Prescription Drug Benefits: Implications for Beneficiaries of Medicare
HMO Use of Formularies (Letter Report, 07/20/1999, GAO/HEHS-99-166).

Pursuant to a congressional request, GAO studied how Medicare health
maintenance organizations (HMO) manage drug formularies to control drug
expenditures and what the implications are for beneficiaries of these
formulary management activities.

GAO noted that: (1) evaluating the prescription drug benefits Medicare
HMOs offer is an important but challenging undertaking for prospective
enrollees; (2) to determine which plan best meets their needs,
beneficiaries need to assess how HMO's use of formularies can affect
their drug benefits; (3) comparing plans can be difficult because the
types of formularies HMOs use and the way in which formularies are
managed differ considerably; (4) the choices beneficiaries make can have
a significant impact on the value of their drug benefit and
out-of-pocket costs; (5) the HMOs GAO studied varied considerably in the
types of formularies they use and the methods they use to manage them;
(6) the HMOs also use several types of formulary controls to manage drug
expenditures; (7) 12 of the 16 HMOs require the use of generic drugs
when they are available; (8) 7 of the 16 use variable copayments, with a
larger amount for brand-name drugs and a smaller amount for generics;
(9) 12 of the 16 HMOs GAO examined deleted drugs from their formularies
in four therapeutic classes that are widely used to treat health
conditions common to the elderly: hypertension, depression, ulcers, and
high cholesterol; (10) these deletions required beneficiaries to switch
to alternative formulary drugs or increase their out-of-pocket expenses,
in some cases to the full price of the drug; (11) however, 15 of the 16
also added drugs to their formularies in these classes; (12) considering
all the deletions and additions, 12 of the 16 HMOs covered as many or
more drugs in each class in January 1999 than they did in November 1997;
(13) with one exception, the HMOs continue to offer several alternatives
for physicians to prescribe in each class; (14) the HMOs also use
different methods to notify beneficiaries of formulary changes and to
consider exceptions from formulary changes; (15) while some HMOs do not
notify beneficiaries of formulary changes, others send beneficiaries a
copy of the formulary as well as a letter that informs them of specific
changes that affect them and the reasons for the changes; and (16)
although some HMOs allow a physician to except a beneficiary from a
change without providing the HMO justification for the decision, others
require that the physician document, in some cases through several
steps, that formulary alternatives are inappropriate for a beneficiary
before the HMO will agree to cover a nonformulary drug.

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

 REPORTNUM:  HEHS-99-166
     TITLE:  Prescription Drug Benefits: Implications for Beneficiaries
	     of Medicare HMO Use of Formularies
      DATE:  07/20/1999
   SUBJECT:  Health care cost control
	     Health care services
	     Health insurance
	     Comparative analysis
	     Health services administration
	     Beneficiaries
	     Information disclosure
	     Health maintenance organizations
	     Drugs
IDENTIFIER:  Medicare Choice Program
	     Medicare Program
	     Medicare Health Maintenance Organizations Program

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************

Cover
================================================================ COVER

Report to Congressional Requesters

July 1999

PRESCRIPTION DRUG BENEFITS -
IMPLICATIONS FOR BENEFICIARIES OF
MEDICARE HMO USE OF FORMULARIES

GAO/HEHS-99-166

Medicare HMO Use of Formularies

(108356)

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

  BBA - Balanced Budget Act of 1997
  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  MCO - managed care organization
  P&T - pharmacy and therapeutics

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

B-279239

July 20, 1999

The Honorable Charles E.  Grassley
Chairman
The Honorable John B.  Breaux
Ranking Minority Member
Special Committee on Aging
United States Senate

The Honorable Ron Wyden
United States Senate

Prescription drug coverage may be the most important reason that over
6 million of the approximately 39 million Medicare beneficiaries have
enrolled in health plans offered by health maintenance organizations
(HMO) that participate in the Medicare+Choice program.\1 Although
traditional Medicare does not cover outpatient prescription drugs,
most HMOs in Medicare+Choice do provide this benefit, resulting in
outpatient drug coverage for over 90 percent of the beneficiaries
enrolled in Medicare+Choice plans. 

Selecting a plan that meets a beneficiary's needs can be difficult. 
As we have reported, consistent comparative information on the
benefits offered by Medicare+Choice plans is not readily available.\2
The lack of comparative information is particularly problematic in
evaluating plans' drug benefits because so many different factors
determine the true extent of coverage.  Currently, Medicare
beneficiaries can join or leave a plan on a monthly basis.  However,
in 2002, making informed choices among health plans will become more
important, because under the Balanced Budget Act of 1997 (BBA) (P.L. 
105-33) Medicare beneficiaries will not be able to change plans as
frequently.  If beneficiaries experience problems with a plan or
decide that another plan's drug benefits better meet their needs,
they will have a limited time each year to change plans.\3 Afterward,
beneficiaries will be locked into their health plan decisions for the
remainder of the year. 

HMOs use various techniques to help control the cost of providing
prescription drug benefits.  One of the most common techniques is to
use a formulary--a list of prescription drugs, grouped by therapeutic
drug class, that an HMO prefers its physicians to prescribe.\4 HMOs
may cover only formulary drugs or provide financial incentives, such
as lower copayments, to use formulary rather than nonformulary drugs. 
In managing their formularies, HMOs perform several functions,
including deciding which drugs to add to or delete from their
formularies, notifying beneficiaries and physicians about formulary
changes, and considering physician requests to cover deleted drugs
and other nonformulary drugs for specific beneficiaries. 

