Medicare: Beneficiaries' Prescription Drug Coverage (Testimony,
09/28/1999, GAO/T-HEHS-99-198).

Pursuant to a congressional request, GAO discussed Medicare
beneficiaries' access to prescription drug coverage, focusing on: (1)
how growth in presciption drug spending for both the general population
and Medicare beneficiaries has made coverage such an important policy
issue; (2) the sources and extent of Medicare beneficiary drug coverage;
and (3) benefit design and implementation issues to be considered in
deliberations about adding a new prescription drug benefit.

GAO noted that: (1) proposals to add prescription drug coverage to
Medicare's benefits come during a period of rapid growth in national
spending for pharmaceuticals and transformations in the prescription
drug market; (2) coverage of drugs by health plans and insurers,
advances in drug treatments, and aggressive marketing have spurred the
growth in the use of pharmaceuticals; (3) insurers have attempted to
manage the cost of the benefit through the use of formularies, pharmacy
benefit managers, and generic substitutions--cost control approaches
that have dramatically changed the nature of the market in which
prescription drugs are purchased; (4) what remains unchanged since the
inception of the Medicare program, however, is the absence of coverage
for outpatient prescription drugs by traditional Medicare; (5) high drug
use among Medicare's beneficiaries translates into a potentially
daunting financial burden, particularly for the third who have no drug
coverage; (6) for those who obtain coverage through employer-sponsored
plans, Medicare Choice plans, Medigap policies, or Medicaid programs,
the rise in spending can have an impact as well; (7) as these payers
attempt to control their outlays, coverage may be scaled back, priced
out of the reach of the average beneficiary, or dropped altogether; (8)
recent experience provides at least two approaches for implementing a
drug benefit; (9) one would involve the Medicare program obtaining price
discounts from manufacturers modeled after Medicaid's drug rebate
program; (10) while the discounts in aggregate would likely be
substantial, this approach lacks the flexibility to achieve the greatest
control over spending, and could not effectively influence or steer
utilization because it does not include incentives that would encourage
beneficiaries to make cost-conscious decisions; (11) the second approach
would draw from private sector experience in negotiating price discounts
from manufacturers in exchange for shifting market share; (12) some
plans and insurers employ pharmacy benefit managers to manage their drug
benefits, including claims processing, negotiating with manufacturers,
establishing lists of drug products that are preferred because of price
or efficacy, and developing beneficiary incentive approaches to control
spending and use; and (13) applying these techniques to the entire
Medicare program, however, would be difficult because of its size, the
need for transparency in its actions, and the imperative for equity for
its beneficiaries.

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

 REPORTNUM:  T-HEHS-99-198
     TITLE:  Medicare: Beneficiaries' Prescription Drug Coverage
      DATE:  09/28/1999
   SUBJECT:  Health care programs
	     Health care costs
	     Prices and pricing
	     Health insurance cost control
	     Drugs
	     Pharmaceutical industry
IDENTIFIER:  Medicare Program
	     Medicare Choice Program
	     Medicaid Program
	     Medigap

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

Before the Subcommittee on Health and Environment, Committee on
Commerce, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
Tuesday, September 28, 1999

MEDICARE - BENEFICIARIES'
PRESCRIPTION DRUG COVERAGE

Statement of Laura A.  Dummit, Associate Director
Health Financing and Public Health Issues
Health, Education, and Human Services Division

GAO/T-HEHS-99-198

GAO/HEHS-99-198T

(101899)

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

  BBA - Balanced Budget Act of 1997
  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  OBRA - Omnibus Budget Reconciliation Act of 1990
  PBM - pharmacy benefit managers

MEDICARE:  BENEFICIARIES'
PRESCRIPTION DRUG COVERAGE
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today as you discuss Medicare beneficiaries'
access to prescription drug coverage.  Over the past several months,
the Congress has focused its attention on Medicare reform issues to
determine the nature and extent of changes needed to modernize the
program and control its effect on the federal budget.  This
discussion comes at an important juncture in the program's history. 
The Congress passed landmark legislation in the Balanced Budget Act
of 1997 (BBA) that has improved the financial underpinnings of the
program, yet more work remains to ensure Medicare's continued
financial viability.  Budget projections show health care consuming
ever larger shares of the federal dollar, threatening to crowd out
funding for other valued government programs and activities.  At the
same time, many believe that Medicare's benefit structure should be
updated to include a prescription drug benefit. 

