Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy Programs
(Testimony, 03/10/99, GAO/T-HEHS-99-75).

Pursuant to a congressional request, GAO discussed the Department of
Defense's (DOD) $1.3 billion pharmacy programs and efforts under way to
redesign DOD's pharmacy benefit.

GAO noted that: (1) the significant problems DOD is experiencing
delivering its pharmacy benefit result largely from the way DOD manages
its three pharmacy programs; (2) rather than viewing the programs as
integral parts of a single pharmacy system, DOD manages the programs as
separate entities; (3) unless DOD begins to manage the various
components of the pharmacy programs as a single system, the problems GAO
identified will continue and potentially worsen; (4) despite ongoing
efforts to improve its pharmacy benefit programs, DOD and its
contractors lack basic prescription drug cost and beneficiary use
information as well as integrated pharmacy patient databases needed to
effectively manage military beneficiaries' pharmaceutical care; (5)
without cost and use information and integrated databases, coupled with
formularies that differ among its pharmacy programs, DOD is unable to
apply proven pharmacy benefit management commercial best practices that
could save hundreds of millions of dollars each year; (6) last year's
DOD mail-order and retail pharmacy initiatives aimed at achieving
savings by using discounted DOD drug prices could cause financial and
patient safety problems for TRICARE contractors because these
initiatives divorce contractors' medical care management from their
pharmaceutical care, and this integration is important in maintaining
the beneficiary population's good health; (7) military treatment
facilities' efforts to hold down costs by restricting the drugs
available on formularies could reduce beneficiaries' access to
prescription drugs and according to contractors has increased their
retail pharmacy costs; (8) such efforts can be particularly hard
financially on retirees aged 65 and over, who have no prescription drug
coverage under Medicare; (9) DOD is seeking to acquire the technology
that will enable it to integrate its pharmacy databases by March 2000;
(10) as mandated by the fiscal year 1999 Strom Thurmond National Defense
Authorization Act, DOD is developing a plan for redesigning its pharmacy
programs and initiating a two-site pharmacy redesign program for
Medicare-eligible beneficiaries; and (11) GAO has not yet been given a
copy or access to this plan and thus cannot comment on it.

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

 REPORTNUM:  T-HEHS-99-75
     TITLE:  Defense Health Care: Need for Top-to-Bottom Redesign of 
             Pharmacy Programs
      DATE:  03/10/99
   SUBJECT:  Pharmaceutical industry
             Drugs
             Data bases
             Health care cost control
             Health care programs
             Managed health care
             Department of Defense contractors
             Private sector practices
             Reengineering (management)
IDENTIFIER:  DOD TRICARE Program
             Federal Employees Health Benefits Program
             Medicare Program
             
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HE99075T GAO

United States General Accounting Office

Testimony Before the Subcommittee on Military Personnel, Committee
on Armed Services, House of Representatives

For Release on Delivery Expected at 1:00 p.m. EST Wednesday, March
10, 1999 DEFENSE HEALTH CARE

Need for Top-to-Bottom Redesign of Pharmacy Programs

Statement of Stephen P. Backhus, Director Veterans' Affairs and
Military Health Care Issues Health, Education, and Human Services
Division

GAO/T-HEHS-99-75

Page 1 GAO/T-HEHS-99-75

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Mr. Chairman and Members of the Subcommittee: We are happy to be
here today to discuss our report on the Department of Defense's
(DOD) $1.3 billion pharmacy programs and efforts under way to
redesign DOD's pharmacy benefit. 1 As you may know, DOD and its

managed care support contractors provide prescription drug
benefits to about 8.1 million active-duty personnel, their
families, and retired beneficiaries. The pharmaceuticals are
dispensed through three programs: 591 military treatment facility
(MTF) outpatient pharmacies, 5 TRICARE managed care support
contractors' retail pharmacies, and a national contractor's mail-
order service. 2 Without question, pharmacy is the health

care benefit most in demand by beneficiaries. During the past
several years, the Congress has grown concerned about the costs
and quality of DOD's pharmacy benefit, and beneficiaries have
complained that some prescribed medications are no longer
available at MTF pharmacies because of cost-cutting. As a result,
the fiscal year 1998