Increasing prescription drug prices and expensive new drugs have
reportedly caused HMOs to more closely examine the drugs they include
on their formularies.  These decisions affect not only an HMO's drug
expenditures, but also beneficiaries' care, particularly when their
HMO deletes a drug they have been taking and requires them to obtain
an exception to remain on the drug, switch to another drug, or pay
more of the cost out-of-pocket. 

Concerns have been raised that beneficiaries may not be aware of the
implications of formulary management decisions before they enroll in
Medicare HMOs--decisions that affect their coverage, whether and how
they will be notified about formulary changes, and how their
physicians may obtain exceptions from formulary changes that they
believe are inappropriate.  In response to these concerns, more than
half of the states have enacted legislation related to HMOs and other
managed care organizations' (MCO) formulary management, including
laws that require MCOs to disclose their formularies and procedures
by which plan enrollees may obtain coverage of specific nonformulary
drugs. 

Because of your interest in these issues, you requested that we study
how Medicare HMOs manage drug formularies to control drug
expenditures and what the implications are for beneficiaries of these
formulary management activities. 

To address these issues, we obtained information from 16 HMOs in the
Medicare+Choice program in three markets:  6 in Los Angeles; 7 in
Miami (Dade, Broward, and Palm Beach counties); and 3 in
Philadelphia.  These 16 represented more than 25 percent of all
beneficiaries enrolled in Medicare HMOs.  From each HMO, we obtained
information on the policies and procedures used to make formulary
decisions, notify health care providers and beneficiaries about
formulary changes, and consider physician requests for nonformulary
drugs.  We also obtained copies of formularies in effect for each HMO
on November 1, 1997; November 1, 1998; and January 1, 1999. 

We performed our work between October 1998 and July 1999 in
accordance with generally accepted government auditing standards. 
Appendix I contains more information on our scope and methodology. 

--------------------
\1 A plan refers to a package of benefits, including out-of-pocket
costs and terms of coverage. 

\2 See Medicare+Choice:  New Standards Could Improve Accuracy and
Usefulness of Plan Literature (GAO/HEHS-99-92, Apr.  12, 1999). 

\3 Beneficiaries will have 6 months in 2002 and 3 months in the years
following to change their enrollment choices. 

\4 A drug class is a group of drugs that are similar in chemistry,
method of action, and purpose of use. 

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

Evaluating the prescription drug benefits Medicare HMOs offer is an
important but challenging undertaking for prospective enrollees.  To
determine which plan best meets their needs, beneficiaries need to
assess how HMOs' use of formularies can affect their drug benefits. 
Comparing plans can be difficult because the types of formularies
HMOs use and the ways in which formularies are managed differ
considerably.  The choices beneficiaries make can have a significant
impact on the value of their drug benefits and out-of-pocket costs. 
Plans vary widely in the drugs they cover on their formularies, the
copayments they require beneficiaries to make, and the annual limits
on beneficiaries' coverage.  Further, beneficiaries in some plans may
not learn about formulary changes until the beneficiaries are at the
pharmacy counter.  Some plans also make it difficult for physicians
to obtain an exception to allow patients to remain on their existing
medication at no additional cost if it is dropped from the formulary. 

The HMOs we studied vary considerably in the types of formularies
they use and the methods they use to manage them.  For example, 10 of
the 16 HMOs use closed formularies that limit coverage to certain
drugs, and another formulary is partially closed, in that the HMO
limits coverage of drugs within 20 classes but will cover all drugs
outside those classes.  The HMOs also use several types of formulary
controls to manage drug expenditures.  Twelve of the 16 HMOs require
the use of generic drugs when they are available.  Seven of the 16
use variable copayments, with a larger amount for brand-name drugs
and a smaller amount for generics. 

Twelve of the 16 HMOs we examined deleted drugs from their
formularies in four therapeutic classes that are widely used to treat
health conditions common to the elderly:  hypertension, depression,
ulcers, and high cholesterol.  These deletions required beneficiaries
to switch to alternative formulary drugs or increase their
out-of-pocket expenses, in some cases to the full price of the drug. 
However, 15 of the 16 also added drugs to their formularies in these
classes.  Considering all the deletions and additions, 12 of the 16
HMOs covered as many or more drugs in each class in January 1999 than
they did in November 1997.  With one exception, the HMOs continue to
offer several alternatives for physicians to prescribe in each class. 

The HMOs also use different methods to notify beneficiaries of
formulary changes and to consider exceptions from formulary changes. 
While some HMOs do not notify beneficiaries of formulary changes,
others send beneficiaries a copy of the formulary as well as a letter
that informs them of specific changes that affect them and the
reasons for the changes.  Although some HMOs allow a physician to
except a beneficiary from a change without providing the HMO
justification for the decision, others require that the physician
document, in some cases through several steps, that formulary
alternatives are inappropriate for a beneficiary before the HMO will
agree to cover a nonformulary drug.  Some HMOs may also require that
a beneficiary use a formulary drug for a trial period to see if there
are any adverse effects before the HMO will cover the physician's
original drug choice. 

