oversight

Pharmacy Benefit Managers: FEHBP Plans Satisfied with Savings and Services, but Retail Pharmacies Have Concerns

Published by the Government Accountability Office on 1997-02-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Requesters




February 1997
                 PHARMACY BENEFIT
                 MANAGERS
                 FEHBP Plans Satisfied
                 With Savings and
                 Services, but Retail
                 Pharmacies Have
                 Concerns




GAO/HEHS-97-47
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-276005

      February 21, 1997

      Congressional Requesters

      The Office of Personnel Management (OPM) estimates that insurance
      carriers in the Federal Employees Health Benefits Program (FEHBP)
      covered nearly 9 million federal employees, retirees, and dependents in
      1995 and that pharmacy benefit payments for its five largest plans were
      about $2 billion.1 Moreover, pharmacy benefit payments for these plans
      accounted for an increasing share of their total FEHBP health care
      costs—growing from 12 percent in 1990 to 19 percent in 1995.

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

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

      To address these questions, we examined three FEHBP plans that
      contracted with PBMs—the Blue Cross and Blue Shield Association (Blue
      Cross), the Government Employees Hospital Association (GEHA), and the
      Rural Carrier Benefit Plan (Rural). Together, these plans cover about
      50 percent of all FEHBP employees and retirees, and each contracts with
      one of the six largest PBMs. Although the Rural plan has a relatively small
      enrollment compared with Blue Cross and GEHA, it is one of the few

      1
      OPM did not have pharmacy benefit payment data for the remaining plans, most of which were health
      maintenance organizations (HMO).
      2
       For other related GAO products, see Blue Cross FEHBP Pharmacy Benefits (GAO/HEHS-96-182R,
      July 19, 1996); Blue Cross and Blue Shield: Change in Pharmacy Benefits Affects Federal Enrollees
      (GAO/T-HEHS-96-206, Sept. 5, 1996); and Pharmacy Benefit Managers: Early Results on Ventures With
      Drug Manufacturers (GAO/HEHS-96-45, Nov. 9, 1995).



      Page 1                                             GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                   B-276005




                   fee-for-service FEHBP plans that contracts with a PBM other than Merck-
                   Medco Managed Care, Inc., or PCS Health Systems, Inc. (These companies
                   are referred to in this report as “Medco” and “PCS,” respectively.) We met
                   with representatives of each plan and the PBMs they contract with,
                   reviewed the contracts between the plans and PBMs, analyzed reports on
                   the PBMs’ performance in meeting contract requirements, and reviewed
                   plan customer satisfaction surveys. Appendix I contains a detailed
                   discussion of our scope and methodology.

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


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

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

                   The plans’ decisions to use PBMs to control pharmacy benefit costs,
                   however, can shift business away from retail pharmacies. For example,
                   Blue Cross’s 1996 benefit change, which encouraged mail order purchases,
                   reduced affected enrollees’ payments to retail pharmacies by 36 percent or
                   about $95 million. During the same period, total payments to retail
                   pharmacies for all enrollees decreased by about 7 percent or about
                   $34 million. Moreover, PBM and plan officials, as well as industry experts,
                   acknowledge that any additional efforts to control FEHBP pharmacy benefit



                   Page 2                                   GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                        B-276005




                        costs in the future might require plans to adopt more restrictive cost-
                        containment procedures that could possibly limit enrollees’ access to
                        drugs and pharmacy services and lessen enrollees’ satisfaction with their
                        pharmacy benefits.


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

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

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


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

                        According to Rural officials, their decision to use a PBM to provide mail
                        order services in 1986 was directly linked to a need to contain pharmacy
                        benefit payments that were rising faster than the increase in drug



                        Page 3                                  GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                                           B-276005




                                           utilization. GEHA officials also cited the need to slow the rate of increase in
                                           their pharmacy benefit payments, which they attributed to rising drug
                                           prices and utilization. Blue Cross officials also said that they expected PBM
                                           services to help them control pharmacy benefit payments, which have
                                           constituted an increasing share of total benefit payments.

