DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth  
in Spending at Retail Pharmacies (04-APR-08, GAO-08-327).	 
                                                                 
Estimated to reach $15 billion by 2015, the Department of	 
Defense's (DOD) prescription drug spending has been a growing	 
concern for the federal government. The John Warner National	 
Defense Authorization Act (NDAA) for Fiscal Year 2007 required	 
GAO to examine DOD's pharmacy benefits program. Specifically, as 
discussed with the committees of jurisdiction, GAO examined DOD's
prescription drug spending trends from fiscal years 2000 through 
2006 and DOD's key efforts to limit its prescription drug	 
spending. To conduct this work, GAO analyzed DOD's data on	 
spending trends, including trends in beneficiary pharmacy use.	 
GAO also assessed DOD's cost avoidance data and the agency's	 
efforts to limit spending through its uniform formulary, which is
a list of preferred drugs available to all beneficiaries. GAO	 
interviewed DOD officials about these and other efforts to limit 
spending.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-327 					        
    ACCNO:   A81563						        
  TITLE:     DOD Pharmacy Program: Continued Efforts Needed to Reduce 
Growth in Spending at Retail Pharmacies 			 
     DATE:   04/04/2008 
  SUBJECT:   Beneficiaries					 
	     Cost analysis					 
	     Defense cost control				 
	     Fiscal policies					 
	     Health care cost control				 
	     Health care costs					 
	     Health care programs				 
	     Managed health care				 
	     Pharmaceutical industry				 
	     Prescription drugs 				 
	     Prices and pricing 				 
	     Program evaluation 				 
	     Program management 				 
	     Strategic planning 				 
	     Cost estimates					 
	     Cost growth					 
	     Program costs					 
	     Program goals or objectives			 
	     DOD Pharmacy Benefits Program			 

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GAO-08-327

   

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material separately. 

Report to Congressional Committees: 

United States Government Accountability Office: GAO: 

April 2008: 

DOD Pharmacy Program: 

Continued Efforts Needed to Reduce Growth in Spending at Retail 
Pharmacies: 

GAO-08-327: 

GAO Highlights: 

Highlights of GAO-08-327, a report to congressional committees. 

Why GAO Did This Study: 

Estimated to reach $15 billion by 2015, the Department of Defenseï¿½s 
(DOD) prescription drug spending has been a growing concern for the 
federal government. The John Warner National Defense Authorization Act 
(NDAA) for Fiscal Year 2007 required GAO to examine DODï¿½s pharmacy 
benefits program. Specifically, as discussed with the committees of 
jurisdiction, GAO examined DODï¿½s prescription drug spending trends from 
fiscal years 2000 through 2006 and DODï¿½s key efforts to limit its 
prescription drug spending. To conduct this work, GAO analyzed DODï¿½s 
data on spending trends, including trends in beneficiary pharmacy use. 
GAO also assessed DODï¿½s cost avoidance data and the agencyï¿½s efforts to 
limit spending through its uniform formulary, which is a list of 
preferred drugs available to all beneficiaries. GAO interviewed DOD 
officials about these and other efforts to limit spending. 

What GAO Found: 

Collectively, DODï¿½s drug spending at retail pharmacies, military 
treatment facilities (MTF), and the TRICARE Mail Order Pharmacy (TMOP) 
more than tripled from $1.6 billion in fiscal year 2000 to $6.2 billion 
in fiscal year 2006. Retail pharmacy spending drove most of this 
increase, rising almost ninefold from $455 million to $3.9 billion and 
growing from 29 percent of overall drug spending to 63 percent. The 
growth in retail spending reflects the fact that federal pricing 
arrangements, which generally result in prices lower than retail 
prices, were not applied to drugs dispensed at retail pharmacies during 
this time. In addition, beneficiariesï¿½ increased use of retail 
pharmacies over the less costly options of MTFs or the TMOP exacerbated 
the effect of these higher prices. For example, 2 million beneficiaries 
used only retail pharmacies in fiscal year 2006ï¿½double the number in 
fiscal year 2002. However, future growth in retail pharmacy spending 
may slow as the NDAA for Fiscal Year 2008 now requires that federal 
pricing arrangements be applied to drugs dispensed at retail 
pharmacies. 

DODï¿½s key efforts to limit its prescription drug spending have included 
its use of the uniform formulary and beneficiary outreach to encourage 
use of the TMOP. By leveraging its uniform formulary, which was 
implemented in fiscal year 2005, the agency avoided about $447 million 
in drug costs in fiscal year 2006 and $916 million in fiscal year 2007, 
according to DODï¿½s data. In exchange for formulary placement, 
manufacturers can offer DOD prices below those otherwise available 
through federal pricing arrangements, which at the time of our review 
were applied only to drugs dispensed at MTFs and the TMOP. To 
compensate, in August 2006, DOD began obtaining voluntary manufacturer 
rebates for formulary drugs dispensed at retail network pharmacies. As 
of October 1, 2007, DOD collected about $28 million in rebates for 
fiscal year 2007. Also in 2006, DOD began beneficiary outreachï¿½through 
quarterly newsletters and other materialsï¿½emphasizing the TMOPï¿½s 
convenience and cost savings. To help beneficiaries transfer their 
prescriptions to the TMOP, DOD launched the Member Choice Center in 
August 2007 and plans to target related outreach toward beneficiaries 
who frequently obtain high-cost drugs from retail pharmacies. 

DODï¿½s ongoing efforts are important to limit future prescription drug 
spending. In addition, DOD has the recommendations of a congressionally 
mandated task force to considerï¿½that copayment policies be changed to 
encourage beneficiaries to purchase preferred drugs from cost-effective 
sources. The agency is also undertaking a fundamental reformï¿½the NDAA 
for Fiscal Year 2008 requirement to apply federal pricing arrangements 
to drugs dispensed at retail pharmaciesï¿½that could have an even greater 
impact on spending. DOD will need to carefully monitor the impact of 
this new requirement along with its ongoing efforts in order to assess 
the progress in controlling spending. DOD will also need to determine 
what types of additional efforts, if any, will be necessary to ensure 
the fiscal sustainability of its pharmacy benefits program. 

What GAO Recommends: 

GAO recommends that DOD (1) monitor the impact of federal pricing 
arrangements for drugs dispensed at retail pharmacies along with 
ongoing efforts to limit pharmacy spending to determine the extent to 
which they reduce the growth in retail pharmacy spending and (2) 
identify, implement, and monitor other efforts, as needed, to reduce 
the growth in retail pharmacy spending. In its comments, DOD concurred 
with GAOï¿½s recommendations. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-327. For more 
information, contact John E. Dicken at (202) 512-7114 or 
[email protected]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

DOD's Prescription Drug Spending More Than Tripled from Fiscal Years 
2000 through 2006, with Retail Pharmacies Accounting for the Largest 
Increase: 

DOD Has Efforts Under Way to Limit Prescription Drug Spending through 
the Uniform Formulary, Beneficiary Outreach, and Other Proposed 
Changes: 

DOD's Process for Choosing Drugs for Its Uniform Formulary Is Based on 
Clinical and Cost-Effectiveness Reviews: 

DOD Has Several Methods for Quality Assurance and Beneficiary Feedback 
and Uses Pharmacy Data to Inform Its Disease Management Programs: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: The DOD P&T Committee and the Uniform Formulary BAP: 

Appendix II: Comments from the Department of Defense: 

Table: 

Table 1: Current Pharmacy Copayments for DOD Civilian Beneficiaries: 

Figures: 

Figure 1: DOD Prescription Drug Spending for Fiscal Year 2000 through 
Fiscal Year 2006, by Point of Service: 

Figure 2: Trends in the Number of Beneficiaries Obtaining Drugs from a 
Single Point of Service: 

Figure 3: Trends in the Number of Maintenance Drug Prescriptions Filled 
for DOD Beneficiaries, by Point of Service: 

Figure 4: Pharmacy Spending by Age Group and Point of Service for 
Fiscal Years 2002 through 2006: 

Figure 5: Key Steps of DOD's Uniform Formulary Decision Process: 

Abbreviations: 

AHLTA: Armed Forces Health Longitudinal Technology Application: 

BAP: Uniform Formulary Beneficiary Advisory Panel: 

CHCS: Composite Health Care System: 

DOD: Department of Defense: 

MTF: military treatment facility: 

NDAA: National Defense Authorization Act: 

PDTS: Pharmacy Data Transaction Service: 

P&T: Pharmacy and Therapeutics Committee: 

TMA: TRICARE Management Activity: 

TMOP: TRICARE Mail Order Pharmacy: 

VA: Department of Veterans Affairs: 

VARR: Voluntary Agreements for TRICARE Retail Network Rebates: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

April 4, 2008: 

Congressional Committees: 

As part of our efforts to identify major challenges facing the nation 
in the 21st century, we reported that prescription drug spending was 
one of the fastest-growing segments of health care spending in both the 
public and private sectors.[Footnote 1] The Department of Defense (DOD) 
provides pharmacy benefits to about 9 million beneficiaries through 
TRICARE, its health care program. Estimated to reach $15 billion by 
2015, DOD's prescription drug spending has been a growing concern for 
the federal government. How the agency can best limit its drug spending 
has been a focus of recent debate. 