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

Medicare beneficiaries may obtain health care through Medicare's
traditional fee-for-service arrangement or enroll in a Medicare
managed care plan if one is available in their county.  The BBA
established the Medicare+Choice program to replace Medicare's
previous managed care program.  Medicare+Choice expanded
beneficiaries' health plan options by permitting new types of
entities, such as preferred-provider organizations and
provider-sponsored organizations, to participate in Medicare.  As of
March 1999, about 6.1 million beneficiaries were enrolled in 244
Medicare+Choice plans that offer prescription drug benefits.  All of
the plans offering these benefits were HMOs. 

The BBA directed the Health Care Financing Administration (HCFA) to
provide beneficiaries with general information about managed care
plans.  HCFA's goal is to make beneficiaries aware of their health
plan options and to provide some summary information to help
beneficiaries compare those options.  For example, HCFA plans to
provide each beneficiary a Medicare handbook that contains
information about the benefits offered by available plans. 
Beneficiaries may also call HCFA's toll-free number (1-800-MEDICAR)
or access an Internet site (www.medicare.gov) that also provides
basic comparative information about plan options.  However, for
detailed information about specific plans, HCFA directs beneficiaries
to MCOs. 

HCFA reviews and approves all written information that MCOs provide
beneficiaries to ensure that the materials are not inaccurate,
misleading, or unclear.  Although HCFA does not require plans to
notify beneficiaries of formulary changes, it reviews any materials
or letters the plans send beneficiaries regarding drug formularies or
formulary changes.  However, HCFA does not review plans' formulary
decisions.  We previously reported that inconsistent review standards
have contributed to inconsistent reviews.\5

HCFA is also responsible for reviewing changes to plan benefits. 
HCFA's contracts with MCOs establish the minimum benefits a plan must
offer and the maximum fees it may charge during a calendar year.  The
contracts stipulate that MCOs are not allowed to make benefit changes
that reduce benefits or increase fees for any benefits until the next
contract cycle.  According to HCFA officials, however, the agency has
not determined whether formulary deletions constitute a benefit
reduction.  The officials said that the agency has just begun to
consider the issue. 

Prior to 1996, few states had laws regulating the use of drug
formularies by MCOs.  However, according to the National Conference
of State Legislatures, by April 1999 at least 26 states had enacted
laws concerning the disclosure to plan enrollees of formularies,
procedures to obtain nonformulary drugs, or both.\6

For example, 13 of the 26 states enacted legislation that required
MCOs to disclose both their formularies and the procedures they
require to obtain coverage of nonformulary drugs.\7

Two of the three states we visited have passed laws related to MCOs'
formulary management.  Pennsylvania law requires that, upon request,
MCOs provide information on whether specific drugs are covered and a
description of the process by which a physician can prescribe
nonformulary drugs when the formulary drug has been ineffective or
causes an adverse reaction.\8 California law requires that MCOs
provide copies of formularies, upon request, establish expedited
processes to consider physician requests for nonformulary drugs, and
continue coverage for any drugs deleted from their formularies that a
physician continues to prescribe for individual plan enrollees.\9 The
California Department of Corporations has reviewed the formularies of
HMOs suspected of deleting drugs inappropriately from their
formularies before the July 1, 1999, effective date of the law
requiring continued coverage.\10

The HMOs we studied rely extensively on the deliberations of pharmacy
and therapeutics (P&T) committees within their companies to determine
which drugs to add to or delete from their formularies.  Typically, a
company would use a P&T committee that included medical and pharmacy
representatives from each of its HMOs.  P&T committees consider
several factors when they assess whether a drug should be added to or
deleted from a formulary, including the drug's clinical effectiveness
and safety, and whether the drug is therapeutically equivalent to
drugs already on the formulary.  Most of the P&T committees for the
HMOs in our study also consider a drug's cost in their deliberations. 
Appendix II contains more information on the HMOs' P&T processes. 

--------------------
\5 GAO/HEHS-99-92, Apr.  12, 1999. 

\6 Jacob Herstek, Managed Care Drug Formularies (Washington, D.C.: 
National Conference of State Legislatures, Apr.  1, 1999). 

\7 The administration has directed federal health plans, including
Medicare MCOs, to comply with recommendations of the President's
Advisory Commission on Consumer Protection and Quality in the Health
Care Industry concerning the information consumers should receive
from plan sponsors about formularies, the drugs they include, and
exceptions to formulary drugs. 

\8 Pa.  Stat.  Ann.  tit.  40, section 991.2136 (West 1999). 

\9 Cal.  Health & Safety Code sections 1363.01, 1367.20, 1367.22,
1367.24 (West 1999). 

\10 The Department has used a panel of consultants to review the
deletions and develop an approach and criteria for their decisions. 
According to a Department official, the Department has decided to
keep both the identities of panel members and the criteria they used
to evaluate formulary changes confidential. 

   HMOS USE DIFFERENT APPROACHES
   TO MANAGE FORMULARIES
------------------------------------------------------------ Letter :3

HMOs use formularies to control their drug expenditures by limiting
the number of drugs a plan will cover, using financial incentives to
encourage the use of formulary drugs, and employing compliance
programs that encourage or require physicians to prescribe formulary
drugs.  To accomplish these goals, HMOs develop and manage
formularies in conjunction with decisions they make concerning the
design of their drug benefit.  Typically, the design includes such
features as (1) the extent to which the plan will pay for
nonformulary drugs, if at all; (2) the copayments the plan requires
from beneficiaries for formulary or nonformulary prescriptions; and
(3) limits or caps on the total dollar amount the plan will pay for
outpatient drugs. 

