Pharmacy Benefit Managers: FEHBP Plans Satisfied with Savings and
Services, But Retail Pharmacies Have Concerns (Letter Report, 02/21/97,
GAO/HEHS-97-47).

Pursuant to a congressional request, GAO reviewed the Federal Employees
Health Benefits Program's (FEHBP) pharmacy benefits, focusing on: (1)
why FEHBP plans have contracted with pharmacy benefit managers (PBM) to
provide pharmacy benefits; (2) what types of services and savings the
PBMs provide FEHBP plans; (3) how FEHBP plans evaluate PBM customer
service; and (4) retail pharmacists' concerns about the quality of PBM
pharmacy services and the effect of some PBM practices on the retail
pharmacy business.

GAO found that: (1) the three FEHBP plans it studied contracted with
PBMs to control rapidly rising pharmacy benefit payments; (2) the plans
estimate that PBMs saved them over $600 million in 1995 by obtaining
manufacturer and pharmacy discounts and managing drug utilization; (3)
these savings reduced the pharmacy benefit costs each plan believes it
would have paid without using a PBM by between 20 and 27 percent; (4)
the PBMs met most of the performance standards in their 1995 contracts,
and the plans believe that the PBMs have provided plan enrollees
high-quality pharmacy service; (5) surveys of plan enrollees also
indicate a high degree of satisfaction, with between 93 and 98 percent
of respondents noting satisfaction with their pharmacy benefit services;
(6) the plans' decisions to use PBMs to control pharmacy benefit costs,
however, can shift business away from retail pharmacies; (7) for
example, Blue Cross's 1996 benefit change, which encouraged mail order
purchases, reduced affected enrollees' payments to retail pharmacies by
36 percent or about $95 million; (8) during the same period, total
payments to retail pharmacies for all enrollees decreased by about 7
percent or about $34 million; and (9) moreover, PBM and plan officials,
as well as industry experts, acknowledge that any additional efforts to
control FEHBP pharmacy benefit costs in the future might require plans
to adopt more restrictive cost-containment procedures that could
possibly limit enrollees' access to drugs and pharmacy services and
lessen enrollees' satisfaction with their pharmacy benefits.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-97-47
     TITLE:  Pharmacy Benefit Managers: FEHBP Plans Satisfied with 
             Savings and Services, But Retail Pharmacies Have
             Concerns
      DATE:  02/21/97
   SUBJECT:  Employee medical benefits
             Federal employees
             Customer service
             Employee benefit plans
             Drugs
             Health insurance cost control
             Health resources utilization
IDENTIFIER:  Federal Employees Health Benefits Program
             Rural Carrier Benefit Plan
             
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Cover
================================================================ COVER


Report to Congressional Requesters

February 1997

PHARMACY BENEFIT MANAGERS - FEHBP
PLANS SATISFIED WITH SAVINGS AND
SERVICES, BUT RETAIL PHARMACIES
HAVE CONCERNS

GAO/HEHS-97-47

FEHBP Pharmacy Benefits

(108298)


Abbreviations
=============================================================== ABBREV

  AWP - average wholesale price
  COB - coordination of benefits
  DUR - drug utilization review
  FEHBP - Federal Employees Health Benefits Program
  GEHA - Government Employees Hospital Association
  HMO - health maintenance organization
  MAC - maximum allowable cost
  NACDS - National Association of Chain Drug Stores
  OPM - Office of Personnel Management
  PBM - pharmacy benefit manager
  PCS - PCS Health Systems, Inc. 

Letter
=============================================================== LETTER


B-276005

February 21, 1997

Congressional Requesters

The Office of Personnel Management (OPM) estimates that insurance
carriers in the Federal Employees Health Benefits Program (FEHBP)
covered nearly 9 million federal employees, retirees, and dependents
in 1995 and that pharmacy benefit payments for its five largest plans
were about $2 billion.\1

Moreover, pharmacy benefit payments for these plans accounted for an
increasing share of their total FEHBP health care costs--growing from
12 percent in 1990 to 19 percent in 1995. 

Like a growing number of health insurers interested in controlling
prescription drug costs, FEHBP plans have contracted with companies
called pharmacy benefit managers (PBM).  These companies manage
pharmacy benefits on behalf of plan sponsors, such as self-insured
employers and HMOs.  By the end of 1995, about 58 percent of federal
enrollees were covered by a PBM, according to OPM. 