National Defense Authorization Act (P.L. 105-85) required that we
review DOD's pharmacy programs, focusing on (1) the adequacy of
the information that DOD and its contractors have to manage the
pharmacy benefit; (2) the merits and feasibility of DOD and its
contractors applying commercial best practices, including a
uniform formulary, 3 in managing its pharmacy programs; (3) the
merits and limitations of recent mail-order and retail pharmacy
initiatives to secure discounted DOD drug prices; and (4)

the potential effects MTFs' funding and formulary management
decisions may have on beneficiaries' access to pharmacies and
TRICARE contractors' costs.

In summary, we found that the significant problems DOD is
experiencing delivering its pharmacy benefit result largely from
the way DOD manages its three pharmacy programs. Rather than
viewing the programs as integral parts of a single pharmacy
system, DOD manages the programs as separate

1 Defense Health Care: Fully Integrated Pharmacy System Would
Improve Service and Cost-Effective- ness (GAO/HEHS-98-176, June
12, 1998).

2 TRICARE represents a redesign of the DOD health system during an
era of military downsizing and budgetary concerns. Under TRICARE,
beneficiary health care is coordinated and managed on a regional
basis using MTFs, supplemented by managed care support
contractors. TRICARE contractors administer three types of health
planshealth maintenance organization (TRICARE Prime), preferred

provider network (TRICARE Extra), and fee-for-service (TRICARE
Standard).

3 A formulary is a list of prescription drugs, grouped by
therapeutic class, that a health plan prefers its physicians and
beneficiaries to use. Drugs are chosen for a formulary for medical
value and also price.

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 2 GAO/T-HEHS-99-75

entities, not taking into account, for example, the merits of
establishing a uniform DOD formulary and integrated databases or
the effects that initiatives, such as implementing a separate
mail-service pharmacy program, will have on the other programs.
Unless DOD begins to manage

the various components of the pharmacy programs as a single
system, the problems we identified will continue and potentially
worsen. Specifically, we found the following:

 Despite ongoing efforts to improve its pharmacy benefit programs,
DOD and its contractors lack basic prescription drug cost and
beneficiary use information as well as integrated pharmacy patient
databases needed to effectively manage military beneficiaries'
pharmaceutical care.

 Without cost and use information and integrated databases,
coupled with formularies that differ among its pharmacy programs,
DOD is unable to apply proven pharmacy benefit management (PBM)

commercial best practices that could save hundreds of millions of
dollars each year.  Last year's DOD mail-order and retail pharmacy
initiatives aimed at achieving savings by using discounted DOD
drug prices could cause

financial and patient safety problems for TRICARE contractors
because these initiatives divorce contractors' medical care
management from their pharmaceutical care, and this integration is
important in maintaining the beneficiary population's good health.
MTFs' efforts to hold down costs by restricting the drugs
available on

formularies could reduce beneficiaries' access to prescription
drugs and according to contractors has increased their retail
pharmacy costs. Such efforts can be particularly hard financially
on retirees aged 65 and over, who have no prescription drug
coverage under Medicare.

DOD currently is seeking to acquire the technology that will
enable it to integrate its pharmacy databases by March 2000. Also,
as mandated by the fiscal year 1999 Strom Thurmond National
Defense Authorization Act (P.L. 105-261), DOD is developing a plan
for redesigning its pharmacy programs and initiating a two-site
pharmacy redesign program for Medicare-eligible beneficiaries. We
have not yet been given a copy or access to this plan and

thus cannot comment on it.

Background In operating a system of military health care delivery,
DOD has twin missions: care and treatment of military personnel
where and when they need it and cost-effective and accessible
health care benefits for active- duty families and retired
military personnel and their families. The largest

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 3 GAO/T-HEHS-99-75

DOD pharmacy program is the outpatient pharmacies operated in the
direct care system of Air Force, Army, and Navy MTFs. In fiscal
year 1997, these pharmacies dispensed about 55 million
prescriptions at an

estimated cost of $1 billion. MTFs get most of their prescription
drug supplies through the Defense Supply Center in Philadelphia.
This DOD agency negotiates discounted drug prices through
distribution and pricing agreements (DAPA) with over 200 drug
manufacturers. DAPA prices are between 24 and 70 percent less than
average wholesale prices.

