Federal Employees' Health Benefits
Effects of Using Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies Gao ID: GAO-03-196 January 10, 2003Rising prescription drug costs have contributed to rising employer health plans premiums in recent years. Most federal employees, retirees, and their dependents participating in the Federal Employees Health Benefits Program (FEHBP), administered by the Office of Personnel Management (OPM), are enrolled in plans that contract with pharmacy benefit managers (PBM) to administer their prescription drug benefits. GAO was asked to examine how pharmacy benefits managers participating in the federal program affect health plans, enrollees, and pharmacies. GAO examined the use of PBMs by three plans representing about 55 percent of the 8.3 million people covered by FEHBP plans. For example, GAO surveyed 36 retail pharmacies on prices that a customer without third party coverage would pay for 18 high-volume or high-expenditure drugs and compared these prices to prices paid by the plans and PBMs.
The PBMs reviewed produced savings for health plans participating in FEHBP by obtaining drug price discounts from retail pharmacies and dispensing drugs at lower costs through mail-order pharmacies, passing on certain manufacturer rebates to the plans, and operating drug utilization control programs. For example, the average price PBMs obtained from retail pharmacies for 14 brand name drugs was about 18 percent below the average price paid by customers without third-party coverage. Enrollees in the plans reviewed had wide access to retail pharmacies, coverage of most drugs, and benefited from cost savings generated by the PBMs. Enrollees typically paid lower out-of-pocket costs for prescriptions filled through mail-order pharmacies and benefited from other savings that reduced plans' costs and therefore helped to lessen rising premiums. Most retail pharmacies participate in the FEHBP plans' networks in order to obtain business from the large number of enrollees covered. Pharmacy associations report that the PBMs' large market shares leave some retail pharmacies with little leverage in negotiating with PBMs. Retail pharmacies must accept discounted reimbursements from PBMs they contract with and perform additional administrative tasks associated with claims processing. OPM generally concurred with GAO's findings. The plans and PBMs reviewed provided technical comments, and two independent reviewers stated the report was fair and balanced. One pharmacy association expressed strong concerns, including that the report did not more broadly address economic relationships in the PBM industry. GAO examined relationships between the PBMs and manufacturers and pharmacies specific to their FEHBP business. However, relationships between PBMs and other entities for other plans were beyond the report's scope.
GAO-03-196, Federal Employees' Health Benefits: Effects of Using Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies
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Report to the Honorable Byron L. Dorgan, U.S. Senate:
United States General Accounting Office:
GAO:
January 2003:
Federal Employees‘ Health Benefits:
Effects of Using Pharmacy Benefit Managers on Health Plans, Enrollees,
and Pharmacies:
GAO-03-196:
GAO Highlights:
Highlights of GAO-03-196, a report to the Honorable Byron L. Dorgan,
U.S. Senate:
Why GAO Did This Study:
Rising prescription drug costs have contributed to rising employer
health plans premiums in recent years. Most federal employees,
retirees, and their dependents participating in the Federal Employees
Health Benefits Program (FEHBP), administered by the Office of
Personnel Management (OPM), are enrolled in plans that contract with
pharmacy benefit managers (PBM) to administer their prescription drug
benefits.
GAO was asked to examine how pharmacy benefit managers participating
in the federal program affect health plans, enrollees, and pharmacies.
GAO examined the use of PBMs by three plans representing about 55
percent of the 8.3 million people covered by FEHBP plans. For example,
GAO surveyed 36 retail pharmacies on prices that a customer without
third-party coverage would pay for 18 high-volume or high-expenditure
drugs and compared these prices to prices paid by the plans and PBMs.
What GAO Found:
The PBMs reviewed produced savings for health plans participating in
FEHBP by obtaining drug price discounts from retail pharmacies and
dispensing drugs at lower costs through mail-order pharmacies, passing
on certain manufacturer rebates to the plans, and operating drug
utilization control programs. For example, the average price PBMs
obtained from retail pharmacies for 14 brand name drugs was about 18
percent below the average price paid by customers without third-party
coverage.
Enrollees in the plans reviewed had wide access to retail pharmacies,
coverage of most drugs, and benefited from cost savings generated by
the PBMs. Enrollees typically paid lower out-of-pocket costs for
prescriptions filled through mail-order pharmacies and benefited from
other savings that reduced plans‘ costs and therefore helped to lessen
rising premiums.
Most retail pharmacies participate in the FEHBP plans‘ networks in
order
to obtain business from the large number of enrollees covered.
Pharmacy
associations report that the PBMs‘ large market shares leave some
retail
pharmacies with little leverage in negotiating with PBMs. Retail
pharmacies must accept discounted reimbursements from PBMs they
contract
with and perform additional administrative tasks associated with claims
processing.
OPM generally concurred with GAO‘s findings. The plans and PBMs
reviewed provided technical comments, and two independent reviewers
stated the report was fair and balanced. One pharmacy association
expressed strong concerns, including that the report did not more
broadly
address economic relationships in the PBM industry. GAO examined
relationships between the PBMs and manufacturers and pharmacies
specific
to their FEHBP business. However, relationships between PBMs and other
entities for other plans were beyond the report‘s scope.
GAO HIghlights Figure:
[See PSDF for image]
[End of Figure]
Contents:
Letter:
Results in Brief:
Background:
PBMs Achieved Savings through Price Discounts, Rebate Payments, and
Managing Drug Use:
PBMs Provided FEHBP Enrollees Generally Unrestricted Access to
Prescription Drugs, Cost Savings, and Other Benefits:
Pharmacies Included in PBM Retail Networks Must Accept Discounted
Prices and Perform Various Administrative Tasks:
PBMs Received Compensation from Plans and Payments from Manufacturers
for Their FEHBP Business:
Concluding Observations:
Agency and Other Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Office of Personnel
Management:
Appendix III: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: FEHBP Plans and PBMs Reviewed:
Table 2: FEHBP Plans‘ Formularies Compared to VA National Formulary:
Table 3: Comparison of Enrollee Cost-Sharing for a 90-day Supply of
Retail and Mail-Order Prescription Drugs, 2002:
Table 4: Selected High-Volume or High-Expenditure Drugs for 3 FEHBP
Plans:
Figures:
Figure 1: PBM Relationships with Market Participants:
Figure 2: PBM Discounted Plan Prices Compared to Cash-Paying Customer
Prices for 30-Day Supplies, April 2002:
Figure 3: Overview of PBMs‘ Compensation and Payment Sources:
Abbreviations:
AMP: average manufacturer price:
AWP: average wholesale price:
BCBS: Blue Cross and Blue Shield:
FEHBP: Federal Employees Health Benefits Program:
GEHA: Government Employees Hospital Association:
HMO: health maintenance organization:
IOM: Institute of Medicine:
MAC: maximum allowable cost:
NACDS: National Association of Chain Drug Stores:
NCPA: National Community Pharmacists Association:
NDC: National Drug Code:
OPM: Office of Personnel Management:
PBM: pharmacy benefit managers:
SEC: Securities and Exchange Commission:
VA: Department of Veterans Affairs:
WAC: wholesale acquisition cost:
January 10, 2003:
The Honorable Byron L. Dorgan
United States Senate:
Dear Senator Dorgan:
The increasing cost of prescription drugs has been a key component of
rising employer health care costs in recent years. In 2001, total
employer health benefit costs rose 11 percent, while prescription drug
costs rose 17 percent.[Footnote 1] Many employer-sponsored health plans
and insurers contract with pharmacy benefit managers (PBMs) to help
manage their prescription drug benefits. PBMs negotiate drug prices
with pharmacies and drug manufacturers on behalf of health plans and,
in addition to other administrative, clinical, and cost containment
services, process drug claims for the health plans. In 2001, nearly 200
million Americans had their prescription drug benefits managed by a
PBM. Most federal employees, retirees, and their dependents
participating in the Federal Employees Health Benefits Program (FEHBP),
the largest employer-sponsored health insurance program in the United
States, are enrolled in plans that contract with PBMs to manage their
prescription drug benefits.
Because PBMs play a critical role in managing prescription drug
benefits, you asked us to examine PBMs‘ role within the FEHBP program.
In particular, we addressed the following questions:
1. Do PBMs achieve savings, and, if so, how?
2. How do FEHBP plans‘ use of PBMs affect enrollees, including access
to prescription drugs and out-of-pocket spending?
3. How do FEHBP plans‘ use of PBMs affect retail pharmacies, including
pharmacies‘ reimbursements for drugs dispensed and administrative
requirements?
4. How are PBMs compensated for services provided to FEHBP plans?
To respond to these questions, we examined the use of PBMs by three
FEHBP plans: Blue Cross and Blue Shield (BCBS), Government Employees
Hospital Association (GEHA), and PacifiCare of California. Together,
these plans accounted for about 55 percent of the 8.3 million people
covered by FEHBP as of July 2002 and represented various plan types and
PBM contractors.[Footnote 2] BCBS contracted with the two largest PBMs
in the United States for its pharmacy benefit services--Medco Health
Solutions, a subsidiary of the pharmaceutical company Merck & Co.,
Inc., and AdvancePCS. GEHA contracted with Medco Health Solutions and
PacifiCare of California contracted with Prescription Solutions,
another subsidiary of PacifiCare Health Systems.
We reviewed contracts between the PBMs and plans, financial statements
regarding payments made between the plans and PBMs, and retail and
mail-order prices for selected drugs from the FEHBP plans we reviewed
and the PBMs with which they contracted. We also obtained pricing
information from retail pharmacies, interviewed officials at the Office
of Personnel Management (OPM),[Footnote 3] and associations
representing PBMs and retail pharmacies, and reviewed studies regarding
the use of PBMs and prescription drug payments. Specifically:
* To assess whether PBMs achieve cost savings, we obtained April 2002
prices for 18 drugs that the three FEHBP plans paid to their PBMs for
retail and mail order prescriptions.[Footnote 4] We compared these
prices to cash prices[Footnote 5] that customers would pay at retail
pharmacies in California, North Dakota, Washington, D.C., and the
Virginia and Maryland suburbs of Washington, D.C., and to Medicaid
reimbursement rates in these locations. In addition, we obtained plan
and PBM data on drug manufacturers‘ rebates that PBMs pass on to plans
and any estimated savings resulting from certain PBM intervention
techniques such as drug utilization reviews and prior authorization.