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


Table 1: Examples of PBM Administrative Services Provided to Three FEHBP Plans
Service                       Description
Retail pharmacy network         PBMs recruit pharmacies, negotiate network drug price discounts, and monitor network
development                     pharmacies’ customer services.
Mail order pharmacy operation   PBMs operate mail order pharmacies that allow enrollees to obtain prescriptions, particularly
                                maintenance prescriptions, by mail.
Formulary development           PBMs use pharmacy and therapeutics (P&T) committeesa to help develop formularies that list drugs
                                the plans prefer physicians to prescribe in each therapeutic category.
Rebate negotiation              PBMs negotiate and obtain rebates from drug manufacturers in return for inclusion and low-cost
                                designation of their drugs on the plans’ formularies and for formulary compliance programs that
                                impact market share.
Claims processing               PBMs process benefit claims and prepare periodic payment and drug utilization reports for plan
                                customers.
                                           a
                                            P&T committees are independent groups of health care professionals that evaluate drugs in all
                                           therapeutic categories on the basis of safety, efficacy, and substitutability.



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

                                           3
                                            The usual and customary price is the price pharmacies charge cash-paying customers whose
                                           prescriptions are not covered by health insurers.
                                           4
                                            Drug manufacturers suggest a list price that wholesalers charge pharmacies. The average of the list
                                           prices, collected for many wholesalers, is called a drug’s AWP.
                                           5
                                            MAC refers to a maximum price that retail pharmacies in plans’ networks may be paid for certain
                                           generic drugs.



                                           Page 4                                                GAO/HEHS-97-47 FEHBP Pharmacy Benefits
B-276005




Pharmacies accept these levels of reimbursement and PBM cost-reduction
practices to attract or retain the plans’ enrollees.

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

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




6
 Blue Cross does not use its PBMs’ national formularies. Rather, Blue Cross develops its own
formulary with input from its two PBMs.
7
 The PBMs also offer their customers incentive-based or closed formularies. Incentive-based
formularies require enrollees to pay higher copayments if their physicians prescribe nonformulary
drugs. Closed formularies are more restrictive, limiting coverage to formulary drugs only.



Page 5                                               GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                                          B-276005




Table 2: Physician and Pharmacist Interventions Performed for Three FEHBP Plans
Intervention                   Description
DUR                            DUR programs analyze patterns of drug use to prevent contraindications and adverse interactions.
                               PBMs use this information to make prescription substitution recommendations to physicians and
                               inform plans and physicians about physicians’ prescribing patterns.
Generic substitution           Generic substitution interventions switch medications from brand-name drugs to chemically
                               equivalent generic drugs. In some states, pharmacists can make this switch if the physician does
                               not indicate that the prescription must be dispensed as written.
Therapeutic interchange        Therapeutic interchange interventions switch nonformulary medications to preferred formulary
                               drugs. Therapeutic intervention programs encourage patients to use, and physicians to prescribe,
                               less expensive brand-name formulary drugs considered as safe and effective as other, more
                               expensive brand-name drugs.
Prior authorization            Prior authorization is required for medications that may be used to treat conditions or illnesses that
                               are not covered by a plan, are outside the Food and Drug Administration or manufacturer
                               guidelines, have a high potential for abuse, or are ordered in unusual quantities.
Disease management             Disease management programs try to improve the care delivered to a specific group of patients,
                               such as those with diabetes, by recommending particular therapies or patient self-management
                               techniques. PBMs use physician and patient education materials to emphasize shared
                               responsibility and cost-effective approaches.

                                          The PBMs’ retail network and mail order pharmacies use computerized
                                          systems to review enrollees’ combined mail order and retail pharmacy
                                          records and detect problems with prescriptions at the point of dispensing.
                                          These concurrent activities can alert the pharmacist when a drug may
                                          adversely interact with other drugs a patient is using. They can also
                                          identify situations when a generic or formulary alternative to the
                                          prescribed drug is available or when the drug duplicates an existing
                                          prescription. If the review identifies a nonrecommended, redundant, or
                                          potentially harmful drug, a pharmacist or technician contacts the
                                          prescribing physician. Figures 1 and 2 depict the mail order and retail
                                          dispensing processes at Caremark.




