Medicare: Sponsors' Management of the Prescription Drug Discount 
Card and Transitional Assistance Benefit (13-JAN-06,		 
GAO-06-299R).							 
                                                                 
The Medicare Prescription Drug, Improvement, and Modernization	 
Act of 2003 (MMA) added a prescription drug benefit to the	 
Medicare program, which became effective January 1, 2006. To	 
assist Medicare beneficiaries with their prescription drug costs 
until the new benefit became available, the MMA also required the
establishment of a temporary program, the Medicare Prescription  
Drug Discount Card and Transitional Assistance Program, which	 
began in June 2004. The drug card program offers Medicare	 
beneficiaries access to discounts off the retail price of	 
prescription drugs at the point of sale. All Medicare		 
beneficiaries, except those receiving Medicaid drug coverage,	 
were eligible to enroll in the drug card program. Certain	 
low-income beneficiaries without other drug coverage qualified	 
for an additional benefit, a transitional assistance (TA) subsidy
that can be applied toward the cost of drugs covered under the	 
drug card program. Drug cards were offered and are managed by	 
private organizations, known as drug card sponsors. General drug 
cards were available to all eligible beneficiaries living in a	 
card's service area; there are both national and regional general
cards. Exclusive and special endorsement drug cards were	 
available to specific beneficiary groups. Some drug card sponsors
offered more than one drug card. The Centers for Medicare &	 
Medicaid Services (CMS)--the agency within the Department of	 
Health and Human Services (HHS) that manages the Medicare and	 
Medicaid programs--administers and oversees the drug card	 
program. In response to a Congressional request, we examined drug
card sponsors' management of the drug card and TA benefit and any
challenges that sponsors experienced in meeting program 	 
requirements. Specifically, we (1) identified how drug card	 
sponsors provided beneficiaries access to discounted drugs and	 
the discounts obtained through these arrangements; (2) reviewed  
how drug card sponsors managed the TA benefit, including the	 
enrollment of low-income beneficiaries and management of the TA  
subsidies; and (3) identified any benefits other than discounts  
on prescription drugs that drug card sponsors provided to	 
beneficiaries.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-299R					        
    ACCNO:   A44837						        
  TITLE:     Medicare: Sponsors' Management of the Prescription Drug  
Discount Card and Transitional Assistance Benefit		 
     DATE:   01/13/2006 
  SUBJECT:   Beneficiaries					 
	     Federal aid programs				 
	     Medicare						 
	     Prescription drugs 				 
	     Program evaluation 				 
	     Program management 				 
	     Health care cost control				 
	     Medicare Prescription Drug Discount Card		 
	     and Transitional Assistance Program		 
                                                                 

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GAO-06-299R

     

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January 13, 2006

The Honorable Henry A. Waxman

Ranking Minority Member

Committee on Government Reform

House of Representatives

Subject: Medicare: Sponsors' Management of the Prescription Drug Discount
Card and Transitional Assistance Benefit

Dear Mr. Waxman:

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) added a prescription drug benefit to the Medicare program, which
became effective January 1, 2006.1 To assist Medicare beneficiaries with
their prescription drug costs until the new benefit became available, the
MMA also required the establishment of a temporary program, the Medicare
Prescription Drug Discount Card and Transitional Assistance Program, which
began in June 2004.2 The drug card program offers Medicare beneficiaries
access to discounts off the retail price of prescription drugs at the
point of sale. All Medicare beneficiaries, except those receiving Medicaid
drug coverage, were eligible to enroll in the drug card program.3 Certain
low-income beneficiaries without other drug coverage qualified for an
additional benefit, a transitional assistance (TA) subsidy that can be
applied toward the cost of drugs covered under the drug card program.4

1Pub. L. No. 108-173, S:101, 117 Stat. 2066, 2071, 2072.

2Pub. L. No. 108-173, S:101, 117 Stat. 2066, 2071, 2131. Throughout this
report, we refer to the Medicare Prescription Drug Discount Card and
Transitional Assistance Program as the drug card program. Beneficiaries
could enroll in the drug card program through December 2005. Beneficiaries
can use their drug cards until the effective date of their enrollment in a
Medicare prescription drug plan or until May 15, 2006, whichever comes
first.

3Not all applicants were eligible to enroll in the drug card program. CMS
established an appeal process for those initially denied eligibility.

4For beneficiaries who qualify for TA, the program offered a subsidy of up
to $600 per year toward the cost of covered drugs. To qualify for TA, a
beneficiary must (1) have had an income at or below 135 percent of the
federal poverty level (FPL) and (2) with certain exceptions, not have had
other prescription drug coverage through Medicaid, an employer-sponsored
group health insurance program, an individual health insurance policy,
TRICARE (the Department of Defense health care program for active-duty
personnel, retirees, and their dependents), or the Federal Employees
Health Benefits Program. TA funds available to beneficiaries in 2004 and
2005 can be used until the effective date of their enrollment in a
Medicare prescription drug plan or until May 15, 2006, whichever comes
first.