Broadening Medicare's coverage to include prescription drugs could
ease the significant financial burden some Medicare beneficiaries
face because of outpatient drug costs.  However, a recent study
suggests that such an expansion could add between 7.2 and 10 percent
annually to Medicare's costs.\1 At the same time, Medicare's rolls
are growing and are projected to increase rapidly with the aging of
the baby boom generation.  Major technological advances in medicine
and biotechnology may continue to boost the importance of
prescription drugs.  The policy dilemma before you today is that, on
the one hand, Medicare's lack of a prescription drug benefit may
impede access to certain treatment advances for beneficiaries who
have no access to other coverage.  On the other hand, the cost
implications of including a prescription drug benefit will be
substantial.  Additional costs could further erode the projected
financial condition of the Medicare program, which, according to its
trustees, is already unsustainable in its present form. 

My remarks today will focus on how growth in prescription drug
spending for both the general population and Medicare beneficiaries
has made coverage such an important policy issue.  I will also
address the sources and extent of Medicare beneficiary drug coverage. 
I will conclude with a discussion of benefit design and
implementation issues to be considered in deliberations about adding
a new prescription drug benefit.  My comments are based on analyses
of recent data and our body of completed work on prescription drugs. 

In summary, proposals to add prescription drug coverage to Medicare's
benefits come during a period of rapid growth in national spending
for pharmaceuticals and transformations in the prescription drug
market.  Coverage of drugs by health plans and insurers, advances in
drug treatments, and aggressive marketing have spurred the growth in
the use of pharmaceuticals.  Insurers have attempted to manage the
cost of the benefit through the use of formularies, pharmacy benefit
managers, and generic substitutions--cost control approaches that
have dramatically changed the nature of the market in which
prescription drugs are purchased. 

What remains unchanged since the inception of the Medicare program,
however, is the absence of coverage for outpatient prescription drugs
by traditional Medicare.  High drug use among Medicare's
beneficiaries translates into a potentially daunting financial
burden, particularly for the third who have no drug coverage.  For
those who obtain coverage through employer-sponsored plans,
Medicare+Choice plans, Medigap policies, or Medicaid programs, the
rise in spending can have an effect as well.  As these payers attempt
to control their outlays, coverage may be scaled back, priced out of
the reach of the average beneficiary, or dropped altogether.  Shifts
in the availability of coverage, its costs, and its adequacy are
likely to continue. 

The implications of adding prescription drug coverage to Medicare's
benefit package depend on details such as its scope and financing. 
Its design and implementation will also shape the effect of this
benefit on beneficiaries, Medicare spending, and the pharmaceutical
market.  Recent experience provides at least two approaches for
implementing a drug benefit.  One would involve the Medicare
program's obtaining price discounts from manufacturers.  Such an
arrangement could be modeled after Medicaid's drug rebate program. 
While the discounts in aggregate would likely be substantial, this
approach lacks the flexibility to achieve the greatest control over
spending.  It could not effectively influence or steer drug use
because it does not include incentives that would encourage
beneficiaries to make cost-conscious decisions.  The second approach
would draw from private sector experience in negotiating price
discounts from manufacturers in exchange for shifting market share. 
Some plans and insurers employ pharmacy benefit managers (PBM) to
manage their drug benefits, including claims processing, negotiating
with manufacturers, establishing lists of drug products that are
preferred because of price or efficacy, and developing beneficiary
incentive approaches to control spending and use.  Applying these
techniques to the entire Medicare program, however, would be
difficult because of its size, the need for transparency in its
actions, and the imperative for equity for its beneficiaries. 

--------------------
\1 M.  E.  Gluck, ï¿½National Academy of Social Insurance Medicare
Brief:  A Medicare Prescription Drug Benefit,ï¿½ April 1999, p.  8. 
http//www.nasi.org/medicare.medbr1.htm (Apr.  22, 1999). 

   RISING DRUG SPENDING ELEVATES
   THE IMPORTANCE OF COVERAGE AND
   EFFORTS TO CONTROL EXPENDITURES
---------------------------------------------------------- Chapter 0:1

Extensive research and development over the past 10 years have led to
new prescription drug therapies and improvements over existing
therapies that, in some instances, have replaced other health care
interventions.  As a result, the importance of prescription drugs as
part of health care has grown, as has drug spending as a component of
health care costs.  To protect against these costs, Medicare
beneficiaries can choose to enroll in a Medicare+Choice plan with
drug coverage if one is available in their area or purchase a Medigap
policy.\2 Many beneficiaries have employer-sponsored health coverage
as retirees.  Others may receive coverage if they are eligible for
Medicaid or other public programs.  The availability and breadth of
such coverage are changing as the costs of expanded prescription drug
use drives payers to adopt new approaches to control these
expenditures or cut back on coverage.  These approaches, in turn, are
reshaping the drug market. 

--------------------
\2 As an alternative to traditional Medicare fee-for-service,
Medicare+Choice plans (formerly Medicare risk health maintenance
organizations) allow beneficiaries to obtain all their services
through a managed care organization and Medicare makes a monthly
capitation payment to the plan on their behalf. 

      RISE IN PRESCRIPTION DRUG
      SPENDING
-------------------------------------------------------- Chapter 0:1.1

Over the past 5 years, prescription drug expenditures have grown
substantially, both in total and as a share of all health
expenditures.  Prescription drug spending grew an average of 11.1
percent per year from 1992 to 1997, compared with a 5.5 percent
average annual growth rate for health expenditures overall.  (See
table 1.) As a result, prescription drugs account for a larger share
of total health care spendingï¿½rising from 5.6 percent to 7.2 percent. 

                          Table 1
          
           National Expenditures on Prescription
                       Drugs, 1992-97

                                      Annual        Annual
                                   growth in     growth in
                  Prescription  prescription    all health
                          drug          drug          care
                  expenditures  expenditures  expenditures
Year                (millions)     (percent)     (percent)
----------------  ------------  ------------  ------------
1997                   $78,888         14.1%          4.8%
1996                    69,111          13.2           4.9
1995                    61,060          10.6           4.9
1994                    55,189           9.0           5.5
1993                    50,632           8.7           7.4
1992                    46.598          10.6           9.1
Average annual                          11.1           5.5
 growth 1992-97
----------------------------------------------------------
Source:  Health Care Financing Administration (HCFA), Office of the
Actuary. 

Total drug expenditures have been driven up by both greater use of
drugs and the substitution of higher-priced new drugs for
lower-priced existing drugs.  Several factors have contributed to
rising expenditures:  more third-party payments for drugs, the
introduction of new drug therapies, and more aggressive marketing by
manufacturers through direct-to-consumer advertising. 

Private insurance coverage for prescription drugs is likely to have
contributed to the rise in spending because insured consumers are
shielded from the direct costs of prescription drugs.  In the decade
between 1987 and 1997, the share of prescription drug expenditures
paid by private health insurers rose from almost a third to more than
half.  (See fig.  1.) The development of new, more expensive drug
therapies--including new drugs that replace old drugs and new drugs
that treat disease more effectively--also contributed to the drug
spending growth by driving up the volume of drugs used as well as the
average price for drugs used.  The average number of new drugs
entering the market each year rose from 24 at the beginning of the
1990s to 33 now.  Similarly, biotechnology advances and a growing
knowledge of the human immune system are significantly shaping the
discovery, design, and production of drugs.  Advertising pitched to
consumers is also likely to have upped their use of prescription
drugs.  A recent study found that the ten drugs most heavily
advertised directly to consumers in 1998 accounted for 22 percent of
the total increase in drug spending between 1993 and 1998.\3 Between
March 1998 and March 1999, industry spending on advertising grew 16
percent to $1.5 billion. 

   Figure 1:  Comparison of
   National Outpatient Drug
   Expenditures, 1987 and 1997

   (See figure in printed
   edition.)

Note:  Out-of-pocket expenditures include direct spending by
consumers for prescription drugs, such as coinsurance, deductibles,
and any amounts not covered by insurance.  Out-of-pocket premiums
paid by individuals are not counted here. 