Formularies are often described as open, incentive-based, or closed. 
Open formularies are often referred to as voluntary because
beneficiaries are not penalized financially if their physicians
prescribe nonformulary drugs.  HMOs that use open formularies may do
so in conjunction with compliance programs that encourage physicians
to prescribe formulary drugs, even though the HMOs will still cover
both formulary and nonformulary drugs.  An incentive-based formulary
provides beneficiaries financial incentives for their physicians to
prescribe formulary drugs.  Under this arrangement, the plan still
covers nonformulary drugs, but it requires a copayment for them that
is not required for formulary drugs or a higher copayment than that
required for formulary drugs.  A closed formulary takes these
financial incentives one step further by limiting coverage to only
formulary drugs.  Therefore, if a beneficiary's physician prescribes
a nonformulary drug, the beneficiary will have to pay the full cost
of that prescription unless the HMO grants an exception.  According
to one report, the percentage of HMOs using closed formularies is
expected to increase from about 25 percent in 1996 to about 37
percent in 1999.\11

Ten of the 16 HMOs in our study use closed formularies, and another
is partially closed in that the HMO limits coverage to drugs in 20
classes but will cover all drugs outside of those classes.\12 Two of
the HMOs examined have open formularies in which beneficiaries pay
the same copayment for formulary and nonformulary drugs, and the
remaining three HMOs use incentive-based formularies that require a
higher copayment for nonformulary drugs than for formulary drugs. 

The HMOs we studied also manage their prescription drug expenditures
by using several types of formulary controls, such as generic
substitution and variable copayments.\13 Generic substitution
encourages or requires the use of generic drugs when they are
available in place of more expensive brand-name drugs.  Beneficiaries
may also be required as part of the overall benefit design to make
different copayments for brand-name, generic, and nonformulary drugs. 
While the use of generic substitutions has been common for over 90
percent of all HMOs since 1996, a dramatic increase appears to have
occurred in the use of variable copayments, which were used by about
53 percent of HMOs in 1996 and are expected to be used by about 86
percent of HMOs in 1999.\14 Twelve of the 16 HMOs in our study
require the use of generic drugs when they are available.\15 At most
of these HMOs, if beneficiaries do not choose the generic, they pay
the cost difference between the generic and brand-name drug or the
cost difference plus any copayment for the brand-name drug.  Seven of
the 16 HMOs also use variable copayments between brand-name and
generic drugs, charging more for brand-name drugs than for generic
drugs. 

Between November 1997 and January 1999, all but one of the HMOs we
examined made additions to or deletions from their formularies in at
least one of four classes of drugs that are used to treat health
conditions common to the elderly:  hypertension, depression, ulcers,
and high cholesterol.\16 Twelve of the 16 HMOs deleted a total of 62
drugs from their formularies, which required beneficiaries to switch
to alternate formulary drugs.\17 These deletions were the result of
the HMOs' clinical or cost assessments about the drugs, rather than
the result of generic substitutions for brand-name drugs.  Although
deletions occurred in each class, most deletions occurred in the
antihypertension class, in which 11 HMOs deleted a total of 39
drugs.\18 In addition, 1 of these 11 HMOs changed from using an open
formulary for all drugs to a formulary in which many drug classes,
including three we studied, were closed.\19

While many plans deleted drugs from their formularies, 15 of the 16
HMOs added one or more drugs to their formulary in at least one of
the classes we reviewed.  Collectively, the HMOs made over 200
additions.  Considering all formulary deletions and additions, 12 of
the 16 HMOs covered as many or more drugs in each class in January
1999 than they did in November 1997.  Moreover, with one exception,
the HMOs continued to offer several alternatives for physicians to
prescribe in each class. 

Although most of the HMOs included a number of drugs for
hypertension, depression, ulcers, and high cholesterol on their
formularies, the number of drugs varied for each class.  For example,
in January 1999, the number of drugs for the four classes we reviewed
ranged from 2 to 9 for antiulcer drugs, 3 to 10 for anticholesterol
drugs, 12 to 22 for antidepression drugs, and 30 to 78 for
antihypertension drugs. 

--------------------
\11 Novartis Pharmaceuticals Corporation, Pharmacy Benefit Report,
Trends and Forecasts, 1998 Edition (East Hanover, N.J.:  Novartis,
1998). 

\12 Within the closed classes, this HMO encourages beneficiaries to
use a subset of drugs that the HMO has informed beneficiaries and
physicians are more economical.  Formularies may cover as many as 100
drug classes.  One of the four classes we reviewed, antidepressants,
remains open for this HMO. 

\13 Another type of control is prior authorization, which requires
physicians to obtain prior approval from the HMO before prescribing
certain drugs.  This type of control was not common for the drugs we
studied. 

\14 See Novartis, Pharmacy Benefit Report. 

\15 Exceptions may be authorized if medically appropriate. 

\16 We reviewed the HMOs' formularies to understand the prevalence of
changes beneficiaries might experience in Medicare HMOs and the
extent to which the drugs on the resulting formularies might vary. 
We did not evaluate the clinical appropriateness of the formulary
changes. 

\17 The total includes some duplication of drugs that were deleted
from different formularies. 

\18 This general class or category, like others we reviewed, was
divided into different classes of drugs. 

\19 We could not determine the number of deletions this transition
represented for these three classes from 1997 to 1998. 