The MTF direct care system is supplemented by 5 TRICARE managed
care support contractors, which, among other services, provide
retail pharmacy benefits to eligible beneficiaries. DOD's national
mail-order pharmacy program contractor is another way DOD augments
MTF pharmacy

services. This program delivers 30- to 90-day supplies of
medications taken for longer-term, chronic health problems to
eligible beneficiaries' homes. In 1997, DOD's contractor-supported
retail and mail-order pharmacy programs cost about $245 million.

In contrast, in the private sector, PBMs administer prescription
drug coverage on behalf of health plan sponsors. PBMs are a type
of managed care firm whose objective is to provide high-quality
prescription drug services at the lowest possible cost. PBMs offer
their customers such services as (1) formulary development and
management, (2) retail pharmacy networks and mail service, (3)
drug rebate negotiation with

manufacturers, (4) generic substitution, (5) therapeutic
interchange programs, (6) claims processing, and (7) drug
utilization review. PBMs' ability to control pharmacy benefit
costs for customers has led to their

increasing involvement in private sector plans, including the
Federal Employees' Health Benefits Program (FEHBP).

DOD and the Contractors Lack Information Needed to Effectively
Manage Pharmacy Programs

DOD lacks the comprehensive prescription drug cost and use data
that PBMs and their health plan sponsors routinely track and
analyze to manage pharmacy benefits and control costs. MTF
pharmacy cost and use data are unreliable at both local and
headquarters levels, and the limited data TRICARE contractors do
provide are not merged with MTF data or used to manage pharmacy
benefits. For example, we had to piece together data

from multiple sources to estimate DOD's fiscal year 1997 total
pharmacy costs--$1.3 billionbecause summary cost data were not
available.

A root cause of the problem is that existing pharmacy patient
databases at the MTFs, regional TRICARE contractors, and the
national mail-order

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 4 GAO/T-HEHS-99-75

pharmacy contractor are not integrated. Although most military
beneficiaries regularly obtain prescription drugs from multiple
dispensing outlets across DOD's three programs, no centralized
computer database exists with each patient's complete medication
history. Millions of dollars in unneeded costs from
overutilization and patient safety problems from adverse reactions
to prescription drugs are likely occurring because DOD

and its contractors lack the databases needed to support automated
prospective drug utilization review systems to review
prescriptions before they are dispensed. PBMs widely use such
systems to reduce inappropriate prescription drug use that can
cause adverse reactions leading to illness, hospitalization, and
even death. In addition, automated drug utilization systems are
used to better identify patterns of fraud, abuse, or other
inappropriate or medically unnecessary care.

In DOD's programs, for example, the lack of such systems has
allowed beneficiary prescription drug stockpiling to become so
pervasive among MTF pharmacies that pharmacists commonly refer to
the problem as polypharmacyor the practice of visiting multiple
pharmacies to accumulate more prescription drugs than needed.
Three cases illustrate this phenomenon:

 A patient and his wife tried to fill prescriptions worth $400 at
an Air Force base pharmacy. Somewhat suspicious, the pharmacist
called the out-of-state base that wrote the prescriptions and
found that the couple

had gotten a 90-day supply of each drug from that pharmacy 3 days
earlier and, checking further, that they had gotten 90-day
supplies of the drugs at a third base pharmacy that morning. The
pharmacist refused to

fill the prescriptions.  Upon her husband's death from chronic
lung disease, a widow returned

several boxes of inhalant drugs and supplies to an Army base's
pharmacy. Obtained from several MTF pharmacies over a 2-year
period, the drugs were valued at about $5,000. In responding to
why she and her husband obtained drugs that were not used, the
widow pointed out that her husband was entitled to them, he feared
his benefits might be

curtailed, and so they stocked up.  At another Air Force base, a
young patient's mother obtained 260

prescriptions in 15 months from several on-base doctors. The
prescriptions were filled at the base hospital and clinic
pharmacies. In effect, she amassed a 5-year supply of inhalant
asthma drugs (Proventil

and Ventolin) and inhalation devices. When an investigation was
conducted as a result of the mother's aggressive behavior toward
pharmacy staff, the base hospital pharmacy staff had to manually

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 5 GAO/T-HEHS-99-75

compile the patient's medication profile from the hospital and
clinic pharmacies to determine the extent of the mother's drug
stockpiling.

