Prescription Drugs
Overview of Approaches to Control Prescription Drug Spending in Federal Programs Gao ID: GAO-09-819T June 24, 2009Millions of individuals receive prescription drugs through federal programs. The increasing cost of prescription drugs has put pressure to control drug spending on federal programs such as the Federal Employees Health Benefits Program (FEHBP), Medicare Part D, the Department of Veterans Affairs (VA), the Department of Defense (DOD), and Medicaid. Prescription drug spending within the FEHBP in particular, which provides health and drug coverage to about 8 million federal employees, retirees, and their dependents, has been a significant contributor to FEHBP cost and premium growth. The Office of Personnel Management (OPM), which administers the FEHBP, predicted that prescription drugs would continue to be a primary driver of program costs in 2009. GAO was asked to describe approaches used by the FEHBP to control prescription drug spending and summarize approaches used by other federal programs. This testimony is based on prior GAO work, including Prescription Drugs: Oversight of Drug Pricing in Federal Programs (GAO-07-481T) and Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices Used by Other Countries and U.S. Private Payers and Federal Programs (GAO-07-358T) and selected updates from relevant literature on drug spending controls prepared by other congressional and federal agencies.
FEHBP uses competition among health plans to control prescription drug spending, giving plans an incentive to rein in costs and leverage their market share to obtain favorable drug prices. Most FEHBP plans contract with pharmacy benefit managers (PBMs) to help administer the prescription drug benefit. In a 2003 report, GAO found that the PBMs reduced drug spending by: negotiating rebates with drug manufacturers and passing some of the savings to the plans; obtaining drug price discounts from retail pharmacies and dispensing drugs at lower costs through mail-order pharmacies operated by the PBMs; and using other techniques that reduce utilization of certain drugs or substitute other, less costly drugs. While OPM does not negotiate drug prices or discounts for FEHBP, it attempts to limit spending through annual premium and benefit negotiations with plans, including the encouragement of spending controls such as generic substitution. Other federal programs use a range of approaches to control prescription drug spending. (1) Medicare--the federal health insurance program for the elderly and disabled--offers an outpatient prescription drug benefit known as Medicare Part D that uses competition between plan sponsors and their PBMs to limit drug spending, in part through the ability to negotiate prices and price concessions with drug manufacturers and pharmacies. Plans are required to report these negotiated price concessions to the Centers for Medicare & Medicaid Services (CMS), to help CMS determine the extent to which they are passed on to beneficiaries. (2) VA and DOD pharmacy benefit programs for veterans, active duty military personnel, and others may use statutorily mandated discounts as well as negotiations with drug suppliers to limit drug spending. VA and DOD have access to a number of prices to consider when purchasing drugs--including the Federal Supply Schedule prices that VA negotiates with drug manufacturers--paying the lowest of all available prices. (3) The Medicaid program for low-income adults and children is subject to aggregate payment limits and drug payment guidelines set by CMS. Medicaid does not negotiate drug prices with manufacturers, but reimburses retail pharmacies for drugs dispensed to beneficiaries at set prices. An important element of controlling Medicaid drug spending is the Medicaid drug rebate program, under which drug manufacturers are required by law to provide rebates for certain drugs covered by Medicaid. Under the rebate program, states take advantage of prices manufacturers receive for drugs in the commercial market that reflect discounts and rebates negotiated by private payers. In addition, Part D, VA and DOD, and Medicaid use techniques similar to FEHBP to limit drug spending, such as generic substitution, prior authorization, utilization review programs, or cost-sharing requirements.
GAO-09-819T, Prescription Drugs: Overview of Approaches to Control Prescription Drug Spending in Federal Programs
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Testimony:
Before the Subcommittee on Federal Workforce, Postal Service, and the
District of Columbia, Committee on Oversight and Government Reform,
House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 2:00 p.m. EDT:
Wednesday, June 24, 2009:
Prescription Drugs:
Overview of Approaches to Control Prescription Drug Spending in Federal
Programs:
Statement of John E. Dicken:
Director, Health Care:
GAO-09-819T:
GAO Highlights:
Highlights of GAO-09-819T, a testimony before the Subcommittee on
Federal Workforce, Postal Service, and the District of Columbia,
Committee on Oversight and Government Reform, House of Representatives.
Why GAO Did This Study:
Millions of individuals receive prescription drugs through federal
programs. The increasing cost of prescription drugs has put pressure to
control drug spending on federal programs such as the Federal Employees
Health Benefits Program (FEHBP), Medicare Part D, the Department of
Veterans Affairs (VA), the Department of Defense (DOD), and Medicaid.