Health plans use various strategies to control their drug costs. These 
strategies include having a formulary, which is a list of preferred 
drugs that are generally available to beneficiaries; requiring the use 
of less expensive generic drugs when available; having higher 
prescription copayments for drugs purchased at pharmacies not in an 
established network; and offering strong financial incentives to use 
mail-order pharmacies. DOD instituted some of these strategies in 
response to a provision in the National Defense Authorization Act 
(NDAA) for Fiscal Year 2000.[Footnote 2] The NDAA required the agency 
to create a pharmacy benefits program that included a uniform 
formulary, which is a formulary of drugs available to all TRICARE 
beneficiaries, and authorized the establishment of beneficiary 
copayments for drug purchases. Furthermore, DOD can use statutory 
federal pricing arrangements to purchase drugs. These arrangements 
typically result in prices lower than those otherwise 
available.[Footnote 3] During our review, federal pricing arrangements 
were applied to drugs dispensed only at military treatment facilities 
(MTF) and the TRICARE Mail Order Pharmacy (TMOP).[Footnote 4] However, 
the recently enacted NDAA for Fiscal Year 2008 requires federal pricing 
arrangements to be applied to drugs dispensed at retail pharmacies as 
of January 28, 2008.[Footnote 5] 

The John Warner National Defense Authorization Act for Fiscal Year 2007 
directed us to examine DOD's pharmacy benefits program.[Footnote 6] 
Specifically, as discussed with the committees of jurisdiction, we 
examined DOD's (1) prescription drug spending trends from fiscal year 
2000 through fiscal year 2006; (2) key efforts to limit its 
prescription drug spending; (3) process for choosing which drugs to 
include on the uniform formulary; and (4) related quality assurance, 
beneficiary feedback, and disease management efforts. 

To provide information on DOD's prescription drug spending trends from 
fiscal year 2000 through fiscal year 2006, we obtained and reviewed 
data provided by DOD's Pharmacoeconomic Center. The data were not 
adjusted for inflation and included information DOD uses to track drug 
spending at MTFs, the TMOP, and network and nonnetwork retail 
pharmacies. The data reviewed also included information on beneficiary 
use of these points of service and beneficiary prescription drug use by 
age group. 

To describe DOD's efforts to limit its prescription drug spending, we 
obtained and reviewed DOD data on the costs the agency had avoided at 
MTFs, the TMOP, and retail network pharmacies for fiscal years 2006 and 
2007 that were used to demonstrate the financial impact of its 
formulary decisions.[Footnote 7] We also obtained data from DOD that 
were used to calculate the amount of rebates the agency had collected 
from drug manufacturers through its Voluntary Agreements for TRICARE 
Retail Network Rebates (VARR) for fiscal year 2007, and we interviewed 
10 drug manufacturers to obtain their perspective on why they did or 
did not use the VARRs.[Footnote 8] In addition, we interviewed DOD 
officials about the agency's efforts to limit spending and reviewed 
reports by DOD's Task Force on the Future of Military Health Care, 
which was directed by Congress to assess ways to sustain DOD health 
care services. 

To describe DOD's process for choosing which drugs to include on the 
uniform formulary, we reviewed relevant federal law and regulations, 
DOD policy guidance for implementing the process, and minutes from 
regular meetings at which formulary issues were discussed. We also 
interviewed officials from the Pharmacoeconomic Center and the TRICARE 
Management Activity (TMA) to obtain further information. 

To identify DOD's quality assurance and beneficiary feedback 
mechanisms, we interviewed DOD officials and obtained information on 
specific electronic systems used at the MTFs, the TMOP, and retail 
network pharmacies. We identified and reviewed surveys DOD uses to 
obtain beneficiary feedback on its pharmacy program, and we interviewed 
DOD officials about how DOD uses those surveys and other mechanisms to 
obtain beneficiary satisfaction data and feedback on the pharmacy 
benefit. Finally, we reviewed DOD's disease management program policies 
and information on how beneficiaries are identified for the program. 

We obtained the most current data available at the time of our review 
on DOD's prescription drug spending, cost avoidance, and rebates. We 
interviewed officials from the Pharmacoeconomic Center and TMA about 
the methodology used to generate the data and the data's use and 
limitations. Through these interviews, we determined that the data were 
sufficiently reliable for our purposes, but we did not independently 
verify the data. We conducted our review from April 2007 through 
February 2008 in accordance with generally accepted government auditing 
standards. 

Results in Brief: 

DOD's prescription drug spending more than tripled from $1.6 billion in 
fiscal year 2000 to $6.2 billion in fiscal year 2006. Retail pharmacy 
spending drove most of this increase, rising from $455 million to $3.9 
billion and growing from 29 percent of DOD's overall drug spending to 
63 percent. TMOP spending likewise rose, from $106 million to $721 
million, but increased from only 7 percent of total drug spending to 12 
percent. MTF spending increased from $1 billion to $1.5 billion, but 
its share of total drug spending decreased from 65 percent to 25 
percent. Three overarching factors influenced these trends. First, 
federal pricing arrangements, which generally result in lower drug 
prices, were not applied to drugs dispensed at retail pharmacies during 
this time, so these drugs were generally more expensive for both DOD 
and its beneficiaries. Second, increased use of retail pharmacies has 
exacerbated the effect of higher retail prices. For example, 2 million 
beneficiaries used only retail pharmacies in fiscal year 2006--double 
the number in fiscal year 2002. DOD officials cited base closures 
reducing access to MTFs, MTF personnel deployments, and the convenience 
of retail pharmacies as reasons for this trend. Third, according to DOD 
officials, TRICARE expansions beginning in 2001 led, by fiscal year 
2006, to 1.7 million eligible beneficiaries age 65 or older, who use 
more drugs. 

DOD's key efforts to limit its prescription drug spending include its 
use of the uniform formulary, beneficiary outreach to encourage use of 
the TMOP, and proposed changes to beneficiary copayments. As a result 
of its uniform formulary decisions, DOD's data show that it avoided 
about $447 million in drug costs in fiscal year 2006 and $916 million 
in fiscal year 2007. In exchange for formulary placement, manufacturers 
can offer DOD lower prices than those otherwise available through 
statutory federal pricing arrangements, which, at the time of our 
review, were applied only to drugs dispensed at MTFs and the TMOP. 
MTFs, which are generally limited to dispensing formulary drugs, 
accounted for most of DOD's cost avoidance. To compensate, in August 
2006, DOD began obtaining voluntary manufacturer rebates for formulary 
drugs dispensed at retail network pharmacies. As of October 1, 2007, 
DOD collected about $28 million through its voluntary manufacturer 
rebates for fiscal year 2007. Also in 2006, DOD began beneficiary 
outreach--through quarterly newsletters, news releases, and other 
materials--emphasizing the TMOP's convenience and cost savings. To help 
beneficiaries transfer their prescriptions to the TMOP, DOD launched 
the Member Choice Center in August 2007 and plans to target outreach 
about the center toward beneficiaries who frequently obtain high-cost 
drugs from retail pharmacies. DOD also proposed for fiscal years 2007 
and 2008 to eliminate copayments at the TMOP and increase copayments at 
retail pharmacies to encourage beneficiaries to use the TMOP. However, 
DOD has been prohibited from increasing copayments at retail pharmacies 
through fiscal year 2008. Nonetheless, the Task Force on the Future of 
Military Health Care recommended in December 2007 that DOD's copayment 
policies be changed to create more incentive for beneficiaries to use 
preferred drugs and cost-effective points of service. 

DOD's process for choosing which drugs to include on the uniform 
formulary is based on reviews in which the clinical and cost- 
effectiveness of a drug is compared with other drugs in its therapeutic 
class. This process, established by law, involves three entities. The 
Pharmacy and Therapeutics (P&T) Committee recommends drugs to be added 
to the formulary based on clinical and cost-effectiveness reviews. The 
Uniform Formulary Beneficiary Advisory Panel (BAP) comments on the P&T 
Committee's recommendations from a beneficiary perspective. The 
Director of TMA makes final decisions after considering both the P&T 
Committee's recommendations and the BAP's comments. As of October 2007, 
28 drug classes representing 322 drugs had been reviewed for the 
uniform formulary. Of the 322 drugs reviewed, 249 were designated as 
formulary. 