                                          Page 6                                           GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                                  B-276005




Figure 1: Mail Order
Prescription-Dispensing Process




                                  Page 7     GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                              B-276005




Figure 2: Retail Network
Pharmacy-Dispensing Process




                              The PBMs’ retrospective DUR programs study the combined retail and mail
                              order drug utilization patterns of the plans’ enrollees to identify other




                              Page 8                                 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                     B-276005




                     instances in which physicians may have prescribed inappropriate
                     medications or enrollees may not be using prescribed drugs properly.
                     When retrospective DUR activities identify inappropriate prescribing or
                     drug usage, such as incorrect dosages or durations of therapy, PBMs
                     typically contact the physicians and encourage the use of more cost-
                     effective drugs or appropriate therapies.

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


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

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




                     Page 9                                 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                                      B-276005




Figure 3: 1995 Blue Cross FEHBP
Pharmacy Savings                                                                            MAC

                                                                                            7.2%
                                                                                            Prior Approval

                                                                                            2.7%
                                                                                            Intervention Program

                                                                                            2.0%
                                                                                            DUR

                                                                                            0.4%
                                                                                            COB


                                                        •
                                                   •


                                          • 14.3%

                                                                      52.3% •               Retail and Mail Order Pharmacy
                                                                                            Discounts
                                                21.2%
                                                   •




                                                                                            Manufacturer Discounts



                                      Source: Blue Cross and Blue Shield Association.




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

                                  •   Retail and mail order pharmacy discounts accounted for about
                                      $264 million in savings.8 For retail, total savings resulted from the
                                      difference between the reimbursement amount PCS paid pharmacies for
                                      individual prescriptions and the drugs’ usual and customary prices. Mail


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



                                      Page 10                                             GAO/HEHS-97-47 FEHBP Pharmacy Benefits
    B-276005




    order savings resulted from discounts off AWP that Blue Cross negotiated
    with Medco.
•   MAC savings accounted for approximately $72 million in savings. These
    savings resulted from the difference between the reimbursement amount
    PCS paid the pharmacies for certain generic drugs and the drugs’ usual and
    customary prices.9
•   Manufacturer rebates accounted for about $107 million in savings and
    represent the guaranteed manufacturer discounts that PCS and Medco
    negotiated with drug manufacturers for including their products on their
    formulary. Blue Cross received 90 percent of the total rebates, and the
    PBMs retained the remaining 10 percent as an administrative fee and
    incentive to increase the amount of discounts.
•   DUR accounted for about $10 million in savings that resulted from clinical
    activities the PBMs performed. Savings include the sum of the prices of
    prescriptions reversed or denied because of DUR alerts.10
•   Medco’s intervention program accounted for about $13.5 million in
    savings, which were derived, in part, from the use of less expensive
    brand-name drugs.
•   The prior approval program accounted for about $36.5 million in savings.
    Blue Cross determined savings from this program by calculating the cost
    of prescriptions denied reimbursement or never filled by enrollees who
    received a prior approval form.11 This program covers 13 drugs that
    require Blue Cross approval before dispensing.
•   The coordination of benefits (COB) program accounted for about $2 million
    in savings. Blue Cross computed savings from this program by determining
    the total reductions in the amount Blue Cross was responsible for paying
    for claims that were also covered in part by other insurers. COB is an
    industrywide method used to avoid paying duplicate benefits to an
    individual covered by another insurer.

    GEHA estimated that its 1995 FEHBP pharmacy savings totaled about
    $85 million. Prescription drug payments in 1995 totaled about $226 million.

    9
     MAC savings include about 73 percent of all generic drugs dispensed by retail pharmacies that are
    reimbursed by Blue Cross. The remaining 27 percent represent generic drugs for which Blue Cross, at
    PCS’ recommendation, does not pay retail pharmacies incentives to encourage substitution because
    (1) they have such narrow therapeutic ranges that variations among them could affect a patient’s
    response or (2) generically available products with reliable suppliers and low cost are insufficient to
    justify such incentives.
    10
      A DUR alert could occur for several reasons, including one or more of the following: rejects for early
    refill and maximum daily dose and reversals based on screens for drug interaction, duplicate therapy,
    drug allergy, drug and pregnancy, drug and disease, drug and gender, drug and age, under-minimum
    daily dose, and underuse.
    11
     Savings calculations involved determining the number of months for which a specific drug is usually
    prescribed.