Drug cards were offered and are managed by private organizations, known as
drug card sponsors. General drug cards were available to all eligible
beneficiaries living in a card's service area; there are both national and
regional general cards.5 Exclusive and special endorsement drug cards were
available to specific beneficiary groups.6 Some drug card sponsors offered
more than one drug card. The Centers for Medicare & Medicaid Services
(CMS)-the agency within the Department of Health and Human Services (HHS)
that manages the Medicare and Medicaid programs-administers and oversees
the drug card program.

In response to your request, we examined drug card sponsors' management of
the drug card and TA benefit and any challenges that sponsors experienced
in meeting program requirements. Specifically, we (1) identified how drug
card sponsors provided beneficiaries access to discounted drugs and the
discounts obtained through these arrangements; (2) reviewed how drug card
sponsors managed the TA benefit, including the enrollment of low-income
beneficiaries and management of the TA subsidies; and (3) identified any
benefits other than discounts on prescription drugs that drug card
sponsors provided to beneficiaries.7

To address these objectives, we focused our work on general drug cards;
our work did not include exclusive or special endorsement cards. We
interviewed staff from 7 of 32 general drug card sponsors.8 We
judgmentally selected the drug card sponsors we interviewed. They
represented a mix of national and regional cards; varied in terms of total
enrollment, TA enrollment, and number of beneficiary complaints received
by CMS; and reflected different organization types (for example, pharmacy
benefit managers (PBM),9 health insurers, and managed care organizations).
We also interviewed CMS officials, staff from six CMS contractors that
have assisted with key program oversight activities, officials from HHS's
Office of Inspector General (OIG), and staff from selected pharmacy and
pharmacist associations.10 Additionally, we reviewed relevant documents
from drug card sponsors, CMS, and CMS contractors, such as drug card
sponsor applications, CMS guidance, and CMS contractor reports. Data from
CMS and CMS contractors reflected the most recent available as of November
2005. We conducted our work from April 2005 through January 2006 in
accordance with generally accepted government auditing standards.

5National cards provide beneficiaries access to discounts at pharmacies
nationwide, while regional cards offer discounts at pharmacies within a
smaller geographic area-an entire state at a minimum.

6Exclusive cards are cards that Medicare managed care plans offered only
to their plan enrollees. (Some Medicare managed care plans also offered
general cards open to all eligible beneficiaries, not just those enrolled
in their plans.) Special endorsement cards serve residents of long-term
care facilities such as skilled nursing facilities; U.S. territory
residents; and American Indians and Alaskan Natives who use Indian Health
Service, Indian Tribe and Tribal Organization, and Urban Indian
Organization pharmacies.

7We have conducted other work related to this topic. See GAO, Medicare:
CMS's Implementation and Oversight of the Medicare Prescription Drug
Discount Card and Transitional Assistance Program,  GAO-06-78R
(Washington, D.C.: Oct. 28, 2005) and Medicare: CMS's Beneficiary
Education and Outreach Efforts for the Medicare Prescription Drug Discount
Card and Transitional Assistance Program,  GAO-06-139R (Washington, D.C.:
Nov. 18, 2005).

8Included in the 32 sponsoring organizations are affiliated organizations,
such as 11 individual Blue Cross and Blue Shield entities that are counted
as one organization.

9Pharmacy benefit managers manage prescription drug benefits for
third-party payers, such as employer-sponsored health plans and other
health insurers.

Results in Brief

Drug card sponsors generally built on existing arrangements that they, or
their partner PBMs, had with drug manufacturers and pharmacies to provide
beneficiaries access to discounted drugs. Drug card sponsors we
interviewed generally reported little difficulty obtaining discounts for
beneficiaries and meeting CMS's requirements to provide pharmacy access
for beneficiaries. Analyses conducted by CMS found that beneficiaries
enrolled in the drug card program could obtain prices that were 12 to 25
percent less than the average retail prices of brand-name drugs.11
Analyses by other research organizations found similar results. Some
program requirements, however, were new and challenging for some drug card
sponsors, or their partner PBMs, to implement. These included providing
drug manufacturer discounts to beneficiaries at the point of sale and
meeting CMS's requirements for reporting detailed data on discounts
obtained from drug manufacturers and pharmacies. To manage the TA benefit,
drug card sponsors generally relied on their prior experience in
administering insurance coverage. Drug card sponsors that we interviewed
reported some challenges with beneficiary enrollment for TA, reconciling
TA subsidy balances with CMS, or both. Drug card sponsors' records of TA
enrollment did not always agree with enrollment data from CMS's
eligibility files, and some sponsors had difficulty maintaining accurate
TA account balances. All of the drug card sponsors we interviewed told us
they provided beneficiaries with at least one additional benefit beyond
discounts on covered drugs, such as mail-order dispensing to lower drug
costs and drug interaction monitoring programs to promote quality and
safety. However, little is known about the extent to which drug card
sponsors overall provided these additional benefits because sponsors were
not required to report to CMS on the extent to which they provided these
added benefits.