Prescription drug spending within the FEHBP in particular, which
provides health and drug coverage to about 8 million federal employees,
retirees, and their dependents, has been a significant contributor to
FEHBP cost and premium growth. The Office of Personnel Management
(OPM), which administers the FEHBP, predicted that prescription drugs
would continue to be a primary driver of program costs in 2009.
GAO was asked to describe approaches used by the FEHBP to control
prescription drug spending and summarize approaches used by other
federal programs. This testimony is based on prior GAO work, including
Prescription Drugs: Oversight of Drug Pricing in Federal Programs (GAO-
07-481T) and Prescription Drugs: An Overview of Approaches to Negotiate
Drug Prices Used by Other Countries and U.S. Private Payers and Federal
Programs (GAO-07-358T) and selected updates from relevant literature on
drug spending controls prepared by other congressional and federal
agencies.
What GAO Found:
FEHBP uses competition among health plans to control prescription drug
spending, giving plans an incentive to rein in costs and leverage their
market share to obtain favorable drug prices. Most FEHBP plans contract
with pharmacy benefit managers (PBMs) to help administer the
prescription drug benefit. In a 2003 report, GAO found that the PBMs
reduced drug spending by: negotiating rebates with drug manufacturers
and passing some of the savings to the plans; obtaining drug price
discounts from retail pharmacies and dispensing drugs at lower costs
through mail-order pharmacies operated by the PBMs; and using other
techniques that reduce utilization of certain drugs or substitute
other, less costly drugs. While OPM does not negotiate drug prices or
discounts for FEHBP, it attempts to limit spending through annual
premium and benefit negotiations with plans, including the
encouragement of spending controls such as generic substitution.
Other federal programs use a range of approaches to control
prescription drug spending.
* Medicare”the federal health insurance program for the elderly and
disabled”offers an outpatient prescription drug benefit known as
Medicare Part D that uses competition between plan sponsors and their
PBMs to limit drug spending, in part through the ability to negotiate
prices and price concessions with drug manufacturers and pharmacies.
Plans are required to report these negotiated price concessions to the
Centers for Medicare & Medicaid Services (CMS), to help CMS determine
the extent to which they are passed on to beneficiaries.
* VA and DOD pharmacy benefit programs for veterans, active duty
military personnel, and others may use statutorily mandated discounts
as well as negotiations with drug suppliers to limit drug spending. VA
and DOD have access to a number of prices to consider when purchasing
drugs”including the Federal Supply Schedule prices that VA negotiates
with drug manufacturers”paying the lowest of all available prices.
* The Medicaid program for low-income adults and children is subject to
aggregate payment limits and drug payment guidelines set by CMS.
Medicaid does not negotiate drug prices with manufacturers, but
reimburses retail pharmacies for drugs dispensed to beneficiaries at
set prices. An important element of controlling Medicaid drug spending
is the Medicaid drug rebate program, under which drug manufacturers are
required by law to provide rebates for certain drugs covered by
Medicaid. Under the rebate program, states take advantage of prices
manufacturers receive for drugs in the commercial market that reflect
discounts and rebates negotiated by private payers.
In addition, Part D, VA and DOD, and Medicaid use techniques similar to
FEHBP to limit drug spending, such as generic substitution, prior
authorization, utilization review programs, or cost-sharing
requirements.
View [hyperlink, http://www.gao.gov/products/GAO-09-819T] or key
components. For more information, contact John E. Dicken at (202) 512-
7114 or dickenj@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here as you examine approaches to control the rising
spending for prescription drugs within the Federal Employees Health
Benefits Program (FEHBP). As you know, the FEHBP provides health
coverage, including prescription drug coverage, to about 8 million
federal employees, retirees, and their dependents. As with other public
and private employer-sponsored health plans, prescription drug spending
has been a significant contributor to FEHBP cost and premium growth.
Projected increases in the costs of prescription drugs alone would have
accounted for about a 3 to 5 percent annual increase in FEHBP premiums
from 2002 through 2007. The Office of Personnel Management (OPM), the
federal agency that administers the FEHBP, predicted that prescription
drugs would continue to be a primary driver of program costs in 2009.
