Federal Employees' Health Benefits: Effects of Using Pharmacy	 
Benefit Managers on Health Plans, Enrollees, and Pharmacies	 
(10-JAN-03, GAO-03-196).					 
                                                                 
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 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.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-196 					        
    ACCNO:   A05842						        
  TITLE:     Federal Employees' Health Benefits: Effects of Using     
Pharmacy Benefit Managers on Health Plans, Enrollees, and	 
Pharmacies							 
     DATE:   01/10/2003 
  SUBJECT:   Drugs						 
	     Employee medical benefits				 
	     Federal employees					 
	     Pharmaceutical industry				 
	     Cost analysis					 
	     Health care cost control				 
	     Federal Employees Health Benefits			 
	     Program						 
                                                                 

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GAO-03-196

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

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.

PBM Discounted Prices Compared to Prices for Customers without Third-
Party Coverage, 30- day Supply, April 2002

FEDERAL EMPLOYEES* HEALTH BENEFITS

Effects of Using Pharmacy Benefit Managers on Health Plans, Enrollees, and
Pharmacies

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 196. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Kathryn G. Allen at (202) 512- 7118. Highlights of
GAO- 03- 196, a report to the Honorable Byron L. Dorgan, U. S. Senate

January 2003

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.

Page i GAO- 03- 196 Pharmacy Benefits for Federal Employees Letter 1
Results in Brief 4 Background 6 PBMs Achieved Savings through Price
Discounts, Rebate

Payments, and Managing Drug Use 9 PBMs Provided FEHBP Enrollees Generally
Unrestricted Access to Prescription Drugs, Cost Savings, and Other
Benefits 15 Pharmacies Included in PBM Retail Networks Must Accept
Discounted Prices and Perform Various Administrative Tasks 20 PBMs
Received Compensation from Plans and Payments from Manufacturers for Their
FEHBP Business 25 Concluding Observations 28 Agency and Other Comments and
Our Evaluation 28 Appendix I Scope and Methodology 31

Appendix II Comments from the Office of Personnel Management 36

Appendix III GAO Contact and Staff Acknowledgments 38

Related GAO Products 39

Tables

Table 1: FEHBP Plans and PBMs Reviewed 7 Table 2: FEHBP Plans* Formularies
Compared to VA National Formulary 17 Table 3: Comparison of Enrollee Cost-
Sharing for a 90- day Supply of Retail and Mail- Order Prescription Drugs,
2002 18 Table 4: Selected High- Volume or High- Expenditure Drugs for 3
FEHBP Plans 32 Contents

Page ii GAO- 03- 196 Pharmacy Benefits for Federal Employees Figures

Figure 1: PBM Relationships with Market Participants 8 Figure 2: PBM
Discounted Plan Prices Compared to Cash- Paying Customer Prices for 30-
Day Supplies, April 2002 10 Figure 3: Overview of PBMs* Compensation and
Payment Sources 26 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

Page 1 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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. 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? 1
William M. Mercer Incorporated, Mercer/ Foster Higgins National Survey of
EmployerSponsored Health Plans 2001, (New York: 2002).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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. 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), 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. 4 We compared these prices to cash
prices 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.

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 thirdparty coverage.

Page 3 GAO- 03- 196 Pharmacy Benefits for Federal Employees

 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 6 with the National Formulary for the
Department of Veterans Affairs (VA). 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.

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).

Page 4 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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
Results in Brief

Page 5 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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
mailorder

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
mailorder drugs, PBM officials said that discounted prices paid by the
plans to

Page 6 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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.

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. Background

Page 7 GAO- 03- 196 Pharmacy Benefits for Federal Employees

Table 1: FEHBP Plans and PBMs Reviewed July 2002 Enrollment (percentage of
total FEHBP enrollment) PBMs

BCBS 4,038,671 (48.8) AdvancePCS (retail) Medco Health Solutions (mail
order) GEHA 441,151 (5.3) Medco Health Solutions PacifiCare of California
57,042 (0.7) 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).

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.

Page 8 GAO- 03- 196 Pharmacy Benefits for Federal Employees

Figure 1: PBM Relationships with Market Participants

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.

PBM Health plan

Enrollee Retail pharmacy

Pharmaceutical manufacturer

Administrative services Discounts/ rebates Clinical management

Payment for drugs Administrative fees

Payment for retail drugs Clinical information

Electronic claims Discounted retail drug prices

Mail- order drugs Mail- order drug cost share

Payment for mail- order drugs Clinical programs/ data

Rebates/ fees Discounted mail- order drugs

Source: GAO analysis based on plan and PBM data and literature review.

Page 9 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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.