DOD has several methods for quality assurance and beneficiary feedback 
and uses pharmacy data to inform its disease management programs. DOD 
provides quality assurance in its pharmacy program at MTFs, the TMOP, 
and retail network pharmacies through the use of several electronic 
systems that detect potential problems related to prescribed drugs. For 
example, the Armed Forces Health Longitudinal Technology Application 
(AHLTA) alerts MTF providers of duplicate treatments, therapeutic 
overlap, drug interactions, and drug allergies when a prescription is 
entered into the system. The agency obtains beneficiary feedback 
through surveys with questions about pharmacy access and utilization 
and satisfaction with the TMOP. DOD also reviews beneficiary comments 
obtained at meetings with military beneficiary associations. It uses 
beneficiary feedback to make improvements to the pharmacy program--for 
example, to simplify and encourage the use of the TMOP, including 
transferring prescriptions from retail pharmacies--an outreach effort 
that would help limit retail pharmacy spending. DOD also uses its 
pharmacy data to identify beneficiaries for its asthma, diabetes, and 
congestive heart failure disease management programs. 

To help ensure the fiscal sustainability of DOD's pharmacy benefits 
program and complement more fundamental reforms recently enacted or 
being considered, we recommend that the Secretary of Defense direct the 
Assistant Secretary of Defense for Health Affairs to: 

* monitor the effect of federal pricing arrangements for drugs 
dispensed at retail pharmacies along with ongoing efforts to limit 
pharmacy spending to determine the extent to which they reduce the 
growth in retail pharmacy spending; and: 

* identify, implement, and monitor other efforts, as needed, to reduce 
the growth in retail pharmacy spending. 

In its written comments on a draft of this report, DOD concurred with 
our findings and recommendations. 

Background: 

TRICARE, DOD's health care program, has 9.1 million eligible 
beneficiaries that include active duty, certain reservists, and retired 
members of the uniformed services, as well as their families and 
survivors. Beneficiaries may generally obtain care from either MTFs or 
civilian providers.[Footnote 9] TRICARE beneficiaries can obtain 
prescription drugs directly from MTFs, the TMOP, and network and 
nonnetwork retail pharmacies.[Footnote 10] 

The pharmacy benefits law, as passed in October 1999, directed the 
Secretary of Defense to establish a pharmacy benefits program.[Footnote 
11] The program is, among other things: 

* required to include a uniform formulary that should ensure drugs are 
available in the complete range of therapeutic classes;[Footnote 12] 

* required to make drugs on the uniform formulary available to 
beneficiaries at MTFs, the TMOP, and retail pharmacies; and: 

* authorized to establish copayment requirements for generic, 
formulary, and nonformulary drugs. 

The pharmacy benefits law also directed the Secretary of Defense to 
establish the P&T Committee to develop the uniform formulary, and the 
BAP to review and comment on the development of the uniform formulary. 
Finally, the Secretary of Defense was to implement the use of the 
Pharmacy Data Transaction Service (PDTS) at designated MTFs, the TMOP, 
and retail network pharmacies. The PDTS is an electronic service that 
DOD uses to maintain prescription drug information for all TRICARE 
beneficiaries worldwide. 

In 2001, DOD established the current pharmacy copayment structure, 
which is based on whether a drug is classified as formulary generic 
(tier 1), formulary brand-name (tier 2), or nonformulary (tier 3). The 
copayment also depends on where the beneficiary chooses to fill his or 
her prescription. (See table 1.) 

Table 1: Current Pharmacy Copayments for DOD Civilian Beneficiaries: 

Delivery option: Military treatment facility (MTF); 
Supply: up to 90 days; 
Copayments: Formulary generic (tier 1): $0; 
Copayments: Formulary brand (tier 2): $0; 
Copayments: Nonformulary (tier 3): $0[A]. 

Delivery option: TRICARE Mail Order Pharmacy (TMOP); 
Supply: up to 90 days; 
Copayments: Formulary generic (tier 1): $3; 
Copayments: Formulary brand (tier 2): $9; 
Copayments: Nonformulary (tier 3): $22. 

Delivery option: Retail network pharmacy; 
Supply: up to 30 days; 
Copayments: Formulary generic (tier 1): $3; 
Copayments: Formulary brand (tier 2): $9; 
Copayments: Nonformulary (tier 3): $22. 

Delivery option: Retail nonnetwork pharmacy, TRICARE Extra and 
Standard[B]; 
Supply: up to 30 days; 
Copayments: Formulary generic (tier 1): Greater of $9 or 20 percent of 
total cost; 
Copayments: Formulary brand (tier 2): Greater of $9 or 20 percent of 
total cost; 
Copayments: Nonformulary (tier 3): Greater of $22 or 20 percent of 
total cost. 

Delivery option: Retail nonnetwork pharmacy, TRICARE Prime[B]; 
Supply: up to 30 days; 
Copayments: Formulary generic (tier 1): 50 percent; 
Copayments: Formulary brand (tier 2): 50 percent; 
Copayments: Nonformulary (tier 3): 50 percent. 

Source: DOD. 

Notes: Active duty service members are not required to pay copayments 
at MTFs, the TMOP, or retail network pharmacies. Active duty service 
members who fill prescriptions for covered medications under the 
pharmacy benefit at nonnetwork retail pharmacies are required to pay 
the total cost of the prescription and then file a claim for 
reimbursement with Express Scripts, Inc., a private pharmacy benefits 
management company that operates DOD's retail pharmacy program and the 
TMOP. 

[A] MTFs can only dispense nonformulary drugs if medically necessary. 
Proof of medical necessity is not required for nonformulary drugs to be 
dispensed at the TMOP or retail pharmacies. 

[B] Under TRICARE, beneficiaries can choose among three benefit 
options: a health maintenance organization option called TRICARE Prime, 
a preferred-provider organization option called TRICARE Extra, and a 
fee-for-service option called TRICARE Standard. 

[End of table] 

The NDAA for Fiscal Year 2007 directed DOD to establish the Task Force 
on the Future of Military Health Care to assess health care services 
provided to members of the military, retirees, and their families and 
to make recommendations for sustaining those services.[Footnote 13] In 
addition to other aspects of DOD's health care system, the task force 
reviewed DOD's pharmacy benefits program.[Footnote 14] It issued an 
interim report in May 2007 and a final report in December 2007 to the 
Secretary of Defense on its findings and recommendations. The Secretary 
of Defense may comment on the recommendations provided in the task 
force's final report and, within 90 days of its issuance, must forward 
the report to the Committees on Armed Services of the Senate and the 
House of Representatives. 

DOD's Prescription Drug Spending More Than Tripled from Fiscal Years 
2000 through 2006, with Retail Pharmacies Accounting for the Largest 
Increase: 

DOD's spending on prescription drugs more than tripled from $1.6 
billion in fiscal year 2000 to $6.2 billion in fiscal year 2006. Retail 
pharmacy spending accounted for the greatest increase, rising almost 
ninefold from $455 million to $3.9 billion. It also grew from 29 
percent of DOD's overall drug spending to 63 percent--the largest 
increase of the points of service. TMOP spending rose from $106 million 
to $721 million and increased from 7 percent of total spending to 12 
percent. MTF pharmacy spending rose from $1 billion in fiscal year 2000 
to $1.7 billion in fiscal 2004, but declined slightly to $1.5 billion 
in fiscal year 2006. In fiscal year 2000, MTF spending accounted for 65 
percent of DOD's overall drug spending but declined to 25 percent in 
fiscal year 2006. (See fig. 1.) 

Figure 1: DOD Prescription Drug Spending for Fiscal Year 2000 through 
Fiscal Year 2006, by Point of Service: 

[See PDF for image] 

This figure is a stacked vertical bar graph depicting the following 
data: 

DOD Prescription Drug Spending for Fiscal Year 2000 through Fiscal Year 
2006, by Point of Service (dollars in billions): 

Fiscal year: 2000; 
Retail: $0.46; 
TMOP: $0.11; 
MTF: $1.03; 
Total: $1.6. 

Fiscal year: 2001; 
Retail: $0.68; 
TMOP: $0.19; 
MTF: $1.17
Total: $2.04. 

Fiscal year: 2002; 
Retail: $1.28; 
TMOP: $0.35; 
MTF: $1.39; 
Total: $3.02. 

Fiscal year: 2003; 
Retail: $1.85; 
TMOP: $0.43
MTF: $1.57; 
Total: $3.85. 

Fiscal year: 2004; 
Retail: $2.43; 
TMOP: $0.55; 
MTF: $1.77; 
Total: $4.75. 

Fiscal year: 2005; 
Retail: $3.10; 
TMOP: $0.63; 
MTF: $1.63; 
Total: $5.36 

Fiscal year: 2006; 
Retail: $3.92; 
TMOP: $0.72; 
MTF: $1.54; 
Total: $6.28. 

Source: DOD. 

Note: Data were not adjusted for inflation. 