[Footnote 1]
Because of the importance of controlling prescription drug spending by
the federal government, you asked us to describe prescription drug
spending control approaches used by the FEHBP and summarize the
approaches used by other federal programs. Accordingly, my testimony
today will describe the approach used by FEHBP to control prescription
drug spending and summarize approaches used under Medicare, the
Department of Veterans Affairs (VA), the Department of Defense (DOD),
and Medicaid. My remarks are based on prior work performed from 2003 to
2009 on federal programs that purchase or cover prescription drugs,
with selected updates from relevant literature on drug spending
controls prepared by other congressional and federal agencies.[Footnote
2] We used various methodologies to complete our work; please see the
individual products for the details. Our work was performed in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background:
The FEHBP is the largest employer-sponsored health insurance program in
the country. Through it, about 8 million federal employees, retirees,
and their dependents received health coverage--including for
prescription drugs--in 2008. Coverage is provided under competing plans
offered by multiple private health insurers under contract with OPM,
which administers the program, subject to applicable requirements. In
2009, 269 health plan options were offered by participating insurers,
10 of which were offered nationally while the remaining health plan
options were offered in certain geographic regions. According to OPM,
plans must cover all medically necessary prescription drugs approved by
the Food and Drug Administration (FDA), but plans may maintain
formularies that encourage the use of certain drugs over others.
[Footnote 3] Enrollees may obtain prescriptions from retail pharmacies
that contract with the plans or from mail-order pharmacies offered by
the plans. In 2005, FEHBP prescription drug spending was an estimated
$8.3 billion.
Medicare--the federal health insurance program that serves about 45
million elderly and disabled individuals--offers an outpatient
prescription drug benefit known as Medicare Part D. This benefit was
established by the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) beginning January 1, 2006.[Footnote 4]
As of February 2009, Part D provided federally subsidized prescription
drug coverage for nearly 27 million beneficiaries. The Centers for
Medicare & Medicaid Services (CMS), part of the Department of Health
and Human Services (HHS), manages and oversees Part D. Medicare
beneficiaries may choose a Part D plan from multiple competing plans
offered nationally or in certain geographic areas by private sponsors,
largely commercial insurers, under contract with CMS. Part D plan
sponsors offer drug coverage either through stand-alone prescription
drug plans for beneficiaries in traditional fee-for-service Medicare or
through Medicare managed care plans, known as Medicare Advantage. In
2009, there were over 3,700 prescription drug plans offered. Under
Medicare Part D, plans can design their own formularies, but each
formulary must include drugs within each therapeutic category and class
of covered Part D drugs. Enrollees may obtain prescriptions from retail
pharmacies that contract with the plans or from mail-order pharmacies
offered by the plans. Medicare Part D spending is estimated to be about
$51 billion in 2009.
The VA pharmacy benefit is provided to eligible veterans and certain
others. As of 2006, about 8 million veterans were enrolled in the VA
system.[Footnote 5] In general, medications must be prescribed by a VA
provider, filled at a VA pharmacy, and listed on the VA national drug
formulary, which comprises 570 categories of drugs. In addition to the
VA national formulary, VA facilities can establish local formularies to
cover additional drugs. VA may provide nonformulary drugs in cases of
medical necessity. In 2006, VA spent an estimated $3.4 billion on
prescription drugs.
The DOD pharmacy benefit is provided to TRICARE beneficiaries,
including active duty personnel, certain reservists, retired uniformed
service members, and dependents.[Footnote 6] As of 2009, there were
about 9.4 million eligible TRICARE beneficiaries. In addition to
maintaining a formulary, DOD provides options for obtaining
nonformulary drugs. Beneficiaries can obtain prescription drugs through
a network of retail pharmacies, nonnetwork retail pharmacies, DOD
military treatment facilities, and DOD's TRICARE Mail-Order Pharmacy.
In 2006, DOD spent $6.2 billion on prescription drugs.
Medicaid, a joint federal-state program, finances medical services for
certain low-income adults and children.[Footnote 7] In fiscal year
2008, approximately 63 million beneficiaries were enrolled in Medicaid.
[Footnote 8] While some benefits are federally required, outpatient
prescription drug coverage is an optional benefit that all states have
elected to offer. Drug coverage depends on the manufacturer's
participation in the federal Medicaid drug rebate program, through
which manufacturers pay rebates to state Medicaid programs for covered
drugs used by Medicaid beneficiaries. Retail pharmacies distribute
drugs to Medicaid beneficiaries and then receive reimbursements from
states for the acquisition cost of the drug and a dispensing fee.
Medicaid outpatient drug spending has decreased since 2006 because
Medicare Part D replaced Medicaid as the primary source of drug
coverage for low-income beneficiaries with coverage under both
programs--referred to as dual eligible beneficiaries.[Footnote 9] In
fiscal year 2008, Medicaid outpatient drug spending was $9.3 billion--
including $5.5 billion as the federal share--which was calculated after
adjusting for manufacturer rebates to states under the Medicaid drug
rebate program.