* To examine the effect of PBM services on enrollees‘ access to drugs
and out-of-pocket costs, we reviewed plan documents; compared the
plans‘ retail pharmacy networks to the number of licensed retail
pharmacies in California, the District of Columbia, Maryland, North
Dakota, and Virginia; and compared the number of drugs and therapeutic
classes included on the plans‘ formularies[Footnote 6] with the
National Formulary for the Department of Veterans Affairs
(VA).[Footnote 7]
* To examine the effect of PBMs on retail pharmacies, we interviewed
representatives of retail pharmacies and associations and
representatives of FEHBP plans and PBMs. We also compared the PBMs‘
payments to retail pharmacies for selected drugs to industry-reported
manufacturer and wholesale prices that estimate pharmacy acquisition
costs.
* To examine how PBMs were compensated for services they provided FEHBP
plans, we examined the contracts between plans and PBMs and associated
annual financial statements and financial information that PBMs filed
with the Securities and Exchange Commission (SEC).
While the plans and PBMs provided certain data that they considered
proprietary, we do not report such data that can be linked to a
specific plan or PBM but instead report aggregated drug price, cost,
savings, and compensation data. We did not independently verify
information provided by plans, PBMs, or pharmacies. Appendix I provides
additional information on our scope and methodology, and a list of our
related products is included at the end of this report. Our work was
conducted from September 2001 through December 2002 according to
generally accepted government auditing standards.
Results in Brief:
The three PBMs we examined achieved savings for FEHBP-participating
health plans by using three key approaches: obtaining drug price
discounts from retail pharmacies and dispensing drugs at lower costs
through their mail-order pharmacies; passing on certain manufacturer
rebates to the plans; and using intervention techniques that reduce
utilization of certain drugs or substitute other, less costly, drugs.
The average price PBMs negotiated for drugs from retail pharmacies was
about 18 percent below the average cash price customers would pay at
retail pharmacies for 14 selected brand-name drugs and 47 percent below
the average cash price for 4 selected generic drugs. These price
savings may overstate PBMs‘ negotiating success because, absent a PBM,
plans would likely manage their own drug benefits and also attempt to
negotiate discounts with retail pharmacies. PBMs provide plans even
greater savings when drugs are dispensed through their mail-order
pharmacies. The average mail-order price was about 27 percent and 53
percent below the average cash price customers would pay at a retail
pharmacy for the selected brand name and generic drugs, respectively.
In addition to discounts, PBMs passed through to plans certain rebates
they earned from drug manufacturers. Across the three plans, rebates
reduced total annual drug spending by 3 percent to 9 percent from 1998
through 2001. Although difficult to precisely quantify, PBMs also
achieved savings through intervention techniques such as prior
authorization and drug utilization reviews that identify excess use,
duplicative therapies, or the availability of effective, low-cost drug
alternatives. For example, plans reported savings in 2001 for various
intervention techniques that ranged from less than 1 percent to 9
percent of their total spending on prescription drug benefits.
FEHBP enrollees generally had unrestricted access to retail pharmacies
and prescription drugs, savings in out-of-pocket spending, and other
safety and customer service benefits. PBMs maintained retail pharmacy
networks for the FEHBP plans that included most retail pharmacies--
typically 90 percent to nearly 100 percent in five jurisdictions we
reviewed. Drug formularies administered by the PBMs were generally not
overly restrictive; they included drugs in most major therapeutic
categories and mechanisms existed to allow enrollees to obtain
nonformulary drugs when prescribed by a physician, although sometimes
at a higher out-of-pocket cost. Enrollees also shared in the savings
PBMs generated for FEHBP plans. For example, enrollees generally paid
less in out-of-pocket costs for drugs from the PBMs‘ mail-order
services than they would at retail pharmacies. Additional PBM savings
passed on to plans translated into smaller premium increases for
enrollees. Further, each PBM operated a program to review prescriptions
at the point of purchase to help prevent:
potentially adverse drug interactions, and the PBMs reported that they
generally met or exceeded contractual standards on customer service
quality.
Pharmacies that participate in retail networks established by FEHBP
plans‘ PBMs must accept discounted prices and undertake additional
administrative tasks not required for cash-paying customers‘
transactions. Although these pharmacies were reimbursed by the PBMs
below the level paid by cash-paying customers, we estimate that PBM
reimbursements exceeded pharmacies‘ drug acquisition costs--not
including overhead costs or any discounts or rebates some pharmacies
may obtain--by an average of approximately 8 percent for brand-name
drugs we selected for review. Administrative requirements to process
PBM and other third-party prescriptions are greater than for cash
transactions. For example, pharmacy staff must file claims
electronically, may be required to contact physicians to approve
formulary drug substitutions, or counsel patients on plan benefits.
Also, retail pharmacies may lose market share to PBM mail-order
pharmacies because some PBMs use cost incentives and enrollee health
information to promote the use of mail order over retail pharmacies.
Nevertheless, most retail pharmacies participate in PBM networks
because of the large market share PBMs represent and the prescription
and nonprescription sales generated by customers the PBMs help bring
into the stores. Pharmacy associations report that retail pharmacies
often have little leverage with PBMs, with negotiations only occurring
when a large chain will not accept the PBM‘s contractual terms or an
independent pharmacy in a rural area must be included to meet health
plans‘ access requirements.
PBMs received compensation for their FEHBP business from FEHBP plans
and payments from pharmaceutical manufacturers through various methods.
* PBMs collected fees from FEHBP plans for various administrative and
clinical services including processing claims and conducting drug
utilization reviews. These administrative fees, which varied by plan
depending on contracted services, accounted for an average of about 1.5
percent of each plan‘s total drug benefit spending in 2001.
* FEHBP plans we reviewed paid PBMs discounted prices for retail drugs
that were virtually the same as prices PBMs paid to reimburse retail
pharmacies. However, plans paid lower prices for mail-order drugs
supplied by the PBM. While not disclosing their acquisition costs for
mail-order drugs, PBM officials said that discounted prices paid by the
plans to PBMs for mail-order drugs were generally higher than prices
PBMs paid manufacturers to acquire drugs.
* The PBMs we reviewed varied in the extent to which they retained a
share of drug manufacturers‘ rebates associated with their FEHBP
business or passed it all on to the FEHBP plans they contracted with.
The PBMs also received other rebates or payments from manufacturers
based on their total business with a particular drug manufacturer.
While information on the size of these payments was unavailable, PBMs‘
public financial information suggests that rebates or other payments
from drug manufacturers may be a large source of PBM earnings.
In commenting on a draft of this report, OPM generally concurred with
our findings. The plans and PBMs we examined reviewed the report for
the accuracy of information regarding their arrangements and provided
technical comments that we incorporated as appropriate. Two independent
experts indicated that the report was fair and balanced and provided
technical comments. An official for the National Association of Chain
Drug Stores (NACDS) expressed strong concerns in response to our draft
report, primarily regarding the scope of our work. An official of the
National Community Pharmacists Association (NCPA) separately said he
concurred with the NACDS official‘s comments. A major concern was that
the report‘s focus on FEHBP plans did not adequately address the full
scope of economic relationships in the PBM industry, including those
between drug manufacturers and PBMs and the extent to which these
relationships create incentives for PBMs to encourage the use of
certain potentially higher-cost drugs. We examined contracts and
relationships between the PBMs and drug manufacturers and pharmacies
specific to their FEHBP line of business. However, relationships
between PBMs and manufacturers and pharmacies for other plans were
beyond the report‘s scope.
Background:
Most FEHBP plans contract with a PBM to help manage their prescription
drug benefits, and those that do not contract with a PBM have internal
components that employ techniques commonly used by PBMs, according to
OPM officials. The three FEHBP plans we reviewed covered more than half
of all FEHBP enrollees and paid $3.3 billion for about 65 million
prescriptions dispensed to these enrollees in 2001. Table 1 shows plan
enrollment and PBMs we reviewed.
Table 1: FEHBP Plans and PBMs Reviewed:
BCBS; July 2002 Enrollment (percentage of total FEHBP enrollment):
4,038,671 (48.8); PBMs: AdvancePCS (retail); Medco Health Solutions
(mail order).
GEHA; July 2002 Enrollment (percentage of total FEHBP enrollment):
441,151 (5.3); PBMs: Medco Health Solutions.
PacifiCare of California; July 2002 Enrollment (percentage of total
FEHBP enrollment): 57,042 (0.7); PBMs: Prescription Solutions.
Source: OPM.
Notes: As of July 2002, FEHBP plans covered 8.3 million people.
Some FEHBP plans offer two benefit options, including BCBS (standard
and basic options) and GEHA (high and standard options).
[End of table]
PBMs offer health plans a variety of services including negotiating
price discounts with retail pharmacies, negotiating rebates with
manufacturers, and operating mail-order prescription services and
administrative claims processing systems. PBMs also provide health
plans with clinical services such as formulary development and
management, prior authorization and drug utilization reviews to screen
prescriptions for such issues as adverse interactions or therapy
duplication, and substitution of generic drugs for therapeutically
equivalent brand-name drugs. In order to provide these services, PBMs
operate with multiple stakeholders in a complex set of relationships,
as shown in figure 1.
Figure 1: PBM Relationships with Market Participants:
[See PDF for image]
[End of figure]
Note: Other market interactions occur that are not represented in
figure 1, including information exchanges among PBMs, manufacturers,
wholesalers, physicians, health plans, and enrollees.
Health plans are primarily responsible for overseeing PBM activities
and for reporting to OPM any problems that could affect benefits
service delivery to enrollees. OPM oversight responsibilities include
negotiating plan benefits and changes, monitoring drug benefit service
delivery, reviewing customer service reports, conducting on-site visits
with pharmacy benefit managers, and handling appeals and complaints
from FEHBP enrollees regarding their pharmacy benefits.
