.80 $139 $17.20 $131 ($8)
Cyclobenzaprine 10mg
(30)
$1.42 $11 $9.58 $10 ($1)
Flomax 0.4mg (30) $105.30 $116 $10.70 $116 ($0)
Simvastatin 20mg (30) $2.86 $15 $12.14 $15 ($0)
Metformin 1000mg
(60)
$2.88 $18 $15.12 $17 ($1)
Nystatin 100 MIL 15
UN/GM CRM
$1.36 $14 $12.64 $11 ($3)
Oxycodone 5mg (180) $20.88 $29 $8.12 $25 ($4)
Temazepam 15mg (60) $4.26 $11 $6.74 $8 ($3)
Terazosin 2mg (120) $8.38 $16 $7.62 $12 ($4)

13. Mail Order Pharmacy Excessive Mark-ups
n Mail-Order Pharmacy: any pharmacy that
delivers via mail or courier excluding chain
or independent pharmacies
n A chain or independent pharmacy in our
cities and towns includes
– Target
– Walgreen's
– CVS
– Sally’s Apothecary
– Jim’s Corner Pharmacy
Confidential and Proprietary

14. Employer 1* Mail and Retail (Community) Pharmacy
Prices Compared
Confidential and Proprietary
Drug Name &
Strength
Drug
Qty.
Mail
$
Community
$
Saving in
Community $
Atenolol 50 mg 90 $38 $8 $30
Cyclobenzaprine
90 $43 $8 $35
10 mg
Fluoxetine 20 mg 90 $120 $54 $66
Gemfibrozil
180 $112 $39 $73
600 mg
Naproxen 500 mg 180 $117 $33 $84
Temazepam 30 mg 30 $13 $5 $8
Trazodone 50 mg 90 $19 $6 $13
Verapamil 240 mg 90 $73 $32 $41
Minocycline
60 $102 $47 $55
100 mg

15. Employer 2* Mail and
Retail (Community) Pharmacy Prices Compared
Confidential and Proprietary
Drug Name &
Strength
Drug
Qty.
Mail
$
Community
$
Saving in
Community $
Alprazolam 0.25mg 90 $31 $10 $21
Atenolol 100 mg 90 $56 $10 $46
Avandia 8 mg 90 $370 $318 $52
Captopril 50 mg 90 $52 $16 $36
Cyclobenzaprine
90 $46 $17 $29
10 mg
Doxycycline
100 mg
90 $63 $40 $23
Evista 60 mg 90 $177 $159 $18
Fluoxetine 20 mg
Cap
90 $120 $56 $64
Fluoxetine 20 mg
Tab
90 $126 $86 $40

16. Mail Order Studies Go to College
n Creighton University Researchers
– Research presented in June 2005 at Academy Health
– Nearly 10,000 pairs of PBM mail order and community retail
prescriptions for exact drugs and dates of service
– Five employer groups (plan sponsors)
– Conclusion
» When the member co-payment is lowered to encourage members to go
with mail order service…
The mail order option costs the sponsor more than retail pharmacy.
Confidential and Proprietary

17. Misleading Contract Language:
Sponsor and PBM
n Nuances of the pharmacy benefit vocabulary
n Seemingly favorable terms may not be a bargain
n Three examples follow:
1. Generic Discount Guarantees
2. Multiple MAC lists
3. Rebates by many names
Confidential and Proprietary

18. Generic Discount Guarantees
DRUG Quantity AWP- 60% Transparent
Confidential and Proprietary
MAC
Prices
Saving
With MAC
Atenolol 50mg 100 $33.33 $10.50 $22.83
Alprazolam
100 $36.28 $11.95 $24.33
0.5mg
Captopril 25mg 100 $29.33 $19.00 $10.33
Cephalexin
28 $17.04 $11.50 $5.54
500mg
Fluoxetine
20mg
100 $106.40 $25.00 $81.40
Lorazepam 2mg 100 $50.28 $25.50 $24.78
Ranitidine 150 100 $61.78 $49.89 $11.89
Glyburide 5mg 60 $17.44 $16.95 $0.49