FEHBP Uses Competition between Health Plans to Control Prescription
Drug Costs:
FEHBP uses competition among health plans as the primary measure to
control prescription drug spending and other program costs. Under an
annual "open season," enrollees may remain enrolled in the same plan or
select another competing plan based on benefits, services, premiums,
and other such factors. Thus, plans have the incentive to try to retain
or increase their market share by providing the benefits sought by
enrollees along with competitive premiums. In turn, the larger a plan's
market share, the more leverage it has for obtaining favorable drug
prices on behalf of its enrollees and controlling prescription drug
spending.
Similar to most private employer-sponsored or individually purchased
health plans, most FEHBP plans contract with pharmacy benefit managers
(PBMs) to help them administer the prescription drug benefit and
control drug spending. In a 2003 report reviewing the use of PBMs by
three plans representing about 55 percent of total FEHBP enrollment, we
found that the PBMs used three key approaches to achieve savings for
the health plans:
* negotiating rebates with drug manufacturers and passing some of the
savings to the plans;
* obtaining drug price discounts from retail pharmacies and dispensing
drugs at lower costs through mail-order pharmacies operated by the
PBMs; and:
* using other intervention techniques that reduce utilization of
certain drugs or substitute other, less costly drugs.[Footnote 10] For
example, under generic substitution PBMs substituted less expensive,
chemically equivalent generic drugs for brand-name drugs; under
therapeutic interchange PBMs encouraged the substitution of less
expensive formulary brand-name drugs for more expensive nonformulary
drugs within the same drug class; under prior authorization PBMs
required enrollees to receive approval from the plan or PBM before
dispensing certain drugs that are high cost or meet other criteria; and
under drug utilization review PBMs examined prescriptions at the time
of purchase or retrospectively to assess safety considerations and
compliance with clinical guidelines, including appropriate quantity and
dosage.
The PBMs were compensated by retaining some of the negotiated savings.
The PBMs also collected fees from the plans for administrative and
clinical services, kept a portion of the payments from FEHBP plans for
mail-order drugs in excess of the prices they paid manufacturers to
acquire the drugs, and in some cases retained a share of the rebates
that PBMs negotiated with drug manufacturers.[Footnote 11]
While OPM does not play a role in negotiating prescription drug prices
or discounts, it does attempt to limit prescription drug spending
through its leverage with participating health plans in annual premium
and benefit negotiations. Each year, OPM negotiates benefit and rate
proposals with participating plans and announces key policy goals for
the program, including those relating to spending control. For example,
in preparation for benefit and rate negotiations for the 2007 plan
year, OPM encouraged proposals from plans to continue to explore the
appropriate substitution for higher cost drugs with lower cost
therapeutic alternatives, such as generic drugs, and the use of tiered
formularies or prescription drug lists. OPM also sought proposals from
plans to pursue the advantages of specialty pharmacy programs aimed at
reducing the high costs of infused and intravenously administered
drugs.[Footnote 12] In preparation for 2010 benefit and rate
negotiations, OPM reiterated its desire for proposals from plans to
substitute lower cost for higher cost therapeutically equivalent drugs,
adding emphasis to using evidence-based health outcome measures.
[Footnote 13]
Other Federal Programs Use a Range of Approaches to Control
Prescription Drug Spending:
Medicare Part D uses a competitive model similar to FEHBP, while other
federal programs use other methods, such as statutorily mandated prices
or direct negotiations with drug suppliers.
Medicare Part D Uses Competing Prescription Drug Plans:
Medicare Part D follows a model similar to the FEHBP by relying on
competing prescription drug plans to control prescription drug
spending. As with the FEHBP, during an annual open season Part D
enrollees may remain enrolled in the same plan or select from among
other competing plans based on benefit design, premiums, and other plan
features. To attract enrollees, plans have the incentive to offer
benefits that will meet beneficiaries' prescription drug needs at
competitive premiums. The larger a plan's market share, the more
leverage it has for obtaining favorable drug prices on behalf of its
enrollees and controlling prescription drug spending. As a result, Part
D plans vary in their monthly premiums, the annual deductibles, and
cost sharing for drugs. Plans also differ in the drugs they cover on
their formulary and the pharmacies they use.