PBMs Achieved Savings through Price Discounts, Rebate Payments, and
Managing Drug Use:
PBMs achieved savings for FEHBP plans primarily by obtaining price
discounts for drugs, obtaining rebate payments from manufacturers, and
employing various intervention techniques to control drug utilization
and cost. In comparison to cash-paying customer prices, PBMs we
reviewed obtained significant discounts from retail pharmacies and
offered even greater discounts when prescriptions were dispensed
through mail-order pharmacies. In addition, PBMs passed on to plans
some or all manufacturers‘ rebates associated with the FEHBP plans‘
contracts and used intervention techniques that reduced plan spending
on drug benefits.
PBMs Obtained Discounted Prices Significantly Below Those Paid by Cash-
Paying Customers:
In comparison to prices cash-paying customers without third-party
coverage would pay at retail pharmacies, the PBMs we examined achieved
significant discounts for drugs purchased at retail pharmacies and
offered even greater discounts through their mail-order pharmacies. The
average price PBMs obtained for drugs from retail pharmacies was about
18 percent below the average price cash-paying customers would pay at
retail pharmacies for 14 selected brand-name drugs and 47 percent below
the cash price for 4 selected generic drugs. For the same quantity, the
average price paid at mail order for the brand and generic drugs was
about 27 percent and 53 percent below the average cash-paying customer
price, respectively.[Footnote 8] (See fig. 2.):
Figure 2: PBM Discounted Plan Prices Compared to Cash-Paying Customer
Prices for 30-Day Supplies, April 2002:
[See PDF for image]
[End of figure]
Note: Most mail-order pharmacies dispense at larger volumes, typically
a 90-day supply. Average mail-order discounts from cash-paying customer
prices increase slightly if prescriptions are dispensed for a 90-day
supply rather than for a 30-day supply.
Moreover, PBMs we reviewed obtained greater discounts from retail
pharmacies than did state Medicaid programs, which represent another
major purchaser of drugs through retail pharmacies. We estimate that
the average reimbursement rate for drugs by 5 Medicaid programs we
reviewed was about 11 percent below the average price cash-paying
customers would pay at retail pharmacies for the selected brand-name
drugs (compared to 18 percent for the FEHBP plans we reviewed) and 23
percent below the average cash price for the selected generic drugs
(compared to 47 percent for the FEHBP plans we reviewed).[Footnote 9]
While PBMs negotiated prices significantly lower than a cash-paying
customer would pay, these discounts may overstate the level of savings
plans achieve from using PBMs since no benchmark exists to accurately
determine what discounts plans would obtain without a PBM. In the
absence of a PBM, FEHBP plans could obtain some level of drug price
discounts from retail pharmacies and drug manufacturers but would also
directly incur the costs associated with undertaking these
responsibilities. Also, PBMs can negotiate deeper discounts for plans
with smaller networks of retail pharmacies because the pharmacies can
anticipate receiving a higher concentration of the plans‘ enrollees.
For example, BCBS introduced its basic option in 2002 that includes a
smaller network of retail pharmacies--about 70 percent as many
pharmacies as its standard option--and deeper discounts in its retail
pharmacy payments compared to its standard option.
PBMs Further Reduced Plans‘ Drug Expenditures by Passing Through
Certain Manufacturer Rebates:
PBMs also passed through to the FEHBP plans they contracted with some
or all of drug manufacturer rebates associated with their FEHBP
business. Over the past 4 years, we estimate that the plans we reviewed
received rebate payments that effectively reduced plans‘ annual
spending on prescription drugs by 3 percent to 9 percent. The share of
rebates PBMs pass through to plans varies and is subject to contractual
agreements negotiated between PBMs and the plans.[Footnote 10]
Rebates and formularies are interrelated. Drug manufacturers provide
PBMs certain rebates depending not only on inclusion of their drugs on
a plan‘s formulary but also on the PBMs‘ ability to increase a
manufacturer‘s market share for certain drugs. Formulary incentives,
such as lower enrollee cost sharing for certain drugs compared to
competing therapeutically equivalent drugs, encourage the former‘s use.
Manufacturers may pay higher rebates when formularies have stronger
incentives to use specific drugs. Therefore, PBMs may be able to
provide other health plans with higher rebates if their formularies are
more restrictive than those of the FEHBP plans we examined.
PBM Intervention Techniques Contributed to Plans‘ Savings, but Are
Difficult to Quantify:
Although PBM intervention techniques help contain plans‘ cost increases
by managing drug utilization and identifying opportunities to dispense
less expensive drugs, their full impact on savings is not easily
quantifiable. The FEHBP plans and PBMs we reviewed reported savings for
individual intervention techniques ranging from less than 1 percent to
9 percent of plans‘ total drug spending in 2001.[Footnote 11] Because
plans varied in their use of intervention techniques and employed
different cost savings methodologies, these estimates may not be
comparable across plans. Techniques plans most commonly used included
concurrent drug utilization review, prior authorization, therapeutic
brand interchange, and brand to generic substitution. The reported
cumulative effect of several techniques for one plan amounted to 14
percent of drug spending.
Measuring cost savings from PBM intervention techniques is difficult
for various reasons, including:
* Savings methodologies did not reflect the effect intervention
techniques may have over time on enrollees‘ utilization patterns and
physicians‘ prescribing practices. That is, there may be a sentinel
effect from PBMs‘ reviews whereby enrollees and physicians may stop
filling or prescribing drugs that do not meet PBMs‘ utilization review
or refill criteria, but the extent to which these behavior changes
occur is beyond the scope of PBMs‘ data systems.
* Plans and PBMs we reviewed did not consistently measure the number or
costs of drugs not dispensed as a result of PBM interventions that
result in drug substitutions, denials for adverse drug interaction, or
other interventions, making it difficult to estimate savings from
certain intervention techniques.
* Plans did not systematically measure savings when the primary goal of
the intervention technique was patient safety and compliance with
drugs‘ clinical guidelines.
Among various intervention techniques, concurrent drug utilization and
prior authorization provided some plans the largest quantifiable
savings. The following are examples of intervention savings estimates
reported by plans we reviewed.
* Drug utilization review includes the PBM examining prescriptions
concurrently at the time of purchase to assess safety considerations,
such as potential adverse interactions, and compliance with clinical
guidelines, including quantity and dose. These reviews can also occur
retrospectively to analyze enrollees‘ drug utilization and physicians‘
prescribing patterns. Two plans estimated savings from drug utilization
review ranging from 6 percent to 9 percent, with about 60 percent to 80
percent of the savings from concurrent reviews, including claim denials
from the PBM to prevent early drug refills and safety advisories to
caution pharmacists about potential adverse interactions or therapy
duplications.[Footnote 12] The remaining estimated savings are from
retrospective reviews.
* Prior authorization requires enrollees to receive approval from the
plan or PBM before dispensing certain drugs that treat conditions or
illnesses not otherwise covered by plans, have high costs, have a high
potential for abuse, or are ordered in unusual quantities. Some plans
may also require prior authorization for nonformulary drugs. Each of
the plans we reviewed required prior authorization for certain drugs
such as growth hormones and a drug used to treat Alzheimer‘s disease.
Two plans reported savings from prior authorization ranging from 1
percent to 6 percent of plan spending for drugs that either were not
dispensed or were substituted for with less costly alternatives.
* Therapeutic interchange encourages the substitution of less expensive
formulary brand-name medications considered safe and effective for more
expensive nonformulary drugs within the same drug class. Two plans
reported savings ranging from 1 percent to 4.5 percent from therapeutic
interchange. These estimates are in addition to savings associated with
rebates plans earned for drugs in the formulary.[Footnote 13]
* Generic substitution involves dispensing less expensive, chemically-
equivalent generic drugs in place of brand name drugs. Where a PBM
specifically intervened by contacting the physician to change a
prescription from requiring a brand name to allowing a generic drug,
one plan reported savings of less than 1 percent of the plan‘s total
drug spending. The other two plans said they do not have readily
available data to measure savings from PBM interventions for generic
drugs. All three plans reported more general information on their
generic drug use, but the extent to which generic drugs are used cannot
solely be attributed to PBMs because plan benefit design and physician
prescribing patterns also influence generic drug use. On average, the
plans we reviewed reported that generic drugs were dispensed more often
by retail pharmacies (about 45 percent of all drugs dispensed) than by
mail-order pharmacies (about 34 percent). The difference in use of
generic drugs may in part reflect differences in the types of drugs
that are typically dispensed through retail and mail-order pharmacies.
For drugs where a generic version was available, the retail and mail-
order pharmacies dispensed generic drugs at more similar rates--on
average 89 percent of the time for retail pharmacies and 87 percent of
the time for mail-order pharmacies.
PBMs Provided FEHBP Enrollees Generally Unrestricted Access to
Prescription Drugs, Cost Savings, and Other Benefits:
PBMs we reviewed generally provided enrollees with access to a nearby
pharmacy, maintained formularies for plan enrollees that included drugs
in most major therapeutic categories, and provided access to
nonformulary drugs when medically necessary. The FEHBP plans passed on
savings generated by the PBMs to enrollees in the form of lower out-of-
pocket costs for prescription drugs in certain instances, such as
through lower cost sharing for drugs obtained through mail-order
pharmacies, and a smaller increase in premiums for all enrollees than
might occur absent the PBM savings. Enrollees also benefited from PBM
intervention programs to prevent potentially dangerous drug
interactions and customer service that generally met or exceeded
quality standards established in contracts negotiated with the FEHBP
plans.
PBMs Provided Enrollees Access to Broad Retail Pharmacy Networks and
Generally Nonrestrictive Drug Formularies:
Nearly all FEHBP enrollees had a retail pharmacy participating in their
plan within a few miles of their residence. Two of the plans required
the PBM to assure that at least 90 percent of enrollees had at least
one pharmacy located within 5 miles of their residences. The PBMs for
these plans reported to us they exceeded plans‘ access standards and
that close to 100 percent of enrollees live within 5 miles of a network
pharmacy. The third plan did not have a specific contractual access
standard, but plan officials said they have verified that well over 90
percent of enrollees live within 5 miles of a network pharmacy. We also
compared the PBMs‘ networks statewide in five states to the total of
licensed retail pharmacies and found high levels of pharmacy
participation. In most instances, we estimate that more than 90 percent
to nearly 100 percent of licensed retail pharmacies participated in the
PBM networks.[Footnote 14]
Enrollees also had few restrictions on which drugs they could obtain.