As PBMs have assumed a bigger role in managing pharmacy benefits for
federal enrollees, questions have arisen about the effect of their
cost-
containment methods on the quality and availability of pharmacy
services and on other segments of the health care marketplace. 
Accordingly, we were asked to provide information on (1) why FEHBP
plans have contracted with PBMs to provide pharmacy benefits, (2)
what types of services and savings the PBMs provide FEHBP plans, (3)
how FEHBP plans evaluate PBM customer service, and (4) the concerns
of retail pharmacists about the quality of PBM pharmacy services and
the effect of some PBM practices on the retail pharmacy business.\2

To address these questions, we examined three FEHBP plans that
contracted with PBMs--the Blue Cross and Blue Shield Association
(Blue Cross), the Government Employees Hospital Association (GEHA),
and the Rural Carrier Benefit Plan (Rural).  Together, these plans
cover about 50 percent of all FEHBP employees and retirees, and each
contracts with one of the six largest PBMs.  Although the Rural plan
has a relatively small enrollment compared with Blue Cross and GEHA,
it is one of the few fee-for-service FEHBP plans that contracts with
a PBM other than Merck-
Medco Managed Care, Inc., or PCS Health Systems, Inc.  (These
companies are referred to in this report as "Medco" and "PCS,"
respectively.) We met with representatives of each plan and the PBMs
they contract with, reviewed the contracts between the plans and
PBMs, analyzed reports on the PBMs' performance in meeting contract
requirements, and reviewed plan customer satisfaction surveys. 
Appendix I contains a detailed discussion of our scope and
methodology. 

This report was prepared initially at the request of, among others,
the former Chairman, Subcommittee on Oversight of Government
Management and the District of Columbia, and the former Ranking
Minority Member, Subcommittee on Post Office and Civil Service.  In
addition to the other initial requesters, we are addressing this
report to the Ranking Minority Member, Subcommittee on Post Office
and Civil Service, Committee on Government Management, and the
Ranking Minority Member, Subcommittee on Civil Service, Committee on
Government Reform and Oversight, because it contains information
pertaining to matters under these Subcommittees' jurisdictions. 


--------------------
\1 OPM did not have pharmacy benefit payment data for the remaining
plans, most of which were health maintenance organizations (HMO). 

\2 For other related GAO products, see Blue Cross FEHBP Pharmacy
Benefits (GAO/HEHS-96-182R, July 19, 1996); Blue Cross and Blue
Shield:  Change in Pharmacy Benefits Affects Federal Enrollees
(GAO/T-HEHS-96-206, Sept.  5, 1996); and Pharmacy Benefit Managers: 
Early Results on Ventures With Drug Manufacturers (GAO/HEHS-96-45,
Nov.  9, 1995). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The three FEHBP plans we studied contracted with PBMs to control
rapidly rising pharmacy benefit payments.  The plans estimate that
PBMs saved them over $600 million in 1995 by obtaining manufacturer
and pharmacy discounts and managing drug utilization.  These savings
reduced the pharmacy benefit costs each plan believes it would have
paid without using a PBM by between 20 and 27 percent. 

The PBMs met most of the performance standards in their 1995
contracts, and the plans believe that the PBMs have provided plan
enrollees high-
quality pharmacy service.  Surveys of plan enrollees also indicate a
high degree of satisfaction, with between 93 and 98 percent of
respondents noting satisfaction with their pharmacy benefit services. 

The plans' decisions to use PBMs to control pharmacy benefit costs,
however, can shift business away from retail pharmacies.  For
example, Blue Cross's 1996 benefit change, which encouraged mail
order purchases, reduced affected enrollees' payments to retail
pharmacies by 36 percent or about $95 million.  During the same
period, total payments to retail pharmacies for all enrollees
decreased by about 7 percent or about $34 million.  Moreover, PBM and
plan officials, as well as industry experts, acknowledge that any
additional efforts to control FEHBP pharmacy benefit costs in the
future might require plans to adopt more restrictive cost-
containment procedures that could possibly limit enrollees' access to
drugs and pharmacy services and lessen enrollees' satisfaction with
their pharmacy benefits. 


   BACKGROUND
------------------------------------------------------------ Letter :2

OPM contracts with almost 400 health insurance carriers to operate
the FEHBP.  Under this program, health insurance carriers, including
fee-for-
service plans and HMOs, offer about 8.7 million federal employees,
retirees, and dependents health benefit plans that include pharmacy
benefits. 

In the last 10 years, several FEHBP plans have contracted with PBMs
to manage pharmacy benefits.  Blue Cross, GEHA, and Rural have
contracted with PBMs to obtain both mail order and retail pharmacy
services.  Blue Cross, the largest FEHBP plan, contracted with Medco
in 1987 to provide mail order services and with PCS in 1993 to
provide retail services.  GEHA has used Medco to manage mail order
services since 1990 and retail services since 1993.  Rural first
contracted for mail order services in 1986.  It has used Caremark,
Inc., to manage mail order services since 1992 and retail services
since 1993. 

OPM oversees all FEHBP contracts and reviews benefit change proposals
to assess the changes' cost-effectiveness and possible effect on the
delivery of benefits to federal enrollees.  The federal health plans
oversee the activities of the PBMs and report to OPM any significant
problems that could affect the delivery of benefits to enrollees. 
OPM does not review or audit PBM savings estimates unless they are
submitted as justification for a benefit change that could affect the
quality of enrollees' services. 


   PBMS PROVIDE FEHBP PLANS A
   RANGE OF COST-CONTROL SERVICES
------------------------------------------------------------ Letter :3

Officials at the plans we visited said that they contracted with PBMs
to help control rapidly rising pharmacy benefit payments.  The use of
PBMs allows the plans to pay lower prices for prescription drugs and
provide a wide range of services that typically reduce pharmacy
benefit costs and improve customer services, such as providing mail
order drug services and checking prescriptions for adverse drug
interactions.  According to PBM officials, the services they offer to
the FEHBP plans are generally equivalent to those offered to private
industry customers. 

According to Rural officials, their decision to use a PBM to provide
mail order services in 1986 was directly linked to a need to contain
pharmacy benefit payments that were rising faster than the increase
in drug utilization.  GEHA officials also cited the need to slow the
rate of increase in their pharmacy benefit payments, which they
attributed to rising drug prices and utilization.  Blue Cross
officials also said that they expected PBM services to help them
control pharmacy benefit payments, which have constituted an
increasing share of total benefit payments. 

The plans' PBMs provide a variety of administrative services intended
to control costs.  These include retail pharmacy network development,
mail order pharmacy operation, formulary development, and
manufacturer rebate negotiation.  Table 1 describes some of the
administrative services that the PBMs provide the FEHBP plans. 



                                     Table 1
                     
                     Examples of PBM Administrative Services
                          Provided to Three FEHBP Plans

Service             Description
------------------  ------------------------------------------------------------
Retail pharmacy     PBMs recruit pharmacies, negotiate network drug price
network             discounts, and monitor network pharmacies' customer
development         services.

Mail order          PBMs operate mail order pharmacies that allow enrollees to
pharmacy operation  obtain prescriptions, particularly maintenance
                    prescriptions, by mail.

Formulary           PBMs use pharmacy and therapeutics (P&T) committees\a to
development         help develop formularies that list drugs the plans prefer
                    physicians to prescribe in each therapeutic category.

Rebate negotiation  PBMs negotiate and obtain rebates from drug manufacturers in
                    return for inclusion and low-cost designation of their drugs
                    on the plans' formularies and for formulary compliance
                    programs that impact market share.

Claims processing   PBMs process benefit claims and prepare periodic payment and
                    drug utilization reports for plan customers.
--------------------------------------------------------------------------------
\a P&T committees are independent groups of health care professionals
that evaluate drugs in all therapeutic categories on the basis of
safety, efficacy, and substitutability. 

The PBMs' mail order pharmacies and retail pharmacy networks discount
prescriptions purchased by plan enrollees.  The PBMs typically
reimburse the retail pharmacies according to a discount formula based
on an industry standard, such as the drug's usual and customary
price,\3 average wholesale price (AWP),\4 or maximum allowable cost
(MAC)\5 plus a dispensing fee.  The PBMs also require network
pharmacies to support other cost-reduction techniques, such as
substituting a less expensive generic drug for a brand-name drug when
an equivalent generic drug is available.  Pharmacies accept these
levels of reimbursement and PBM cost-reduction practices to attract
or retain the plans' enrollees. 

Two of the FEHBP plans use the PBMs' national formularies to indicate
the prescription drugs that the plans prefer enrollees to use.\6 All
of the formularies list the drugs by therapeutic class and, in some
cases, relative price.  The PBMs give physicians and enrollees copies
of the formularies to encourage the use of lower cost formulary drugs
over higher cost formulary and nonformulary drugs and to perform
other formulary compliance activities (see table 2).  This ability to
direct market share within a therapeutic class allows the PBMs to
obtain rebates from manufacturers of formulary drugs.  On the basis
of plan estimates, the plans we examined received over $113 million
collectively in rebates in 1995.  Rebates accounted for between 2 and
21 percent of the plans' estimated savings.  Because the FEHBP plans
use open formularies, enrollee reimbursement is not limited to the
drugs listed on the formularies.\7

In addition to obtaining rebates and price discounts, the PBMs use
other methods referred to as "interventions" to cut costs and improve
pharmacy services.  These interventions include activities such as
drug utilization review (DUR), generic and therapeutic interchange
programs, and disease management programs.  Table 2 describes some of
the intervention services that the PBMs provide the FEHBP plans. 



                                     Table 2
                     
                      Physician and Pharmacist Interventions
                         Performed for Three FEHBP Plans

Intervention        Description
------------------  ------------------------------------------------------------
DUR                 DUR programs analyze patterns of drug use to prevent
                    contraindications and adverse interactions. PBMs use this
                    information to make prescription substitution
                    recommendations to physicians and inform plans and
                    physicians about physicians' prescribing patterns.

