DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting  
from the Uniform Formulary and Manufacturer Rebates (31-OCT-07,  
GAO-08-172R).							 
                                                                 
Rising pharmacy costs have been a long-standing issue for the	 
Department of Defense (DOD). In 1998, we reported that DOD's	 
fiscal year 1997 total pharmacy costs were $1.3 billion--a 13	 
percent increase from fiscal year 1995. In fiscal year 2006, DOD 
dispensed 115 million prescriptions to about 6.5 million	 
beneficiaries at a cost of about $6 billion. One effort to	 
control pharmacy costs is through the use of a uniform formulary,
which is a list of preferred drugs that are generally available  
to beneficiaries. The National Defense Authorization Act for	 
Fiscal Year 2000 directed DOD to establish a pharmacy benefits	 
program that included a uniform formulary. DOD implemented the	 
uniform formulary in 2005. Drugs on the uniform formulary are	 
generally available at military treatment facilities (MTF), the  
TRICARE Mail Order Pharmacy (TMOP), and retail pharmacies. Each  
quarter, DOD reviews drugs for inclusion on the uniform 	 
formulary. DOD's decision to designate a drug as either formulary
or nonformulary is based on the drug's clinical and		 
cost-effectiveness relative to the other drugs in its therapeutic
class. In its decision-making process, DOD considers information 
such as the drug's indications, clinical outcomes, and the price 
a manufacturer is willing to charge DOD if the drug is selected  
for placement on the uniform formulary. DOD's costs for a drug	 
may vary depending on whether the drug is dispensed at an MTF,	 
the TMOP, or a retail pharmacy. In exchange for formulary	 
placement, manufacturers can offer DOD prices below those	 
otherwise available through statutory federal pricing		 
arrangements for drugs dispensed at MTFs and the TMOP, and	 
voluntary rebates for drugs dispensed at retail network 	 
pharmacies. The John Warner National Defense Authorization Act	 
for Fiscal Year 2007 required that we examine DOD's pharmacy	 
benefits program. In September 2007, we briefed your staff on the
status of our work. This report responds to your request for	 
information specifically on DOD's estimate of reduced pharmacy	 
costs (1) resulting from drug costs avoided through its uniform  
formulary, and (2) from manufacturer rebates for drugs dispensed 
at retail network pharmacies.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-172R					        
    ACCNO:   A77805						        
  TITLE:     DOD Pharmacy Benefits Program: Reduced Pharmacy Costs    
Resulting from the Uniform Formulary and Manufacturer Rebates	 
     DATE:   10/31/2007 
  SUBJECT:   Defense cost control				 
	     Health care cost control				 
	     Health care costs					 
	     Managed health care				 
	     Prescription drugs 				 
	     DOD Pharmacy Benefits Program			 

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GAO-08-172R

   

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October 31, 2007

Congressional Committees

Subject: DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting
from the Uniform Formulary and Manufacturer Rebates

Rising pharmacy costs have been a long-standing issue for the Department
of Defense (DOD). In 1998, we reported that DOD's fiscal year 1997 total
pharmacy costs were $1.3 billion--a 13 percent increase from fiscal year
1995.^1 In fiscal year 2006, DOD dispensed 115 million prescriptions to
about 6.5 million beneficiaries at a cost of about $6 billion.

One effort to control pharmacy costs is through the use of a uniform
formulary, which is a list of preferred drugs that are generally available
to beneficiaries. The National Defense Authorization Act for Fiscal Year
2000 directed DOD to establish a pharmacy benefits program that included a
uniform formulary.^2 DOD implemented the uniform formulary in 2005.^3
Drugs on the uniform formulary are generally available at military
treatment facilities (MTF), the TRICARE Mail Order Pharmacy (TMOP), and
retail pharmacies.^4 Each quarter, DOD reviews drugs for inclusion on the
uniform formulary. DOD's decision to designate a drug as either formulary
or nonformulary is based on the drug's clinical and cost-effectiveness
relative to the other drugs in its therapeutic class.^5 In its
decision-making process, DOD considers information such as the drug's
indications, clinical outcomes, and the price a manufacturer is willing to
charge DOD if the drug is selected for placement on the uniform formulary.
DOD's costs for a drug may vary depending on whether the drug is dispensed
at an MTF, the TMOP, or a retail pharmacy. In exchange for formulary
placement, manufacturers can offer DOD prices below those otherwise
available through statutory federal pricing arrangements^6 for drugs
dispensed at MTFs and the TMOP, and voluntary rebates for drugs dispensed
at retail network pharmacies.

^1GAO, Defense Health Care: Fully Integrated Pharmacy System Would Improve
Service and Cost-Effectiveness, GAO/HEHS-98-176 (June 12, 1998).

^2See Pub. L. No. 106-65, S 701, 113 Stat. 512, 677-80 (1999) (codified as
amended at 10 U.S.C. S 1074g).

^3The process DOD uses to develop the uniform formulary was established by
the National Defense Authorization Act for Fiscal Year 2000.

^4DOD contracts with Express Scripts, Inc., a private pharmacy benefits
management company, to operate its retail network pharmacy program. The
network consists of more than 59,000 retail pharmacies where DOD
beneficiaries can pick up prescriptions.