Source:  HCFA, Office of the Actuary. 

--------------------
\3 Barents Group for the National Institute for Health Care
Management Research and Education Foundation, ï¿½Factors Affecting the
Growth of Prescription Drugs Expenditures,ï¿½ July 9, 1999, p.  iii. 

      CURRENT MEDICARE BENEFICIARY
      DRUG COVERAGE
-------------------------------------------------------- Chapter 0:1.2

Prescription drugs are an important component of medical care for the
elderly because of the prevalence of chronic and other health
conditions associated with aging.  In 1995, Medicare beneficiaries
had on average more than 18 prescriptions filled.\4 This varies
substantially across beneficiaries, however, reflecting the range of
their needs and also financial considerations such as third-party
prescription drug coverage.  In 1995, total average annual drug costs
were $600 for elderly persons compared with a little more than $140
for nonelderly persons.\5 For some, prescription drug spending was
considerably higher--6 percent of Medicare beneficiaries spent $2,000
or more.\6 A recent report had projected that by 1999 an estimated 20
percent of Medicare beneficiaries would have total drug costs of
$1,500 or moreï¿½a substantial sum for persons lacking some form of
insurance to subsidize their purchases or for those facing coverage
limits.\ \7

In 1996, almost a third of Medicare beneficiaries lacked drug
coverage altogether.  (See fig.  2.) The remaining two-thirds had at
least some drug coverage through other sources--most commonly
employer-sponsored health plans.  The proportion of beneficiaries who
had drug coverage rose between 1995 and 1996 because of increases in
the numbers of persons with Medicare health maintenance organization
(HMO), individually purchased supplemental, and employer-sponsored
coverage.  However, recent evidence indicates that this trend of
expanding drug coverage is unlikely to continue. 

   Figure 2:  Sources of Drug
   Coverage for Medicare
   Beneficiaries, 1996

   (See figure in printed
   edition.)

Note:  ï¿½All otherï¿½ includes nonrisk HMOs, state-based plans, the
Department of Defense, and the Department of Veterans Affairs. 

Source:  HCFA data based on the 1996 Medicare Current Beneficiary
Survey. 

Although employer-sponsored health plans provide drug coverage to the
broadest segment of the Medicare population, there are signs that
this could be eroding.  Fewer employers are offering health benefits
to retirees eligible for Medicare and those that continue are asking
retirees to pay a larger share of costs.  The proportion of employers
offering health coverage to retirees eligible for Medicare declined
from 40 percent in 1993 to 30 percent in 1998.  Of the employers
offering health coverage in 1998, 72 percent included prescription
drug coverage.  However, 90 percent of employers with 10,000 or more
employees offered prescription drug coverage to their retirees in
1998. 

In 1999, 13 percent of Medicare beneficiaries obtained prescription
drug coverage through a Medicare+Choice plan, up from 8 percent in
1996.  Medicare+Choice plans have found drug coverage to be an
attractive benefit that beneficiaries seek out when choosing to
enroll in managed care organizations.  However, owing to rising drug
expenditures and their effect on plan costs, the drug benefits the
plans offer are becoming less generous.  According to a recent HCFA
report, many plans will restructure drug benefits in 2000, increasing
enrollees' out-of-pocket costs and limiting their drug coverage. 

Beneficiaries may purchase Medigap policies that provide drug
coverage, although this tends to be expensive, involves significant
cost sharing, and includes annual limits.  Standard Medigap drug
policies include $250 deductibles, 50 percent coinsurance
requirements, and $1,250 or $3,000 annual limits.  In 1999, the
annual premium for one type of Medigap policy with drug coverage
ranged from approximately $1,000 to $6,000.  Furthermore, premiums
have been increasing in recent years. 

All beneficiaries who have full Medicaid benefits receive drug
coverage that is subject to few limits and low cost-sharing
requirements.  For beneficiaries whose incomes are slightly higher
than Medicaid standards, 14 states currently offer pharmacy
assistance programs that provided drug coverage to approximately
750,000 beneficiaries in 1997.  The three largest state programs
accounted for 77 percent of all state pharmacy assistance program
beneficiaries.\8 Most pharmacy assistance programs, like Medicaid,
have few coverage limitations. 