[End of figure] 

Three overarching factors influenced these trends. First, because 
federal pricing arrangements that generally result in lower prices were 
not applied to drugs dispensed at retail pharmacies during this time 
period, these drugs were generally more expensive for both DOD and its 
beneficiaries than the drugs dispensed at MTFs or the TMOP. However, 
the NDAA for Fiscal Year 2008 requires that federal pricing 
arrangements now be applied to TRICARE prescriptions filled at retail 
pharmacies. 

Second, the increased use of retail pharmacies has exacerbated the 
effect of higher retail prices. More beneficiaries are using only 
retail pharmacies to obtain their prescriptions--about 2 million in 
fiscal year 2006, up from about 1 million in fiscal year 2002 (see fig. 
2).[Footnote 15] Further, beneficiaries are obtaining more maintenance 
drugs--drugs for long-term conditions, such as high blood pressure or 
cholesterol--at retail pharmacies (see fig. 3). From fiscal year 2004 
through fiscal year 2006, the number of maintenance drug prescriptions 
dispensed at retail pharmacies increased by more than 11.6 million. 
Those dispensed at the TMOP increased much less, by about 1.5 million, 
while those at MTFs decreased by about 2.5 million. DOD officials cited 
additional reasons that they believed contributed to the increased use 
of retail pharmacies, though they could not quantify the effect of 
these reasons. These reasons included: base closures, which have 
decreased the number of MTF pharmacies; deployment of MTF personnel, 
which limits MTF appointment availability, resulting in more 
beneficiaries going to civilian providers and filling their 
prescriptions at retail pharmacies; the vast TRICARE retail network of 
about 59,000 pharmacies, which has become more convenient for 
beneficiaries; and the prescription copayment structure, which does not 
discourage beneficiaries from using the more costly retail pharmacies. 

Figure 2: Trends in the Number of Beneficiaries Obtaining Drugs from a 
Single Point of Service: 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Trends in the Number of Beneficiaries Obtaining Drugs from a Single 
Point of Service: 

Fiscal year: 2002; 
TMOP: 0.79 million; 
Retail: 1.03 million; 
MTF: 3.45 million. 

Fiscal year: 2003; 
TMOP: 0.83 million; 
Retail: 1.26 million; 
MTF: 3.57 million. 

Fiscal year: 2004; 
TMOP: 0.64 million; 
Retail: 1.50 million; 
MTF: 3.31 million. 

Fiscal year: 2005; 
TMOP: 0.61 million; 
Retail: 1.82 million; 
MTF: 3.03 million. 

Fiscal year: 2006; 
TMOP: 0.55 million; 
Retail: 1.99 million; 
MTF: 2.83 million. 

Source: GAO analysis of DOD data. 

Notes: Full-year data were available beginning in fiscal year 2002. 
Data exclude beneficiaries who obtain drugs from more than one point of 
service. Most beneficiaries who use multiple points of service use 
retail pharmacies in addition to another point of service. 

[End of figure] 

Figure 3: Trends in the Number of Maintenance Drug Prescriptions Filled 
for DOD Beneficiaries, by Point of Service: 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Trends in the Number of Maintenance Drug Prescriptions Filled for DOD 
Beneficiaries, by Point of Service: 

Fiscal year: 2004; 
TMOP: 5 million; 
Retail: 28 million; 
MTF: 31 million. 

Fiscal year: 2005; 
TMOP: 6 million; 
Retail: 35 million; 
MTF: 30 million. 

Fiscal year: 2006; 
TMOP: 7 million; 
Retail: 39 million; 
MTF: 29 million. 

Source: GAO analysis of DOD data. 

Note: Data were available beginning in fiscal year 2004. 

[End of figure] 

Third, according to DOD officials, TRICARE expansions have led to a 
growing population of aging beneficiaries, who use more drugs. By 
fiscal year 2006, about 1.7 million beneficiaries, age 65 or older, 
were eligible for the pharmacy benefit through TRICARE benefit 
expansions that began in 2001.[Footnote 16] According to DOD data, 
retail pharmacy spending for beneficiaries age 65 or older increased by 
about 207 percent from fiscal year 2002 through fiscal year 2006-- 
slightly higher than the 184 percent increase for beneficiaries under 
age 65. (See fig. 4.) DOD officials told us that the average cost per 
beneficiary at retail pharmacies in fiscal year 2006 was about $1,277 
for beneficiaries age 65 or older, compared with about $368 for those 
under age 65. MTF spending declined slightly for both age groups as 
TMOP spending increased.[Footnote 17] Those under age 65 were more 
likely to use MTFs, while those age 65 or older were more likely to use 
the TMOP. 

Figure 4: Pharmacy Spending by Age Group and Point of Service for 
Fiscal Years 2002 through 2006: 

[See PDF for image] 

This figure is a multiple line graph depicting the following data: 

Pharmacy Spending by Age Group and Point of Service for Fiscal Years 
2002 through 2006: 

Fiscal year: 2002; 
Retail, Under age 65: $0.65 billion; 
Retail, Age 65 and older: $0.627 billion; 
MTFs, Under age 65: No data; 
MTFs, Age 65 and older: No data; 
TMOP, Under age 65: $0.114 billion; 
TMOP, Age 65 and older: $0.232 billion. 

Fiscal year: 2003; 
Retail, Under age 65: $0.874 billion; 
Retail, Age 65 and older: $0.973 billion; 
MTFs, Under age 65: $1.04 billion; 
MTFs, Age 65 and older: $0.516 billion; 
TMOP, Under age 65: $0.125 billion; 
TMOP, Age 65 and older: $0.303 billion. 

Fiscal year: 2004; 
Retail, Under age 65: 1.147 billion; 
Retail, Age 65 and older: 1.275 billion; 
MTFs, Under age 65: $1.16 billion; 
MTFs, Age 65 and older: $0.605 billion; 
TMOP, Under age 65: $0.154 billion; 
TMOP, Age 65 and older: $0.39 billion. 

Fiscal year: 2005; 
Retail, Under age 65: $1.5 billion; 
Retail, Age 65 and older: $1.587 billion; 
MTFs, Under age 65: $1.05 billion; 
MTFs, Age 65 and older: $0.577 billion; 
TMOP, Under age 65: $0.185 billion; 
TMOP, Age 65 and older: $0.443 billion. 

Fiscal year: 2006; 
Retail, Under age 65: $1.84 billion; 
Retail, Age 65 and older: $1.929 billion; 
MTFs, Under age 65: $0.99 billion; 
MTFs, Age 65 and older: $0.55 billion; 
TMOP, Under age 65: $0.207 billion; 
TMOP, Age 65 and older: $0.512 billion. 

Source: GAO analysis of DOD data. 

Note: Full-year data were available beginning in fiscal year 2002 for 
retail pharmacies and the TMOP and in fiscal year 2003 for MTFs. Data 
were not adjusted for inflation. 

[End of figure] 

DOD Has Efforts Under Way to Limit Prescription Drug Spending through 
the Uniform Formulary, Beneficiary Outreach, and Other Proposed 
Changes: 

DOD has efforts under way to limit its prescription drug spending 
through the use of its uniform formulary and through beneficiary 
outreach for the TMOP. In an attempt to further limit its drug 
spending, both DOD and its Task Force on the Future of Military Health 
Care have recommended changes to the beneficiary copayment structure 
intended to encourage beneficiaries to use more cost-effective points 
of service. However, the NDAA through Fiscal Year 2008 prohibits any 
increase to retail copayments through fiscal year 2008. 

DOD's Uniform Formulary Has Limited Prescription Drug Spending: 

According to DOD officials, the agency has limited its prescription 
drug spending primarily through costs avoided through the use of its 
uniform formulary, which was implemented during 2005. DOD data show 
that the agency avoided about $447 million in drug costs in fiscal year 
2006 and $916 million in drug costs in fiscal year 2007. 

MTFs accounted for most of DOD's cost avoidance, while retail network 
pharmacies accounted for the least. Cost avoidance is affected by the 
following factors that result from DOD's formulary decisions: 

* The prices DOD obtains for drugs. In exchange for including a 
manufacturer's drug on the uniform formulary, manufacturers can offer 
DOD prices below those otherwise available through statutory federal 
pricing arrangements, which applied only to drugs dispensed at MTFs and 
the TMOP during the time of our review. According to DOD officials, the 
agency had obtained prices for drugs dispensed at MTFs and the TMOP 
that are about 30 percent to 50 percent lower than the prices it 
obtained for drugs dispensed at network and nonnetwork retail 
pharmacies. This difference in price can be attributed to savings 
achieved through the discounts obtained for uniform formulary placement 
as well as the lower prices obtained through federal pricing 
arrangements for drugs dispensed at MTFs and the TMOP. 