While the plans‘ formularies varied with respect to the number of drugs
covered, they included prescription drugs in most major therapeutic
categories.[Footnote 15] To provide a benchmark for comparing the
breadth and depth of the FEHBP formularies, we compared the three
formularies to the outpatient prescription drugs included in the
Department of Veterans Affairs (VA) National Formulary, considered by
the Institute of Medicine to be not overly restrictive.[Footnote 16]
Each plan included over 90 percent of the drugs listed on the VA
formulary or a therapeutically equivalent alternative, and included at
least one drug in 93 percent to 98 percent of the therapeutic classes
covered by VA.[Footnote 17] (See table 2.):
Table 2: FEHBP Plans‘ Formularies Compared to VA National Formulary:
Plan: BCBS; Percent of VA formulary drugs included in plan formulary:
80; Percent of VA formulary drugs not in plan formulary but having a
therapeutic equivalent in plan formulary: 16; Percent of VA formulary‘s
therapeutic classes covered by plan formulary[A]: 93.
Plan: GEHA; Percent of VA formulary drugs included in plan formulary:
97; Percent of VA formulary drugs not in plan formulary but having a
therapeutic equivalent in plan formulary: 2; Percent of VA formulary‘s
therapeutic classes covered by plan formulary[A]: 98.
Plan: PacifiCare of California; Percent of VA formulary drugs included
in plan formulary: 79; Percent of VA formulary drugs not in plan
formulary but having a therapeutic equivalent in plan formulary: 15;
Percent of VA formulary‘s therapeutic classes covered by plan
formulary[A]: 95.
Source: GAO analysis of 2002 BCBS, GEHA, and PacifiCare of California
formularies and the VA National Formulary.
[A] A VA therapeutic class was considered included if the plan
formulary listed one or more VA drugs or a therapeutically equivalent
alternate within the VA therapeutic class.
[End of table]
Each plan provided enrollees access to nonformulary drugs, although
sometimes with higher cost sharing requirements.[Footnote 18] GEHA
provided coverage to all nonformulary drugs at no additional cost to
enrollees. BCBS had additional cost sharing requirements for
nonformulary and certain formulary drugs under its basic option plan.
Enrollees must pay a flat $25 copayment for formulary brand drugs but
must pay the greater of a $35 copayment or 50 percent of the plan‘s
cost for nonformulary brand drugs (known as coinsurance). BCBS required
the enrollees to pay the same 25 percent coinsurance for formulary and
nonformulary drugs under its standard option plan. PacifiCare of
California did not impose additional cost sharing for nonformulary
drugs but generally required enrollees (or their physicians) to
demonstrate the medical necessity and lack of effective alternative
formulary drugs prior to approving coverage of a nonformulary drug.
PBM Savings Helped Reduce Enrollees‘ Costs for Out-of-Pocket
Prescription Drug Spending and Premiums:
FEHBP enrollees benefited from cost savings generated from PBM services
through lower costs for mail-order prescriptions, lower cost sharing
linked to PBMs‘ discounts obtained from retail pharmacies, and a lower
increase in premiums overall. PBM mail-order pharmacy programs often
provided for lower out-of-pocket costs for 90-day supplies of drugs
than an enrollee would pay for the same prescriptions filled at a
retail pharmacy. The GEHA high option plan and PacifiCare of California
imposed lower cost-sharing requirements for mail order while the BCBS
standard option plan imposed a flat copayment for mail order but
required enrollees to pay 25-percent coinsurance at retail. The flat
copayments provided an incentive for enrollees to use mail order for
more expensive brand drugs. Only the GEHA standard plan included the
same cost sharing requirements for both retail and mail order. (See
table 3.):
Table 3: Comparison of Enrollee Cost-Sharing for a 90-day Supply of
Retail and Mail-Order Prescription Drugs, 2002:
Plan: BCBS; Option: Standard; Enrollee‘s cost share at retail pharmacy:
25% coinsurance; Enrollee‘s cost share at mail-order pharmacy: $10
copayment generic; $35 copayment brand.
Option: Basic[A]; Enrollee‘s cost share at retail pharmacy: $30
generic; $75 brand; Greater of 50% coinsurance or
$105 copayment for nonformulary brand; Enrollee‘s cost share at mail-
order pharmacy: Mail-order not available.
Plan: GEHA[B]; Option: High; Enrollee‘s cost share at retail pharmacy:
$15 generic; $45 single-source brand[C]; $90 multisource brand[D];
Second and subsequent refills are greater of 50% coinsurance or
applicable copayment; Enrollee‘s cost share at mail-order pharmacy: $10
generic; $35 single-source brand[C]; $50 multisource brand[D].
Option: Standard; Enrollee‘s cost share at retail pharmacy: $15
copayment generic; 50% coinsurance brand; Enrollee‘s cost share at
mail-order pharmacy: $15 copayment generic; 50% coinsurance brand.
Plan: PacifiCare of California[B]; Option: HMO; Enrollee‘s cost share
at retail pharmacy: $15 copayment generic; $45 copayment brand;
Enrollee‘s cost share at mail-order pharmacy: $10 copayment generic;
$30 copayment brand.
Source: GAO analysis of BCBS, GEHA, and PacifiCare of California
prescription drug benefits literature.
[A] BCBS basic option limits initial prescription to a 34-day supply
with a $10 copayment for generic drugs, $25 copayment for brand-name
drugs, and the greater of 50 percent coinsurance or $35 for
nonformulary brand-name drugs. Continuing prescriptions and refills can
be for up to a 90-day supply with the enrollee paying the higher cost
share amount.
[B] GEHA and PacifiCare of California limit the quantity of drugs
dispensed through retail pharmacies to a 30-day supply; therefore, we
tripled the copayments required for a 30-day supply.
[C] Brand-name drugs available from only one manufacturer, no generic
equivalent available.
[D] Brand-name drugs available from more than one manufacturer and have
a generic equivalent available.
[End of table]
The interaction between a plan‘s benefit design and PBM cost savings
can also affect the amount of enrollees‘ out-of-pocket costs for
prescription drugs.[Footnote 19] For example, in instances where a plan
required enrollees to pay a coinsurance rate representing a portion of
the actual drug cost, enrollees shared directly in price discounts PBMs
obtained from pharmacies. To illustrate, for a hypothetical drug with
an undiscounted cash price of $64, and a PBM-obtained discount price of
$52, an enrollee in a plan with a 25-percent coinsurance requirement
would pay $13 rather than $16. In contrast, where a plan‘s benefit
design provides for a fixed copayment, such as $15 per prescription,
enrollees would pay the same regardless of the discount that PBMs
obtained.
PBM savings were also passed on to enrollees in the form of premiums
that were less than they otherwise would be. Fee-for-service FEHBP plan
premiums are based on past years‘ claims data for FEHBP
enrollees.[Footnote 20] Consequently, PBM reductions in plan claims
costs for prescription drugs translate into lower premiums for
enrollees in later years. For example, we estimate that PBM savings in
the form of rebates passed on to the two fee-for-service FEHBP plans we
examined between 1998 and 2000 translate into about a 1-percent
decrease from what the plans‘ future premiums would have been. In
contrast to savings through cost sharing and other benefit design
features that accrue only to those enrollees who use the prescription
drug benefit, PBM savings in the form of premium savings accrue to all
enrollees, regardless of whether they use prescription drugs.
Enrollees Also Benefit from PBM Drug Utilization Review Programs and
Customer Service:
Each FEHBP plan‘s PBM provided a drug utilization review program to
screen prescription drug therapies for such problems as adverse
interactions, incorrect dosages, or improper duration of treatment.
PBMs maintained a centralized database on each enrollee‘s drug history
and shared this information electronically with pharmacies at the time
the prescription was filled. PBMs are often the only entity with
complete information on a patient‘s medications--particularly when
enrollees are prescribed medication by more than one physician or fill
prescriptions at different pharmacies. We have previously reported that
automated drug utilization systems linked to a centralized database
provide a more thorough prospective review and more benefits than
reviews based on manual or local systems.[Footnote 21]
PBMs provide customer service when they interact directly with FEHBP
enrollees, such as when enrollees contact the PBMs to seek information
about their prescriptions, resolve problems with having their
prescription drugs filled, or obtain drugs through the mail-order
pharmacy. Customer service quality is measured against customer service
standards negotiated between each FEHBP plan and PBM. These standards
included such measures as phone call answer time, mail-order
prescription turn-around time and accuracy rates, and customer
satisfaction as measured through enrollee surveys. Data provided by the
PBMs indicate that they generally met or exceeded these standards,
although we did not independently verify these data.[Footnote 22]
Pharmacies Included in PBM Retail Networks Must Accept Discounted
Prices and Perform Various Administrative Tasks:
Retail pharmacies that participate in the PBM networks used by FEHBP
plans are affected by PBM policies and practices. For example, PBMs
reimbursed pharmacies at levels below cash-paying customers, but above
the pharmacies‘ estimated drug acquisition costs. Processing PBM or
other third-party prescriptions involves additional administrative
requirements compared to cash transactions, and some PBMs may draw
business away from retail pharmacies by providing savings and other
incentives to encourage pharmacy customers to use PBMs‘ mail-order
pharmacies. Nevertheless, participation in the PBM retail networks is
important for pharmacies because the PBMs serving the FEHBP plans we
reviewed also contract with other clients that cumulatively represent a
large share of the national population that purchase prescription and
other nonprescription items from retail pharmacies.
PBMs Reimbursed Retail Pharmacies Less than Cash-Paying Customers but
Above Estimated Costs:
PBMs for the three FEHBP plans we reviewed reimbursed retail pharmacies
at rates below what a cash-paying customer would pay but still above
the pharmacies‘ estimated acquisition costs. The average price paid for
a typical 30-day supply was nearly 18 percent below the cash-paying
customer price for 14 selected brand-name drugs and 47 percent below
the average case price for 4 selected generic drugs. As a result, the
gross margin earned by retail pharmacies on the PBM transactions is
lower on average than for cash-paying customers.[Footnote 23]
We estimate that these PBM discounted prices are higher on average than
the pharmacies‘ cost to acquire these drugs. Retail pharmacies
typically purchase drugs from intermediary wholesale distributors and,
to a lesser extent, from drug manufacturers directly. Because no data
source exists to identify pharmacies‘ actual acquisition costs for
drugs, we used the wholesale acquisition cost (WAC) and added a mark-up
of 3 percent to estimate pharmacy acquisition costs for drugs purchased
from wholesalers.[Footnote 24] Accordingly, for the three FEHBP plans
we reviewed, we estimate that the prices that the PBMs paid to retail
pharmacies provided an average margin of about 8 percent above the
pharmacies‘ average acquisition costs for 10 brand drugs we reviewed.