Since we issued our report, DOD has stepped up its efforts to
plan, acquire, and install an estimated $5 million pharmacy
patient data system by March 2000 that will support automated drug
utilization reviews on a limited basis. At the same time, DOD
continues to study alternative information technology approaches
to implement a comprehensive pharmacy patient management system,
and it may have a cost estimate and timeline for

completing such an overhaul later this summer. Last year, DOD
pharmacy officials estimated the 10-year cost of a similar
comprehensive system to be $43 million but that such a system
would save $424 million over the same period and substantially
reduce patient safety risks.

Applying Commercial Best Practices Could Reduce Costs and Enhance
Care Quality

In addition to integrated databases, PBMs use other practices to
control costs and provide quality service. For example, PBMs offer
health plan sponsors uniform formularies for beneficiaries as well
as help in designing standard beneficiary eligibility criteria and
cost-sharing to provide incentives for physicians to prescribe and
beneficiaries to use formulary drugs. Features such as copayments
for nonformulary drugs, for example, can create the incentives or
disincentives crucial to balancing the health plan's financial
soundness with beneficiaries' freedom to choose

pharmacies and drugs. While DOD's goal is to provide uniform
pharmacy benefits, its programs operate under a complicated and
confusing array of policies, regulations, and contractual
requirements governing key benefit

design elements such as eligibility, drug coverage, and cost-
sharing. For example, DOD's formularies vary depending on where
the beneficiary gets the drugs. As a result, beneficiaries
experience drug coverage and availability uncertainties and
unnecessary costs. The lack of a uniform formulary drives up costs
in other ways such as causing cost-shifting

among MTFs when pharmacy patients shop around for prescriptions.
And, although all military beneficiaries obtain drugs from MTFs
free of charge, the national mail-order and TRICARE contractors'
programs require copayments regardless of whether the drugs are
formulary or generic. Finally, most of DOD's 1.4 million Medicare-
eligible beneficiaries lack a systemwide prescription drug benefit
and thus have a serious coverage gap because Medicare does not
cover outpatient prescriptions.

Such problems prevent other PBM practices from being fully and
systematically applied in DOD's pharmacy programs.

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 6 GAO/T-HEHS-99-75

Establishing a uniform formulary with incentives for physicians to
prescribe and beneficiaries to use formulary drugs could help
reduce current benefit variability and increase cost-
effectiveness. With an incentive-based formulary, DOD and its
contractors could provide nonformulary drugs but require
beneficiaries to make higher copayments

than for formulary or generic drugs. Also, like private sector
plans and PBMs, DOD could negotiate deeper price discounts from
drug companies seeking formulary approval for their products. But,
for systemwide effectiveness, such a formulary may require MTF
prescription drug copayments that DOD believes it lacks authority
to impose. Nonetheless, the existing pharmacy benefit variation
combined with nonintegrated databases prevents DOD from (1)
controlling costs through formulary management; (2) fully
analyzing drug use to curb inappropriate use and introduce less
costly generic and therapeutic substitutes; and (3)

identifying and, as appropriate, educating physicians who
prescribe too many or nonformulary drugs. Such approaches have
enabled private sector health plans to reduce their costs by an
estimated 10 to 20 percent.

On this basis, a uniform, incentive-based formulary could save an
estimated $61 million to $107 million annually, and other PBM
practices could save another $99 million to $197 million annually.