The burden of prescription drug costs falls most heavily on the
Medicare beneficiaries who lack drug coverage or those who have
substantial health care needs.  Drug coverage is slightly less
prevalent among beneficiaries with lower income.  An analysis of 1995
data shows that drug coverage is slightly higher among those with
poorer self-reported health status.  At the same time, however,
beneficiaries who had no drug coverage and were in poor health had
drug expenditures that were $400 lower than beneficiaries who had
drug coverage and were in poor health.  This might indicate access
problems for this segment of the population. 

Even for beneficiaries who have drug coverage, the extent of
protection it affords varies.  The value of a beneficiary's drug
benefit is affected by the benefit design, including cost-sharing
requirements and benefit limitations.  Evidence suggests that
premiums are on the rise for employer-sponsored benefits, Medigap
policies, and, most recently, Medicare+Choice plans.  Copayments,
deductibles, and annual coverage limits can reduce the value of drug
coverage to the beneficiary.  Harder to measure is the effect on
beneficiaries of drug benefit restrictions brought about through
formularies designed to limit or influence the choice of drugs. 

--------------------
\4 M.  Davis and others, ï¿½Prescription Drug Coverage, Utilization,
and Spending Among Medicare Beneficiaries,ï¿½ Health Affairs, Vol.  18,
No.  1 (Jan.-Feb.  1999), p.  237. 

\5 M.  Davis, p.  239, and Agency for Health Care Policy and Research
Center for Cost and Financing Studies, National Medical Expenditure
Survey data, ï¿½Trends in Personal Health Care Expenditures, Health
Insurance, and Payment Sources, Community-Based Population,ï¿½ Mar. 
1997, p.  10. 
http://www.meps.ahcpr.gov/nmes/papers/trends/intnet4d.pdf (June 10,
1999). 

\6 J.  A.  Poisal and others, ï¿½Prescription Drug Coverage and
Spending for Medicare Beneficiaries,ï¿½ Health Care Financing Review,
Vol.  20, No.  3 (Spring 1999), p.  20. 

\7 M.E.  Gluck, p.  2. 

\8 These programs are operated in New Jersey, New York, and
Pennsylvania. 

      COST CONTROL APPROACHES ARE
      RESHAPING THE PHARMACEUTICAL
      MARKET
-------------------------------------------------------- Chapter 0:1.3

During this period of rising prescription drug expenditures,
third-party payers have pursued various approaches to control
spending.  These efforts have initiated a transformation of the
pharmaceutical market.  Whereas insured individuals formerly
purchased drugs at retail pharmacies at retail prices and then sought
reimbursement, now third-party payers influence which drug is
purchased, how much is paid for it, and where it is purchased. 

A common technique to manage pharmacy care and control costs is to
use a formulary.  A formulary is a list of prescription drugs,
grouped by therapeutic class, that a health plan or insurer prefers
and may encourage doctors to prescribe.  Decisions about which drugs
to include in a formulary are based on their medical value and their
price.  Both the inclusion of a drug in a formulary and its cost can
affect how frequently it is prescribed and purchased and, therefore,
can affect its market share. 

Formularies can be open, incentive-based, or closed.  Open
formularies are often referred to as ï¿½voluntaryï¿½ because enrollees
are not penalized if their physicians prescribe nonformulary drugs. 
Incentive-based formularies generally offer enrollees lower
copayments for the preferred formulary or generic drugs. 
Incentive-based or managed formularies are becoming more popular
because they combine flexibility and greater cost-control features
than open formularies.  A closed formulary limits insurance coverage
to the formulary drugs and requires enrollees to pay the full cost of
nonformulary drugs prescribed by their physicians. 

Another way in which the market has been transformed is the use of
PBMs by health plans and insurers to administer and manage
prescription drug benefits.  PBMs offer a range of services,
including prescription claims processing, mail-service pharmacy,
formulary development and management, pharmacy network development,
generic substitution incentives, and drug utilization review.  PBMs
also negotiate discounts and rebates on prescription drugs with
manufacturers. 