We received comments on a draft of this report from CMS. CMS commented
that despite the short implementation period, the drug card program was
successfully implemented. CMS stated that the concern we raised in the
draft report that the agency's use of multiple data systems created
challenges for some drug card sponsors in maintaining accurate TA balances
was unclear. We revised the draft report to clarify that sponsors'
concerns related to a specific CMS data system. We identified that system
and provided examples of the concerns.

10We interviewed staff of the National Association of Chain Drug Stores,
the National Community Pharmacists Association, and the Arkansas
Pharmacists Association.

11The national average retail price used by CMS represents the average
price paid to pharmacies by both insured and cash-paying customers. Prices
paid by insured customers are typically less than those paid by
cash-paying customers due to discounts negotiated by insurers. Data on
these prices were obtained by CMS from Verispan, a health care information
firm that collects and reports data on retail pharmacy transactions.

Background

The MMA was enacted on December 8, 2003, and shortly thereafter, by
January 30, 2004, interested organizations were required to submit their
completed applications to become drug card sponsors to CMS. Organizations
that CMS approved as drug card sponsors could begin enrolling
beneficiaries as of May 3, 2004, and the drug card program took effect on
June 1, 2004. As of November 2005, there were 66 active general drug cards
sponsored by 32 different sponsoring organizations. (See table 1.) Many
general drug cards are sponsored by PBMs, health insurers, or managed care
organizations.

Table 1: Active General Drug Cards by Type of Sponsoring Organization,
November 2005

Type of sponsoring                  Number of      Number of Total general 
organization                  national cardsa regional cards         cards 
PBM                                        18             12            30 
Health insurer/managed care                                                
organization                                3             18            21
Otherb                                     13              2            15 
Total                                      34             32            66 

Source: GAO analysis of CMS data and drug card sponsor information.

aTable does not reflect five approved national cards that were never
marketed.

bOther includes an information technology company, a medical products
company, and a claims processor, among others.

There were nearly 3.8 million Medicare beneficiaries enrolled in general
drug cards as of October 2005;12 about 44 percent were enrolled in both a
drug card and TA, while about 56 percent were enrolled in a drug card
only. (See table 2.) About 87 percent of general drug card enrollees were
enrolled in national drug cards, and about 13 percent were enrolled in
regional drug cards.

Table 2: General Drug Card and TA Enrollment, October 2005

General                                                         
drug        Drug card and TA         Drug card only             
card           enrollment              enrollment         Total 
type     Number Percentage         Number Percentage enrollment 
National         1,334,895 40.7        1,946,065            59.3 3,280,960 
Regional           322,779 66.2          164,531            33.8   487,310 
Total            1,657,674 44.0        2,110,596            56.0 3,768,270 

Source: GAO analysis of CMS data.

Organizations had to meet certain requirements to be approved by CMS as
drug card sponsors. For example, a drug card sponsor had to be a
nongovernmental organization doing business in the United States, be
financially stable and reputable, have at least 3 years of private-sector
experience in pharmacy benefit management, and have served at least 1
million covered lives in a similar pharmacy benefit program. Drug card
sponsors that did not have sufficient experience with pharmacy benefit
management were allowed to partner with PBMs to meet the drug card program
requirements.

12As of October 2005, CMS reported 6.4 million enrollees across all drug
card types, including general and exclusive cards.

Access to Negotiated Discounts and Pharmacies

Drug card sponsors had to demonstrate their ability to meet various
program requirements such as providing Medicare beneficiaries access to
discounted drugs and a network of pharmacies, and must continue to show
they are meeting these requirements. One requirement of the program is
that drug card sponsors must offer a negotiated price13 for at least one
drug in each of more than 200 drug classes that CMS identified as being
commonly used by Medicare beneficiaries.14 According to CMS, nearly all
prescription drugs that can be purchased at retail pharmacies are eligible
to be covered by sponsors' drug cards.15 The MMA specifies 9 classes of
drugs that sponsors are not allowed to cover through their drug cards; the
excluded classes include barbiturates and benzodiazepines, among others.
Drug card sponsors must also contract with a sufficient number of
pharmacies to ensure that their pharmacy networks meet the program's
network access requirements.16 On a weekly basis, drug card sponsors are
required to report to CMS drug prices available at participating
pharmacies.17 They also are required by CMS to report price concession
information (which could include discounts, rebates, and other price
concessions) from both drug manufacturers and pharmacies to CMS on a
quarterly basis.18

13The MMA specified that drug card sponsors shall provide access to
"negotiated prices" on the drugs they cover. CMS regulations define
negotiated price as the discounted price that takes into account
negotiated price concessions such as discounts, rebates, and direct or
indirect subsidies or remunerations. Drug card sponsors are required to
obtain rebates, discounts, or other price concessions from drug
manufacturers and to pass on a share of these concessions to card
enrollees. Sponsors are also required to guarantee that pharmacies provide
the lower of the negotiated price or the usual and customary price for a
covered drug. Neither the MMA nor CMS's regulations specify any minimum
price concession that must be passed on to enrollees.