    Page 11                                               GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                                         B-276005




                                         Figure 4 shows the percentage of total savings that GEHA attributed to
                                         different PBM services.


Figure 4: 1995 GEHA FEHBP Pharmacy
Savings
                                                                                 9.4%
                                                                                 DUR

                                                                                 7.0%
                                                                                 Formulary Rebates

                                                                                 4.7%
                                                                                 Generic Substitution

                                                                                 4.7%
                                                                                 Disease Management

                                                                                 0.2%
                                                                                 Prior Authorization




                                                               •
                                                           •

                                                       •

                                                   •



                                                                   73.9% •       Retail and Mail Order Pharmacy
                                                                                 Discounts




                                         Source: GEHA.




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

                                     •   Retail and mail order pharmacy discounts accounted for approximately
                                         $63 million in savings. Total savings resulted from the difference between



                                         Page 12                                GAO/HEHS-97-47 FEHBP Pharmacy Benefits
    B-276005




    the AWP that GEHA would have paid for retail and mail order drugs and what
    GEHA did pay for these drugs because of the negotiated discounts.
•   DUR accounted for about $8 million in savings, which resulted from the
    concurrent clinical activities the PBM performed. For drugs receiving a DUR
    alert, savings include the sum of the prices of prescriptions reversed or
    denied before dispensing.
•   Formulary rebates accounted for approximately $6 million in savings.
    Under the retail and mail order programs, Medco receives discounts from
    certain drug manufacturers for including the manufacturers’ products on
    Medco’s national formulary. In 1995, GEHA retained 80 percent of total
    rebates due to the dispensing of each manufacturer’s formulary drugs
    under GEHA’s program. GEHA had a guaranteed formulary savings of
    3 percent of the total ingredient cost of brand-name drugs dispensed
    through the mail.
•   Generic substitution accounted for about $4 million in estimated savings.
    Although GEHA did not have a guaranteed generic substitution rate in 1995,
    its substitution rate was higher in 1995 than 1994. The savings represent
    the difference between the 1994 and 1995 generic savings. In other words,
    in 1994, where applicable, generic equivalents were substituted for
    brand-name drugs 68 percent of the time and, in 1995, about 77 percent of
    the time. GEHA’s 1995 savings represent the difference between
    brand-name and generic prices for 9 percent of the drugs dispensed at
    both retail and mail order pharmacies.
•   Disease management accounted for approximately $4 million in savings.
    Savings resulted from multiplying a PBM-determined savings per patient per
    year in overall health care costs by the number of patients enrolled in
    GEHA’s diabetes program.12
•   Prior authorization accounted for about $200,000 in savings, which were
    determined by calculating the cost of a prescription drug that was denied
    reimbursement or never filled by enrollees who received a prior
    authorization form.13

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




    12
     Because GEHA chose not to provide medical claims data to the PBM, the PBM relied on its
    experience with another client who was enrolled in its diabetes disease management program to
    estimate overall savings per patient.
    13
      According to GEHA officials, they only required prior authorization for one drug in 1995.



    Page 13                                               GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                                          B-276005




Figure 5: 1995 Rural FEHBP Pharmacy
Savings                                                                           Managed Plan

                                                                                  DUR

                                                                                  2%
                                                                                  Formulary Substitutions

                                                                                  2%
                                                                                  Formulary Rebates




                                                     • 11%


                                              • 16%


                                                                 69% •            Retail and Mail Order Pharmacy
                                                                                  Discounts




                                          Source: Caremark.