[Footnote 25],[Footnote 26] These estimated margins on the drugs do not
reflect a drug store‘s profit on drug sales because store overhead and
dispensing costs are not deducted.[Footnote 27] They also do not
reflect the costs of drugs when purchased directly from manufacturers
rather than wholesalers nor any rebates or discounts that pharmacies
may receive from suppliers or manufacturers. Moreover, because WAC is
an average of prices charged by manufacturers to multiple purchasers,
it may not accurately reflect the acquisition costs for any
individual retail pharmacy.
PBM Transactions Require Additional Administrative Tasks and Incur
Higher Processing Costs for Retail Pharmacies:
PBM and other third-party transactions require pharmacy staff to
undertake tasks not associated with cash-paying customer transactions,
such as submitting claims electronically, responding to prior
authorization requests, contacting physicians to approve formulary drug
substitutions, and responding to patients‘ questions about their health
plan benefits. Pharmacists and pharmacy association representatives we
interviewed indicated that the administrative requirements imposed by
FEHBP-participating PBMs are generally similar to those imposed by PBMs
associated with other health plans. Several studies have found that
pharmacy staff spent significant time addressing third-party payment
issues. For example, based on surveys of 201 retail pharmacies, one
consultant found that 20 percent of pharmacy staff time was spent on
activities directly related to third-party issues.[Footnote 28] A
synthesis of multiple studies concluded that third-party prescriptions
cost from $0.36 to $1.55 more than cash transactions to
process.[Footnote 29]
Compared to larger chain pharmacies, independent pharmacies may find
PBM processing tasks particularly burdensome or costly. For example,
independent pharmacies may be more likely to use pharmacists to process
third-party transactions because they tend to have fewer other staff
available, such as pharmacy technicians and clerks, according to a
retail pharmacy association official. One study found that the average
labor cost to process third-party prescriptions that required pharmacy
staff intervention (such as responding to an initial claim denial) was
44 percent higher for an independent than a chain pharmacy. This study
attributes the higher costs to the independent pharmacy‘s greater
reliance on pharmacists for performing certain third-party processing
tasks.[Footnote 30]
PBMs Use Financial and Other Incentives to Steer Retail Pharmacy
Customers to Mail-Order Programs:
PBMs may also attempt to steer some enrollees away from retail
pharmacies to their mail-order pharmacies. Two of the PBMs we reviewed
send letters to some enrollees who purchase medications at a retail
pharmacy informing them that their costs under the mail-service
pharmacy program would be lower. These letters may include forms to
facilitate the transfer of the prescription from the retail to the
mail-order pharmacy. In 2001, the three FEHBP plans we reviewed
dispensed 21 percent of all prescriptions through mail order, a higher
share than the industry average. Nationally, a growing but still small
share of prescription drugs is dispensed through mail-order pharmacies-
-about 5 percent of prescriptions and 17 percent of prescription sales
in 2001.[Footnote 31]
Most Pharmacies Participate in PBMs‘ Retail Networks:
Most licensed pharmacies participate in the FEHBP PBMs‘ retail pharmacy
networks, in part because PBMs represent such a substantial market
share-nearly 200 million Americans in 2001.[Footnote 32] Plan and PBM
representatives noted that access to these enrollees benefits retail
pharmacies by increasing traffic in the stores and thus sales of
prescriptions and nonprescription items. According to NACDS,
nonprescription sales nationally accounted for 5 percent of total sales
for independent pharmacies and 39 percent of total sales for chain
pharmacies in 2001.[Footnote 33] However, pharmacy association
representatives report that PBMs‘ large market shares leave many retail
pharmacies with little leverage in negotiating with PBMs. These
officials indicate that retail pharmacies may have to ’take or leave“ a
PBMs‘ proposed contract with actual negotiations only occurring in
instances when a large chain will not accept the contractual terms or
an independent pharmacy without nearby competitors in a rural area must
be included to meet health plans‘ access requirements. While it is
difficult to assess how frequently these situations occur, chain
pharmacies constituted 37 percent of all retail pharmacies and the top
four chain drugs stores accounted for 30 percent of all pharmacy sales
in 2000, according to NACDS.[Footnote 34]
PBMs Received Compensation from Plans and Payments from Manufacturers
for Their FEHBP Business:
PBMs received compensation directly from FEHBP plans for administrative
services and drug costs as well as payments from pharmaceutical
manufacturers. (See fig. 3.) PBM earnings from administrative fees and
payments for mail-order drugs paid by the plans we reviewed varied
depending on contractual arrangements. In addition, the PBMs we
reviewed varied as to whether they retained a portion of drug
manufacturer rebates associated with the FEHBP contracts, and all the
PBMs received other rebates or payments from drug manufacturers.
Figure 3: Overview of PBMs‘ Compensation and Payment Sources:
[See PDF for image]
[End of figure]
Note: The extent to which a PBM receives compensation and payments from
any one of these sources varies based on its contractual arrangements
with plans and manufacturers. For example, some PBMs may contract with
a separate entity to provide mail-order services.
Specifically, the PBMs we reviewed received administrative fees,
payments for drugs, and manufacturer rebates for their FEHBP business.
They also received other rebates or payments from drug manufacturers
based on their entire line of business with a particular manufacturer.
Administrative fees. PBMs charged plans fees for a broad range of
clinical and administrative services, including utilization reviews,
prior authorization, formulary development and compliance, claims
processing, and reporting. Administrative fees for plans we reviewed
varied but on average accounted for about 1.5 percent of total plan
drug spending in 2001.
Payments for Retail and Mail-Order Drugs. PBMs we reviewed retained
little or no revenue from plan payments for retail drug costs and
dispensing fees because they were largely passed through to retail
pharmacies.[Footnote 35] While not disclosing their acquisition costs
for mail-order drugs, PBM officials said that plan payments were
somewhat higher than their payments to pharmaceutical manufacturers for
mail-order drugs. Using the average manufacturer price (AMP) as a proxy
for PBMs‘ mail-order acquisition costs,[Footnote 36] we estimate that
the discounted price for mail-order drugs that plans and enrollees paid
were on average higher than the estimated mail-order acquisition cost
for some (but not all) brand-name drugs and all generic drugs that we
reviewed. On average, the AMP was about 2 percent below the plan prices
for 7 of the 14 brand-name drugs we reviewed but about 3 percent higher
than the plan prices for the other 7 brand-name drugs. The AMP was
below plan prices for all four generic drugs we reviewed.
Rebates. PBMs shared with the FEHBP plans certain rebates that a drug
manufacturer provides a PBM associated with their FEHBP business,
although the extent to which the PBMs retained a portion of these
rebates varied, depending on the contracts negotiated between the plans
and PBMs. We estimate the rebates retained by the PBMs we reviewed
represented less than half of one percent of total plan drug spending.
The plans we reviewed varied as to whether they reimbursed PBMs
separately for administrative services in exchange for a larger share
of contractual rebates or they received less of the contractual rebates
and were charged low or no fees for administrative services.
PBMs also received other manufacturer rebates or payments for services
based on their total volume of a particular manufacturer‘s drugs sold
through FEHBP plans and other plans. For example, one PBM we reviewed
earned additional manufacturer rebates for its efforts to increase drug
manufacturers‘ share of certain products. The PBMs also received fees
from manufacturers for various services, such as encouraging physicians
to change prescribing patterns, educational services to enrollees
regarding compliance with certain drug regimens, and data reporting
services. These rebates and other payments were a large portion of
PBMs‘ earnings, according to PBM officials and industry experts, but
the actual amounts were undisclosed because they are proprietary.
Public financial information suggests that manufacturer payments are
important sources of earnings. For example, in financial reports
submitted to the SEC, two of the PBMs we reviewed stated that
manufacturer rebates and fees were key to their profitability.[Footnote
37]
Concluding Observations:
PBMs are central to most FEHBP plan efforts to manage their
prescription drug benefits, and PBMs have helped the FEHBP plans we
reviewed reduce what they would likely otherwise pay in prescription
drug expenditures while generally maintaining wide access to most
retail pharmacies and drugs. As the cost of prescription drugs
continues to increase, FEHBP plans are likely to encourage PBMs to
continue to leverage their purchasing power with drug manufacturers and
retail pharmacies and pass on the savings to the plans and their
enrollees. However, attempts to achieve additional cost savings can
involve trade-offs for plan enrollees. For example, additional savings
through formulary management can accrue if more restrictive formularies
are used, but enrollees would likely have unrestricted access to fewer
drugs. Similarly, retail pharmacies may be willing to provide deeper
discounts as part of smaller, more selective retail pharmacy networks.
Smaller networks have the potential to draw more enrollees into
participating stores but offer enrollees access to fewer retail
pharmacies. OPM, FEHBP plans, and PBMs must balance these trade-offs in
designing affordable and accessible prescription drug benefits for
federal employees.
Agency and Other Comments and Our Evaluation:
We provided a draft of this report to OPM, the three plans and three
PBMs we reviewed, two pharmacy associations (NACDS and NCPA), and two
independent expert reviewers.
In written comments, OPM generally concurred with our findings. OPM
highlighted the advantages and trade-offs associated with FEHBP plans‘
use of PBMs in providing affordable drug benefits and providing
enrollees with access to prescription drugs. Appendix II contains OPM‘s
comments.
The plans and PBMs reviewed the report for the accuracy of information
regarding their arrangements and provided technical comments regarding
information we reported about them, which we incorporated as
appropriate. Two independent external experts on pharmaceutical drug
pricing who were not affiliated with PBMs, pharmacies, or drug
manufacturers indicated that the draft was fair and balanced. They also
provided technical comments that we incorporated as appropriate.