* Changes in beneficiaries' use of formulary and nonformulary drugs 
within a therapeutic class. Once a drug is designated nonformulary, its 
use may be substituted with a formulary drug, which results in lower 
copayments for the beneficiary and lower costs to DOD. Because MTFs are 
generally limited to dispensing formulary drugs, cost avoidance 
attributed to the use of formulary drugs over nonformulary drugs is 
higher at this point of service than at the TMOP and retail network 
pharmacies, where beneficiaries can obtain more costly nonformulary 
drugs.[Footnote 18] 

* Changes in beneficiaries' use of generic and brand-name drugs within 
a therapeutic class. For both formulary and nonformulary drugs, DOD 
requires the substitution of generic drugs for brand-name drugs at 
MTFs, the TMOP, and retail pharmacies when a generic equivalent is 
available.[Footnote 19] A brand-name drug having a generic equivalent 
may be dispensed only if the prescribing physician establishes medical 
necessity for its use. A beneficiary's use of a generic drug in place 
of a brand-name drug results in lower costs to the beneficiary and to 
DOD. 

* Changes in beneficiaries' use of MTFs, the TMOP, and retail 
pharmacies as a result of formulary designations. For example, a 
beneficiary may shift from obtaining a 30-day supply of a formulary 
drug at a retail pharmacy, where the beneficiary's copayment would be 
higher, to an MTF where the beneficiary can obtain a 90-day supply of 
the drug without a copayment. 

To calculate cost avoidance, DOD first determines the costs it incurred 
at MTFs, the TMOP, and retail network pharmacies for each drug as a 
result of its designation as either formulary or nonformulary. DOD then 
subtracts these incurred costs from the estimated costs it would have 
incurred at MTFs, the TMOP, and retail network pharmacies if the 
designation had not been made.[Footnote 20] Cost avoidance is the 
difference between the incurred and estimated costs. 

In addition to costs avoided, DOD has obtained voluntary manufacturer 
rebates for some of the formulary drugs dispensed at retail network 
pharmacies--though these rebates are a much smaller proportion of 
overall savings. Because federal pricing arrangements were not 
previously applied to drugs dispensed at retail pharmacies, DOD 
implemented the VARR in August 2006 to allow manufacturers to offer 
rebates for these drugs. There are two types of VARRs: the Uniform 
Formulary VARR and the Utilization VARR. The Uniform Formulary VARR is 
an agreement between DOD and a manufacturer that is contingent on the 
manufacturer's drug being selected for the uniform formulary. DOD 
officials told us that as of October 1, 2007, the agency had collected 
about $28 million through Uniform Formulary VARRs for fiscal year 
2007.[Footnote 21] As manufacturers continue to enter into these 
agreements, DOD expects the amount it collects to increase over time. 
The Utilization VARR allows manufacturers to offer a rebate to DOD for 
drugs that are not on the uniform formulary. According to DOD, this 
includes drugs that have not yet been reviewed for the uniform 
formulary and drugs that have been reviewed and designated 
nonformulary. Unlike the Uniform Formulary VARR, the Utilization VARR 
does not secure formulary placement. As of October 2007, no 
manufacturers had entered into a Utilization VARR with DOD. 

In our discussions with 10 drug manufacturers about the VARR program, 7 
of them told us that they had submitted Uniform Formulary VARRs for 
DOD's consideration. Of these 7 manufacturers, 5 indicated that their 
participation was driven by the possibility that their drug would be 
selected for the uniform formulary. With regard to the Utilization 
VARR, 8 of the 10 manufacturers we spoke with indicated that there was 
little or no incentive provided to manufacturers to enter into these 
rebate agreements with DOD. 

DOD Has Beneficiary Outreach Efforts Under Way: 

DOD has outreach efforts under way intended to help encourage 
beneficiaries to use the TMOP instead of retail pharmacies. In 2006, 
according to DOD officials, the agency began to expand its outreach for 
the TMOP through quarterly newsletters, news releases, and other 
materials emphasizing its convenience and cost savings for 
beneficiaries. DOD partnered with, for example, beneficiary 
organizations and family support groups to help distribute these 
outreach materials. DOD also encouraged health care providers to 
promote the use of the TMOP among the TRICARE beneficiaries they serve. 
MTF pharmacists also participated in these efforts by posting signs 
advertising the TMOP in their facilities. 

In addition, DOD launched its Member Choice Center in August 2007, the 
goal of which is to help beneficiaries transfer their prescriptions 
from retail pharmacies to the TMOP. To educate beneficiaries about the 
center's availability, DOD included information about it in newsletters 
and other outreach materials. According to DOD officials, the center 
transferred about 60,000 prescriptions from retail pharmacies to the 
TMOP as of late December 2007. In addition to these efforts, DOD 
intended to specifically target those beneficiaries who frequently 
obtained high-cost drugs from retail pharmacies. DOD officials told us 
that, as of January 2008, this aspect of the program had not yet begun 
and that DOD was working with the contractor for the TMOP to develop a 
letter to be sent to these beneficiaries. 

DOD and Its Task Force on the Future of Military Health Care Have 
Proposed Other Changes to Limit Spending: 

DOD has proposed changes to beneficiary copayments for fiscal years 
2007 and 2008 in an effort to encourage beneficiaries to obtain 
prescriptions from more cost-effective points of service. Specifically, 
DOD proposed to eliminate copayments for generic drugs dispensed at the 
TMOP and to increase retail pharmacy copayments from $3 for formulary 
generic drugs to $5, and from $9 for formulary brand-name drugs to $15. 
DOD first proposed these changes for fiscal year 2007, but Congress 
prohibited any increase to retail pharmacy copayments for that fiscal 
year.[Footnote 22] DOD repeated the proposal for the next fiscal year, 
but the NDAA for Fiscal Year 2008 prohibits any increase to retail 
copayments through the fiscal year.[Footnote 23] 

In addition, the Task Force on the Future of Military Health Care 
concluded in its final report that DOD's copayment policies and 
formulary tier structure do not create effective incentives to 
stimulate compliance with clinical best practices or the most cost- 
effective points of service for obtaining drugs. It recommended that 
DOD's pharmacy tier and copayment structures be revised based on 
clinical and cost-effectiveness standards to promote greater incentive 
to use preferred medications and cost-effective points of service. 
Specifically, the task force stated that a four-tier formulary could 
encourage beneficiaries to use less costly drugs and use them more 
appropriately. It also stated that when a formulary includes more 
tiers, it is easier to lower out-of-pocket costs for drugs that treat 
certain chronic diseases and remove compliance barriers.[Footnote 24] 

DOD's Process for Choosing Drugs for Its Uniform Formulary Is Based on 
Clinical and Cost-Effectiveness Reviews: 

DOD decides which drugs to include on the uniform formulary based on 
reviews in which the clinical and cost-effectiveness of a drug is 
compared with other drugs in its class.[Footnote 25] This process, 
established by DOD under the requirements of the pharmacy benefits law, 
involves three entities: 

* The Pharmacy and Therapeutics (P&T) Committee recommends drugs to be 
added to the uniform formulary based on clinical and cost-effectiveness 
reviews. (For P&T Committee membership, see app. I.) 

* The BAP comments on the P&T Committee's recommendations from a 
beneficiary perspective. (For BAP membership, see app. I.) 

* The Director of TMA makes final decisions after considering both the 
P&T Committee's recommendations and the BAP's comments. (See fig. 5.) 

Figure 5: Key Steps of DOD's Uniform Formulary Decision Process: 

[See PDF for image] 

This figure is an illustration of key steps of DOD's Uniform Formulary 
Decision Process, as follows: 

P&T: 
The Pharmacy & Therapeutics (P&T) Committee meets and makes 
recommendations based on its clinical and cost-effectiveness reviews of 
drugs; 
Time: T. 

BAP: 
The Uniform Formulary Beneficiary Advisory Panel (BAP) meets and 
comments on the P&T Committeeï¿½s recommendations; 
Time: T plus 45 days. 

TMA: 
The Director of TRICARE Management Activity (TMA) makes final 
decisions; 
Time: No more than T plus 240 days. 

Source: GAO analysis of DOD data. 

Note: "T" refers to the day of the P&T Committee meeting. Steps are 
listed as the number of days from "T." 

[End of figure] 

The P&T Committee meets quarterly and generally reviews two to four 
drug classes at each meeting. The priority for therapeutic class 
reviews is determined by various factors, such as the conversion of a 
drug from brand-name to generic and the rate of utilization among 
beneficiaries. The P&T Committee first reviews the clinical 
effectiveness of the drugs in a class. It considers such information as 
indications for which the drug has been approved by the Food and Drug 
Administration, the incidence and severity of adverse effects, and the 
results of studies on effectiveness and clinical outcomes. Using this 
information, the committee determines whether the drugs are 
therapeutically equivalent. It then reviews the cost-effectiveness of 
the drugs, considering such information as the price and rebate quotes 
submitted by manufacturers and the estimated financial effect of 
possible formulary decisions. The committee then determines the 
relative cost-effectiveness of each drug in the class. 