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

                                      •   Retail and mail order pharmacy discounts accounted for approximately
                                          $8 million in savings. These savings resulted from price discounts off
                                          drugs’ AWP for brand-name and AWP or MAC for generic pharmaceutical
                                          products at mail order and retail pharmacies.
                                      •   DUR accounted for about $1.3 million in savings, which occurred when
                                          Caremark did not fill prescriptions due to routine DUR alerts such as drug
                                          allergy, patient not covered, or duplicate claim.
                                      •   Managed plan activities accounted for about $1.9 million in savings. These
                                          savings resulted from instances when Caremark pharmacists contacted
                                          physicians and obtained permission to substitute a generic drug for a
                                          brand-name drug that was prescribed “Dispense as Written.” Other savings



                                          Page 14                                GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                         B-276005




                         resulted from clinical interventions, such as recommendations for more
                         appropriate drug regimens or duration of drug therapy.
                     •   Substitution of formulary drugs for nonformulary drugs by the mail order
                         pharmacy accounted for about $200,000 in savings.
                     •   Formulary rebates accounted for approximately $200,000 in savings.
                         Caremark pays Rural an annual rebate based on a percentage of the prior
                         year’s drug costs.


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

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

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

                         All of the plans use customer surveys to assess enrollees’ satisfaction with
                         their pharmacy benefits. In addition to reviewing the performance
                         reflected in the PBMs’ operating reports, the survey addresses specific


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



                         Page 15                                              GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                 B-276005




                 issues, such as whether the enrollees felt the time their calls were on hold
                 was reasonable, and more general issues, such as enrollees’ overall
                 satisfaction with program performance.

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


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

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

                 15
                   Blue Cross’s customer survey for its retail pharmacy program did not contain a comparable measure
                 for its retail pharmacy services.
                 16
                   Although Caremark’s survey does not specifically target Rural enrollees, Rural officials believe that
                 the results are indicative of Rural enrollees’ experience.



                 Page 16                                                GAO/HEHS-97-47 FEHBP Pharmacy Benefits
B-276005




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

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

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

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



Page 17                                 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
                   B-276005




                   However, payments to retail pharmacies differed between the two plans.
                   About 70 percent of Blue Cross’s prescription payments17 went to its retail
                   network pharmacies; over two-thirds of GEHA’s prescription payments
                   went to its mail order pharmacy.

                   Concerns about the size and effect of PBM pharmacy discounts are
                   reflected in reports that pharmacy profit margins are decreasing as PBMs
                   and managed care organizations account for a greater share of pharmacy
                   business. Moreover, an industry trade publication reported that the
                   number of independent pharmacies decreased by 1,800 or about
                   7.2 percent in 1995.18 However, the publication also notes that many of
                   these pharmacies were purchased by major drug chains and then absorbed
                   into the chains’ nearest pharmacies.

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


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



                   17
                     Unlike GEHA’s payments, the Blue Cross payments do not include the copayments that patients paid
                   to retail pharmacies for their prescription drugs.
                   18
                    Marie Griffin, “Showing Strength, Back-to-Basics Approach Enables Drug Chains to Reach New
                   Heights,” Drug Store News, April 29, 1996, p. 59.



                   Page 18                                            GAO/HEHS-97-47 FEHBP Pharmacy Benefits
B-276005




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

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




Bernice Steinhardt
Director, Health Services Quality
  and Public Health




Page 19                                 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
B-276005




List of Requesters

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

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

The Honorable Barbara A. Mikulski
United States Senate

The Honorable Benjamin Gilman
House of Representatives

The Honorable James Moran
House of Representatives




Page 20                             GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Page 21   GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Contents



Letter                                                                                  1


Appendix I                                                                             24

Scope and
Methodology
Tables        Table 1: Examples of PBM Administrative Services Provided to              4
                Three FEHBP Plans
              Table 2: Physician and Pharmacist Interventions Performed for             6
                Three FEHBP Plans

Figures       Figure 1: Mail Order Prescription-Dispensing Process                      7
              Figure 2: Retail Network Pharmacy-Dispensing Process                      8
              Figure 3: 1995 Blue Cross FEHBP Pharmacy Savings                         10
              Figure 4: 1995 GEHA FEHBP Pharmacy Savings                               12
              Figure 5: 1995 Rural FEHBP Pharmacy Savings                              14




              Abbreviations

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


              Page 22                               GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Page 23   GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Appendix I

Scope and Methodology


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


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

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

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

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




(108298)     Page 24                                 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested