Prescription Drug Benefits: Impact of Medicare HMOs' Use of Formularies
on Beneficiaries (Testimony, 07/20/1999, GAO/T-HEHS-99-171).

Pursuant to a congressional request, GAO discussed the prescription drug
benefits provided by health maintenance organizations (HMO) that
participate in the Medicare Choice program.

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 HMOs' use of formularies can affect
their drug benefit; (3) comparing plans can be difficult because the
types of formularies HMOs use and the way in which they are managed
differ considerably; (4) the choices beneficiaries make can have a
significant impact on the value of their drug benefit and their
out-of-pocket costs; (5) plans vary widely in the drugs they cover on
their formularies, the copayments they require beneficiaries to make and
the annual limits they set on the beneficiaries' coverage; (6) further,
beneficiaries in some plans may not learn about formulary changes until
they are at the pharmacy counter; and (7) 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.

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

 REPORTNUM:  T-HEHS-99-171
     TITLE:  Prescription Drug Benefits: Impact of Medicare HMOs' Use
	     of Formularies on Beneficiaries
      DATE:  07/20/1999
   SUBJECT:  Drugs
	     Health care services
	     Health insurance
	     Comparative analysis
	     Beneficiaries
	     Health services administration
	     Health maintenance organizations
	     Health care cost control
	     Information disclosure
IDENTIFIER:  Medicare Choice Program
	     Medicare Program
	     Medicare Health Maintenance Organizations Program

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

Before the Special Committee on Aging, U.S.  Senate

For Release on Delivery
Expected at 2:30 p.m.
Tuesday, July 20, 1999

PRESCRIPTION DRUG BENEFITS -
IMPACT OF MEDICARE HMOS' USE OF
FORMULARIES ON BENEFICIARIES

Statement of William J.  Scanlon, Director
Health Financing and Public Health Issues
Health, Education, and Human Services Division

GAO/T-HEHS-99-171

GAO/HEHS-99-171T

(101867)

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

  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  P&T - pharmacy and therapeutics

PRESCRIPTION DRUG BENEFITS: 
IMPACT OF MEDICARE HMOS' USE OF
FORMULARIES ON BENEFICIARIES
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to discuss the prescription drug
benefits provided by health maintenance organizations (HMO) that
participate in the Medicare+Choice program.  Currently, about 6.1
million of the 39 million Medicare beneficiaries are enrolled in
Medicare+Choice plans, in many cases because they offer prescription
drug benefits, which are not covered under fee-for-service Medicare. 
Medicare+Choice was intended to expand beneficiaries' health plan
options.  Its success depends on generating quality-based competition
among plans so more beneficiaries are attracted to and remain in the
program. 

Over the past 2 years, this Committee has held several hearings on
the information available to Medicare beneficiaries to enable them to
make prudent choices about whether to enroll in a Medicare+Choice
plan.  Our previous work has identified a number of factors that make
it difficult for beneficiaries to determine which plan offers the
benefits that best meet their needs.\1 In some cases, detailed
information about plans' benefits and out-of-pocket fees is provided
only after a beneficiary enrolls in a plan.  In other cases, detailed
information may be available before enrollment from plan sales agents
and member literature, but beneficiaries may find it difficult to
compare available options because plans present the information in
different formats and use different terms to describe covered
benefits.  Further, plan member literature, a key source of
information for beneficiaries, has often contained inaccurate or
incomplete benefit information.  In our previous work we also noted
that some plans described their benefits using terms like "approved"
drugs or "preferred" drugs without defining them.  In other cases,
plans provided little information on the annual dollar limits on
prescription drug coverage or how they calculated when a beneficiary
had reached the limit.  The value of a limit can vary significantly
depending on which prices a plan uses to calculate the cost of a
prescription.  For example, if the annual limit is based on the
retail cost of a prescription, the benefit would be worth less than
if it was based on the wholesale cost.  The lack of comparative
information is particularly problematic in evaluating plans' drug
benefits because so many different aspects determine the true extent
of coverage. 