19. Multiple MAC lists
n Contract language leads the reasonable person to believe
there is only one MAC list...
– There are multiple MAC lists
– The employers’ MAC lists will be less comprehensive and
aggressive than the pharmacy MAC list. For instance...
» Fewer generics with MAC pricing
» Employers prices are higher than the MAC prices paid to the pharmacy
» Pharmacy is paid with the lowest priced MAC list
“Most sponsors don’t know what they don’t know.”
Confidential and Proprietary

20. Rebates by Many Names
n Contract language will give the sponsor the
impression that there is one rebate…
– There are multiple rebates
» Access rebate
» Administration rebate
» Market share rebate
» Other names as well (not classified as rebates but
instead reimbursements for SG & A expenses)
n Sponsors may get 90% “of the rebate”
– Which rebate???
– Mike Winkleman
» Medco rebate retention of 12%
» From 10-Q for 1st Quarter 2010
Confidential and Proprietary

21. Repackaging
Confidential and Proprietary
Scenario #1
● Patient goes to a community
pharmacy
● The pharmacist orders Lipitor
20mg #30 from their
wholesaler, which comes with
an AWP of $147.04
● The pharmacy is paid AWP –
14% plus a dispensing fee,
which is calculated as...
$147.04 - $20.59 + $2 =
$128.45
*Most people outside the
industry are unaware of this
practice.
Scenario #2
● Patient sent to a PBM mail order
pharmacy
● The pharmacist dispenses Lipitor
20mg #30, which comes with an AWP
of $147.04
● The PBM's pharmacy repackages
drugs, in doing so they create a new
package size with a higher AWP. For
example, a new package might be #60
with an AWP of $408.60.
● The pharmacy mails the patient Lipitor
20mg #30 with an AWP of $204.30. At
AWP - 22% the PBM pays itself:
$204.30 - $44.95 = $159.35

22. What's the Bottom Line?
'Transparency' Defined by Robert Garis, PhD,
Professor Creighton University School of Pharmacy
Level 1. The PBM discloses in the sponsor's contract cash flows.
(Traditional)
Level 2. The PBM passes through all rebates and network prices to
the sponsor [there is no spread pricing]. (Transparent)
Level 3. The PBM passes through all rebates, more competitive
prices than industry norms and provides full accounting (auditing
provisions) to the sponsor. (Transparent + Pass-Through)
Confidential and Proprietary

23. The #1 Way to Significantly Cut Prescription
Drug Costs Without Impacting Current
Benefit Levels is _____________?
Confidential and Proprietary

24. #1 - PBM must sign as a
Fiduciary!
fi·du·ci·ar·y explained by Wikipedia...
A fiduciary duty is the highest standard of
care at either equity or law. A fiduciary is
expected to be extremely loyal to the entity
to whom it owes the duty: it must not put its
own interests before the duty, and must not
profit from its position as fiduciary unless the
principal consents. It is illegal for a fiduciary
to misappropriate money for personal gain.
Confidential and Proprietary

25. “SHAMELESS” Self-Promotion Slide
Access: Mail, specialty & retail pharmacy network 64,000+
Pricing: No spreads and No mark-up (mail-order)
******TTrraannssppaarreennttRRxx,, LLLLCC******
DDrruugg PPrriicciinngg == TTRRUUEE AACCQQUUIISSIITTIIOONN CCOOSSTT ++ FFLLAATT TTRRAANNSSAACCTTIIOONN FFEEEE
Rebates: Guaranteed 100% pass-through to plan sponsors
Value-Added:
– Fiduciary arrangement
– Web-based access to audit and pricing detail
– Disease Management Program (focus on adherence)
– Extensive DUR Program
– Discount OTC and Personal Care
– Voluntary Benefits: Lifelock, roadside service and gym

26. Thank You!
TransparentRx, LLC
2850 W. Horizon Ridge Pkwy, Ste. 200
Henderson, Nevada 89052
Web site: www.transparentrx.com
Email: director@transparentrx.com
Phone: 1-866-499-1940 ext. 201
Confidential and Proprietary