On the basis of the outcomes of both the clinical and cost- 
effectiveness reviews, the committee recommends that each drug in the 
class be designated as either formulary or nonformulary. If the 
committee finds that the drugs in a class are therapeutically 
equivalent, it generally recommends that the lower-cost drugs be 
designated as formulary. However, the committee has recommended that 
certain higher-cost drugs it believed offered additional clinical 
benefits be designated as formulary. For example, the committee 
recommended that two drugs used to treat breakthrough pain in cancer 
patients,[Footnote 26] Fentora and Actiq, be designated as formulary 
despite a more than a forty-fold increase in cost over the two most 
cost-effective drugs in the class. While therapeutically equivalent to 
the other drugs in the class, both Fentora and Actiq can be dissolved 
orally, which the committee valued for patients who have difficulty 
swallowing drugs in tablet form. In addition to recommending that a 
drug be designated as formulary or nonformulary, the P&T Committee 
recommends an implementation period to inform pharmacies and 
beneficiaries of formulary decisions. Its recommendations are then 
provided to the BAP. 

Once the BAP receives the P&T Committee's recommendations, it provides 
comments on behalf of beneficiaries. It reviews each recommendation and 
determines whether it agrees or disagrees with the P&T Committee. As of 
October 2007, the BAP and the P&T Committee disagreed about 17 percent 
of the time, mostly about the length of implementation periods. For 
example, the P&T Committee recommended that formulary and nonformulary 
designations for drugs used to treat overactive bladder conditions 
become effective about 60 days after the final formulary decision was 
made. The BAP stated that additional time was needed to notify 
beneficiaries currently using drugs within the class, suggesting that 
the formulary designations become effective about 120 days after the 
final formulary decision was made. Finally, the BAP's comments are 
documented and submitted to the Director of TMA for consideration when 
making final formulary decisions. 

After reviewing both the P&T Committee's recommendations and the BAP's 
comments, the Director of TMA makes final formulary decisions. In a 
decision paper, the director approves or disapproves of the P&T 
Committee's recommendations and may provide written comments explaining 
his decision. Although the Director of TMA makes the final decision, no 
drug may be designated as nonformulary unless the P&T Committee has 
recommended the nonformulary designation.[Footnote 27] As of October 
2007, the Director of TMA had approved 188 out of the 190 P&T Committee 
recommendations. Uniform formulary decisions become effective on the 
date decision papers are signed by the Director, and the papers are 
made publicly available on the TRICARE Web site.[Footnote 28] As of 
October 2007, 28 drug classes representing 322 drugs had been reviewed 
for the formulary.[Footnote 29] Of the 322 drugs reviewed, 249 were 
designated as formulary. 

DOD Has Several Methods for Quality Assurance and Beneficiary Feedback 
and Uses Pharmacy Data to Inform Its Disease Management Programs: 

DOD uses electronic systems, which detect potential problems related to 
prescribed drugs, for quality assurance at MTFs, the TMOP, and retail 
network pharmacies. It also takes steps to obtain beneficiary feedback 
through surveys and by obtaining beneficiaries' comments. In addition, 
DOD uses pharmacy data to identify beneficiaries who might benefit from 
participating in a disease management program. 

Electronic Systems Provide Quality Assurance for Prescriptions: 

AHLTA, a global electronic health information system, alerts MTF 
providers to duplicate drug treatments, therapeutic overlap, drug 
interactions, and drug allergies when a prescription is entered into 
the system. MTF providers[Footnote 30] are required to use AHLTA when 
prescribing drugs. If, for example, AHLTA identifies a drug allergy, 
the provider receives an alert and can prescribe an alternative drug. 

The Composite Health Care System (CHCS) provides similar alerts to 
staff at MTF pharmacies. When a patient's prescription is processed, 
the CHCS informs the staff of duplicate treatments, therapeutic 
overlap, drug interactions, and drug allergies. DOD officials stated 
that CHCS acts as a redundant quality assurance mechanism, allowing the 
pharmacists to double-check prescriptions written by MTF providers. If 
a beneficiary brings a prescription to the MTF pharmacy from a contract 
provider (outside of the MTF), CHCS will still inform the pharmacy 
staff of potential problems when they enter the prescription 
information into the system. 

The PDTS detects duplicate drug treatments, therapeutic overlap, and 
drug interactions at the TMOP and retail network pharmacies. From these 
points of service, the prescription information is electronically 
submitted to the PDTS, which verifies the individual's TRICARE 
enrollment and provides information on duplicate treatments, 
therapeutic overlap, and drug interactions. The TMOP and retail network 
pharmacies are responsible for obtaining drug allergy information from 
the beneficiary, because the PDTS does not contain that information. 
Beneficiaries are asked to provide drug allergy information when they 
sign up to receive prescriptions through the TMOP. At retail 
pharmacies, the pharmacist is supposed to ask the beneficiary about 
their drug allergies and check their local pharmacy system for this 
information. Prescriptions filled at nonnetwork retail pharmacies are 
input into the PDTS when DOD receives a claim submitted by the 
beneficiary. 

DOD Obtains Feedback on Its Pharmacy Benefit through Beneficiary 
Surveys and Comments: 

DOD administers two surveys that ask specific questions about the 
TRICARE pharmacy benefit. The Health Care Survey of DOD Beneficiaries 
is administered quarterly, but questions specific to the pharmacy 
benefit are asked once a year. The survey asks beneficiaries who had 
prescriptions filled during the last 90 days about pharmacy access and 
utilization. The second survey, the TMOP Satisfaction Survey, is a 
telephone survey administered quarterly. Survey participants are 
selected randomly among beneficiaries who used the TMOP in the last 90 
days. The purpose of this survey is to determine whether Express 
Scripts, the contractor that administers the TMOP, will receive an 
incentive payment. Express Scripts is provided this payment when the 
level of beneficiary satisfaction with the TMOP is 90 percent or 
greater.[Footnote 31] Express Scripts has scored 90 percent or greater 
for 17 of the 18 quarters since March 2003. 

DOD officials stated that they also obtained beneficiary comments on 
the pharmacy benefits program during meetings with representatives of 
military associations that represent many TRICARE beneficiaries. At the 
local level, MTFs also collect information about beneficiary experience 
with the MTF pharmacy on such issues as hours of operation, waiting 
times, and service provided by the pharmacy technicians. These issues 
are usually addressed at the individual MTFs. 

DOD generally uses the results of the Health Care Survey of DOD 
Beneficiaries to tailor articles in newsletters about the pharmacy 
program and to make improvements to it--for example, to simplify and 
encourage the use of the TMOP. DOD officials stated that on the basis 
of the results of the 2006 survey and feedback from military 
associations, they learned DOD beneficiaries wanted an easy method to 
transfer their prescriptions from retail pharmacies to the TMOP. In 
August 2007, DOD launched the Member Choice Center, where beneficiaries 
can call for assistance, register online for the TMOP, and transfer 
their prescriptions from retail pharmacies. The center contacts the 
beneficiary's physician, at the beneficiaries' request, to obtain new 
prescriptions and forward them to the TMOP for processing. 

DOD Uses Pharmacy Data to Identify Beneficiaries for Disease Management 
Programs: 

According to DOD officials, DOD uses PDTS data to identify 
beneficiaries who might benefit from participating in DOD's disease 
management program, an organized effort to achieve desired health 
outcomes in populations with prevalent, often chronic diseases, for 
which care practices may be subject to considerable variation.[Footnote 
32] The PDTS contains data on specific drugs, dosages, and dispensing 
dates. So, for example, DOD uses PDTS data on drugs dispensed for 
asthma to identify beneficiaries who have asthma. DOD uses this 
information and other criteria to determine whether a beneficiary is a 
candidate for the asthma disease management program. Once identified, 
DOD provides patient lists to the managed care support contractors, who 
also provide the information to MTFs. Providers are encouraged to 
support their patient's active participation in the disease management 
program and to facilitate care, such as needed laboratory tests or 
screening examinations. 

DOD implemented disease management programs for congestive heart 
failure and asthma in September 2006 and diabetes in June 2007, which 
are administered by the managed care support contractors. MTFs are 
required to provide disease management programs for asthma, diabetes, 
and screening mammograms. DOD conducts annual comprehensive analyses to 
quantify the effect of the disease management programs. The NDAA for 
Fiscal Year 2007 required that DOD's disease management program 
address, at a minimum: diabetes, cancer, heart disease, asthma, chronic 
obstructive pulmonary disorder, and depression and anxiety 
disorders.[Footnote 33] DOD is working to expand its disease management 
program to include all of the specific diseases and conditions mandated 
and plans to report to Congress in March 2008 on the program's design, 
development, and implementation plan. 