   ISSUES TO CONSIDER IN BENEFIT
   DESIGN AND ADMINISTRATION
---------------------------------------------------------- Chapter 0:2

Policymakers considering proposals for including a prescription drug
benefit in the Medicare program are facing myriad options.  Assessing
the merits of whether and how to implement a drug benefit will
depend, in large measure, on whom the benefit covers and how it is
financed.  In any such assessment, five criteria should be
considered.  (1) Affordability:  A benefit should be evaluated in
terms of its effect on the sustainability of program expenditures for
the long term.  (2) Equity:  A benefit should be fair across groups
of beneficiaries and providers.  (3) Adequacy:  A benefit should
foster cost-effective and clinically meaningful innovations,
furthering Medicare's tradition of supporting technology development. 
(4) Feasibility:  A benefit should incorporate such administrative
essentials as implementation and monitoring techniques.  (5)
Acceptance:  A benefit should account for the need to educate the
beneficiary and provider communities about its costs and the
realities of trade-offs required by significant policy changes. 

Although the Congress will likely examine a number of alternative
benefit designs and administrative options, I would like to briefly
discuss two approaches that may be considered.  One would be similar
to how drug benefits are provided in state Medicaid programs, which
rely on federal authority to lower drug prices through rebates paid
by drug manufacturers to control spending.  The other would be
modeled after approaches adopted by private sector health plans in
which PBMs are used to administer various techniques to control
pharmacy benefit costs.  Each approach has some advantages and
disadvantages. 

      MEDICAID PROGRAMS RELY ON
      DISCOUNTS AND HAVE LIMITED
      UTILIZATION CONTROLS
-------------------------------------------------------- Chapter 0:2.1

As the largest government payer for prescription drugs, Medicaid
makes drug expenditures that account for about 13 percent of the
domestic pharmaceutical market.  Before the enactment of the Medicaid
drug rebate program under the Omnibus Budget Reconciliation Act of
1990 (OBRA), state Medicaid programs paid close to retail prices for
outpatient drugs.  Other large purchasers, such as HMOs and
hospitals, negotiated discounts with manufacturers and paid
considerably less. 

The rebate program required drug manufacturers to give state Medicaid
programs rebates for outpatient drugs.  The rebates were based on the
lowest or ï¿½bestï¿½ prices they charged other purchasers.  In return for
the rebates, state Medicaid programs must reimburse for all drugs
manufactured by pharmaceutical companies that entered into rebate
agreements with HCFA.\9

After the rebate program's enactment, a number of market changes
affected other purchasers of prescription drugs and the amount of the
rebates that Medicaid programs received.  For example, the prices
many large private purchasers, such as HMOs, paid for outpatient
drugs increased substantially.  Moreover, the lowest prices in the
market increased faster than the drugs' average prices as drug
manufacturers significantly reduced the price discounts they offered
private purchasers.  As a result, within 2 years the rebates paid to
state Medicaid programs fell to the minimum percentage required by
OBRA. 

Although the states have received billions of dollars in rebates from
drug manufacturers since OBRA's enactment, state Medicaid directors
have expressed concerns about the rebate program.  The principal
concern involves OBRA's requirement to provide access to the drugs of
all manufacturers that offer rebates, which limits the utilization
controls Medicaid programs can use at a time when prescription drug
expenditures are rapidly increasing.  Although the programs can
require recipients to obtain prior authorization for particular drugs
and can impose monthly limits on the number of covered prescriptions,
they cannot take advantage of other techniques to steer recipients to
less expensive drugs.  The few cost-control strategies available to
state Medicaid programs can add to the administrative burden on state
Medicaid programs. 

--------------------
\9 OBRA allowed the states to exclude certain classes of drugs. 

      OTHER PAYERS EMPLOY VARIOUS
      TECHNIQUES TO CONTROL
      EXPENDITURES
-------------------------------------------------------- Chapter 0:2.2

Other payers such as private and federal employer health plans and
Medicare+Choice plans have taken a different approach to managing
their prescription drug benefits.  They typically use closed or
incentive-based formularies and copayments to control prescription
drug use and obtain better prices by concentrating purchases on
selected drugs.  In many cases, these plans and insurers retain PBMs'
services to manage their pharmacy benefit and control spending. 

Beneficiary cost sharing has had a central role in attempts to
influence drug use.  Copayments are frequently structured to
influence both the choice of drugs and purchasing arrangements. 
While formulary restrictions can channel purchases to preferred
drugs, closed formularies, which provide reimbursement only for
preferred drugs, have generated substantial dissatisfaction among
consumers.  As a result, many plans link their cost-sharing
requirements and formulary lists.  The fastest growing trend today is
to use a formulary in which all drugs are covered but beneficiary
cost-sharing varies for different drugsï¿½typically a smaller copayment
for generic drugs, a larger one for preferred drugs, and an even
larger one for all other drugs.  Reducing copayments has also been
used to encourage enrollees using maintenance drugs for chronic
conditions to use particular suppliers, like a mail order pharmacy. 

Plans and insurers have turned to PBMs for assistance in establishing
formularies, negotiating prices with manufacturers and pharmacies,
processing beneficiaries' claims, and reviewing drug utilization. 
Because PBMs manage drug benefits for multiple purchasers, they often
may have more leverage than individual plans in negotiating prices as
they combine the purchasing power of multiple purchasers. 

Traditional fee-for-service Medicare has generally established
reimbursement rates for services like those provided by physicians
and hospitals and then processed and paid claims with few utilization
controls.  Adopting some of the techniques private plans and insurers
use might have the potential for better control of costs.  However,
how to adapt those techniques to the characteristics and size of the
Medicare program raises questions. 

Negotiated or competitively determined prices would be superior to
administered prices only if Medicare could employ some of the
utilization controls that come from having a formulary and
differential beneficiary cost-sharing.  In this manner, Medicare
would be able to negotiate significantly discounted prices by
promising to deliver a larger market share for a manufacturer's
product.  Manufacturers would have no incentive to offer a deep
discount if all drugs in a therapeutic class were covered on the same
terms.  Without a promised share of the Medicare market, these
manufacturers might reap greater returns from higher prices and
concentrating marketing efforts on physicians and consumers to
influence prescribing patterns. 

Implementing a formulary and other utilization controls could prove
difficult for Medicare.  Developing a formulary involves determining
which drugs are therapeutically equivalent so that several from each
class can be included.  Plans and PBMs currently make those
determinations privatelyï¿½something that would not be possible for
Medicare, which must have transparent policies that are determined
openly.  Given the stakes involved in selecting drugs, one can
imagine the intensive efforts to offer input to and scrutinize the
selection process. 

Medicare may also find it impossible to delegate this task to a PBM
or multiple PBMs.  A single PBM contractor would likely be subject to
the same level of scrutiny as the program.  Such scrutiny could
compromise the flexibility PBMs have used to generate savings.  An
alternative would be to grant flexibility to multiple PBMs that are
responsible only for a share of the market.  Contracting with
multiple PBMs, though, raises other issues.  If each PBM has
exclusive responsibility for a geographic area, beneficiaries who
need certain drugs could be advantaged or disadvantaged merely
because of where they live.  If multiple PBMs operated in each area,
beneficiaries would choose one to administer their drug benefit. 
This raises questions of how to inform beneficiaries of the
differences in the PBMs' policies and whether and how to risk-adjust
payments to PBMs for differences in the health status of
beneficiaries using them. 

   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:3

As the Congress continues its deliberations on Medicare prescription
drug coverage, it will need to consider the needs of beneficiaries
and the fiscal health of the program.  The lack of prescription drug
coverage for some Medicare beneficiaries may cause hardship.  Yet,
ensuring the sustainability of the Medicare program is paramount. 
Balancing these competing concerns may require the best from
government-run programs and private sector efforts to modernize
Medicare for the future. 

-------------------------------------------------------- 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 Subcommittee may
have. 

GAO CONTACTS AND ACKNOWLEDGMENTS

For future contacts regarding this testimony, please call Laura A. 
Dummit at (202) 512-7119 or John Hansen at (202) 512-7105.  Other
individuals who made key contributions include Tricia Spellman,
Kathryn Linehan, and Lara Carreon. 

*** End of document. ***