Generic             Generic substitution interventions switch medications from
substitution        brand-name drugs to chemically equivalent generic drugs. In
                    some states, pharmacists can make this switch if the
                    physician does not indicate that the prescription must be
                    dispensed as written.

Therapeutic         Therapeutic interchange interventions switch nonformulary
interchange         medications to preferred formulary drugs. Therapeutic
                    intervention programs encourage patients to use, and
                    physicians to prescribe, less expensive brand-name formulary
                    drugs considered as safe and effective as other, more
                    expensive brand-name drugs.

Prior               Prior authorization is required for medications that may be
authorization       used to treat conditions or illnesses that are not covered
                    by a plan, are outside the Food and Drug Administration or
                    manufacturer guidelines, have a high potential for abuse, or
                    are ordered in unusual quantities.

Disease management  Disease management programs try to improve the care
                    delivered to a specific group of patients, such as those
                    with diabetes, by recommending particular therapies or
                    patient self-management techniques. PBMs use physician and
                    patient education materials to emphasize shared
                    responsibility and cost-effective approaches.
--------------------------------------------------------------------------------
The PBMs' retail network and mail order pharmacies use computerized
systems to review enrollees' combined mail order and retail pharmacy
records and detect problems with prescriptions at the point of
dispensing.  These concurrent activities can alert the pharmacist
when a drug may adversely interact with other drugs a patient is
using.  They can also identify situations when a generic or formulary
alternative to the prescribed drug is available or when the drug
duplicates an existing prescription.  If the review identifies a
nonrecommended, redundant, or potentially harmful drug, a pharmacist
or technician contacts the prescribing physician.  Figures 1 and 2
depict the mail order and retail dispensing processes at Caremark. 

   Figure 1:  Mail Order
   Prescription-Dispensing Process

   (See figure in printed
   edition.)

   Figure 2:  Retail Network
   Pharmacy-Dispensing Process

   (See figure in printed
   edition.)

The PBMs' retrospective DUR programs study the combined retail and
mail order drug utilization patterns of the plans' enrollees to
identify other instances in which physicians may have prescribed
inappropriate medications or enrollees may not be using prescribed
drugs properly.  When retrospective DUR activities identify
inappropriate prescribing or drug usage, such as incorrect dosages or
durations of therapy, PBMs typically contact the physicians and
encourage the use of more cost-
effective drugs or appropriate therapies. 

The PBMs also try to help the plans contain spending for chronic
conditions, such as asthma and diabetes, by developing disease
management programs to manage the care of enrollees with specific
illnesses.  For example, two PBMs indicated that they notify
enrollees and their physicians about the method they consider most
effective for treating asthma.  Such disease management activities
try to educate both enrollees and their physicians about more
cost-effective treatments and monitor compliance with the
interventions.  The treatment programs are intended to help reduce
the risk of complications and costly additional care, such as
unnecessary diagnosis-related emergency room visits. 


--------------------
\3 The usual and customary price is the price pharmacies charge
cash-paying customers whose prescriptions are not covered by health
insurers. 

\4 Drug manufacturers suggest a list price that wholesalers charge
pharmacies.  The average of the list prices, collected for many
wholesalers, is called a drug's AWP. 

\5 MAC refers to a maximum price that retail pharmacies in plans'
networks may be paid for certain generic drugs. 

\6 Blue Cross does not use its PBMs' national formularies.  Rather,
Blue Cross develops its own formulary with input from its two PBMs. 

\7 The PBMs also offer their customers incentive-based or closed
formularies.  Incentive-based formularies require enrollees to pay
higher copayments if their physicians prescribe nonformulary drugs. 
Closed formularies are more restrictive, limiting coverage to
formulary drugs only. 


   FEHBP PLANS REPORT THAT PBM
   SERVICES YIELD SUBSTANTIAL
   SAVINGS
------------------------------------------------------------ Letter :4

The three FEHBP plans estimate that the PBMs saved their plans over
$600 million in pharmacy benefit costs in 1995.  Although each of the
plans used different approaches to estimate savings and in some cases
may have defined savings sources differently, the savings for all
three plans are based on the plans' estimates of what they would have
paid for prescription drugs and related services without a PBM.  The
estimates were prepared by plan or PBM officials using PBM savings
data.  Although two plans told us that they validated some of the PBM
data, none of the methodologies used to estimate savings has been
examined by independent auditors.  Moreover, according to OPM
officials, OPM does not review or audit the savings unless they
relate to plan benefit changes that could affect enrollee services. 

Blue Cross estimated that its 1995 FEHBP pharmacy savings totaled
about $505 million.  Pharmacy benefit payments in 1995 totaled about
$1.4 billion.  Figure 3 shows the percentage of total savings that
Blue Cross attributed to different PBM services. 

   Figure 3:  1995 Blue Cross
   FEHBP Pharmacy Savings

   (See figure in printed
   edition.)