Mail-Order Program and Retail Pharmacy Proposal Further Fragment
Health Care

Services and Raise Costs

In April 1998, DOD replaced the TRICARE contractors' mail-order
pharmacy services with a separate, national contract to help
control the contractors' rising prescription drug costs. Mail-
order is easy and convenient for beneficiaries to use and can help
control DOD's costs because prescription drugs are purchased at
DAPA prices previously available only to MTF pharmacies. The
TRICARE contractors now pay for the mail-order contractor's costs.
Also, when the next round of TRICARE managed care support
contracts phases in, DOD plans to carve out and provide under one
national contract the TRICARE contractors' retail pharmacy
services. These initiatives, however, may further fragment health
care services and raise costs, as the following illustrate:

 While the TRICARE contractors continue providing retail pharmacy
services, neither they nor the mail-order pharmacy contractor will
have a complete computerized history of each patient's retail and
mail-order medications. This presents potential health risks for
patients.  Having two separate national contractorsone for mail-
order and one

for retail pharmacy serviceswould further fragment DOD health care
services and divorce TRICARE contractors' medical care management
from pharmaceutical care. Contractors would be unable to
adequately

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 7 GAO/T-HEHS-99-75

manage patients' medical care since the prescription drugs are
important in maintaining the beneficiary population's good health
and it would be difficult for contractors to isolate the pharmacy
benefit from the remaining medical benefit.

 Savings from DAPA prices could be short-term because drug
companies may be motivated to raise DAPA prices to avoid losses
from an expanded DOD discounted market. Although these marketplace

adjustments are difficult to project because of the many factors
that influence drug prices, expanding the size of the market that
could have access to DAPA prices could put upward pressure on DAPA
prices. An alternative would allow TRICARE contractors to continue
providing beneficiaries with retail pharmacy services, while
providing DOD the data it needs to obtain DAPA prices from the
drug companies. This approach

would keep pharmaceutical and medical care administration together
under existing contracts. And such an approach may offer savings
in addition to those achievable by integrating patient databases
to support drug utilization review and applying other commercial
best practices in MTF, TRICARE retail, and national mail-order
pharmacy programs. Another alternative would be that, once MTFs
and TRICARE contractors integrate their pharmacy patient
databases, they also could institute electronic billing and
reimbursement. With electronic billing and reimbursement, MTFs
could continue and possibly increase the volume of pharmacy
services they provide to TRICARE contractors' beneficiaries. By
reimbursing MTFs, TRICARE contractors potentially could save money
by directing their beneficiaries to the MTFs to obtain medications
at DAPA

drug prices, rather than using retail pharmacies.

MTF Funding and Formulary Management Decisions Can Limit
Beneficiary Access to Drugs and Affect Other Pharmacy Costs

Following DOD's downsizing efforts in the early 1990s, which
reduced medical personnel and the number of MTF pharmacies,
remaining MTFs began experiencing funding reductions that made the
pharmacy benefit an

attractive target for cost-cutting. At the same time, the demand
for prescription drugs began increasing. Also, policy changes
required that beneficiaries be treated alike in dispensing
formulary drugs. To control costs, MTFs dropped certain
prescription drugs from their formularies and chose not to add
others. This prevented beneficiaries from obtaining certain drugs
at MTFs. Examples follow:

 In 1997, to include Allegra, a widely advertised, nonsedating
antihistamine, on their formularies, two Air Force pharmacies in
Kansas

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 8 GAO/T-HEHS-99-75

and Florida cut dispensing to 30 tablets instead of the full 60
tablets for a 1-month supply. One pharmacy chief told us this
should save about $60,000 each year. Both facilities justified
restricting Allegra, estimated by MTF officials to cost 25 to 50
times more than other antihistamines with major sedative side-
effects, on the basis that it was unwarranted

for overnight use. Similarly, an Air Force medical center in Texas
dropped Allegra from its formulary because it was costing too much
of the medical center's $28 million pharmacy budget to make it
available for all beneficiaries. Instead, this MTF pharmacy
carried Allegra as a nonformulary drug obtainable only under
special-order, primarily for