In oral comments, NACDS‘ Vice President for Policy and Programs
expressed strong concerns, particularly focusing on the scope of our
work, and NCPA‘s Senior Vice President for Government Affairs and
General Counsel separately informed us that he generally concurred with
NACDS‘ comments. NACDS‘ concerns included the following:
* Our draft did not adequately address the overall PBM industry and how
it operates, including special economic relationships that may exist
between some drug manufacturers and PBMs. The NACDS representative
stated that these relationships create incentives for PBMs to encourage
use of certain manufacturers‘ drugs even if they are more costly to the
plan or enrollees. As we noted in the draft, we were asked to examine
the role of PBMs specifically for FEHBP-participating plans and
enrollees, not the PBM industry in general. While the savings we report
through discounts, rebates, and certain interventions do not reflect
whether PBMs encourage higher-cost drugs, the FEHBP plans we reviewed
informed us they believed they saved money from using PBMs.
Relationships between PBMs and manufacturers and pharmacies for other
plans were beyond the scope of this report. In response to the concern
about PBMs‘ influence on drug switching, we added information based on
two PBMs‘ filings with the SEC regarding an ongoing Department of
Justice investigation of certain PBMs‘ relationships with
pharmaceutical manufacturers and retail pharmacies.
* The draft report did not include information about all three plans‘
use of generic drugs, which is one means to reduce the overall cost of
the drug benefit. In the draft report, we addressed savings PBMs
achieve through direct interventions to switch from a prescribed brand
drug to a generic, as opposed to overall generic use rates, which are
affected by other factors such as plans‘ benefit designs. To clarify
our findings, we added information on the relative use of generic drugs
among the retail and mail order pharmacy services for the plans we
reviewed.
* Our finding that the PBMs we reviewed retained little or no
compensation from the payments they receive from plans for retail drugs
because they pass these payments on in total to the retail pharmacies
seemed inconsistent with NACDS‘ experience. While PBMs‘ contractual
arrangements with other plans may differ, the contractual arrangements
with the FEHBP-participating plans we reviewed resulted in the PBMs
passing through to the retail pharmacies the entire payment that they
receive from the plans.
* Our estimate that retail pharmacies‘ drug acquisition costs are on
average about 8 percent below the payments they receive from the FEHBP
plans we reviewed implies this is a profit and does not adequately
acknowledge overhead costs. Our draft report stated that this estimated
margin does not reflect a retail drug store‘s profit because it does
not include overhead costs nor certain other savings that may be
available to some drug stores. We revised the report to better clarify
this point and added information regarding NACDS‘ and other recent
studies‘ estimates of overhead costs for retail pharmacies on a per
prescription basis.
We are sending copies of this report to the Director of the Office of
Personnel Management, appropriate congressional committees, and other
interested parties. We will also make copies available to others upon
request. This report is also available at no charge on GAO‘s Web site
at http://www.gao.gov.
If you or your staff have any questions, please call me at (202) 512-
7118. Another contact and key contributors to this assignment are
listed in appendix III.
Sincerely yours,
signed by Kathryn G. Allen:
Kathryn G. Allen
Director, Health Care--Medicaid
and Private Health Insurance Issues:
[End of section]
Appendix I: Scope and Methodology:
We examined the use of pharmacy benefit managers (PBM) by three Federal
Employees Health Benefits Program (FEHBP) plans: Blue Cross and Blue
Shield (BCBS), Government Employees Hospital Association (GEHA), and
PacifiCare of California. Together, these plans accounted for about 55
percent of the 8.3 million people covered through FEHBP plans as of
July 2002 and represented various plan types and PBM
contractors.[Footnote 38] BCBS contracted with the two largest PBMs in
the United States, Medco Health Solutions and AdvancePCS, for its
pharmacy benefit services. GEHA contracted with Medco Health Solutions
and PacifiCare of California contracted with Prescription Solutions,
another subsidiary of PacifiCare Health Systems.
We reviewed contracts between the PBMs and plans, financial statements
regarding payments made between the plans and PBMs, and retail and
mail-order prices for selected drugs from the FEHBP plans we reviewed
and the PBMs with which they contracted. We also obtained pricing
information from retail pharmacies, interviewed officials at the Office
of Personnel Management (OPM), the federal agency responsible for
administering FEHBP, and associations representing PBMs and retail
pharmacies, and reviewed studies regarding the use of PBMs and
prescription drug payments.
Specifically, to assess the drug discount savings PBMs achieved, we
selected 18 drugs that were among the drugs with the highest
expenditures or number of prescriptions dispensed based on data
reported by the plans. Combined, these 18 high-volume/high-expenditure
drugs represented 12 percent of all prescriptions dispensed to
enrollees of the selected FEHBP plans and 16 percent of total plans‘
drug expenditures in 2001. In selecting these drugs, we also sought to
ensure a distribution of generic and brand drugs for a range of
treatment conditions sold by different drug manufacturers. Table 4
lists the drugs included in our price comparisons.
Table 4: Selected High-Volume or High-Expenditure Drugs for 3 FEHBP
Plans:
Drug name (strength) and dosage form: Brand; Condition for which drug
is used[A]: [Empty].
Drug name (strength) and dosage form: Aciphex (20 mg), tablets;
Condition for which drug is used[A]: Ulcers.
Drug name (strength) and dosage form: Allegra (180 mg), tablets;
Condition for which drug is used[A]: Allergies.
Drug name (strength) and dosage form: Celebrex (200 mg), capsules;
Condition for which drug is used[A]: Arthritis.
Drug name (strength) and dosage form: Celexa (20 mg), tablets;
Condition for which drug is used[A]: Depression.
Drug name (strength) and dosage form: Claritin (10 mg), tablets;
Condition for which drug is used[A]: Allergies.
Drug name (strength) and dosage form: Fosamax (70 mg), tablets;
Condition for which drug is used[A]: Osteoporosis.
Drug name (strength) and dosage form: Lipitor (10 mg), tablets;
Condition for which drug is used[A]: Cholesterol.
Drug name (strength) and dosage form: Lotensin (20 mg), tablets;
Condition for which drug is used[A]: High blood pressure.
Drug name (strength) and dosage form: Norvasc (5 mg), tablets;
Condition for which drug is used[A]: High blood pressure.
Drug name (strength) and dosage form: Paxil (20 mg), tablets; Condition
for which drug is used[A]: Depression.
Drug name (strength) and dosage form: Premarin (0.625 mg), tablets;
Condition for which drug is used[A]: Osteoporosis.
Drug name (strength) and dosage form: Prevacid (30 mg), capsules;
Condition for which drug is used[A]: Ulcers.
Drug name (strength) and dosage form: Prilosec (20 mg), capsules;
Condition for which drug is used[A]: Ulcers.
Drug name (strength) and dosage form: Zocor (20 mg), tablets; Condition
for which drug is used[A]: Cholesterol.
Drug name (strength) and dosage form: Generic; Condition for which drug
is used[A]: [Empty].
Drug name (strength) and dosage form: Albuterol (90 mcg), aerosol;
Condition for which drug is used[A]: Asthma.
Drug name (strength) and dosage form: Atenolol (50 mg), tablets;
Condition for which drug is used[A]: High blood pressure.
Drug name (strength) and dosage form: Furosemide (40 mg), tablets;
Condition for which drug is used[A]: High blood pressure.
Drug name (strength) and dosage form: Hydrocodone with Acetaminophen
(5-500 mg), tablets; Condition for which drug is used[A]: Pain.
Source: Rx List at http://www.rxlist.com/.
[A] These drugs may also be used be used to treat conditions other than
those listed in the table.
[End of table]
At our request, the plans provided prices paid as of April 2002 for the
most common strength, dosage form, and quantity dispensed for these
drugs at retail pharmacies (typically, a 30-day supply) and at mail-
order pharmacies (typically, a 90-day supply).[Footnote 39] Prices
represent the plan and enrollees‘ share of the drug ingredient cost--
expressed as a discount from an industry standard price such as the
average wholesale price (AWP)[Footnote 40] or maximum allowable cost
(MAC)[Footnote 41]--plus a dispensing fee. We did not independently
verify the accuracy of these plan-reported prices.
To compare prices negotiated with PBMs for retail and mail-order
prescriptions to cash prices a customer without third-party coverage
would pay at retail pharmacies, we surveyed 36 pharmacies in
California, North Dakota, Washington, D.C., and the Virginia and
Maryland suburbs of Washington, D.C., from April 18 through April 30,
2002. We selected the locations to be geographically diverse,
specifically including California because it is the only state in which
PacifiCare of California operates, North Dakota to include a state with
a low population density, and the Washington, D.C., metropolitan area
because it includes a large number of FEHBP enrollees. We randomly
selected 12 pharmacies in each of these areas, including both large
chain pharmacies and independent or small chain pharmacies. We
determined that each of the pharmacies surveyed participated in the
retail networks for each of our selected FEHBP plans serving that area.
From each pharmacy, we obtained prices for a 30-day supply of the 18
selected drugs. These prices are applicable only to the pharmacies
surveyed and at the time they were obtained.
We also compared prices plans paid to retail and mail-order pharmacies
to the pharmacies‘ estimated acquisition costs. Retail pharmacies
typically purchase drugs from intermediary wholesale distributors and-
-to a lesser extent--drug manufacturers, while PBM-owned mail-order
pharmacies more typically purchase drugs from manufacturers. Since no
data source exists to identify pharmacy acquisition costs, we estimated
retail pharmacies‘ acquisition costs for drugs purchased from
wholesalers using the wholesale acquisition prices (WAC) reported in
Red Book, a compilation of drug pricing data published by Medical
Economics Company, Inc., as of April 2002.[Footnote 42] We added 3
percent to WAC to estimate the wholesalers‘ margin, based on
information provided by retail pharmacy officials. To estimate mail-
order pharmacies‘ acquisition costs for drugs purchased directly from
drug manufacturers, we used industry-reported and confidential average
manufacturers‘ price information (AMP) obtained from the Centers for
Medicare & Medicaid Services. We selected WAC and AMP prices for our 18
selected drugs using the most common national drug code reported by the
plans for reimbursing retail and mail-order prescription
claims.[Footnote 43] The acquisition costs we have estimated cannot be
generalized beyond the drugs we reviewed. Also, the acquisition costs
we reported are based on averages for the drugs we reviewed, and
individual pharmacies or mail-order operations may have higher or lower
acquisition costs.