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. 8 (See fig. 2.) 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. PBMs Achieved

Savings through Price Discounts, Rebate Payments, and Managing Drug Use

PBMs Obtained Discounted Prices Significantly Below Those Paid by Cash-
Paying Customers

Page 10 GAO- 03- 196 Pharmacy Benefits for Federal Employees

Figure 2: PBM Discounted Plan Prices Compared to Cash- Paying Customer
Prices for 30- Day Supplies, April 2002

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 In dollars

0 10

20 30

40 50

60 70

80 90

14 brand- name drugs 4 generic drugs

Average retail price negotiated with PBM for plan and enrollees Average
mail- order price negotiated with PBM for plan and enrollees Average cash-
paying customer price

7.08 88.59

72.85 64.44

14.90 7.86

Source: GAO analysis of plan prices from three FEHBP plans and cash-
paying customer prices at 36 pharmacies in California, North Dakota, and
the Washington, D. C., area.

Page 11 GAO- 03- 196 Pharmacy Benefits for Federal Employees

percent below the average cash price for the selected generic drugs
(compared to 47 percent for the FEHBP plans we reviewed). 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 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. 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

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.
PBMs Further Reduced Plans* Drug Expenditures

by Passing Through Certain Manufacturer Rebates

Page 12 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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.

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. 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. 11 Plans did not have estimates for all of their
intervention techniques. PBM Intervention

Techniques Contributed to Plans* Savings, but Are Difficult to Quantify

Page 13 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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. 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

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.

Page 14 GAO- 03- 196 Pharmacy Benefits for Federal Employees

interchange. These estimates are in addition to savings associated with
rebates plans earned for drugs in the formulary. 13  Generic substitution
involves dispensing less expensive, chemicallyequivalent

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.

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.

Page 15 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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- ofpocket
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.

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. 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

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. PBMs Provided FEHBP Enrollees

Generally Unrestricted Access to Prescription Drugs, Cost Savings, and
Other Benefits

PBMs Provided Enrollees Access to Broad Retail Pharmacy Networks and
Generally Nonrestrictive Drug Formularies

Page 16 GAO- 03- 196 Pharmacy Benefits for Federal Employees

categories. 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. 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. 17 (See table 2.)

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.

Page 17 GAO- 03- 196 Pharmacy Benefits for Federal Employees

Table 2: FEHBP Plans* Formularies Compared to VA National Formulary Plan

Percent of VA formulary drugs included in plan

formulary Percent of VA formulary drugs not

in plan formulary but having a therapeutic

equivalent in plan formulary

Percent of VA formulary*s therapeutic classes covered

by plan formulary a

BCBS 80 16 93 GEHA 97 2 98 PacifiCare of California 79 15 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.

Each plan provided enrollees access to nonformulary drugs, although
sometimes with higher cost sharing requirements. 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.

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

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. PBM Savings Helped

Reduce Enrollees* Costs for Out- of- Pocket Prescription Drug Spending and
Premiums

Page 18 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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 Option Enrollee*s
cost share at retail pharmacy Enrollee*s cost share at mail- order

pharmacy

Standard 25% coinsurance $10 copayment generic $35 copayment brand BCBS

Basic a $30 generic $75 brand Greater of 50% coinsurance or $105 copayment
for nonformulary brand

Mail- order not available High $15 generic

$45 single- source brand c $90 multisource brand d Second and subsequent
refills are greater of 50% coinsurance or applicable copayment

$10 generic $35 single- source brand c $50 multisource brand d GEHA b
Standard $15 copayment generic

50% coinsurance brand $15 copayment generic

50% coinsurance brand PacifiCare of California b HMO $15 copayment generic

$45 copayment brand $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.

Page 19 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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. 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. 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
feefor- 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.

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

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. Enrollees Also
Benefit

from PBM Drug Utilization Review Programs and Customer Service

Page 20 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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. 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. 22 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 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.
Pharmacies Included

in PBM Retail Networks Must Accept Discounted Prices and Perform Various
Administrative Tasks

Page 21 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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 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 cashpaying 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. 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.
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

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. PBMs Reimbursed Retail
Pharmacies Less than

Cash- Paying Customers but Above Estimated Costs

Page 22 GAO- 03- 196 Pharmacy Benefits for Federal Employees

acquisition costs for 10 brand drugs we reviewed. 25 , 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. 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 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
FEHBPparticipating PBMs are generally similar to those imposed by PBMs 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 brandname 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). PBM Transactions Require

Additional Administrative Tasks and Incur Higher Processing Costs for
Retail Pharmacies

Page 23 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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. 28 A synthesis of
multiple studies concluded that third- party prescriptions cost from $0.36
to $1. 55 more than cash transactions to process. 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. 30
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