military pilots.  In 1996, a Navy hospital in Florida decided not
to add Zyrtec (a new allergy drug for upper respiratory symptoms)
to the formulary. While recognizing Zyrtec's therapeutic edge over
other formulary drugs in the

same class, MTF officials decided that the high demand for Zyrtec
at other Navy MTFs made it cost-prohibitive.  An Army hospital in
Colorado regularly reviews for reduction the 50

formulary drugs on which it expends the most money. In 1997, the
pharmacy spent more than $350,000 dispensing Prilosec (a widely
prescribed ulcer drug). To cut costs, the pharmacy now (1) urges
use of

the less-costly formulary drug Prevacid; (2) requires that
physicians justify Prilosec prescriptions in writing, and (3) is
developing physician guidance on the best uses of Prilosec and
Prevacid.

According to TRICARE contractors, many beneficiaries responded to
formulary restrictions by buying their prescription drugs at
contractor pharmacies, thereby increasing the volume of
prescription drug purchases beyond what the contractors projected
in their original bids. Blaming their cost overruns on MTF
formulary changes, the contractors told us they intended to seek
additional compensation from DOD. A DOD consultant concluded that
the contractors' pharmacy use had risen at the same time MTFs' use
had dropped somewhat. DOD and the contractors disagreed

about the cause of the contractors' cost increases and continue to
study the matter. Of course, if DOD and the contractors had used
integrated pharmacy patient databases during the periods in
question, establishing cause and effect for the contractors'
allegations could have been greatly facilitated.

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 9 GAO/T-HEHS-99-75

Conclusions, Recommendations, and Agency Actions

In our June 1998 report, we concluded that the problems DOD is
experiencing in delivering its pharmacy benefit stem largely from
the way it manages its $1.3 billion pharmacy programs. Although
the MTF and contractor retail and mail-order pharmacy programs
share patient populations and are otherwise highly interrelated,
DOD has adopted a program-by-program focus rather than a
systemwide view of these operations. As a result, changes made to
one program inevitably affect the others, and cross-program
problems such as nonintegrated databases and different
formularies, eligibility, and copayment requirements are having
substantial, unintended consequences for DOD and contractor costs
and for beneficiaries' quality of and access to health care.
Although DOD has taken steps to help improve pharmacy management,
a more fundamental

overhaul is needed. We believe DOD needs a top-to-bottom redesign
of its pharmacy programs that effectively involves the programs'
major stakeholders. Also, we believe DOD needs to commit itself to
managing pharmacy programs as a system and bringing needed reforms
to the system. Otherwise, DOD's pharmacy problems will continue
and likely worsen.

To help DOD establish a more systemwide approach to managing its
pharmacy benefit, we suggested that the Congress consider
directing DOD to establish a uniform, incentive-based formulary
across its pharmacy programs and, as appropriate, to use non-
active-duty beneficiary copayments at MTFs as incentives for
physicians to prescribe and beneficiaries to use formulary drugs.
Also, we suggested that the Congress may wish to give systemwide
eligibility to Medicare-eligible retirees not now eligible for
such benefits. In response, language in the fiscal year 1999 Strom
Thurmond National Defense Authorization Act (P.L. 105-261)

directed DOD to submit this month a plan for a systemwide redesign
of the military pharmacy system and implement its planned
redesigned pharmacy system at two sites for Medicare-eligible
beneficiaries by October 1999.

Also, we made a series of recommendations to DOD to undertake a
thorough redesign of the prescription drug benefit across the
MTFs' and contractors' retail and national mail-order pharmacy
programs. This effort should identify and act on policy,
oversight, managed care support, regulatory, and contractual
changes needed to make the programs as uniform, integrated, and
cost-effective as possible. Some changes may

require additional legislative authorities and, as appropriate,
the Secretary of Defense should seek such authorities from the
Congress.