Part D uses competing sponsors to generate prescription drug savings
for beneficiaries, in part through their ability to negotiate prices
with drug manufacturers and pharmacies. To generate these savings,
sponsors often contract with PBMs to negotiate rebates with drug
manufacturers, discounts with retail pharmacies, and other price
concessions on behalf of the sponsor. MMA specifically states that the
Secretary of HHS may not interfere with negotiations between sponsors
and drug manufacturers and pharmacies.[Footnote 14] Even though CMS is
not involved in price negotiations, it attempts to determine whether
beneficiaries are receiving the benefit of negotiated drug prices and
price concessions when it calculates the final plan payments. Sponsors
must report the price concession amounts to CMS and pass price
concessions onto beneficiaries and the program through lower cost
sharing, lower drug prices, or lower premiums. Similar to OPM, CMS also
negotiates plan design with participating plans and announces key
policy goals for the program, including those relating to spending
control. For example, in preparation for 2010 benefit and rate
negotiations, CMS noted that one of its goals is to establish a more
transparent process so that beneficiaries will be able to better
predict their out-of-pocket costs.
Part D sponsors or their PBMs also use other methods to help contain
drug spending similar to FEHBP plans. For example, most plans assign
covered drugs to distinct tiers, each of which carries a different
level of cost sharing. A plan may establish separate tiers for generic
drugs and brand-name drugs--with the generic drug tier requiring a
lower level of cost sharing than the brand-name drug tier. Plans may
also require utilization management for certain drugs on their
formulary. Common utilization management practices include requiring
physicians to obtain authorization from the plan prior to prescribing a
drug; step therapy, which requires beneficiaries to first try a less
costly drug to treat their condition; and imposing quantity limits for
dispensed drugs. Additionally, all Part D plans must meet requirements
with respect to the extent of their pharmacy networks[Footnote 15] and
the categories of drugs they must cover.[Footnote 16] Plan formularies
generally must cover at least two Part D drugs in each therapeutic
category and class, except when there is only one drug in the category
or class or when CMS has allowed the plan to cover only one drug.
[Footnote 17] CMS has also designated six categories of drugs of
clinical concern for which plans must cover all or substantially all of
the drugs.[Footnote 18]
VA and DOD Use Statutorily Mandated Prices and Negotiate Directly with
Drug Suppliers:
While FEHBP and Medicare Part D use competition between health plans to
control prescription drug spending, VA and DOD rely on statutorily
mandated prices and discounts and further negotiations with drug
suppliers to obtain lower prices for drugs covered on their
formularies.
VA and DOD have access to a number of prices to consider when
purchasing drugs, paying the lowest available.
* Federal Supply Schedule (FSS) prices. VA's National Acquisition
Center negotiates FSS prices with drug manufacturers, and these prices
are available to all direct federal purchasers.[Footnote 19] FSS prices
are intended to be no more than the prices manufacturers charge their
most-favored nonfederal customers under comparable terms and
conditions. Under federal law, drug manufacturers must list their brand-
name drugs on the FSS to receive reimbursement for drugs covered by
Medicaid.[Footnote 20] All FSS prices include a fee of 0.5 percent of
the price to fund VA's National Acquisition Center.
* Federal ceiling prices. Federal ceiling prices, also called Big Four
prices, are available to VA, DOD, the Public Health Service, and the
U.S. Coast Guard. These prices are mandated by law to be 24 percent
lower than nonfederal average manufacturer prices.[Footnote 21]
* Blanket purchase agreements and other national contracts. Blanket
purchase agreements and other national contracts with drug
manufacturers allow VA and DOD--either separately or jointly--to
negotiate prices below FSS prices. The lower prices may depend on the
volume of specific drugs being purchased by particular facilities, such
as VA or military hospitals, or on being assigned preferred status on
VA's and DOD's respective national formularies.
In a few cases, individual VA and DOD medical centers have obtained
lower prices through local agreements with suppliers than they could
have through the national contracts, FSS prices, or federal ceiling
prices.
In addition, VA's and DOD's use of formularies, pharmacies, and prime
vendors can further affect drug prices and help control drug spending.
Both VA and DOD use their own national, standard formulary to obtain
more competitive prices from manufacturers that have their drugs listed
on the formulary. VA and DOD formularies also encourage the
substitution of lower cost drugs determined to be as or more effective
than higher cost drugs. VA and DOD use prime vendors, which are
preferred drug distributors, to purchase drugs from manufacturers and
deliver the drugs to VA or DOD facilities. VA and DOD receive discounts
from their prime vendors that also reduce the prices that they pay for
drugs. For DOD, the discounts vary among prime vendors and the areas
they serve. As of June 2004, VA's prime vendor discount was 5 percent,
while DOD's discounts averaged about 2.9 percent within the United
States. Additionally, similar to FEHBP and Medicare Part D, DOD uses
utilization management methods to limit drug spending including prior
authorization, dispensing limitations, and higher cost sharing for
nonformulary drugs and drugs dispensed at retail pharmacies.