To assess enrollee access to prescription drugs, we compared the number
of retail pharmacies in the plans‘ retail pharmacy networks to the
total number of licensed retail pharmacies in California, the District
of Columbia, Maryland, North Dakota, and Virginia. To examine the
breadth and depth of each plan‘s formulary, we compared each plan‘s
formulary to the National Formulary developed by the Department of
Veterans Affairs (VA). Although the VA formulary was designed for the
veteran-specific population, it is considered by the Institute of
Medicine as not overly restrictive based on its comparison with other
formularies and clinical literature.[Footnote 44] We obtained the
National Formulary from the VA‘s Pharmacy Benefits Management Strategic
Healthcare Group. The VA formulary contains approximately 1,200 items,
including generic, brand name, and over-the-counter drugs, devices, and
supplies. We requested that VA officials remove devices, supplies, and
drugs that are usually prescribed on an in-patient basis or are
available over-the-counter because the FEHBP plans we reviewed cover
inpatient drugs as part of the hospital benefit and do not cover drugs
available over-the-counter. The resulting list included 513 outpatient
prescription drugs representing 162 therapeutic classes. To examine the
breadth and depth of each plan‘s formulary relative to these outpatient
prescription drugs from the VA formulary, we determined whether each of
the drugs and therapeutic classes included on the list of drugs drawn
from the VA formulary was also included on each of the plan
formularies. Each plan also provided us with examples of
therapeutically equivalent drugs included on the plan‘s formulary for
drugs that did not have an exact match on the VA formulary list. We
considered a VA therapeutic class to be included on a plan formulary if
at least one of the VA drugs in that class or a therapeutically
equivalent drug was listed in the plan formulary. For VA therapeutic
classes not included on a plan formulary, we used National Institutes
of Health and Medco Health Solutions on-line databases to analyze the
types of medical conditions treated by the excluded drugs within these
classes.
[End of section]
Appendix II: Comments from the Office of Personnel Management:
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT WASHINGTON, DC 20415-1000:
Ms. Kathryn G. Allen:
Director, Health Care --Medicaid and Private Health Insurance Issues
U.S. General Accounting Office Washington, D.C. 20548:
Dear Ms. Allen:
Thank you for the opportunity to comment on draft report FEDERAL
EMPLOYEES‘HEALTH BENEFITS: Effects of Using Pharmacy Benefit Managers
on Health Plans, Enrollees, and Pharmacies (GAO-03-196).
We have always believed our health plans‘ private sector Pharmacy
Benefit Management (PBM) partners help our health plans provide
affordable drug benefits that meet our enrollees‘ needs and help keep
costs down. I was pleased to see you determined that PBMs do help keep
costs down while offering excellent access to prescriptions for our
consumers. We understand and agree that PBMs add administrative costs,
but that they are not excessive.
The President‘s health care agenda is based on patient-centered health
care, preservation of choice and excellent quality. The Federal
Employees Health Benefits (FEHB) Program is a competitive model and
health plans offer the benefits that they believe their current
enrollees want and that would also be attractive to prospective
enrollees. Our consumers are also price sensitive, so health plans make
efforts to offer their benefit packages at affordable prices. FEHB is
market-driven - aspects of the insurance industry that work in the
private sector are also reflected in the FEHB Program. Many private
sector employers take advantage of the opportunities offered through
the use of PBMs.
Your review of PBMs in the FEHB Program rightly points out the
advantages of PBMs as well as the trade-offs. Our Federal consumers
have come to expect convenient and easy-to-use pharmacy benefits
programs that offer abroad range of affordable prescription drugs. The
role of the Office of Personnel Management (OPM) as a purchaser is to
balance our consumers‘ expectations for comprehensive benefits against
cost implications and marketplace realities. We believe our traditional
private-sector partnerships have allowed us to deliver the goods and
services our consumers want and to help keep the FEHB Program on the
cutting-edge of employer-sponsored benefit programs.
It should be pointed out that OPM‘s reliance on the private sector is
fundamental. The private sector PBMs must generate income above actual
costs in order to stay in business, as is the case in any market. That
is why, for example, net pharmacy acquisition costs are incorporated
into the negotiated price health plans pay for the services offered by
PBMs. The fundamentals of the market place also contribute to the
reasons why some pharmacies devote more resources to managing their
PBM business than others do. Likewise, the customer service component
of each type of vendor plays a big role in building customer business
and retention.
We have also provided comments on several technical issues related to
the draft report in the enclosure.
Thank you, again, for the opportunity to comment.
Sincerely,
Signed by Kay Coles James:
Kay Coles James
Director:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
John Dicken (202) 512-7043:
Acknowledgments:
The following staff made important contributions to this report:
Rashmi Agarwal, Randy Dirosa, Betty Kirksey, Carmen Rivera-Lowitt, and
Annesha White.
[End of section]
Related GAO Products:
VA and DOD Health Care: Factors Contributing to Reduced Pharmacy Costs
and Continuing Challenges. GAO-02-969T. Washington, D.C.:
July 22, 2002.
Medicare Outpatient Drugs: Program Payments Should Better Reflect
Market Prices. GAO-02-531T. Washington, D.C.: March 14, 2002.
Prescription Drugs: Prices Available Through Discount Cards and From
Other Sources. GAO-02-280R. Washington, D.C.: December 5, 2001.
Medicare: Payments for Covered Outpatient Drugs Exceed Providers‘ Cost.
GAO-01-1118. Washington, D.C.: September 21, 2001.
VA Drug Formulary: Better Oversight Is Required, but Veterans Are
Getting Needed Drugs. GAO-01-183. Washington, D.C.: January 29, 2001.
Prescription Drugs: Adapting Private Sector Management Methods for a
Medicare Benefit. GAO/T-HEHS-00-112. Washington, D.C.: May 11, 2000.
Prescription Drug Benefits: Applying Private Sector Management Methods
to Medicare. GAO/T-HEHS-00-84. Washington, D.C.: March 22, 2000.
Pharmacy Benefit Managers: FEHBP Plans Satisfied With Savings and
Services, but Retail Pharmacies Have Concerns. GAO/HEHS-97-47.
Washington, D.C.: February 21, 1997.
FOOTNOTES
[1] William M. Mercer Incorporated, Mercer/Foster Higgins National
Survey of Employer-Sponsored Health Plans 2001, (New York: 2002).
[2] BCBS and GEHA are fee-for-service plans, while PacifiCare of
California is a health maintenance organization (HMO).
[3] OPM has overall administrative responsibility for FEHBP and
authority to contract with private plans, including fee-for-service
insurers and HMOs, to operate the program. As of July 2002, OPM had
contracts with 183 participating plans.
[4] These prices represent the combined enrollee and plan portion paid.
[5] Cash prices refer to the price paid for a prescription without any
insurance or other third-party coverage.
[6] 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.
[7] We used the VA formulary as a benchmark for comparison because the
Institute of Medicine has determined that it is not overly restrictive.
The IOM committee also concluded that the VA formulary is in some
respects more but in many respects less restrictive than other public
or private formularies. See David Blumenthal and Roger Herdman editors,
VA Pharmacy Formulary Analysis Committee, Division of Health Care
Services, Institute of Medicine, Description and Analysis of the VA
National Formulary (National Academy Press, Washington, D.C.: 2000).
[8] In addition to greater discounts, mail-order programs also save
money for plans because only one dispensing fee is assessed for a
typical 90-day supply of drugs rather than three dispensing fees for
each of three 30-day supplies at retail pharmacies. Accounting for the
dispensing fee savings for a 90-day supply, effective average discounts
from cash-paying customer prices rise slightly from 27.3 to 27.7
percent for the selected brand drugs and from 52.5 to 59.1 percent for
the selected generic drugs. Two of the three plans we reviewed limit
coverage for prescriptions dispensed at retail pharmacies to a 30-day
supply. The third plan limits coverage for retail prescriptions up to
an initial 34-day supply but allows up to a 90-day supply for
subsequent prescriptions under its lower option; it allows 90-day
supplies for all prescriptions under its higher option. We did not
survey retail pharmacies for drug prices for a 90-day supply.
[9] Medicaid reimbursement and cash-paying customer prices are for
California, North Dakota, Washington, D.C., and the Virginia and
Maryland suburbs of Washington, D.C.
[10] Under FEHBP, plans may negotiate rebates as part of contractual
agreements with PBMs. In contrast, as a condition of Medicaid coverage
for outpatient drugs, manufacturers are required to provide state
Medicaid programs with certain rebates. For brand name drugs, Medicaid
rebates must be a minimum of 15.1 percent of the average manufacturers‘
price (AMP). For the 14 brand name drugs we reviewed, we estimate that
the minimum Medicaid rebate would reduce costs by an average of at
least 12 percent. For generic drugs, Medicaid rebates must equal 11
percent of the AMP, which we estimate would reduce costs by an average
of about 2 percent for the 4 generic drugs we reviewed. Moreover,
states may negotiate additional rebates with manufacturers in order to
reduce costs.
[11] Plans did not have estimates for all of their intervention
techniques.
[12] Savings from concurrent utilization review may be reduced if an
enrollee subsequently obtains a prescription or refill. One PBM
estimated savings for claims denied for early refills only if a refill
had not been obtained within 14 days.
[13] While plans reported savings from therapeutic interchange,
concerns have been raised that in some cases PBMs‘ relationships with
manufacturers and retail pharmacies influence PBM interventions, such
as substituting higher-cost drugs when lower-cost therapeutic
equivalent drugs are available. Medco Health Solutions and Advance PCS
filings with the SEC indicate that the Department of Justice is
undertaking an industrywide investigation to examine PBM relationships
with pharmaceutical manufacturers and retail pharmacies and PBMs‘
programs related to drug formulary compliance, which includes rebates
and other payments made by manufacturers to PBMs. The SEC filings show
that the Department of Justice is also investigating payments made by
PBMs to retail pharmacies or others in connection with PBM
interventions.