14Drugs that possess similar chemical structures and similar therapeutic
effects are grouped into classes. Most drugs within a class produce
similar benefits, side effects, adverse reactions, and interactions with
other drugs and substances.

15Covered drugs include prescription drugs, certain vaccines, insulin, and
some medical supplies associated with the injection of insulin.

16By regulation, in urban areas, at least 90 percent of a card's enrollees
must live within 2 miles of a contracted network pharmacy; in suburban
areas, at least 90 percent must live within 5 miles of a contracted
network pharmacy; and in rural areas, at least 70 percent must live within
15 miles of a contracted network pharmacy. These access standards are
based on those used in the TRICARE Retail Pharmacy program, which provides
prescription services for Department of Defense beneficiaries through a
network of retail pharmacies.

17The drug prices reported by drug card sponsors were posted on CMS's
Price Compare Web site until September 30, 2005, when CMS deactivated this
component of the Web site.

18The CMS reporting requirement includes the total dollar amount of
discounts obtained, the percentage of discounts passed through to
beneficiaries, and the average dollar discount per prescription.

Management of TA Benefit

Participating drug card sponsors are required by CMS to manage the TA
benefit, including obtaining funds (TA subsidies) from CMS to reimburse
pharmacies for covered drugs dispensed to TA beneficiaries. Sponsors must
establish and use appropriate accounting procedures and controls to track
TA spending for each enrollee and protect against misuse of TA funds,
including the inappropriate use of these funds to pay for excluded drugs.
In addition, drug card sponsors are required to manage the enrollment of
TA beneficiaries, submit monthly TA expenditure reconciliation reports to
CMS, and update CMS's enrollment database with beneficiary-level
enrollment, utilization, and expenditure data.

Drug Card Sponsors Generally Built on Existing Arrangements to Provide
Beneficiaries Access to Discounted Drugs

Drug card sponsors generally built on arrangements that they, or their
partner PBMs, had for existing business to provide Medicare beneficiaries
access to discounted drugs. Some drug card sponsors incorporated drug
manufacturer assistance programs for low-income individuals into the drug
card program as a way to provide additional discounts to beneficiaries
beyond those required by the MMA. While sponsors generally reported little
difficulty obtaining discounts for beneficiaries and meeting pharmacy
access requirements, providing drug manufacturer discounts to
beneficiaries at the point of sale and reporting detailed data to CMS on
the discounts obtained were new and challenging for some sponsors.

Drug card sponsors that we interviewed, or their partner PBMs, generally
relied on their existing business relationships for the drug card program.
They did not provide detailed information to CMS about their arrangements
with drug manufacturers and pharmacies because the agency did not require
sponsors to disclose proprietary information about these relationships.
According to the drug card sponsors that we interviewed, they sometimes
sought arrangements with additional drug manufacturers to include a
broader array of drugs, and one drug card sponsor also reported seeking
agreements with additional pharmacies to meet program access requirements.

Some drug card sponsors also built on existing drug manufacturer
assistance programs for low-income individuals to provide additional
discounts to beneficiaries beyond those required by the MMA. According to
CMS data, eight drug manufacturers have agreements with sponsors of some
drug cards to provide additional discounts to TA beneficiaries who have
exhausted their TA benefit, referred to as wrap-around coverage.19 (See
table 3.) Four of these drug manufacturers also have agreements to provide
additional discounts to low-income beneficiaries above the TA income
limit.20

19Most of these drug manufacturers provided discounted drugs to low-income
individuals prior to the Medicare drug card program.

20The TA income limit for 2005 was $1,077 per month for a single
individual in the 48 contiguous states. The income limit was higher in
Alaska ($1,345 per month) and Hawaii ($1,239 per month).

Table 3: Drug Manufacturers with Wrap-around Coverage for TA
Beneficiaries, September 2005

                        Number of drug cards with wrap-around Number of drugs 
Drug manufacturer                                coveragea        coveredb 
Abbott                                                  44               5 
AstraZenecac                                            13              19 
Eli Lillyd                                              45              15 
Genzyme                                                  5               1 
Johnson & Johnson                                       22              44 
Merck                                                   49              39 
Novartisd                                               48              27 
Pfizerc                                                 24              55 

Source: GAO analysis of CMS data from
www.cms.hhs.gov/medicarereform/drugcard/mfagreements.asp (accessed on
Sept. 22, 2005).

aWrap-around coverage is for TA beneficiaries who have exhausted their TA
benefit.

bNumber of drugs covered may include multiple formulations of a single
drug.

cThe drug manufacturer offered discounts to low-income beneficiaries above
the TA income limit, but only to enrollees of United HealthCare Insurance
Company's U Share Prescription Drug Discount Card.

dThe drug manufacturer offered discounts to low-income beneficiaries above
the TA income limit for any drug card willing to participate.