Medicaid Uses Aggregate Payment Limits, Drug Pricing Guidelines, and
Required Rebates:
Unlike VA and DOD, Medicaid programs do not negotiate drug prices with
manufacturers to control prescription drug spending, but reimburse
retail pharmacies for drugs dispensed to beneficiaries at set prices.
CMS sets aggregate payment limits--known as the federal upper limit
(FUL)--for certain outpatient multiple-source prescription drugs.
[Footnote 22] CMS also provides guidelines regarding drug payment.
States are to pay pharmacies the lower of the state's estimate of the
drug's acquisition cost to the pharmacy, plus a dispensing fee, or the
pharmacy's usual and customary charge to the general public; for
certain drugs the FUL or the state maximum allowable costs may apply if
lower.[Footnote 23]
In addition to these retail pharmacy reimbursements, Medicaid programs
also control prescription drug spending through the Medicaid drug
rebate program.[Footnote 24] Under the drug rebate program, drug
manufacturers are required to provide quarterly rebates for covered
outpatient prescription drugs purchased by state Medicaid programs.
Under the rebate program, states take advantage of the prices
manufacturers receive for drugs in the commercial market that reflect
the results of negotiations by private payers such as discounts and
rebates. For brand-name drugs, the rebates are based on two price
benchmarks per drug that manufacturers report to CMS: best price
[Footnote 25] and average manufacturer price (AMP).[Footnote 26] The
relationship between best price and AMP determines the unit rebate
amount and thus the overall size of the rebate that states receive. The
basic unit rebate amount is the greater of two values: the difference
between best price and AMP or 15.1 percent of AMP. If the brand-name
drug's AMP rises faster than inflation as measured by the change in the
consumer price index, the manufacturer is required to provide an
additional rebate to the state Medicaid program. In addition to brand-
name drugs, states also receive rebates for generic drugs. For generic
drugs, the basic unit rebate amount is 11 percent of the AMP. A state's
rebate for a drug is the product of the unit rebate amount plus any
applicable additional rebate amount and the number of units of the drug
paid for by the state's Medicaid program. In addition to the rebates
mandated under the drug rebate program, states can also negotiate
additional rebates with manufacturers.
Like FEHBP and Medicare Part D participating plans, Medicaid programs
also use other utilization management methods to control prescription
drug spending including prior authorization and utilization review
programs, dispensing limitations, and cost-sharing requirements.
Mr. Chairman, this concludes my prepared remarks. I would be happy to
answer any questions that you or other members of the Subcommittee may
have.
Contacts and Acknowledgments:
For future contacts regarding this testimony, please contact John E.
Dicken at (202) 512-7114 or at dickenj@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this testimony. Randy DiRosa, Assistant Director;
Rashmi Agarwal; William A. Crafton; Martha Kelly; and Timothy Walker
made key contributions to this statement.
[End of section]
Related GAO Products:
Federal Employees Health Benefits Program: Enrollee Cost Sharing for
Selected Specialty Prescription Drugs. [hyperlink,
http://www.gao.gov/products/GAO-09-517R]. Washington, D.C.: April 30,
2009.
Medicare Part D Prescription Drug Coverage: Federal Oversight of
Reported Price Concessions Data. [hyperlink,
http://www.gao.gov/products/GAO-08-1074R]. Washington, D.C.: September
30, 2008.
DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth in
Spending at Retail Pharmacies. [hyperlink,
http://www.gao.gov/products/GAO-08-327]. Washington, D.C.: April 4,
2008.
DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting from
the Uniform Formulary and Manufacturer Rebates. [hyperlink,
http://www.gao.gov/products/GAO-08-172R]. Washington, D.C.: October 31,
2007.
Military Health Care: TRICARE Cost-Sharing Proposals Would Help Offset
Increasing Health Care Spending, but Projected Savings Are Likely
Overestimated. [hyperlink, http://www.gao.gov/products/GAO-07-647].
Washington, D.C.: May 31, 2007.
Federal Employees Health Benefits Program: Premiums Continue to Rise,
but Rate of Growth Has Recently Slowed. [hyperlink,
http://www.gao.gov/products/GAO-07-873T]. Washington, D.C.: May 18,
2007.