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. PBMs
Use Financial and

Other Incentives to Steer Retail Pharmacy Customers to Mail- Order
Programs

Page 24 GAO- 03- 196 Pharmacy Benefits for Federal Employees

dispensed through mail- order pharmacies* about 5 percent of prescriptions
and 17 percent of prescription sales in 2001. 31 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. 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. 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. 34 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). Most
Pharmacies

Participate in PBMs* Retail Networks

Page 25 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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. PBMs Received

Compensation from Plans and Payments from Manufacturers for Their FEHBP
Business

Page 26 GAO- 03- 196 Pharmacy Benefits for Federal Employees

Figure 3: Overview of PBMs* Compensation and Payment Sources

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

PBM Enrollee

Retail pharmacy Pharmaceutical

manufacturer Payment for retail drugs

Mail- order drug cost share

Retail drug cost share

Health plan Payment for retail and mail- order drugs

Rebates and other payments

Payment for mail- order drugs Formulary rebates

Administrative fees Source: GAO analysis of plans and PBMs reviewed.

Page 27 GAO- 03- 196 Pharmacy Benefits for Federal Employees

pharmacies. 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* mailorder
acquisition costs, 36 we estimate that the discounted price for mailorder
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

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, S: 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.

Page 28 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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. 37 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 tradeoffs 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.

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*

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 forprofit 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. Concluding Observations

Agency and Other Comments and Our Evaluation

Page 29 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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

Page 30 GAO- 03- 196 Pharmacy Benefits for Federal Employees

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,

Kathryn G. Allen Director, Health Care* Medicaid

and Private Health Insurance Issues

Appendix I: Scope and Methodology Page 31 GAO- 03- 196 Pharmacy Benefits
for Federal Employees

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. 1 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.
1 BCBS and GEHA are fee- for- service plans, while PacifiCare of
California is a health maintenance organization (HMO). Appendix I: Scope
and Methodology

Appendix I: Scope and Methodology Page 32 GAO- 03- 196 Pharmacy Benefits
for Federal Employees

Table 4: Selected High- Volume or High- Expenditure Drugs for 3 FEHBP
Plans Drug name (strength) and dosage form Condition for which drug is

used a Brand Aciphex (20 mg), tablets Ulcers Allegra (180 mg), tablets
Allergies Celebrex (200 mg), capsules Arthritis Celexa (20 mg), tablets
Depression Claritin (10 mg), tablets Allergies

Fosamax (70 mg), tablets Osteoporosis Lipitor (10 mg), tablets Cholesterol
Lotensin (20 mg), tablets High blood pressure Norvasc (5 mg), tablets High
blood pressure Paxil (20 mg), tablets Depression Premarin (0.625 mg),
tablets Osteoporosis

Prevacid (30 mg), capsules Ulcers Prilosec (20 mg), capsules Ulcers Zocor
(20 mg), tablets Cholesterol

Generic Albuterol (90 mcg), aerosol Asthma Atenolol (50 mg), tablets High
blood pressure Furosemide (40 mg), tablets High blood pressure Hydrocodone
with Acetaminophen (5- 500 mg), tablets 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.

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). 2 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) 3 or maximum 2 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. 3 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.

Appendix I: Scope and Methodology Page 33 GAO- 03- 196 Pharmacy Benefits
for Federal Employees

allowable cost (MAC) 4 *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. 5 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 industryreported 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 4
MACs represent upper limit prices that an insurer or health plan will
reimburse for generically available or multiple source medications. 5 Red
Book CD- ROM, vol. 24 (April 2002).

Appendix I: Scope and Methodology Page 34 GAO- 03- 196 Pharmacy Benefits
for Federal Employees

order prescription claims. 6 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. 7 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

6 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. 7 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.

Appendix I: Scope and Methodology Page 35 GAO- 03- 196 Pharmacy Benefits
for Federal Employees

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.

Appendix II: Comments from the Office of Personnel Management Page 36 GAO-
03- 196 Pharmacy Benefits for Federal Employees

Appendix II: Comments from the Office of Personnel Management

Appendix II: Comments from the Office of Personnel Management Page 37 GAO-
03- 196 Pharmacy Benefits for Federal Employees

Appendix III: GAO Contact and Staff Acknowledgments

Page 38 GAO- 03- 196 Pharmacy Benefits for Federal Employees

John Dicken (202) 512- 7043 The following staff made important
contributions to this report: Rashmi Agarwal, Randy Dirosa, Betty Kirksey,
Carmen Rivera- Lowitt, and Annesha White. Appendix III: GAO Contact and
Staff

Acknowledgments GAO Contact Acknowledgments

Related GAO Products Page 39 GAO- 03- 196 Pharmacy Benefits for Federal
Employees

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. Related GAO Products

(290118)

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