   DIFFERENCES IN FORMULARY
   MANAGEMENT HAVE IMPLICATIONS
   FOR BENEFICIARIES
------------------------------------------------------------ Letter :4

Beneficiaries interested in determining the value of a plan's
prescription drug benefits need to consider a number of factors. 
Differences in the types of formularies, the drugs they include, and
formulary controls used by the HMOs can affect whether drugs are
covered and how much they will cost.  Beneficiaries may also be
affected by differences in the methods the HMOs use to notify them
about formulary changes and in how they consider physician requests
for exceptions from formulary deletions.  As a result, beneficiaries
enrolled in some HMOs may be better informed about formulary changes
than those enrolled in others, and it may be easier for some
physicians to request and obtain coverage for nonformulary drugs. 

      IMPLICATIONS OF DIFFERENT
      FORMULARY TYPES AND CONTROLS
---------------------------------------------------------- Letter :4.1

The type of formulary and formulary controls used by an HMO, combined
with benefit design features, have implications for the extent and
value of a beneficiary's coverage.  Considering only copayments and
annual limits on benefits to evaluate plans' drug benefits results in
a superficial comparison of the coverage plans offer.  For example,
table 1 shows that HMOs using closed formularies differ considerably
in the copayments they require and annual limits they set for
prescription drugs.  However, beneficiaries interested in comparing
those plans should also determine whether the plans cover the drugs
they currently use.  Even closed formularies vary in the number of
drugs included in a therapeutic class. 

                          Table 1
          
          Formulary Types and Controls Used by 16
           Medicare HMOs for Selected 1999 Plans

                              Copaymen
                   Copayment     t for      Annual dollar
      Formulary   for brand-   generic      limit on all
HMO   type        name drugs     drugs      drugs
----  ----------  ----------  --------  --  --------------
1     Open               $15       $15      Unlimited, but
                                            $1,000 for
                                            brand-name
                                            drugs

2     Open                15         5      $1,600, with a
                                            semiannual
                                            limit of $800

3     Closed              10       5\a      $1,750

4     Partially            0       0\a      Unlimited
      closed\b

5     Incentive-           0       0\a      Unlimited
      based\c

6     Closed               0       0\a      Unlimited

7     Closed               0       0\a      Unlimited

8     Incentive-           0       0\a      Unlimited
      based\c

9     Closed               0       0\a      Unlimited

10    Closed               0       0\a      Unlimited

11    Incentive-          12       3\a      Unlimited, but
      based\c                               $2,000 for
                                            brand-name
                                            drugs

12    Closed              15       5\a      Unlimited

13    Closed              10       5\a      Unlimited, but
                                            $4,500 for
                                            brand-name
                                            drugs

14    Closed              20       5\a      $2,000

15    Closed               7         7      Unlimited

16    Closed              10         5      Unlimited
----------------------------------------------------------
Note:  Typically, copayments shown are for purchasing about a 1-month
supply at a retail pharmacy. 

\a Generics required, if available. 

\b Formulary closed for specific drug classes but open for others. 

\c HMO requires a copayment for nonformulary drugs.  HMO 5--$30, with
a $1,000 limit for nonformulary drugs; HMO 8--$10; and HMO 11--$25. 

Beneficiaries may also want to consider the trade-offs between
certain factors in considering plans' coverage.  As seen in table 1,
some HMOs offer open or incentive-based formularies that cover any
drugs beneficiaries may need but require copayments and limit the
annual amount they will pay for drugs.  In contrast, other HMOs use
closed formularies that limit the drugs they cover but require small
copayments and have higher annual limits.  For example, one HMO that
has an open formulary and variable copayments for brand-name and
generic drugs limits the total amount annually it will pay for all
drugs.  In comparison, another HMO in the same market has a closed
formulary, a lower copayment for brand-name drugs, and a higher
annual limit.  In this example, a beneficiary would need to consider
the trade-offs between having an open formulary with less generous
copayment and annual limit amounts and having a closed formulary with
more generous copayment and annual limit amounts.  For some
beneficiaries, having a closed formulary might not be a negative
factor if the formulary included the drugs they used and was
extensive in the drugs it included relative to other HMO formularies
in the same market.  The HMO's lower copayment for brand-name drugs
could also be an attractive feature for beneficiaries who use a
brand-name drug with no generic equivalent.  For other beneficiaries,
however, a lower copayment for brand-name drugs and a slightly higher
annual limit would not outweigh the benefit of an open formulary that
would include any drug they might need. 

      IMPLICATIONS OF FORMULARIES'
      COVERING DIFFERENT DRUGS
---------------------------------------------------------- Letter :4.2

While the number of formulary changes the HMOs made provides a sense
of the magnitude of formulary change, what is perhaps more
significant to beneficiaries is that the specific drugs the HMOs
covered in each of the classes we reviewed varied considerably. 
Beneficiaries need to be aware of the differences in HMOs'
formularies to ensure that they select a plan with a formulary that
includes the drugs they use or that offers alternatives that are
acceptable to them and their physicians.  For example, the number of
antiulcer drugs included on the formularies of the HMOs we studied
varied between two and nine, with only one drug, Tagamet, included on
all of the formularies.  Some HMOs added other drugs that are used
for more severe ulcer cases or when other antiulcer drugs are not
effective.  Beneficiaries who have medical conditions that warrant
the use of several antiulcerants may want to determine which plans
offer a greater selection of these drugs on their formularies. 
Because many beneficiaries take several different prescription drugs,
it is also helpful for them to know the extent to which HMOs offer
formulary options in different therapeutic classes for drugs commonly
used by the elderly. 