Prescription Drugs: Oversight of Drug Pricing in Federal Programs.
[hyperlink, http://www.gao.gov/products/GAO-07-481T]. Washington, D.C.:
February 9, 2007.
Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices
Used by Other Countries and U.S. Private Payers and Federal Programs.
[hyperlink, http://www.gao.gov/products/GAO-07-358T]. Washington, D.C.:
January 11, 2007.
Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper
Limits for Reimbursement Compared with Retail Pharmacy Acquisition
Costs. [hyperlink, http://www.gao.gov/products/GAO-07-239R].
Washington, D.C.: December 22, 2006.
Federal Employees Health Benefits Program: Premium Growth Has Recently
Slowed, and Varies among Participating Plans. [hyperlink,
http://www.gao.gov/products/GAO-07-141]. Washington, D.C.: December 22,
2006.
Medicaid: States' Payments for Outpatient Prescription Drugs.
[hyperlink, http://www.gao.gov/products/GAO-06-69R]. Washington, D.C.:
October 31, 2005.
Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns
about Rebates Paid to States. [hyperlink,
http://www.gao.gov/products/GAO-05-850T]. Washington, D.C.: June 22,
2005.
Mail Order Pharmacies: DOD's Use of VA's Mail Pharmacy Could Produce
Savings and Other Benefits. [hyperlink,
http://www.gao.gov/products/GAO-05-555]. Washington, D.C.: June 22,
2005.
Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns
about Rebates Paid to States. [hyperlink,
http://www.gao.gov/products/GAO-05-102]. Washington, D.C.: February 4,
2005.
Contract Management: Further Efforts Needed to Sustain VA's Progress in
Purchasing Medical Products and Services. [hyperlink,
http://www.gao.gov/products/GAO-04-718]. Washington, D.C.: June 22,
2004.
Medicare: Observations on Program Sustainability and Strategies to
Control Spending on Any Proposed Drug Benefit. [hyperlink,
http://www.gao.gov/products/GAO-03-650T]. Washington, D.C.: April 9,
2003.
Federal Employees' Health Benefits: Effects of Using Pharmacy Benefit
Managers on Health Plans, Enrollees, and Pharmacies. [hyperlink,
http://www.gao.gov/products/GAO-03-196]. Washington, D.C.: January 10,
2003.
[End of section]
Footnotes:
[1] OPM, News Release: OPM Announces Open Season for Health Benefits,
Dental and Vision Insurance, and Flexible Spending Accounts (Sept. 25,
2008).
[2] A list of related GAO products is included at the end of this
statement. For other reports we reviewed, please see, for example,
Congressional Budget Office, Budget Options Volume 1: Health Care
(Washington, D.C.: Dec. 2008); Congressional Budget Office, The Health
Care System for Veterans: An Interim Report (Washington, D.C.: Dec.
2007); Congressional Research Service, Medicare Part D Prescription
Drug Benefit: A Primer (Washington, D.C.: Aug. 20, 2008); Congressional
Research Service, Prescription Drug Coverage Under Medicaid
(Washington, D.C.: Feb. 6, 2008); Congressional Research Service,
Pharmaceutical Costs: A Comparison of Department of Veterans Affairs
(VA), Medicaid, and Medicare Policies (Washington, D.C.: Apr. 13,
2007); Federal Trade Commission, Pharmacy Benefit Managers: Ownership
of Mail-Order Pharmacies (Washington, D.C.: Aug. 2005); and Medicare
Payment Advisory Commission, Report to the Congress: Medicare Payment
Policy (Washington, D.C.: Mar. 2009).
[3] Formularies include lists of prescription drugs, grouped by
therapeutic class (groups of drugs that are similar in chemistry,
method of action, and purpose of use), that health plans or insurers
encourage physicians to prescribe and beneficiaries to use.
[4] Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2071-2152 (codified at
42 U.S.C. §§ 1395w-101 to 1395w-152). MMA redesignated the previous
part D of title XVIII of the Social Security Act as part E and inserted
a new part D after part C.
[5] Of the almost 8 million veterans enrolled, about 5 million received
health care services. Additionally, there were over 4 million pharmacy
users in VA in 2006.
[6] DOD provides health care through TRICARE--a regionally structured
program that uses contractors to maintain provider networks to
complement health care provided at military treatment facilities.