Source:  Blue Cross and Blue Shield Association. 

The following describes the savings that Blue Cross attributed to PBM
services: 

  -- Retail and mail order pharmacy discounts accounted for about
     $264 million in savings.\8 For retail, total savings resulted
     from the difference between the reimbursement amount PCS paid
     pharmacies for individual prescriptions and the drugs' usual and
     customary prices.  Mail order savings resulted from discounts
     off AWP that Blue Cross negotiated with Medco. 

  -- MAC savings accounted for approximately $72 million in savings. 
     These savings resulted from the difference between the
     reimbursement amount PCS paid the pharmacies for certain generic
     drugs and the drugs' usual and customary prices.\9

  -- Manufacturer rebates accounted for about $107 million in savings
     and represent the guaranteed manufacturer discounts that PCS and
     Medco negotiated with drug manufacturers for including their
     products on their formulary.  Blue Cross received 90 percent of
     the total rebates, and the PBMs retained the remaining 10
     percent as an administrative fee and incentive to increase the
     amount of discounts. 

  -- DUR accounted for about $10 million in savings that resulted
     from clinical activities the PBMs performed.  Savings include
     the sum of the prices of prescriptions reversed or denied
     because of DUR alerts.\10

  -- Medco's intervention program accounted for about $13.5 million
     in savings, which were derived, in part, from the use of less
     expensive brand-name drugs. 

  -- The prior approval program accounted for about $36.5 million in
     savings.  Blue Cross determined savings from this program by
     calculating the cost of prescriptions denied reimbursement or
     never filled by enrollees who received a prior approval form.\11
     This program covers 13 drugs that require Blue Cross approval
     before dispensing. 

  -- The coordination of benefits (COB) program accounted for about
     $2 million in savings.  Blue Cross computed savings from this
     program by determining the total reductions in the amount Blue
     Cross was responsible for paying for claims that were also
     covered in part by other insurers.  COB is an industrywide
     method used to avoid paying duplicate benefits to an individual
     covered by another insurer. 

GEHA estimated that its 1995 FEHBP pharmacy savings totaled about $85
million.  Prescription drug payments in 1995 totaled about $226
million.  Figure 4 shows the percentage of total savings that GEHA
attributed to different PBM services. 

   Figure 4:  1995 GEHA FEHBP
   Pharmacy Savings

   (See figure in printed
   edition.)

Source:  GEHA. 

The following describes the savings that GEHA attributed to PBM
services: 

  -- Retail and mail order pharmacy discounts accounted for
     approximately $63 million in savings.  Total savings resulted
     from the difference between the AWP that GEHA would have paid
     for retail and mail order drugs and what GEHA did pay for these
     drugs because of the negotiated discounts. 

  -- DUR accounted for about $8 million in savings, which resulted
     from the concurrent clinical activities the PBM performed.  For
     drugs receiving a DUR alert, savings include the sum of the
     prices of prescriptions reversed or denied before dispensing. 

  -- Formulary rebates accounted for approximately $6 million in
     savings.  Under the retail and mail order programs, Medco
     receives discounts from certain drug manufacturers for including
     the manufacturers' products on Medco's national formulary.  In
     1995, GEHA retained 80 percent of total rebates due to the
     dispensing of each manufacturer's formulary drugs under GEHA's
     program.  GEHA had a guaranteed formulary savings of 3 percent
     of the total ingredient cost of brand-name drugs dispensed
     through the mail. 

  -- Generic substitution accounted for about $4 million in estimated
     savings.  Although GEHA did not have a guaranteed generic
     substitution rate in 1995, its substitution rate was higher in
     1995 than 1994.  The savings represent the difference between
     the 1994 and 1995 generic savings.  In other words, in 1994,
     where applicable, generic equivalents were substituted for
     brand-name drugs 68 percent of the time and, in 1995, about 77
     percent of the time.  GEHA's 1995 savings represent the
     difference between brand-name and generic prices for 9 percent
     of the drugs dispensed at both retail and mail order pharmacies. 

  -- Disease management accounted for approximately $4 million in
     savings.  Savings resulted from multiplying a PBM-determined
     savings per patient per year in overall health care costs by the
     number of patients enrolled in GEHA's diabetes program.\12

  -- Prior authorization accounted for about $200,000 in savings,
     which were determined by calculating the cost of a prescription
     drug that was denied reimbursement or never filled by enrollees
     who received a prior authorization form.\13

Rural estimated that its 1995 FEHBP pharmacy savings totaled about
$11.6 million.  Prescription drug payments in 1995 totaled about $46
million.  Figure 5 shows the percentage of total savings that Rural
attributed to different PBM services. 

   Figure 5:  1995 Rural FEHBP
   Pharmacy Savings

   (See figure in printed
   edition.)

Source:  Caremark. 