Conclusions: 

DOD's pharmacy spending increased at an unsustainable rate from fiscal 
year 2000 through fiscal year 2006. Retail pharmacy spending drove most 
of the increase, primarily due to the lack of federal pricing 
arrangements and increased beneficiary utilization at these pharmacies. 
In contrast, increases in pharmacy spending at MTFs and the TMOP, 
typically the more cost-effective points of service, were less 
pronounced. DOD has taken steps to curtail its rising pharmacy 
spending, including using its uniform formulary to obtain lower drug 
prices and creating a rebate program for retail pharmacies--efforts 
that have saved the agency hundreds of millions of dollars. More 
recently, DOD established an outreach program to encourage 
beneficiaries to transfer their prescriptions from retail pharmacies to 
the TMOP, which has been a less costly option for both DOD and its 
beneficiaries. 

DOD's ongoing efforts are important to limit future prescription drug 
spending. In addition, the agency has its task force's proposals to 
consider, which include changes to the copayment and tier structures 
aimed at shifting beneficiary utilization away from retail pharmacies. 
The agency is also undertaking a fundamental reform--the NDAA for 
Fiscal Year 2008 requirement to apply federal pricing arrangements to 
drugs dispensed at retail pharmacies--that could have an even greater 
effect on spending. DOD will need to carefully monitor the effect of 
this new requirement along with its ongoing efforts in order to assess 
the progress in controlling spending. DOD will also need to determine 
what types of additional efforts, if any, will be necessary to ensure 
the fiscal sustainability of its pharmacy benefits program. 

Recommendation for Executive Action: 

To help ensure the fiscal sustainability of DOD's pharmacy benefits 
program and complement more fundamental reforms recently enacted or 
recently proposed, we recommend that the Secretary of Defense direct 
the Assistant Secretary of Defense for Health Affairs to: 

* monitor the effect of federal pricing arrangements for drugs 
dispensed at retail pharmacies along with ongoing efforts to limit 
pharmacy spending to determine the extent to which they reduce the 
growth in retail pharmacy costs, and: 

* identify, implement, and monitor other efforts, as needed, to reduce 
the growth in retail pharmacy spending. 

Agency Comments and Our Evaluation: 

In commenting on a draft of this report, DOD stated that it concurred 
with our findings and recommendations and that it remains diligent in 
its efforts to curtail retail pharmacy costs. DOD noted that its 
recently implemented outreach program to encourage beneficiaries to 
transfer prescriptions from retail pharmacies to the less expensive 
TMOP has had an unanticipated level of participation. 

Specifically, in response to our recommendation to monitor the impact 
of federal pricing arrangements for drugs dispensed at retail 
pharmacies, DOD stated that it has requested additional resources to 
implement this NDAA for Fiscal Year 2008 requirement. DOD acknowledged 
that, when fully implemented, this authority will have a significant 
impact on controlling the growth in retail pharmacy costs. While this 
may likely be the case, we reiterate the need for DOD to monitor the 
extent to which the federal pricing reduces growth in pharmacy spending 
in order to determine whether additional efforts to reduce spending are 
warranted. With regard to our recommendation to implement other 
efforts, as needed, to reduce growth in retail pharmacy spending, DOD 
responded that the recommendations of its task force would have an 
impact on overall DOD pharmacy costs in general and retail pharmacy 
costs in particular. However, DOD stated that congressional action is 
necessary for these measures to be implemented and that it stands ready 
to implement them if granted the authority to do so. Nonetheless, our 
recommendation was not limited solely to the task force 
recommendations. DOD could explore other cost saving initiatives, 
similar to its outreach efforts to encourage beneficiaries' use of the 
TMOP, which do not require congressional action. DOD's comments are 
reprinted in appendix II. 

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 [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, 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. 

Signed by: 

John E. Dicken: 
Director, Health Care: 

[End of section] 

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 L. 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: 

[End of section] 

Appendix I: The DOD P&T Committee and the Uniform Formulary BAP: 

Composition of the Department of Defense Pharmacy and Therapeutics 
Committee: 

The Department of Defense Pharmacy and Therapeutics Committee consists 
of both voting and nonvoting members. 

Voting Members: 

* Physician Chairman, Health Affairs/TRICARE Management Activity: 

* Director, Department of Defense Pharmacy Programs, TRICARE Management 
Activity: 

* Director, Department of Defense Pharmacoeconomic Center: 

* The Army, Navy, and Air Force Surgeons General Internal Medicine 
specialty consultants or designees: 

* One Army, Navy, or Air Force Surgeon General Pediatric specialty 
consultant or designee: 

* One Army, Navy, or Air Force Surgeon General Family Practice 
specialty consultant or designee: 

* One Army, Navy, or Air Force Surgeon General Obstetric/Gynecology 
specialty consultant or designee: 

* One physician or pharmacist from the United States Coast Guard: 

* The Army, Navy, and Air Force Pharmacy specialty consultants or 
designees: 

* One provider at large from the Army, Navy, and Air Force: 

* One physician or pharmacist from the Department of Veterans Affairs: 

* The Contracting Officer's Representative for the TRICARE Retail 
Pharmacy Program: 

* The Contracting Officer's Representative for the TRICARE Mail Order 
Pharmacy: 

The Pediatric, Family Practice, and Obstetric/Gynecology positions on 
the P&T Committee are rotated among the services every 3 years. 

Nonvoting Members: 

* Representative(s) of the Joint Readiness Clinical Advisory Board: 

* Representative(s) of the TRICARE Management Activity Office of 
General Counsel: 

* Representative(s) of the TRICARE Management Activity Resource 
Management Directorate: 

* Representative(s) of the Defense Supply Center Philadelphia: 

Composition of the Uniform Formulary Beneficiary Advisory Panel: 

The Uniform Formulary Beneficiary Advisory Panel consists of the 
following members: 

* members of nongovernment organizations and associations that 
represent the views and interests of TRICARE beneficiaries: 

* contractors for the TRICARE Retail Pharmacy Program: 

* contractors for the TRICARE Mail Order Pharmacy: 

* TRICARE network providers: 

[End of section] 

Appendix II: Comments from the Department of Defense: 

The Assistant Secretary Of Defense: 
Health Affairs: 
1200 Defense Pentagon: 
Washington, DC 20301-1200: 

March 19, 2008: 

Mr. John E. Dicken: 
Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Dicken: 

This is the Department of Defense (DoD) response to the Government 
Accountability Office (GAO) draft report, GAO-08-327, "DoD Pharmacy 
Program: Continued Efforts Needed to Reduce Growth in Spending at 
Retail Pharmacies," dated February 25. 2008 (GAO Code 290604). 

Thank you for the opportunity to review and comment on the Draft 
Report. Overall, I concur with the report (enclosed). In addition, I 
have received concurrence from the three Uniformed Services. As stated 
in the report, DoD has taken numerous steps to curtail rising pharmacy 
spending including using the DoD Uniform Formulary to leverage 
negotiations for lower drug prices and creating a voluntary rebate 
program that has saved the agency hundreds of millions of dollars. In 
addition, the recently implemented outreach program to encourage 
beneficiaries to transfer their prescriptions from the retail program 
to the less expensive mail order program has had an unanticipated level 
of participation. 

The Department remains diligent in its efforts to curtail retail 
pharmacy costs. We will continue to employ outcomes research, best 
business practices and pharmacy benefit management principles, 
including formulary management, step-therapy, coordination of benefits, 
and incentives through co-pay adjustments. Furthermore, the National 
Defense Authorization Act for Fiscal Year 2008, Section 703, extends 
federal discounts to the
purchase of pharmaceuticals used in the TRICARE retail pharmacy 
network. When fully implemented, this authority will have a significant 
impact on controlling the growth in retail pharmacy costs. 

My points of contact on this issue are RADM Thomas McGinnis 
(Functional) and Mr. Gunther Zimmerman (Audit Liaison) who may be 
reached (703) 681-2890 and (703) 681-4360 respectively. 

Sincerely, 

Signed by: 
S. Ward Casscells, MD: 

Enclosure: As stated: 

Government Accountability Office Draft Report Dated February 26, 2008
(Government Accountability Office Code 290604): 

"DoD Pharmacy Program: Continued Efforts Needed to Reduce Growth in
Spending at Retail Pharmacies" 

Department Of Defense Comments To The Recommendation: 

To help ensure the fiscal sustainability of the Department of Defense's 
(DoDs) pharmacy benefits program and complement more fundamental 
reforms recently enacted or recently proposed, we recommend that the 
Secretary of Defense direct the Assistance Secretary of Defense (Health 
Affairs) to: 

Recommendation #1: Monitor the impact of federal pricing arrangements 
for drugs dispensed at retail pharmacies along with ongoing efforts to 
limit pharmacy spending to determine the extent to which they reduce 
the growth in retail pharmacy costs. 

DOD Response: Concur. We have requested additional resources to make 
the federal mandate operational. 

Recommendation #2: Identify, implement, and monitor other efforts, as 
needed, to reduce the growth in retail pharmacy spending. 