[7] Medicaid consists of 56 distinct programs created within broad
federal guidelines and administered by state Medicaid agencies. The 56
Medicaid programs include 1 for each of the 50 states; the District of
Columbia; Puerto Rico; and the U.S. territories of American Samoa,
Guam, Northern Mariana Islands, and the Virgin Islands. Within a
framework established by federal statutes, regulations, and policies,
each state (1) establishes its own eligibility standards; (2)
determines the type, amount, duration, and scope of services; (3) sets
the rate of payment for services; and (4) administers its own program.
[8] Approximately 6 million of the 63 million Medicaid beneficiaries
were 65 years or older in 2008.
[9] Part D includes different levels of premium and cost-sharing
assistance for dual eligible beneficiaries as well as assistance for
other eligible beneficiaries who have low incomes and modest assets but
do not meet the eligibility requirements for Medicaid.
[10] GAO, Federal Employees' Health Benefits: Effects of Using Pharmacy
Benefit Managers on Health Plans, Enrollees, and Pharmacies,
[hyperlink, http://www.gao.gov/products/GAO-03-196] (Washington, D.C.:
Jan. 10, 2003).
[11] In the private market, one of the key ways PBMs influence price
negotiations with manufacturers is through formulary development and
management. PBMs may assist health plans in developing or managing a
formulary that the health plan will cover. Manufacturers pay PBMs
through rebates or other payments to be included on plan formularies
and to capture greater market share for their drugs.
[12] U.S. Office of Personnel Management Insurance Services Program,
Federal Employees Health Benefits Program Call Letter No. 2006-09
(Washington, D.C.: Apr. 4, 2006).
[13] U.S. Office of Personnel Management Insurance Services Program,
Federal Employees Health Benefits Program Call Letter No. 2009-08
(Washington, D.C.: Apr. 20, 2009).
[14] The Secretary may also not require a particular formulary or
institute a price structure for the reimbursement of Medicare Part D
drugs. Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2098 (codified at 42
U.S.C. § 1395w-111(i)).
[15] All prescription drug plans must have a contracted pharmacy in
their network that is within 2 miles of 90 percent of urban
beneficiaries, 5 miles of 90 percent of suburban beneficiaries, and 15
miles of 70 percent of rural beneficiaries. 42 C.F.R.
§423.120(a)(1)(2008).
[16] Under the MMA, prescription drug plans must cover drugs within
each therapeutic category and class of Part D drugs. Pub. L. No. 108-
173, § 101, 117 Stat. 2066, 2085 (codified at 42 U.S.C. § 1395w-
104(b)(3)(C)).
[17] 42 C.F.R. §423.120(b)(2)(2008).
[18] Part D plan formularies must include all or substantially all
drugs in the immunosuppressant, antidepressant, antipsychotic,
anticonvulsant, antiretroviral, and antineoplastic drug categories.
[19] VA and DOD directly purchase drugs from manufacturers for their
beneficiaries. FEHBP, Medicare Part D, and Medicaid provide
reimbursement for drugs dispensed to beneficiaries.
[20] See 38 U.S.C. § 8126(a)(4).
[21] See 38 U.S.C. § 8126(a)(2). The nonfederal average manufacturer
price is the weighted average price of a single form and dosage unit
paid by wholesalers to a manufacturer, taking into account cash
discounts or similar price reductions. Big Four prices, in general, do
not apply to generic drugs.
[22] Federal regulations set specific limits for multiple-source drugs
for which there are two or more therapeutically equivalent products.
[23] States may establish their own methodologies for estimating retail
pharmacies' drug acquisition costs. Most states choose to estimate
these costs by taking a percentage discount from the average wholesale
price. The usual and customary charge for a drug is the full retail
price that individuals without prescription drug coverage pay when
purchasing drugs at a retail pharmacy. Some states also administer a
maximum allowable cost program for selected multiple-source drugs with
the maximum price at which the state will reimburse those medications.
[24] See 42 U.S.C. § 1396r-8.
[25] Best price is the lowest price available from the manufacturer to
any wholesaler, retailer, provider, health maintenance organization, or
nonprofit or government entity, with some exceptions. Among other
things, sales made through the FSS, single-award contract prices of any
federal agency, federal depot prices, and prices charged to DOD, VA,
Indian Health Service, and Public Health Service are not considered in
determining best price.
[26] AMP is defined by statute as the average price paid to a
manufacturer for a drug by wholesalers for drugs distributed to the
retail pharmacy class of trade. Under the rebate agreement
manufacturers negotiate with HHS, AMP does not include prices to
government purchasers based on the FSS, prices from direct sales to
hospitals or health maintenance organizations, or prices to wholesalers
when they relabel drugs they purchase under their own label.
[End of section]
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