While drug card sponsors that we interviewed told us that they generally
experienced little difficulty obtaining discounts for beneficiaries and
meeting pharmacy access requirements, there were some challenges. For
example, drug card sponsors said that they, or their partner PBMs, often
had to develop new processes to pass drug manufacturer discounts to
Medicare beneficiaries at the point of sale. Some drug card sponsors
volunteered that drug discount card programs managed by PBMs prior to the
drug card program did not typically include drug manufacturer discounts,
relying instead on discounts negotiated with pharmacies. In the drug card
program, the price paid by beneficiaries at the point of sale reflects
both drug manufacturer and pharmacy discounts.21 Providing drug
manufacturer discounts to beneficiaries at the point of sale was a new
process for many drug card sponsors and PBMs because these discounts are
typically processed after the point of sale for their existing lines of
business such as commercial insurance.22

Several drug card sponsors we interviewed also told us of additional
challenges they faced. For example, some drug card sponsors said their use
of open rather than more restrictive formularies in the drug card program
limited their ability to negotiate larger discounts with drug
manufacturers because they were unable to increase the

21CMS officials estimated that the majority of discounts came from
pharmacies rather than from drug manufacturers.

22For other programs managed by PBMs, the manufacturer discount is
typically not applied at the point of sale, but instead is often provided
in the form of a rebate to the insurer or insured group on an established
schedule after the transaction is completed. In the drug card program,
according to the sponsors we interviewed, PBMs periodically reimburse
pharmacies for the drug manufacturer portion of the discounts from drug
card sales, typically on a weekly or biweekly basis. On a less frequent
basis, generally monthly or quarterly, PBMs receive payments from drug
manufacturers for the manufacturers' portion of the discounts on drug
sales to beneficiaries.

market share of manufacturers' products sold to beneficiaries.23 In
addition, some drug card sponsors that we interviewed indicated that
pharmacies sometimes declined to participate in the drug card program
because they considered the level of discounts to be too high or because
the pharmacy was sponsoring its own card. Further, pharmacies that did not
have separate executed contractual agreements with PBMs specifically for
the drug cards may have been unaware that they were participating in the
drug card program, which created problems for beneficiaries when they
tried to purchase drugs at those pharmacies. Finally, one drug card
sponsor told us that some independent pharmacies that used Pharmacy
Service Administrative Organizations (PSAO) to contract with PBMs did not
always know they were participating with a particular drug card. This
occurred because the individual pharmacies did not always recognize that
the PSAO had contracted with a drug card sponsor on their behalf.24

As of November 2005, the overall quality of the quarterly price concession
data submitted to CMS by drug card sponsors was poor, with problems such
as outliers and missing data.25 This precluded CMS from compiling a
detailed accounting of the amount and source of discounts and other price
concessions for the drug card program. Some drug card sponsors that we
interviewed told us that CMS's guidance for reporting price concession
data was unclear and not timely, and that reporting the data in the form
required by CMS was complex. CMS officials reported that as of November
2005 they were continuing to work with drug card sponsors to resolve the
problems.26

Although drug card sponsors' reporting of quarterly price concession data
has been problematic, CMS and other research organizations have conducted
analyses of drug prices using data reported weekly to CMS for posting on
the Price Compare Web site,

23A formulary is a list of approved drugs that a plan will cover. An open
formulary contains no restrictions on what drugs are covered. The drug
card program did not require open formularies, but most drug card sponsors
offered them through their PBMs. For example, one drug card sponsor told
us that the complexity involved in using a restricted formulary would not
have been practical given the short duration of the drug card program.

24PSAOs are organizations that sometimes represent independent pharmacies
in contractual negotiations with entities such as PBMs or managed care
organizations.

25These data include the total dollar amount of discounts obtained by
sponsors, the proportion of discounts coming from manufacturers versus
pharmacies for each sponsor, and the amount of discounts obtained for
beneficiaries with wrap-around coverage. This information on drug card
sponsors' price concession data was also discussed in a previous report.
See GAO, Medicare: CMS's Implementation and Oversight of the Medicare
Prescription Drug Discount Card and Transitional Assistance Program, 
GAO-06-78R (Washington, D.C.: Oct. 28, 2005).

26As of October 2005, for the drug cards where CMS identified problems,
incorrect data had been removed from the system into which drug card
sponsors reported their data. However, not all of the sponsors have
provided corrected information.

which identified discounts available to drug card beneficiaries.27 A CMS
analysis found that beneficiaries enrolled in drug cards could obtain
prices as of September 2004 that were approximately 12 to 21 percent less
than the national average retail price for selected brand-name drugs. This
analysis also found that low-income beneficiaries who used the TA benefit
had the potential to save between 44 and 92 percent compared to national
average retail prices. A second analysis conducted by CMS found that
beneficiaries enrolled in the drug cards could obtain prices as of
February 2005 that were approximately 14 to 25 percent less than the
national average retail price for cash-paying customers. Other analyses
conducted by research organizations such as the Lewin Group and the Henry
J. Kaiser Family Foundation found similar results.28

Drug Card Sponsors Generally Used Prior Experience Administering Insurance
Coverage to Manage the TA Benefit