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 10 GAO/T-HEHS-99-75

Specific action areas identified in our report included the
following:  Develop an approach for effectively involving affected
stakeholders

such as the TRICARE contractors in decisions bearing on the
system. A starting point may be allowing the TRICARE contractors
to be represented on the national DOD pharmacy and therapeutics
committee.  Expeditiously integrate the existing MTF, TRICARE
retail, and national

mail-order pharmacy patient databases and providing for automated
prospective drug utilization review, rather than waiting for the
planned large-scale overhaul of DOD's health care information
system in 2003.  Establish a uniform, incentive-based formulary
for MTF, TRICARE

retail, and national mail-order pharmacies' programs. This should
include using non-active-duty beneficiary copayments at MTFs to
encourage the use of formulary drugs at MTF, contractor retail,
and

mail-order pharmacies.  Extend systemwide prescription drug
eligibility to Medicare-eligible

retirees not entitled to prescription drug benefits under the
Medicare subvention demonstration and pharmacy base closure
programs.  Review national FEHBP and other private sector
prescription drug

benefits for lessons learned in establishing new DOD program
criteria and revising prescription drug benefits. A guiding
principle should be to provide DOD beneficiaries with uniform and
geographically convenient access to DOD prescription drug services
no matter where they reside.  Upon integrating the existing
pharmacy patient databases, institute

electronic billing and claims reimbursement among MTFs and TRICARE
contractors.  Upon integrating the MTF pharmacy patient databases,
institute mandatory third-party insurer billing for MTF
prescription drugs

provided to beneficiaries who have other health insurance for
prescription drugs.  Direct and ensure that MTF pharmacies and
TRICARE contractors routinely apply accepted PBM practices such as
prior authorization,

early refill edits, duplicate therapy edits, and physician-
approved therapeutic interchangeconsistent with DOD pharmacy
benefit policies.  Postpone awarding a separate national retail
pharmacy PBM contract until the subject reforms have been
implemented for current TRICARE

retail pharmacy programs and until cost-savings from those reforms
can be compared with potential cost-savings under a separate
retail pharmacy contract.

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 11 GAO/T-HEHS-99-75

DOD and the TRICARE contractors agreed with each of the
recommendations, but DOD made certain points. With respect to
extending systemwide drug eligibility to Medicare-eligible
retirees, DOD said that

legislative authority would be required to fund such services
above this population's current MTF space-available services. We
believe that if our recommendations were implemented promptly and
strategically, the resulting savings would help to defray such
added costs. Also,

implementing automated prospective drug utilization review
systems; a uniform, incentive-based formulary; and other PBM best
practices could save DOD and its contractors hundreds of millions
of dollars annually by substantially lowering prescription drug
costs. And collecting copayments

for nonformulary drugs from all non-active-duty beneficiaries
would save millions more, as would applying safer drug therapies
to reduce general health care costs. Likewise, extending the
systemwide drug benefit to Medicare-eligible retirees will result
in better management of their care, and major dollar savings may
be achieved with drug utilization review, which helps avoid
excessive use and adverse drug reactions that can cause illness,
hospitalization, and even death. In short, the financial and other

health benefits to be derived from overhauling the system can be
applied against the costs of a military retirees' systemwide drug
benefit.

Also, DOD stated that although MTF pharmacy copayments are valid
and effective, beneficiaries will resist them and perceive benefit
erosion. We believe the MTF pharmacy benefit already has eroded as
a result of funding

reductions and formulary restrictions and that our collective
recommendations will help reverse this troublesome course.
Furthermore, beneficiaries' general acceptance of MTF pharmacy
copayments will critically depend on DOD's bringing about and
promoting marked

improvements in its overall pharmacy efficiency, cost-
effectiveness, and quality.

Lastly, DOD is in the process of planning its pharmacy program
redesign and expects to implement the redesigned retail and mail-
order pharmacy programs for Medicare-eligible beneficiaries at two
yet-to-be selected sites

Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy
Programs

Page 12 GAO/T-HEHS-99-75

by October 1999. We have not yet been provided a copy of or access
to DOD's plan for redesigning its pharmacy benefit. Thus, we have
no comments.

Mr. Chairman, this concludes my prepared statement. We will be
happy to respond to any questions you or other Subcommittee
members may have. We look forward to continuing to work with the
Subcommittee as it exercises its oversight of DOD's redesign of
the military pharmacy system.

(101624) Lett er

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