      HOW HMOS NOTIFY
      BENEFICIARIES AFFECTS IMPACT
      OF FORMULARY CHANGES
---------------------------------------------------------- Letter :4.3

Notifying beneficiaries about formulary changes is an important means
for ensuring that beneficiaries know about potential changes to their
current drug treatment and its cost.  It can also reduce those
instances in which beneficiaries first learn of a formulary change at
the pharmacy counter.  For most of the HMOs we studied, formulary
changes can occur and be implemented at different times throughout
the year.  As a result, for these HMOs, notification of formulary
changes is an ongoing process. 

The HMOs vary in the methods they routinely use to notify
beneficiaries and physicians about formulary changes.  For example,
while 9 of the 16 HMOs provide copies of formularies on request, the
other 7 routinely mail copies of formularies to beneficiaries,
usually on an annual basis, with information that explains the
formulary's purpose and how the beneficiary can use it to review
formulary drugs in different classes.  Four of these seven HMOs also
send letters to beneficiaries notifying them about specific formulary
changes that affect them, as do five of the nine HMOs that send
formularies only on request.  (App.  III provides an example of a
notification letter.) In contrast, four of the nine HMOs do not
notify beneficiaries about formulary changes.  Officials for these
HMOs told us they did not consider it necessary to notify
beneficiaries of formulary deletions or additions because the HMOs
continue to cover nonformulary drugs in some way.  These officials
were concerned that beneficiaries would find formularies too
confusing to be helpful. 

The HMOs also have different policies regarding those situations when
beneficiaries first learn of formulary changes that affect them at
their pharmacy counter.  In such instances, the pharmacist has
on-line access to the formulary used by the beneficiary's HMO and is
able to inform the beneficiary of the formulary change.  Normally,
the pharmacist will then contact the beneficiary's physician and
notify him or her about the change and seek the physician's approval
for a new prescription of a formulary drug.  When the pharmacist is
unsuccessful in contacting the physician's office or the physician
does not approve the change, the HMOs in our study handled the
situation differently.  If the beneficiary wanted to fill the
prescription at that point, most of the HMOs would require that the
beneficiary pay the amount their plan required for a nonformulary
drug.  However, 3 of the 16 HMOs specifically allowed both new and
established members in those situations a grace period in which
they could have one refill of the original drug, and the plan would
cover it as a formulary drug.  This grace period allowed
beneficiaries the opportunity to contact their physicians to discuss
their options before they needed the next prescription. 

All of the HMOs we examined send physicians copies of formularies at
least once a year, as well as periodic newsletters that include
information on formulary changes and other health-related issues. 
Eight of the 16 also send physicians letters notifying them of
specific beneficiaries affected by formulary changes.  Although the
HMOs provide this information to physicians, officials for most of
the HMOs acknowledged that physicians who are associated with several
HMOs do not realistically have time to keep up with formulary changes
for multiple plans.  As a result, the burden of informing many
physicians when drugs are deleted from formularies falls on the
beneficiary. 

      EXCEPTIONS POLICY CAN
      INSULATE BENEFICIARIES FROM
      FORMULARY CHANGES
---------------------------------------------------------- Letter :4.4

Beneficiaries are most directly affected by a formulary decision when
the drug they have been accustomed to using is deleted from their
HMO's formulary and their plan covers only formulary drugs.  The
change has health care and financial implications for beneficiaries
because it requires that they either switch to a new drug that is on
the formulary or continue to use the original drug that has become
nonformulary and pay for it themselves.  Beneficiaries who change
health plans may face the same situation if their new plan does not
cover the drugs they have been using.  For a beneficiary whose drug
has become nonformulary, the physician must decide whether an
alternate drug on the formulary is appropriate for the beneficiary's
care and, if so, write a prescription for the drug and help the
beneficiary adjust to the new medication.  However, if the physician
believes that it is inappropriate for the beneficiary to switch to a
formulary drug, the physician must contact plan representatives to
request an exception for the beneficiary so that the HMO will
continue to cover the beneficiary's original drug. 

The number of beneficiaries or prescriptions affected by a formulary
deletion depends on the drug deleted and the size of an HMO's
beneficiary population.  For example, one HMO with about 100,000
beneficiaries deleted an antihypertension drug that, according to HMO
data, affected 275 prescriptions.  The HMO reported that it received
and approved only one or two exception requests a month.  In
contrast, another HMO with about 40,000 beneficiaries deleted drugs
from 20 drug classes, affecting over 14,000 prescriptions and over
9,000 beneficiaries during a 6-month period in 1998.  Because of the
extent of these deletions, the HMO developed an extensive information
campaign to notify beneficiaries and physicians about the changes and
implications for beneficiaries of deleting the drugs.  During this
period, the HMO received about 300 requests for nonformulary drugs
and approved about 65 percent of them. 

The HMOs in our study vary considerably in the processes they use to
consider exceptions for nonformulary drugs.  Beneficiaries enrolled
with 2 of the 16 HMOs are not affected by formulary changes because
the HMOs use open formularies.  Thus, physicians in these plans can
prescribe nonformulary drugs without going through an exception
process.  At the other 14 HMOs, requests for nonformulary drugs are
handled in different ways.  Table 2 summarizes the exception
processes for the 16 HMOs. 

                          Table 2
          
          Processes Used by Selected Medicare HMOs
          for Making Nonformulary Drug Exceptions

                                            Number of HMOs
Exception process                            using process
--------------------------------------  ------------------
Physician must provide documentation,                    5
 such as medical chart notes, to show
 that no formulary drug is
 appropriate.
Physician must call HMO administrators                 5\a
 to discuss the reasons for an
 exception.
Physician must submit an exception                       2
 request form, but the physician's
 justification for the request is
 automatically accepted.
No exception process exists because                      2
 the HMO uses an open formulary.
No exception process exists because                      1
 nonformulary drugs are covered with a
 copayment.
Physician must document that the                         1
 patient tried the formulary drug but
 experienced an adverse reaction or
 drug failure.
----------------------------------------------------------
\a Depending on the reason, four HMOs may require documentation
following this discussion. 

Six of the 14 HMOs that use closed or incentive-based formularies
require physicians to submit specific medical documentation to
demonstrate why formulary alternatives will not be appropriate for a
beneficiary.  One of these six HMOs also requires the physician to
document that the beneficiary used the formulary alternative during a
trial period and that either the beneficiary experienced an adverse
reaction to the drug or the drug failed as a treatment alternative. 

Three of the 14 HMOs that use closed or incentive-based formularies
except beneficiaries already enrolled in the HMOs from formulary
changes--a policy referred to as grandfathering. Grandfathering
allows a physician to keep a beneficiary on the original drug if the
physician believes that is the most appropriate care.\20 In these
cases, the physician's prescribing a nonformulary drug is not an
issue as long as the beneficiary remains enrolled in the plan. 
Although an HMO's use of grandfathering could enhance the value of a
drug benefit for many beneficiaries, this policy was not described in
plan materials the HMOs provided beneficiaries. 

--------------------
\20 Three other HMOs use grandfathering in a more limited way,
applying it to only some drugs used by both current and incoming
members. 

   CONCLUSIONS
------------------------------------------------------------ Letter :5

To fully evaluate the prescription drug benefits offered by different
plans, beneficiaries need some knowledge of how HMOs use drug
formularies in ways that can affect the value of their benefits. 
This knowledge helps beneficiaries determine which plan best meets
their needs by enabling beneficiaries to evaluate a combination of
factors, including the type of formulary an HMO uses and whether it
covers the drugs they use, whether a plan requires beneficiaries to
share in the cost of prescriptions through copayments, and whether a
plan limits the amount of the beneficiaries' drug benefit.  This
knowledge also helps beneficiaries determine how well an HMO informs
them about formulary changes and how flexible the HMO is in allowing
exceptions to formulary drugs when necessary.  Naturally, a
beneficiary's preferences and circumstances will affect the
importance placed on any one of these factors in evaluating drug
benefits. 

To compare Medicare+Choice plans and make informed health care
decisions, beneficiaries need clear and easily understood information
that includes the drugs the formularies cover, formulary changes, and
policies and procedures for requesting coverage for nonformulary
drugs.  Beneficiaries and MCOs also need a clear understanding of
those circumstances in which formulary changes result in a reduction
of drug benefits. 

---------------------------------------------------------- Letter :5.1

We are sending copies of this report to interested congressional
committees and Members and agency officials and will make copies
available to others on request. 

If you or your staffs have any questions about this report, please
call me at (202) 512-7114 or John Hansen, Assistant Director, at
(202) 512-7105.  Others who made major contributions to this report
include Joel Hamilton and David Michaels. 

William J.  Scanlon
Director, Health Financing
 and Public Health Issues

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

Our study included 16 health maintenance organizations (HMO) in three
markets:  6 in Los Angeles, 7 in Miami, and 3 in Philadelphia.  As of
June 1999, the combined number of beneficiaries enrolled in plans
offered by these HMOs represented more than one-quarter of all
Medicare beneficiaries enrolled in Medicare HMOs.  We selected these
three markets on the basis of several factors, including the number
of Medicare HMOs in the market, the number of beneficiaries enrolled
in each HMO, the types of HMOs represented, and the experience each
HMO had in managing prescription drug benefits for Medicare
beneficiaries. 

From each HMO, we obtained information on the policies and procedures
used to make formulary decisions, notify health care providers and
beneficiaries about formulary changes, and consider physician
requests for nonformulary drugs.  We also reviewed copies of
formularies for each HMO made available to physicians and
beneficiaries that were in effect on November 1, 1997; November 1,
1998; and January 1, 1999.  Specifically, we compared formulary
changes for drugs used to treat hypertension, depression, ulcers, and
high cholesterol.  In addition, we interviewed representatives of
associations concerned with issues related to formulary management,
such as state pharmacy and medical associations, consumer groups, and
the American Medical Association.  Further, we interviewed officials
of the Health Care Financing Administration (HCFA) concerning the
agency's role in monitoring Medicare managed care organizations'
(MCO) drug benefits and changes to their formularies. 

The 16 HMOs in our study enroll the largest number of beneficiaries
in each market and range in size from about 11,000 to about 440,000
beneficiaries.  The largest HMOs were in Los Angeles, ranging in size
from about 27,000 to about 440,000 beneficiaries.  By comparison, the
HMOs in the Miami market ranged from about 24,000 to about 230,000;
the HMOs in Philadelphia ranged from about 11,000 to about 118,000. 
Eleven of the HMOs are for-profit and five are not-for-profit. 

The HMOs in our study have been providing beneficiaries prescription
drug benefits for 3 to more than 10 years.  This range of experience
was an important factor for our study, because officials of these
HMOs were able to provide a historical perspective on managing a drug
benefit for Medicare beneficiaries.  In contrast, some markets have
few, if any, Medicare HMOs that have a history of providing
prescription drug benefits to beneficiaries for longer than 1 or 2
years. 

All 16 HMOs operate in mature and competitive managed care markets
for Medicare beneficiaries, as reflected by the number of years
Medicare HMOs have operated in each market and the extent of the
pharmacy benefits they offer.  For example, most HMOs in our study
provide unlimited drug benefits.  The Miami market is especially
competitive:  all of the HMOs in our study in that market provide
unlimited prescription drug benefits and require no copayments from
beneficiaries.  Officials for several of these HMOs emphasized their
market's competitiveness by explaining that, although they would like
to consider copayments as a means to help control drug expenditures,
such a change would cause a significant number of beneficiaries to
disenroll and join competitors' plans.  These HMOs have relied
instead on formulary management and drug utilization techniques to
help control their prescription drug expenditures. 

P&T COMMITTEES
========================================================== Appendix II

The HMOs we studied rely extensively on the deliberations of pharmacy
and therapeutics (P&T) committees within their companies to determine
which drugs to add to or delete from their formularies.  Typically,
the P&T committees operate at a company's national level and include
medical and pharmacy representatives from each HMO in the company. 
The P&T committees consider several factors when they assess whether
a drug should be added to or deleted from a formulary, including the
drug's clinical effectiveness and safety, and whether the drug is
therapeutically equivalent to drugs already on the formulary.  Most
of the P&T committees for the HMOs in our study also consider a
drug's cost in their deliberations.  Fifteen of the 16 HMOs use
similar formularies for their Medicare and commercial plans, and 10
of the 16 HMOs are either using, or in the process of developing,
formularies at the national level. 

In addition, all the HMOs obtain input from physicians and other
health care providers when considering formulary changes.  In
general, P&T committees will add a drug to the formulary if the drug
clearly offers therapeutic benefits that other formulary drugs do not
offer and the drug is as safe as or safer than other formulary drugs. 
To make this determination, committee members review available
literature, including any studies that may compare the drug being
considered for formulary addition with other drugs that may already
be on the formulary.  Some HMOs also use pharmacy benefit managers to
help make decisions about which drugs to include on a formulary.\21

At most of the HMOs we studied, the P&T committees also consider a
drug's cost in their formulary decisions, while at other HMOs drug
cost considerations are handled by staff that are external to the P&T
process.  According to HMO officials, cost considerations most often
concern drugs that the P&T committee deems therapeutically equivalent
to other drugs on the formulary.  The committee may see no reason to
add a therapeutically equivalent drug to the formulary unless there
is an economic benefit.  In these cases, the drug's cost is normally
the tiebreaking factor that determines whether the drug is added and,
perhaps, a therapeutically equivalent and more expensive drug is
deleted from the formulary.  Both the drug's purchase cost and any
rebate the HMO is able to negotiate with a drug manufacturer are key
factors in cost considerations.  However, HMO officials told us that
they lacked reliable comparative data for most drugs for considering
the long-term costs of using one drug over another to treat specific
health conditions. 

The decisions P&T committees make about the drugs to include on their
formularies vary for several reasons, including different assessments
by P&T committees about the clinical aspects of drugs, as well as
different assessments by HMOs concerning the cost of adding drugs to
their formularies.  The prices HMOs are able to negotiate with drug
manufacturers can also affect HMOs' assessments of which drugs to
include on their formularies and the extent to which beneficiaries
must share in a drug's cost. 

--------------------
\21 For more information on pharmacy benefit managers, see Pharmacy
Benefit Managers:  Early Results on Ventures With Drug Manufacturers
(GAO/HEHS-96-45, Nov.  9, 1995). 

SAMPLE HMO NOTIFICATION LETTER
========================================================= Appendix III

The following is a typical example of the information some of the
HMOs we reviewed provide beneficiaries in notifying them about
specific formulary changes: 

     To make sure you have access to prescription drugs that are both
     clinically effective and reasonably priced, we regularly review
     the list of medications that are covered by your benefit plan. 
     We have a committee of experts that includes independent
     physicians and pharmacists who review the prescription drugs on
     that list, which is called a formulary.' On the basis of the
     experts' assessment of therapeutic value and cost-effectiveness,
     drugs may be deleted from the formulary. 

     This letter is to advise you that _____ is being removed from
     the formulary as a result of our latest review.  We are making
     this change because other drugs on the formulary are equally
     clinically effective while offering greater cost-effectiveness. 

     Our records indicate that you are currently receiving _____ , a
     drug that is affected by this action.  Effective ____, this drug
     will no longer be on the formulary.  Beginning ____, you will be
     responsible for paying the full price for the medication unless
     you are granted an exception by the health plan.  Your doctor
     has been informed of this change, and we have provided a list of
     other drugs covered under your plan that are equally effective. 
     It is important for you to speak with your physician before
     _____ to discuss using one of the formulary alternatives, or to
     request an exception to continue to use ____. 

*** End of document. ***