DOD Response: Concur. Implementing the recommendations of the recent 
DoD Task Force on the Future of Military Health Care include adjusting 
pharmacy co-pays, excluding non-formulary medication out-of-pocket 
costs from the catastrophic cap, include selected over-the-counter 
drugs to the Uniform Formulary, and mandating a point of service for 
selected medications will all require Congressional action through 
legislative relief. Each of these actions would have impact on overall 
DoD pharmacy costs in general and retail pharmacy costs in particular. 
The Department stands ready to implement any or all of these efforts if 
granted the authority to do so. 

[End of section] 

Footnotes: 

[1] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP] 
(February 2005). 

[2] See Pub. L. No. 106-65, ï¿½ 701, 113 Stat. 512, 677-80 (1999) 
(codified as amended at 10 U.S.C. ï¿½ 1074g). 

[3] Federal pricing arrangements refer to prices made available under 
38 U.S.C. ï¿½ 8126. The Federal Supply Schedule price is generally 
available to all federal purchasers through contracts administered by 
the Department of Veterans Affairs. The law also requires drug 
manufacturers to provide brand-name drugs to the four large federal 
purchasers of drugs, including DOD, at a price that does not exceed a 
federal ceiling price. If the Federal Supply Schedule price for a given 
brand-name drug exceeds the federal ceiling price, manufacturers must 
offer another price to the four large agencies that is at or below the 
federal ceiling price. The federal ceiling price does not apply to 
generic drugs. 

[4] In 2004, the Department of Veterans Affairs(VA)--the federal agency 
responsible for maintaining the Federal Supply Schedule--issued a 
letter instructing manufacturers to issue refunds to DOD for drugs 
dispensed at retail pharmacies. These refunds were meant to reflect the 
difference between the price DOD paid and the price it would have been 
entitled to under federal pricing arrangements. However, in 2006, the 
Court of Appeals for the Federal Circuit ruled that VA's letter was 
insufficient to impose a new substantive rule on the drug 
manufacturers. The court did not rule on the issue of whether VA could 
impose federal pricing on manufacturers if it used a rulemaking 
procedure. See Coalition for Common Sense in Government Procurement v. 
Secretary of Veterans Affairs, 464 F.3d 1306 (Fed. Cir. 2006). 

[5] See Pub. L. No. 110-181, ï¿½ 703, 122 Stat. 3, 188 (to be codified at 
10 U.S.C. ï¿½ 1074g(f)). 

[6] See Pub. L. No. 109-364, ï¿½ 718, 120 Stat. 2083, 2292-93 (2006). 

[7] Cost avoidance refers to the drug costs DOD would have otherwise 
incurred if a formulary decision had not been made. 

[8] VARRs are used by DOD to obtain rebates specifically for drugs 
dispensed at TRICARE retail network pharmacies. 

[9] TRICARE is a regionally structured program that uses contractors to 
maintain provider networks to complement health care provided at MTFs. 

[10] DOD contracts with Express Scripts, Inc., a private pharmacy 
benefits management company, to operate DOD's retail pharmacy program 
and the TMOP. Express Scripts has a network of about 59,000 retail 
pharmacies where DOD beneficiaries can pick up prescriptions; 
beneficiaries can also use nonnetwork retail pharmacies--that is, any 
retail pharmacy not in Express Scripts' network. 

[11] See Pub. L. No. 106-65, ï¿½ 701, 113 Stat. 512, 677-80 (1999) 
(codified as amended at 10 U.S.C. ï¿½ 1074g). 

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

[13] See Pub. L. No. 109-364, ï¿½ 711, 120 Stat. 2083, 2284-87 (2006). 

[14] During a meeting on April 18, 2007, the Comptroller General 
testified before the task force and provided information on DOD's 
overall health care spending and its pharmacy copayments. He suggested 
that the task force consider whether TRICARE's copayment structure 
should be brought into parity with those of other public and private 
payers. See GAO, DOD's 21st Century Health Care Spending Challenges, 
Presentation for the Task Force on the Future of Military Health Care, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-766CG] 
(Washington, D.C.: Apr. 18, 2007). 

[15] Full-year data for beneficiaries were available beginning in 
fiscal year 2002. 

[16] Implemented in April 2001, the TRICARE Senior Pharmacy Program 
allowed beneficiaries and their dependents, all of whom must be age 65 
or older, to obtain prescriptions from the TMOP and retail pharmacies. 
See Pub. L. No. 106-398, ï¿½ 711, 114 Stat. 1645A-175 through 1645A-176 
(2000). Before this program, these beneficiaries could fill their 
prescriptions only at MTFs. The TRICARE Senior Pharmacy Program has 
been absorbed into TRICARE for Life, the program that began in October 
2001 and provides medical benefits to beneficiaries who are eligible 
for Medicare Part A and are enrolled in Medicare Part B on the basis of 
age, disability, or end-stage renal disease. In fiscal year 2005, 
Congress authorized the TRICARE Reserve Select program. Eligible 
reservists that enroll in the program may obtain prescriptions 
similarly to other TRICARE beneficiaries. See 10 U.S.C. ï¿½ 1076d. 
According to DOD officials, more than 485,000 reservists became 
eligible for the pharmacy benefit, but over 11,000 had enrolled as of 
December 2006. 

[17] Full-year MTF data were available beginning in fiscal year 2003. 

[18] MTFs can dispense nonformulary drugs if medically necessary. Proof 
of medical necessity is not required for nonformulary drugs to be 
dispensed at the TMOP or retail pharmacies. 

[19] If no generic equivalent exists or if using a brand-name drug is 
medically necessary when a generic equivalent is available, the brand- 
name drug will be dispensed at no copayment at MTFs and at the brand- 
name copayment at the TMOP and retail pharmacies. If a beneficiary 
insists on obtaining a brand-name drug that is not considered medically 
necessary when a generic equivalent is available, the beneficiary is 
responsible for the full cost of the prescription. 

[20] DOD determines these estimated costs using utilization and price 
data for each drug before formulary placement was determined. 

[21] DOD projected that it would collect at least $120 million through 
Uniform Formulary VARRs for fiscal year 2008. This projection was based 
on rebates that it collected in fiscal year 2007 and did not account 
for new rebate agreements that would be implemented for drugs 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. 
This projection was determined prior to the enactment of the NDAA for 
Fiscal Year 2008. DOD officials stated that the amount in rebates that 
the agency expected to collect for fiscal year 2008 may vary given the 
requirement that federal pricing arrangements be extended to drugs 
dispensed at retail pharmacies. 

[22] See NDAA for Fiscal Year 2007, Pub. L. No. 109-364, ï¿½ 704(a), 120 
Stat. 2280 (2006). 

[23] See Pub. L. No. 110-181, ï¿½ 702, 122 Stat. 3, 188. 

[24] The following formulary categories were suggested: (1) Preferred 
drugs, including generic, cost-effective brand-name, and selected over- 
the-counter drugs; (2) other formulary drugs; (3) nonformulary drugs; 
and (4) "Special Category" drugs, such as specialty, very expensive, 
and biotechnology drugs. The task force recommended specific copayments 
for the first three tiers of its proposed formulary structure and 
suggested that Congress grant DOD the authority to mandate the most 
cost-effective point of service where "Special Category" drugs can be 
obtained. 

[25] Until a drug has been reviewed for the uniform formulary, it is 
made available to TRICARE beneficiaries at either the formulary generic 
or brand-name copayment depending on the type of drug and where the 
beneficiary chooses to obtain it. 

[26] Breakthrough pain refers to the intermittent flares of severe pain 
that can occur in patients taking medications for chronic pain control 
on a fixed schedule. 

[27] See 10 U.S.C. ï¿½ 1074g(a)(2)(D). 

[28] See "DOD Pharmacy and Therapeutics Committee," [hyperlink, 
http://www.tricare.mil/pharmacy/PT_Cmte/default.htm], downloaded 
December 3, 2007. 

[29] The 322 drugs reviewed for the uniform formulary include multiple 
forms of a single drug classified by such factors as its various dosage 
forms, strengths, and manufacturers. 

[30] MTF providers include physicians, nurse practitioners, 
podiatrists, and others. 

[31] Express Scripts can receive payment in each quarter based on 
beneficiaries' satisfaction rates: $250,000 at 90 percent; $500,000 at 
92 percent; $750,000 at 94 percent; $1 million at 96 percent; $1.25 
million at 98 percent; and $1.5 million at 100 percent. 

[32] Disease management programs are interventions that are evidence- 
based to direct the patient's plan of care. Programs also equip the 
patient with information and a self-care plan to self-manage wellness 
and prevent complications that may result from poor control of the 
disease process. 

[33] See Pub. L. No. 109-364, ï¿½ 734, 120 Stat. 2083, 2299-301 (2006). 

[End of section] 

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