Moreover, making informed choices among health plans is becoming more
important for Medicare beneficiaries because the Balanced Budget Act
of 1997 specifies that beginning in 2002, beneficiaries will no
longer be able to change plans on a monthly basis, as they are
permitted to now.  If beneficiaries experience problems with a plan
or decide that another plan's pharmacy benefits better meet their
needs, they will have a limited time period each year to change
plans, after which they will be locked in to their decision for the
remainder of the year.\2

While HMOs use various techniques to help control the cost of
providing prescription drug benefits, a common technique is to use a
formulary--a list of prescription drugs, grouped by therapeutic drug
class, which an HMO prefers its physicians to prescribe.  HMOs may
cover only formulary drugs or provide financial incentives, such as
lower copayments, to use formulary rather than nonformulary drugs. 
HMOs manage their formularies in several ways, including deciding
which formulary drugs to add or delete, notifying beneficiaries and
physicians about formulary changes, and considering physician
requests to cover deleted or nonformulary drugs for specific
beneficiaries.  As prescription drug costs rise, formularies may
become an even more important tool HMOs use to control drug
expenditures.  Aggressive formulary management may control spending,
but beneficiaries need to be aware of how it may affect the value of
their drug benefit. 

My comments will focus on a report we are issuing to your Committee
today that examines how Medicare HMOs manage drug formularies to
control drug expenditures and the implications for beneficiaries.  We
gathered information from 16 HMOs located in three markets--Los
Angeles, Miami, and Philadelphia--which account for a significant
share of Medicare enrollment.  These 16 HMOs represented more than 25
percent of all beneficiaries enrolled in Medicare HMOs.  Our findings
are based on our analysis of the policies and procedures the HMOs
used to make formulary decisions, notify health care providers and
beneficiaries about formulary changes, and consider physician
requests for nonformulary drugs.  We also analyzed how each HMO's
formulary changed from November 1997 to January 1999. 

In summary, 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 benefit.  Comparing plans can be difficult because the
types of formularies HMOs use and the way in which they are managed
differ considerably.  The choices beneficiaries make can have a
significant impact on the value of their drug benefit and their
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 they set on beneficiaries' coverage.  Further,
beneficiaries in some plans may not learn about formulary changes
until they 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. 

--------------------
\1 Medicare+Choice:  New Standards Could Improve Accuracy and
Usefulness of Plan Literature (GAO/HEHS-99-92, Apr.  12, 1999) and
Medicare Managed Care:  HCFA Missing Opportunities to Provide
Consumer Information (GAO/T-HEHS-97-109, Apr.  10, 1997). 

\2 Beneficiaries will have 6 months in 2002 and 3 months in following
years to change their enrollment choices. 

   HMOS USE DIFFERENT APPROACHES
   TO MANAGE FORMULARIES
---------------------------------------------------------- Chapter 0:1

HMOs use formularies to control their drug expenditures by limiting
the number of drugs a plan will cover and using financial incentives
to encourage the use of formulary drugs.  Formularies can be open,
incentive-based, or closed.  Open formularies are often referred to
as ï¿½voluntaryï¿½ because beneficiaries are not penalized financially if
their physicians prescribe nonformulary drugs.  Incentive-based
formularies generally offer beneficiaries lower copayments for
preferred formulary or generic drugs.  A closed formulary limits
coverage to formulary drugs only and requires enrollees to pay the
full cost of nonformulary drugs prescribed by their physician. 

The HMOs we studied rely extensively on the deliberations of pharmacy
and therapeutics (P&T) committees to determine which drugs to add to
or delete from their formularies.  Typically, 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, safety, and whether the drug is therapeutically
equivalent to drugs already on the formulary.  Most of the P&T
committees for the HMOs we studied also consider a drug's cost. 

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. 

Ten of the 16 HMOs in our study use closed formularies, and another
is ï¿½partially closedï¿½ in that the HMO limits coverage to drugs in
certain classes but will cover all drugs outside of those classes. 
Two of the HMOs examined have open formularies in which beneficiaries
pay the same copayment amount 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 formulary controls, such as generic substitution and
variable copayments.  Generic substitution encourages or requires the
use of generic drugs when they are available in place of a more
expensive brand-name drug.  Beneficiaries may also be required as
part of the overall benefit design to make different copayments for
brand-name, generic, and nonformulary drugs.  Twelve of the 16 HMOs
in our study require the use of generic drugs when they are
available, and 7 of the 16 also use variable copayments. 

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 requiring them to pay the full
price of the drug.  However, 15 of the 16 also added drugs to their
formularies in at least one of 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 as they did in November 1997. 
With one exception, the HMOs continued to offer several alternatives
for physicians to prescribe in each class. 

   DIFFERENCES IN FORMULARY
   MANAGEMENT HAVE IMPLICATIONS
   FOR BENEFICIARIES
---------------------------------------------------------- Chapter 0:2

Beneficiaries interested in determining the value of a plan's
prescription drug benefit 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 a
beneficiary's 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 how they consider
physician requests for exceptions from formulary deletions. 

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 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 on request.  In
contrast, four of the nine HMOs do not notify beneficiaries about
formulary changes.  As a result, beneficiaries may not learn that
their drug has been dropped from a formulary and that they will have
to pay the full price for the drug until they are standing at the
counter of their local drug store. 

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 only covers 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. 

For a beneficiary whose drug is nonformulary, a physician must decide
whether an alternate drug on the formulary is appropriate for the
beneficiary's care.  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 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.  At the other 14 HMOs, requests for
nonformulary drugs are handled in different ways.  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
tried the formulary alternative during a trial period and that the
beneficiary experienced either 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
will grant exceptions for beneficiaries already enrolled in the HMOs
from formulary changes--a policy referred to as ï¿½grandfathering.ï¿½
Grandfathering allows a physician to keep a beneficiary on the
original drug if the physician believes that is the most appropriate
care.  The physician's prescribing of 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 to many beneficiaries, this policy was not described in
plan materials the HMOs provided beneficiaries. 

   CONCLUSIONS
---------------------------------------------------------- Chapter 0:3

The success of Medicare+Choice is predicated on quality-based
competition.  However, Medicare+Choice cannot realize its potential
unless beneficiaries are well-informed about their enrollment
options.  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 evaluating a combination of factors, including the
type of formulary an HMO uses and whether it covers the drugs they
use, whether the HMO requires beneficiaries to share in the cost of
prescriptions through copayments, and whether the HMO limits the
amount of their drug benefit.  This knowledge also helps
beneficiaries determine how well an HMO keeps them informed 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 help beneficiaries compare Medicare+Choice plans and make informed
health care decisions, they need clear and easily understood
information that includes the drugs the formularies cover, how
formulary changes are handled, and policies and procedures for
requesting coverage for nonformulary drugs.  While particular
formulary changes are not predictable, beneficiaries do enroll in
Medicare+Choice plans with the knowledge that Medicare contracts do
not allow benefits to be reduced during the course of the contract
year.  Beneficiaries thus also need a clear understanding of which
formulary changes would constitute a reduction of drug benefits and
therefore would be unallowable during a contract year. 

Previously we recommended that the Health Care Financing
Administration (HCFA) require (1) standard formats and terminology
for important aspects of managed care organizations' marketing
materials, including benefits descriptions, and (2) that literature
distributed by organizations follow these standards.  While HCFA has
made some progress in standardizing important aspects of plans'
materials, it has not yet required Medicare+Choice organizations to
provide a single standard and comprehensive document that describes
plan benefits and beneficiaries' rights and responsibilities as plan
members. 

-------------------------------------------------------- Chapter 0:3.1

Mr.  Chairman, this concludes my prepared statement.  I will be happy
to answer any questions you or other Members of the Committee may
have. 

   GAO CONTACTS AND
   ACKNOWLEDGMENTS
---------------------------------------------------------- Chapter 0:4

For future contacts regarding this testimony, please call William J. 
Scanlon at (202) 512-7114 or John Hansen at (202) 512-7105.  Other
individuals who made key contributions include Joel Hamilton and
David Michaels. 

*** End of document. ***