Drug card sponsors, or their partner PBMs, generally relied on their prior
experience administering insurance coverage to manage the TA benefit. Some
of the drug card sponsors we interviewed reported challenges with managing
the enrollment of low-income beneficiaries, reconciling TA subsidy
balances with CMS, or both. Audits conducted by a CMS contractor,
IntegriGuard, found that drug card sponsors' TA reports of enrollment did
not always agree with enrollment data from CMS's eligibility files, and
some sponsors did not properly document changes they made to TA
applications after they were signed by the Medicare beneficiary and
submitted to the sponsor.29 Additionally, some drug card sponsors had
difficulty maintaining accurate TA subsidy balances, particularly when
beneficiaries transferred between drug cards or disenrolled from a drug
card. Further, some drug card sponsors we interviewed reported confusion
about which drugs were to be excluded from coverage. Audits conducted by
IntegriGuard found that drug card sponsors had made approximately $1.9
million in incorrect TA payments for excluded drugs.

Drug card sponsors were required to obtain completed TA enrollment
applications from Medicare beneficiaries and perform an initial
eligibility screen before submitting the applications to CMS for
eligibility verification. Following CMS's eligibility verification, drug
card sponsors were required to notify beneficiaries of their eligibility
status and right to appeal, as well as to determine the beneficiary's
required coinsurance amount.30 See figure 1 for an overview of the TA
enrollment process.

27Early in the program, some drug card sponsors experienced problems with
reporting drug pricing data for the Price Compare Web site. CMS identified
problems such as inconsistencies in sponsors' reported unit prices for
non-pill prescriptions-such as creams and sprays-and delays in drug card
sponsors' reporting of data. CMS officials reported that they worked with
sponsors to standardize their reporting of non-pill prices, did not post
some sponsors' data on the Price Compare Web site, and took actions to
address reporting problems. CMS officials stated that the quality of the
Price Compare Web site data improved after the first 2 to 3 months of the
drug card program.

28See the Lewin Group, Assessment of Beneficiary Savings in the Medicare
Drug Discount Card Program (Falls Church, Va.: August 2004) and Henry J.
Kaiser Family Foundation, Medicare Drug Discount Cards: A Work in Progress
(Menlo Park, Calif.: July 2004).

29CMS contracted with IntegriGuard, a Medicare program integrity
contractor, to conduct audits of drug cards.

Figure 1: Medicare Beneficiary Enrollment Process for TA

Notes: CMS contracted with MAXIMUS, an organization with experience in
enrollment and eligibility issues for state Medicaid programs, to manage
beneficiary appeals of TA eligibility denials. Enrollment of new
beneficiaries ended December 31, 2005.

CMS established a process for Medicare beneficiaries who were initially
denied eligibility for the TA subsidy to appeal the decision. As of August
2005, approximately 76,000 TA eligibility denials were appealed and
adjudicated;31 58 percent of these were reversed during reconsideration.32
Reasons for the initial denials varied, but most often it was because the
beneficiary appeared to fail the TA income requirements (41 percent), be
enrolled in another Medicare drug card (25 percent), or have other
prescription drug coverage (22 percent).

Several drug card sponsors we interviewed told us they experienced
problems with the TA enrollment process, including reconciling enrollment
and eligibility data with CMS. For example, one drug card sponsor told us
that when coverage changes in one state's Medicaid program led to the loss
of Medicaid prescription drug coverage for some low-income Medicare
beneficiaries in the state, there were delays in enrolling these
individuals in the drug card program. The delays resulted because the CMS
eligibility verification system continued to reflect these individuals as
having Medicaid drug coverage, which would have made them ineligible for
enrollment in a drug card. In addition, 8 of 23 audits conducted by
IntegriGuard found that TA enrollment data as reported on drug card
sponsors' monthly TA reports did not always agree with CMS's eligibility
data files for the same period of time. Further, 10 of the 23 IntegriGuard
audits found that drug card sponsors did not always properly document
changes they made to TA applications after they were signed by
beneficiaries and initially submitted to the sponsor. For example, when
drug card sponsors followed up with beneficiaries about missing or
incorrect information on applications, they did not always document why or
on what date they made changes to the applications.

30The MMA established the following coinsurance amounts for TA
beneficiaries: 5 percent of the drug price for beneficiaries at or below
100 percent of the FPL, and 10 percent for beneficiaries above 100 percent
and up to and including 135 percent of the FPL.

31There were 1.6 million Medicare beneficiaries enrolled in general drug
cards and TA as of August 2005.

32Of the reversed denials, 61 percent were initially denied by CMS; 39
percent by drug card sponsors.