The following describes the savings that Rural attributed to PBM
services: 

  -- Retail and mail order pharmacy discounts accounted for
     approximately $8 million in savings.  These savings resulted
     from price discounts off drugs' AWP for brand-name and AWP or
     MAC for generic pharmaceutical products at mail order and retail
     pharmacies. 

  -- DUR accounted for about $1.3 million in savings, which occurred
     when Caremark did not fill prescriptions due to routine DUR
     alerts such as drug allergy, patient not covered, or duplicate
     claim. 

  -- Managed plan activities accounted for about $1.9 million in
     savings.  These savings resulted from instances when Caremark
     pharmacists contacted physicians and obtained permission to
     substitute a generic drug for a brand-name drug that was
     prescribed "Dispense as Written." Other savings resulted from
     clinical interventions, such as recommendations for more
     appropriate drug regimens or duration of drug therapy. 

  -- Substitution of formulary drugs for nonformulary drugs by the
     mail order pharmacy accounted for about $200,000 in savings. 

  -- Formulary rebates accounted for approximately $200,000 in
     savings.  Caremark pays Rural an annual rebate based on a
     percentage of the prior year's drug costs. 


--------------------
\8 Retail pharmacy savings do not include savings from the use of
generic drugs for which PCS has set a maximum reimbursement limit for
pharmacies. 

\9 MAC savings include about 73 percent of all generic drugs
dispensed by retail pharmacies that are reimbursed by Blue Cross. 
The remaining 27 percent represent generic drugs for which Blue
Cross, at PCS' recommendation, does not pay retail pharmacies
incentives to encourage substitution because (1) they have such
narrow therapeutic ranges that variations among them could affect a
patient's response or (2) generically available products with
reliable suppliers and low cost are insufficient to justify such
incentives. 

\10 A DUR alert could occur for several reasons, including one or
more of the following:  rejects for early refill and maximum daily
dose and reversals based on screens for drug interaction, duplicate
therapy, drug allergy, drug and pregnancy, drug and disease, drug and
gender, drug and age, under-minimum daily dose, and underuse. 

\11 Savings calculations involved determining the number of months
for which a specific drug is usually prescribed. 

\12 Because GEHA chose not to provide medical claims data to the PBM,
the PBM relied on its experience with another client who was enrolled
in its diabetes disease management program to estimate overall
savings per patient. 

\13 According to GEHA officials, they only required prior
authorization for one drug in 1995. 


   FEHBP PLANS REPORT THAT PBM
   CUSTOMER SERVICES MEET
   PERFORMANCE STANDARDS
------------------------------------------------------------ Letter :5

The FEHBP plans evaluate PBM customer service by determining the
extent to which the PBMs meet the annual performance standards in
their contracts.  The performance standards are intended to ensure
quality service, and they focus on factors such as mail order
turn-around time and access to counseling and retail pharmacy
services.  According to plan data, the PBMs met most of each plan's
customer service performance standards in 1995.  Furthermore,
enrollees in all three plans reported high levels of satisfaction
with the quality of PBM services.\14

All of the PBM contracts include performance standards for customer
services provided to the FEHBP plans and their enrollees.  The mail
order contracts typically specify acceptable time frames for
telephone responses and prescription dispensing.  For example, two of
the plans' contracts require their PBMs to answer a specified
percentage of the customer service telephone calls to each plan's
mail order pharmacy within 20 seconds.  All of the contracts also
require the PBMs to dispense between 90 and 99 percent of all mail
order prescriptions within 2 to 7 business days. 

Regarding retail network access, one plan's contract specifies that a
network pharmacy be located within 5 miles of 98 percent of the
plan's enrollees.  Although the other two 1995 contracts did not
specify pharmacy distances, one plan's retail network had a pharmacy
within 5 miles of 92 percent of the plan's enrollees, and the other
plan's PBM was required to contract with retail pharmacies in
"agreed-upon locations."

All of the plans use customer surveys to assess enrollees'
satisfaction with their pharmacy benefits.  In addition to reviewing
the performance reflected in the PBMs' operating reports, the survey
addresses specific issues, such as whether the enrollees felt the
time their calls were on hold was reasonable, and more general
issues, such as enrollees' overall satisfaction with program
performance. 

In 1995, the plans' surveys typically reflected high levels of
enrollee satisfaction.  For example, an average of 94 percent of
those who responded to Blue Cross's 1995 quarterly pharmacy program
surveys indicated that they were either "satisfied" or "very
satisfied" with their mail order prescription service.\15 According
to Caremark, 95 percent of those who responded to its annual customer
satisfaction survey described their experiences purchasing long-term
prescriptions through Caremark's mail order service as "good," "very
good," or "excellent."\16 Caremark reported that 93 percent of those
responding indicated similar satisfaction with their retail services. 
GEHA's 1995 biannual patient satisfaction survey results showed that
about 98 percent of enrollee responses indicated their overall level
of customer satisfaction with retail and mail order services as
"satisfied" or "very satisfied."


--------------------
\14 Blue Cross contracts with the Gallup Organization to conduct
quarterly retail and mail order customer satisfaction surveys.  GEHA
receives the results of semiannual retail and mail order customer
satisfaction surveys from Medco.  Caremark contracts with Walker
Research to conduct annual customer satisfaction surveys.  The
Caremark survey population is not limited to Rural enrollees, but
Caremark and Rural use the results as a performance indicator because
Rural enrollees account for a large proportion of those served.  None
of the plans has audited the survey results. 

\15 Blue Cross's customer survey for its retail pharmacy program did
not contain a comparable measure for its retail pharmacy services. 

\16 Although Caremark's survey does not specifically target Rural
enrollees, Rural officials believe that the results are indicative of
Rural enrollees' experience. 


   PBM PRACTICES CONCERN RETAIL
   PHARMACIES
------------------------------------------------------------ Letter :6

The FEHBP plans we studied are satisfied with the savings and quality
of services provided by the PBMs, and enrollees have reported a high
degree of satisfaction with PBM pharmacy services.  The National
Association of Chain Drug Stores (NACDS) and retail pharmacists,
however, have raised questions about the effect of PBM use on retail
pharmacies and the quality and availability of pharmacy services. 
The pharmacists' concerns typically focus on three areas--access to
retail pharmacy services, quality of mail order pharmacy services,
and reduced reimbursement for drugs dispensed by retail pharmacies. 

Although retail pharmacists contend that FEHBP plans' use of PBMs can
limit enrollees' ability to obtain prescriptions at their local
retail pharmacies, plan data indicate that enrollee access to retail
pharmacy services has not been substantially limited.  For example,
in 1995, enrollees could purchase discounted prescriptions at between
44,000 and 55,000 retail network pharmacies, or between 80 and 97
percent of pharmacies nationwide, and obtain mail order services
particularly valued by enrollees who do not live near a retail
pharmacy.  Furthermore, they could purchase regularly priced
prescriptions at any retail pharmacy. 

Retail pharmacists also have raised questions about the quality of
mail order services because mail order pharmacists cannot provide
face-to-face counseling to patients and lack access to information
about all the medications an enrollee is using.  We found, however,
that although mail order pharmacists at the plans we studied do not
provide face-to-face patient counseling, they do provide telephone
counseling 24 hours a day. 

In addition, both retail network and mail order PBM pharmacists for
these plans have access to integrated drug utilization records that
include all the prescriptions each enrollee has received through the
plans' retail network and mail order pharmacies.  As a result,
pharmacists at these locations appear equally able to detect
potentially adverse drug interactions or inappropriate prescriptions
before dispensing a drug.  In addition, both of the mail order
pharmacies we observed use a variety of quality assurance processes
to ensure that enrollees receive the correct drug and number of
prescriptions.  These processes include automated scans that match
prescriptions to drug quantities, names, and mailing labels. 
Typically, these and most other pharmacy activities are performed by
pharmacists or trained pharmacy technicians supervised by
pharmacists. 

Lastly, retail pharmacists contend that FEHBP plans' use of PBMs can
affect retail pharmacies' business in two ways.  First, plan designs
can provide enrollees with financial incentives to use mail order
services.  Second, cost-containment strategies can rely too heavily
on retail pharmacy discounts. 

A pharmacy benefit change instituted by Blue Cross in 1996
illustrated the retail pharmacists' concerns.  This change affected
the way many federal enrollees obtain prescription drugs.  Blue
Cross's attempt to increase savings by encouraging mail order
purchases produced an unexpectedly rapid increase in mail order
prescriptions, resulting in a 36-percent reduction or about $95
million in payments for affected enrollees to retail pharmacies
during the first 5 months of 1996.  Total payments to all retail
pharmacies for prescriptions dispensed to all enrollees in Blue
Cross's federal health plan, including those affected by the benefit
change, decreased about $34 million or about 7 percent during that
period.  Rural experienced a similar shift when the plan implemented
a comparable benefit change in 1989.  According to Rural officials,
this change also resulted in an immediate and substantial increase of
between 35 and 40 percent in the number of prescriptions filled by
mail order.  Nevertheless, in 1995, over two-thirds of all
prescriptions at the Blue Cross and GEHA federal health plans
continued to be filled by retail pharmacies.  However, payments to
retail pharmacies differed between the two plans.  About 70 percent
of Blue Cross's prescription payments\17 went to its retail network
pharmacies; over two-thirds of GEHA's prescription payments went to
its mail order pharmacy. 

Concerns about the size and effect of PBM pharmacy discounts are
reflected in reports that pharmacy profit margins are decreasing as
PBMs and managed care organizations account for a greater share of
pharmacy business.  Moreover, an industry trade publication reported
that the number of independent pharmacies decreased by 1,800 or about
7.2 percent in 1995.\18 However, the publication also notes that many
of these pharmacies were purchased by major drug chains and then
absorbed into the chains' nearest pharmacies. 