^5A therapeutic class is a group of drugs that are similar in chemical
structure, pharmacological effect, or clinical use.

The John Warner National Defense Authorization Act for Fiscal Year 2007
required that we examine DOD's pharmacy benefits program.^7 In September
2007, we briefed your staff on the status of our work. This report
responds to your request for information specifically on DOD's estimate of
reduced pharmacy costs (1) resulting from drug costs avoided through its
uniform formulary, and (2) from manufacturer rebates for drugs dispensed
at retail network pharmacies. We plan to report more fully on DOD's
pharmacy benefits program in a subsequent report.

To obtain this information, we reviewed summary information provided by
DOD officials on costs avoided for fiscal years 2006 and 2007. We also
obtained data on the amount in rebates DOD collected in fiscal year 2007
and the amount in rebates it expects to collect in fiscal year 2008. Cost
avoidance refers to DOD's reduced pharmacy costs at MTFs, the TMOP, and
retail network pharmacies resulting from the decision on whether to
include a drug on the uniform formulary. Manufacturer rebates that DOD
receives for drugs dispensed through retail network pharmacies are in
addition to costs avoided. We also interviewed officials from DOD's
Pharmacoeconomic Center regarding the methodology used to develop the cost
avoidance and rebate estimates and its limitations. Through these
interviews we determined that the summary cost avoidance and rebate data
provided by DOD were sufficiently reliable for our purposes, but we did
not independently verify DOD's data. We conducted our work from April 2007
through October 2007 in accordance with generally accepted government
auditing standards.

DOD summary data show that through its uniform formulary DOD avoided about
$447 million in drug costs in fiscal year 2006 and estimated that it would
avoid about $900 million in drug costs in fiscal year 2007. MTFs account
for most of DOD's cost avoidance because they are generally required to
dispense formulary drugs, which are typically lower cost.^8 To calculate
cost avoidance, DOD determines the costs it incurred at MTFs, the TMOP,
and retail network pharmacies for each drug reviewed for the uniform
formulary and designated as either formulary or nonformulary. DOD
subtracts these incurred costs from the estimated costs it would have
incurred at MTFs, the TMOP, and retail network pharmacies if those drugs
had not been designated as formulary or nonformulary.

In addition, DOD officials told us that as of fiscal year 2007 DOD has
collected about $28 million in voluntary manufacturer rebates for drugs
dispensed at retail pharmacies since the program began in 2006. DOD
expects to collect at least $120 million in fiscal year 2008
through voluntary rebates.^9 Because federal pricing arrangements are not
applied to drugs dispensed through retail pharmacies, DOD developed the
Voluntary Agreements for TRICARE Retail Network Rebates (VARR) in August
2006 to allow manufacturers to offer rebates for these drugs. All of DOD's
reduced costs achieved through voluntary rebates as of October 1, 2007,
were through VARRs related to the uniform formulary. The uniform formulary
VARR is an agreement between DOD and a manufacturer for its drugs selected
for the uniform formulary.^10 DOD expects the amount it collects through
Uniform Formulary VARRs to increase over time as manufacturers continue to
enter into these agreements with DOD for drugs that are selected for the
uniform formulary.

^6Federal pricing arrangements refer to the lower of the Federal Supply
Schedule price available generally to federal purchasers or a price
available to four large agencies, including DOD. Federal pricing
arrangements are not applied to drugs dispensed at retail network
pharmacies.

^7See Pub. L. No. 109-364, S 718, 120 Stat. 2083, 2292-93 (2006).

^8MTFs can dispense nonformulary drugs if medically necessary.

We provided a draft of this report to DOD for comment. The department
reviewed the draft and determined that comments were not necessary.

                                   - - - - -

We are sending copies of this report to the Secretary of Defense and other
interested parties. We will also make copies available to others on
request. In addition, the report will be available at no charge on GAO's
Web site at http://www.gao.gov.

If you or your staff members have any questions, please contact me at
(202) 512-7114 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Major contributors to this report were Bonnie Anderson,
Assistant Director; Keyla Lee; Lesia Mandzia; and Tim Walker.

John E. Dicken
Director, Health Care

^9DOD's estimate of the amount of voluntary rebates for fiscal year 2008
is based on rebates that it collected in fiscal year 2007. It does not
account for new rebate agreements that will be implemented for drugs that
will be reviewed in fiscal year 2008. DOD officials noted that these
rebate projections are contingent on assumptions, for example, about
changing market conditions, and the potential for rebate agreements to be
terminated.

^10Another type of VARR is the Utilization VARR, which is an agreement
between DOD and manufacturers for drugs that have not yet been reviewed
for the uniform formulary and for those drugs that have been reviewed and
designated nonformulary. As of October 2007, no manufacturers had provided
DOD with a Utilization VARR.

List of Committees

The Honorable Carl Levin: 
Chairman: 
The Honorable John McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Ted Stevens: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Ike Skelton: 
Chairman: 
The Honorable Duncan Hunter: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable John P. Murtha: 
Chairman: 
The Honorable C.W. Bill Young: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

(290672)

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