Drug card sponsors generally managed TA funds as they, or their partner
PBMs, managed insurance benefits for their existing lines of business.
This included operating a real-time claims adjudication system that
facilitates the reimbursement of pharmacies for drugs purchased by TA
beneficiaries and applies the correct beneficiary coinsurance at the point
of sale. As shown in figure 2, once the TA beneficiary pays the 5 or 10
percent coinsurance and receives drugs at the pharmacy, the pharmacy files
a claim, which is paid by the PBM. The PBM, if it is not the sponsoring
organization, then sends an invoice for TA claims to the drug card
sponsor. The drug card sponsor, in turn, draws down TA funds from its CMS
account for claims paid to the PBM. To account for the TA funds expended,
drug card sponsors are required to enter beneficiary-level expenditure
data into CMS's enrollment database and provide a monthly report to CMS
reconciling their paid pharmacy claims to TA funds drawn from the
sponsor's CMS account.

Figure 2: Flow of Funds and Reporting for TA

Note: Step 3 in the figure would not apply if the sponsoring organization
is a PBM itself.

According to audits conducted by IntegriGuard and discussed by some drug
card sponsors we interviewed, some sponsors had difficulty maintaining
accurate TA subsidy balances for beneficiaries who transferred between
cards or disenrolled from the program. IntegriGuard audits of 23 drug
cards found that sponsors of 11 of these cards had allowed some
beneficiaries to receive subsidies that exceeded their TA limit. CMS
officials largely attributed the problem to beneficiaries transferring
between cards. Some drug card sponsors told us that CMS's Enrollment and
Eligibility Verification Systems (EEVS) contributed to these difficulties,
pointing to problems they experienced when they attempted to reconcile
their enrollment data with CMS. For example, one drug card sponsor told us
that it did not have the ability to check enrollment information in EEVS
in real time. Another drug card sponsor reported that its TA claims
payment system operated in real-time, but that it relied on TA eligibility
data updates from CMS that were provided in periodic batch files.

Several drug card sponsors we interviewed also reported confusion about
drugs that were to be excluded from coverage through the drug cards,
citing inadequate guidance from CMS. While CMS provided general guidance
on classes of excluded drugs on previous occasions beginning in June 2004,
it did not issue a comprehensive list of excluded drugs until November
2004. IntegriGuard audits of 23 drug cards found that for each, the
sponsor had incorrectly used TA funds to pay for at least some excluded
drugs. This resulted in approximately $1.9 million of incorrect TA
payments as of November 2005, which drug card sponsors are required to
repay to CMS.33

Drug Card Sponsors Provided Beneficiaries with Some Additional Benefits
Beyond Discounts on Covered Drugs

All seven drug card sponsors we interviewed said that they provided at
least one benefit to Medicare beneficiaries in addition to the discounts
on covered drugs. They extended existing PBM programs designed to lower
costs and promote quality and safety to beneficiaries. These programs
included mail-order options, efforts to increase the use of lower-cost
generic drugs, and programs to detect potential problems such as allergy
risks and adverse drug interactions. CMS guidance to drug card sponsors
permitted them to provide additional products or services to
beneficiaries, such as discounts on over-the-counter drugs at no
additional cost to beneficiaries. However, there is little information
available on the extent that these additional services or discounts are
offered by drug card sponsors overall because they are not required by the
drug card program, and sponsors are not required to report this
information.

Medicare beneficiaries could achieve additional savings over discounted
retail prices if they used a drug card sponsor's mail-order option or
substituted lower-cost generics for brand-name drugs when offered. For
example, one drug card sponsor we interviewed estimated that beneficiaries
could achieve an additional 5 percent savings on mail-order purchases of
brand-name drugs. According to the sponsor, however, savings from the use
of the mail-order option may be limited to beneficiaries who could afford
to purchase a 3-month supply of drugs at one time, a typical requirement
for purchases made through mail-order pharmacies. This drug card sponsor
also reported having a program that automatically substituted generic
drugs where allowed. Another drug card sponsor reported providing
educational materials to beneficiaries on the savings associated with
using generics.

33See GAO, Medicare: CMS's Implementation and Oversight of the Medicare
Prescription Drug Discount Card and Transitional Assistance Program, 
GAO-06-78R (Washington, D.C.: Oct. 28, 2005) for information on
overpayments as a result of 15 of these IntegriGuard audits that were
finalized by October 2005.

Drug card sponsors that we interviewed also said that they, or their
partner PBMs, often had a variety of quality and safety programs, which
they sometimes extended to drug card beneficiaries. For example, six of
the seven drug card sponsors we interviewed had drug safety edits that
allowed pharmacists to identify potential adverse drug interactions or
drug allergies at the point of sale. Further, four of the drug card
sponsors said that they conducted some form of drug utilization review,
and one offered a program of medication therapy management.34

Agency Comments

We provided a draft of this report for comment to the Administrator of
CMS, and we received written comments. (See enc. I.)