Although the future impact of PBM use on federal enrollees and retail
pharmacies is unclear, additional efforts to control FEHBP plans'
pharmacy benefit costs could affect retail pharmacies and federal
enrollees.  For example, if the number of retired FEHBP enrollees
continues to grow, payments for maintenance drugs might increase and
the plans might decide to provide additional incentives to use mail
order services for maintenance prescriptions.  This type of benefit
change could allow the plans to take further advantage of large mail
order discounts but could also result in further declines in the
plans' payments to retail pharmacies.  Moreover, if plans adopt
additional actions to control pharmacy benefit costs, such as
adopting restrictive formularies and more aggressive therapeutic
interchange programs or reducing reimbursement rates and the size of
the retail network, these actions could affect enrollees' access to
drugs.  Such actions could also affect enrollees' satisfaction with
their pharmacy benefits as well as the retail pharmacies' business. 


--------------------
\17 Unlike GEHA's payments, the Blue Cross payments do not include
the copayments that patients paid to retail pharmacies for their
prescription drugs. 

\18 Marie Griffin, "Showing Strength, Back-to-Basics Approach Enables
Drug Chains to Reach New Heights," Drug Store News, April 29, 1996,
p.  59. 


   AGENCY AND OTHER COMMENTS
------------------------------------------------------------ Letter :7

We obtained comments on a draft of this report from OPM, Blue Cross,
GEHA, Rural, Medco, and Caremark.  We also obtained comments from
NACDS on the section of the report that addressed the concerns of
retail pharmacies.  In general, they found the report to be accurate
and complete and provided specific technical comments, which we
incorporated into the report where appropriate. 


---------------------------------------------------------- Letter :7.1

Copies of this report will be made available to the Director of OPM;
officials of Blue Cross, GEHA, Rural, Medco, PCS, and Caremark; and
others upon request. 

This report was prepared by John C.  Hansen, Assistant Director;
Jennifer Weil Arns, Evaluator-in-Charge; and Mary W.  Freeman. 
Please call Mr.  Hansen at (202) 512-7105 if you or your staff have
any questions. 

Bernice Steinhardt
Director, Health Services Quality
 and Public Health

List of Requesters

The Honorable Joseph Lieberman
Ranking Minority Member
Subcommittee on Post Office
 and Civil Service
Committee on Governmental Management
United States Senate

The Honorable John L.  Mica
Chairman
The Honorable Tim Holden
Ranking Minority Member
Subcommittee on Civil Service
Committee on Government Reform
 and Oversight
House of Representatives

The Honorable Barbara A.  Mikulski
United States Senate

The Honorable Benjamin Gilman
House of Representatives

The Honorable James Moran
House of Representatives


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To understand why the FEHBP plans we studied had contracted with PBMs
for pharmacy benefit services, we met with representatives of OPM,
Blue Cross, GEHA, and Rural to discuss their reasons for contracting
with PBMs and the goals they hope to achieve through PBM contracts. 
We also obtained prescription and total benefit payment data from the
plans and OPM. 

To identify PBM services, we reviewed recent PBM contracts, OPM open
season benefit brochures, and plan and PBM benefit literature.  We
also observed operations at Medco's Tampa, Florida, and Caremark's
Richmond, Virginia, mail order pharmacies and met with plan and PBM
officials to discuss these services in detail.  To determine the
means used to assess PBM performance, we examined contracts and
planning documents to identify performance standards such as
telephone response times and time required to fill prescriptions.  We
also interviewed plan and PBM officials to discuss PBM performance
assessment, and we reviewed activity reports to determine whether the
PBMs are meeting performance requirements. 

Regarding concerns about the effect of PBM use, we met with plan
officials to discuss their satisfaction with PBM savings and obtain
savings estimates.  We also obtained copies of customer surveys and
questions used to assess enrollee satisfaction.  However, the
reported results of these customer satisfaction surveys have not been
verified by the plans or OPM.  We met with representatives of NACDS
to discuss their views on the effect of PBMs on retail pharmacies. 
In addition, we reviewed the Health Care Financing Administration's
report, Assessment of the Impact of Pharmacy Benefit Managers, dated
September 30, 1996.  We also examined Blue Cross prescription
utilization and drug payment data to determine the effects of the
1996 pharmacy benefit change on payments to retail pharmacies. 

Because much of the information contained in the PBM contracts is
proprietary and confidential, we have not specified individual
manufacturer discounts and rebates.  Moreover, because actual drug
prices are proprietary, we did not compare mail order and retail drug
prices. 

We conducted our study between March 1996 and January 1997 in
accordance with generally accepted government auditing standards. 


*** End of document. ***