[14] The states are California, the District of Columbia, Maryland,
North Dakota, and Virginia. Estimates of pharmacy participation rates
are approximate because of ongoing changes in the number of pharmacies
licensed in each state and included in each PBM network and because PBM
retail pharmacy networks may include a small number of nonretail
pharmacies, such as hospital pharmacies. In 2002, BCBS began offering a
basic option to FEHBP enrollees that includes about 70 percent as many
pharmacies nationwide as the BCBS standard option but still meets
contractual standards for a retail pharmacy to be located within a few
miles of nearly all basic option enrollees. More than 200,000 people
are in BCBS‘s basic option compared to about 3.8 million people in the
standard option.
[15] Formularies may be developed by the plan with suggestions for
changes from a PBM, or entirely by a PBM and used by the plan. BCBS and
PacifiCare designed their own formularies, while GEHA used a formulary
developed by Medco Health Solutions. Decisions on inclusion of drugs in
a formulary are typically made by a pharmacy and therapeutics committee
composed of physicians and pharmacists. Plan officials and documents
described such committees as being designed to evaluate the safety,
efficacy, and cost of drugs in all therapeutic categories before
recommending drugs for inclusion on the formulary. Plans we reviewed
had no or few committee members affiliated with the plan or PBM.
[16] See Blumenthal and Herdman, Description and Analysis of the VA
National Formulary.
[17] BCBS excluded from its formulary 7 percent of the VA therapeutic
classes, which contain drugs to treat insect stings, itching, psoriasis
and other skin disorders, erectile dysfunction, certain types of
rheumatoid arthritis, fungal eye infections, lung diseases where mucous
complicates the condition, constipation, and a topical anesthetic and
water inhaler. GEHA excluded from its formulary 2 percent of the VA
therapeutic classes, which contain drugs to treat opiate (e.g., heroin,
morphine) dependence, constipation, and a topical anesthetic.
PacifiCare of California excluded from its formulary 5 percent of the
VA therapeutic classes, which contain drugs to treat various
infections, opiate (e.g., heroin, morphine) dependence, psoriasis and
other skin disorders, erectile dysfunction, and inflamed gingiva.
PacifiCare of California‘s formulary also did not include several
injectable drugs that are covered separately under the plan‘s medical
benefit.
[18] OPM indicates that, in conducting annual negotiations with plans,
it seeks to ensure enrollee access to nonformulary drugs although such
access may involve higher cost sharing requirements.
[19] A plan‘s pharmacy benefit design includes the drugs a plan will
cover through its formulary, the quantities in which drugs will be
dispensed, the sources from which drugs may be obtained, and enrollee‘s
cost-sharing requirements, such as copayments.
[20] For most HMOs, the premium rate is based on rates charged to the
two employer groups closest in size to the plan‘s FEHBP enrollment.
Because these premiums are based on the HMO‘s overall premium setting
strategies and not just the FEHBP claims experience, the extent to
which rebates and other PBM savings for the plan‘s FEHBP business would
yield lower premiums depends on the HMO‘s current market strategies for
setting competitive premiums and passing on lower costs in the form of
lower premiums to FEHBP and similarly sized groups. About 30 percent of
FEHBP enrollees are covered under an HMO plan.
[21] U.S. General Accounting Office, Prescription Drugs: Automated
Prospective Review Systems Offer Potential Benefits for Medicaid, GAO/
AIMD-94-130 (Washington, D.C.:
Aug. 5, 1994).
[22] Contracts called for the PBMs to regularly report to the plans
their actual performance in relation to the standards and usually
provided plans with the right to audit these performance reports and
impose penalties or terminate the contract if PBM performance fell
below the standards. In a few recent instances, financial penalties
were imposed when performance temporarily fell short of a standard. For
example, one PBM paid a penalty of $40,000 for failing to meet the plan
standard concerning call answer time during 2 months of 2001, but the
PBM met the standard during the remainder of the year.
[23] In 2001, about 16 percent of all prescriptions were purchased by
customers who paid the entire cost without any third-party coverage,
and the remainder were paid by customers with third-party payers,
including Medicaid, according to the National Association of Chain Drug
Stores.
[24] WAC is a published, industry-reported measure of the average price
manufacturers charge wholesalers. According to retail pharmacy
representatives, wholesalers sell drugs to retail pharmacists for about
1 to 3 percent above WAC on average. WAC does not include rebates or
discounts manufacturers may offer to wholesalers.
[25] Margins on drugs represent the portion of PBM drug reimbursements
(including dispensing fees) and enrollees‘ share of costs that exceed
the pharmacy‘s acquisition costs for the selected drugs. Retail plan
prices represent 10 of the 14 brand-name drugs we examined because the
wholesale acquisition cost was not available for the other 4 brand-name
drugs. The PBM negotiated prices were also higher than the estimated
acquisition costs for all four generic drugs we reviewed.
[26] The U.S. Department of Health and Human Services Office of
Inspector General recently released estimates of pharmacy acquisition
costs for drugs reimbursed by state Medicaid programs. Using its
approach
to estimate the acquisition costs for the drugs we reviewed would
result
in prices that PBMs paid retail pharmacies providing an average margin
of about 6 percent above the pharmacies‘ average acquisition costs for
the 10 brand drugs and about 14 percent above for the 4 generic drugs.
See Department of Health and Human Services, Office of Inspector
General, Medicaid Pharmacy - Additional Analyses of the Actual
Acquisition Cost of Prescription Drug Products, (Washington, D.C.:
September 2002).
[27] While it was not possible to identify the pharmacies‘ overhead
costs for the 18 drugs we reviewed, recent studies done for the
California and Texas Medicaid programs estimate that the median
dispensing costs for pharmacies participating in these states‘ Medicaid
programs were about $6.95 and $5.95 per prescription, respectively. See
Myers and Stauffer LC, ’Study of Medi-Cal Pharmacy
Reimbursement,“(Missouri: June 2002) and ’Determination of the Cost of
Dispensing Pharmaceutical Prescriptions for the Texas Vendor Drug
Program,“ (Missouri: August 2002). The National Association of Chain
Drug Stores (NACDS) estimates that retail pharmacies‘ dispensing costs
were on average $7.26 per prescription in 2001. See NACDS, The Chain
Pharmacy Industry Profile 2002 (Alexandria, Virginia: 2002).
[28] Arthur Andersen LLP, Pharmacy Activity Cost and Productivity
Study, November 1999.
[29] Richard N. Herrier et al., ’Case Study Using Descriptive Analysis
to Estimate Hidden Costs In Processing Third Party Prescriptions,“
Journal of the American Pharmaceutical Association, 40, no. 5
(September/October 2000). In addition to synthesizing other studies,
this study also conducted time and motion measurement of retail
pharmacies and based on this new research estimated that third-party
prescriptions cost an average of $0.44 to $0.61 more than cash
transactions to process.
[30] Richard N. Herrier, et al.
[31] National Association of Chain Drug Stores, The Chain Pharmacy
Industry Profile, 2002 (Alexandria, VA: 2002).
[32] Independent pharmacies were somewhat less likely to participate in
FEHBP PBM retail networks than chain pharmacies. For example, we found
that all but one of the pharmacies not participating in two PBM retail
networks in the District of Columbia were independent. Similarly, a
2001 survey of pharmacies in Connecticut, New Jersey, New York, and
Pennsylvania by the Pharmaceutical Care Management Association found
independent drug stores somewhat less likely to participate in PBM
retail networks (96.5 percent) than chain drug stores (99.9 percent).
According to a pharmacy industry representative, independent pharmacies
may have fewer staff available to manage third-party transactions and
contracting functions. In addition, certain PBM contract requirements
can pose a challenge, such as requiring the use of computer systems or
software that may be unaffordable to some small, independent
pharmacies, according to another pharmacy industry representative.
[33] National Association of Chain Drug Stores, The Chain Pharmacy
Industry Profile, 2002 (Alexandria, VA: 2002).
[34] National Association of Chain Drug Stores, The Chain Pharmacy
Industry Profile, 2002 (Alexandria, VA: 2002) and Booz Allen Hamilton,
Medicare-endorsed Prescription Drug Card Assistance Initiative,
(McLean, VA: 2002).
[35] The plan and enrollees share the cost of retail drugs, with the
enrollee share paid directly to the retail pharmacy.
[36] The AMP is the average price paid to a drug manufacturer by
wholesalers for prescription drugs distributed to the retail pharmacy
class of trade, after deducting customary prompt pay discounts. AMP was
created by the Omnibus Budget Reconciliation Act of 1990 (Pub. L. No.
101-508, § 4401, 104 Stat. 1388, 1388-156) for determining Medicaid
rebates and is not publicly available. It is calculated by the
manufacturer and submitted to the Centers for Medicare & Medicaid
Services, the federal agency that determines Medicaid rebates.
[37] See AdvancePCS, 10-K Form filed with SEC on June 28, 2002 and
Medco Health Solutions Form S-1, filed with SEC on April 17, 2002. A
10-K Form is an annual report that many for-profit corporations must
file with SEC within 90 days of the close of their fiscal year and a S-
1 Form is a basic registration form that may be used to register a
proposed public offering with SEC. These publicly available documents
contain audited financial statements and other information on a
corporation‘s financial condition.
[38] BCBS and GEHA are fee-for-service plans, while PacifiCare of
California is a health maintenance organization (HMO).
[39] We were unable to obtain the retail and mail-order price for one
drug from one plan because the drug was not available on the plan‘s
formulary at the specified strength.
[40] Drug manufacturers suggest a list price that wholesalers charge
pharmacies. The average of the list prices, collected for many
wholesalers, is called a drug‘s AWP.
[41] MACs represent upper limit prices that an insurer or health plan
will reimburse for generically available or multiple source
medications.
[42] Red Book CD-ROM, vol. 24 (April 2002).
[43] National Drug Codes (NDCs) are the universal product identifiers
for drugs for human use and are unique for each chemical entity, dosage
form, manufacturer, strength, and package size.
[44] See IOM, Description and Analysis of the VA National Formulary.
The IOM used several criteria to assess the restrictiveness of the VA
formulary, including how the VA formulary compares to formularies used
in other public and private health care systems, and how it compares to
reasonableness standards in the literature. The IOM committee also
concluded that the VA formulary is in some respects more but in many
respects less restrictive that other public or private formularies. The
VA formulary does not contain specific types of drugs, such as
pediatric drugs, that typically would be covered by the FEHBP plans we
reviewed.
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