In responding to our draft report, CMS had several general comments.
First, CMS reiterated our finding that drug card sponsors largely built
off of existing industry practices to manage the drug card and TA benefit.
CMS stated that the drug card program's short implementation period was
possible because of sponsors' reliance on existing practices. Second, CMS
stated that the provision of both pharmacy and manufacturer discounts at
the point of sale, which we discussed in our draft report, distinguished
the drug card program from other discount cards on the market. CMS added
that a September 2004 analysis conducted by the agency, which we also
described in our draft report, found that beneficiaries enrolled in
approved drug cards could obtain discounts of approximately 12 to 21
percent off the national average retail price of common brand-name drugs
at the point of sale, with the potential for even higher discounts for
low-income beneficiaries who used their TA benefit. Third, CMS commented
that a recent evaluation conducted of the drug card program found that
most drug card enrollees who were surveyed expressed overall satisfaction
with their cards, especially with the breadth of the pharmacy networks,
the enrollment process, and savings achieved. Fourth, CMS highlighted the
value of the structure it established for the drug card program to
communicate with sponsors and stated that it planned to operate a similar
communication structure for the new Medicare prescription drug benefit
that became effective on January 1, 2006. Finally, CMS noted that the
agency and its contractors learned a tremendous amount about providing
drug coverage through the drug card program, and that these lessons were
helpful in preparing for the implementation of the Medicare prescription
drug benefit that is currently underway.

34Drug utilization review programs assist with preventing and detecting
inappropriate drug use such as over- or underutilization of medications.
Medication therapy management programs are designed to ensure that drugs
prescribed for persons taking medications for multiple chronic conditions
are appropriately used to optimize therapeutic outcomes and reduce the
risk of adverse events.

In addition to these general comments, CMS provided several more specific
comments. With respect to our finding that the overall quality of the
price concession data reported to CMS by drug card sponsors was poor, CMS
stated that it has worked to resolve significant quality issues. CMS said
that most submissions are now accurate. As noted in the draft report, the
overall quality of that data as of November 2005 was poor, and we have not
assessed or verified any changes in the data's quality since that time.
Our finding, however, highlights the importance of CMS oversight of
sponsor-reported data.

In our draft report, we stated that CMS's multiple data systems created
problems for some drug card sponsors in managing the TA subsidies. CMS
said it was unable to interpret this concern because we did not indicate
the specific systems in question or the actual nature of the problem.
Further, CMS stated that it appeared that we simply repeated a concern
raised by a sponsor. In response, we revised our report to clarify that
sponsors' concerns related to CMS's EEVS system. Additionally, as more
than one drug card sponsor raised concerns, we provided specific examples.

Regarding our finding that some drug card sponsors reported confusion
about which drugs were to be excluded from coverage, CMS stated that the
categories of excluded drugs are defined by statute and are repeated in
the drug card regulation and solicitation. CMS added that it was the
responsibility of drug card sponsors to identify the specific drugs in the
excluded classes and ensure that these drugs were not covered. As we noted
in our draft report, audits of 23 drug cards conducted for CMS by
IntegriGuard found that the sponsors of all 23 cards had incorrectly used
TA funds to cover excluded drugs totaling $1.9 million. CMS noted in its
comments that it provided guidance on excluded drug classes on several
occasions, but acknowledged that it did not provide sponsors with a list
of specific drugs that were to be excluded from coverage until November
2004, 5 months after the program began. However, CMS stated that it has
continued to remind sponsors of their obligation. In its comments, CMS
stated that on August 30, 2005, for example, it issued a memo to all drug
card sponsors directing each sponsor to conduct an internal review of its
drug card data, books, and records to identify all excluded drugs that
were paid for with TA funds. CMS required drug card sponsors to repay TA
funds that were identified through the internal reviews as having been
improperly paid. While drug card sponsors are responsible for the correct
use of TA funds, CMS is ultimately accountable for ensuring that no
program monies are inappropriately spent.

With respect to our report of delays in beneficiary enrollment caused by
changes in a state's Medicaid program, CMS acknowledged that it was
possible for delays in state reporting to have led to delays in drug card
enrollment. It added that the reconsideration process, which we discussed
in our draft report, was established to consider different evidence
regarding program eligibility and enroll beneficiaries affected by such
concerns.

In response to our discussion of data discrepancies between sponsors'
monthly TA reports and CMS's eligibility data files for the same time
period, CMS stated that this occurred in a small number of instances. As
we discussed in our draft report, however, discrepancies were identified
in 8 of 23 audits conducted for CMS by IntegriGuard. CMS said that it has
worked with drug card sponsors to identify and correct these deficiencies.

Finally, CMS also provided technical comments, which we have addressed as
appropriate.

                                   - - - - -

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution of it until 30 days
from the date of this report. At that time, we will send copies to the
Administrator of CMS and interested congressional committees. We will also
provide copies to others upon request. The report will also be available
on GAO's home page at http://www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (202) 512-7119 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Key contributors are listed in enclosure II.

Sincerely yours,

Kathleen King

Director, Health Care

Enclosures-2

           Comments from the Centers for Medicare & Medicaid Services

Now on pp. 3, 9 and 12.

                     GAO Contact and Staff Acknowledgments

GAO Contact Kathleen King, (202) 512-7119 or [email protected]

Acknowledgments In addition to the contact named above, Debra Draper,
Assistant

Director; Lori Achman; Eric Anderson; Jennie Apter; Robin Burke; Ann
Tynan; and Syeda Uddin made key contributions to this report.

(290451)

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