oversight

Prescription Drug Benefits: Implications for Beneficiaries of Medicare HMO Use of Formularies

Published by the Government Accountability Office on 1999-07-20.

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

                  United States General Accounting Office

GAO               Report to Congressional Requesters




July 1999
                  PRESCRIPTION DRUG
                  BENEFITS
                  Implications for
                  Beneficiaries of
                  Medicare HMO Use of
                  Formularies




GAO/HEHS-99-166
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-279239

      July 20, 1999

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

      The Honorable Ron Wyden
      United States Senate

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

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




      1
       A “plan” refers to a package of benefits, including out-of-pocket costs and terms of coverage.
      2
       See Medicare+Choice: New Standards Could Improve Accuracy and Usefulness of Plan Literature
      (GAO/HEHS-99-92, Apr. 12, 1999).
      3
       Beneficiaries will have 6 months in 2002 and 3 months in the years following to change their
      enrollment choices.



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

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

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

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

To address these issues, we obtained information from 16 HMOs in the
Medicare+Choice program in three markets: 6 in Los Angeles; 7 in Miami
(Dade, Broward, and Palm Beach counties); and 3 in Philadelphia. These
16 represented more than 25 percent of all beneficiaries enrolled in
Medicare HMOs. From each HMO, we obtained information on the policies

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



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                   and procedures used to make formulary decisions, notify health care
                   providers and beneficiaries about formulary changes, and consider
                   physician requests for nonformulary drugs. We also obtained copies of
                   formularies in effect for each HMO on November 1, 1997; November 1, 1998;
                   and January 1, 1999.

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


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

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

                   Twelve of the 16 HMOs we examined deleted drugs from their formularies
                   in four therapeutic classes that are widely used to treat health conditions
                   common to the elderly: hypertension, depression, ulcers, and high
                   cholesterol. These deletions required beneficiaries to switch to alternative
                   formulary drugs or increase their out-of-pocket expenses, in some cases to



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             the full price of the drug. However, 15 of the 16 also added drugs to their
             formularies in these classes. Considering all the deletions and additions,
             12 of the 16 HMOs covered as many or more drugs in each class in
             January 1999 than they did in November 1997. With one exception, the
             HMOs continue to offer several alternatives for physicians to prescribe in
             each class.

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


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

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



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detailed information about specific plans, HCFA directs beneficiaries to
MCOs.


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

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

Prior to 1996, few states had laws regulating the use of drug formularies by
MCOs. However, according to the National Conference of State
Legislatures, by April 1999 at least 26 states had enacted laws concerning
the disclosure to plan enrollees of formularies, procedures to obtain
nonformulary drugs, or both.6 For example, 13 of the 26 states enacted
legislation that required MCOs to disclose both their formularies and the
procedures they require to obtain coverage of nonformulary drugs.7

Two of the three states we visited have passed laws related to MCOs’
formulary management. Pennsylvania law requires that, upon request,
MCOs provide information on whether specific drugs are covered and a
description of the process by which a physician can prescribe
nonformulary drugs when the formulary drug has been ineffective or



5
 GAO/HEHS-99-92, Apr. 12, 1999.
6
 Jacob Herstek, Managed Care Drug Formularies (Washington, D.C.: National Conference of State
Legislatures, Apr. 1, 1999).
7
 The administration has directed federal health plans, including Medicare MCOs, to comply with
recommendations of the President’s Advisory Commission on Consumer Protection and Quality in the
Health Care Industry concerning the information consumers should receive from plan sponsors about
formularies, the drugs they include, and exceptions to formulary drugs.



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                     causes an adverse reaction.8 California law requires that MCOs provide
                     copies of formularies, upon request, establish expedited processes to
                     consider physician requests for nonformulary drugs, and continue
                     coverage for any drugs deleted from their formularies that a physician
                     continues to prescribe for individual plan enrollees.9 The California
                     Department of Corporations has reviewed the formularies of HMOs
                     suspected of deleting drugs inappropriately from their formularies before
                     the July 1, 1999, effective date of the law requiring continued coverage.10

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


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

                     Formularies are often described as open, incentive-based, or closed. Open
                     formularies are often referred to as “voluntary” because beneficiaries are
                     not penalized financially if their physicians prescribe nonformulary drugs.
                     HMOs that use open formularies may do so in conjunction with compliance


                     8
                      Pa. Stat. Ann. tit. 40, section 991.2136 (West 1999).
                     9
                      Cal. Health & Safety Code sections 1363.01, 1367.20, 1367.22, 1367.24 (West 1999).
                     10
                      The Department has used a panel of consultants to review the deletions and develop an approach and
                     criteria for their decisions. According to a Department official, the Department has decided to keep
                     both the identities of panel members and the criteria they used to evaluate formulary changes
                     confidential.
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programs that encourage physicians to prescribe formulary drugs, even
though the HMOs will still cover both formulary and nonformulary drugs.
An incentive-based formulary provides beneficiaries financial incentives
for their physicians to prescribe formulary drugs. Under this arrangement,
the plan still covers nonformulary drugs, but it requires a copayment for
them that is not required for formulary drugs or a higher copayment than
that required for formulary drugs. A closed formulary takes these financial
incentives one step further by limiting coverage to only formulary drugs.
Therefore, if a beneficiary’s physician prescribes a nonformulary drug, the
beneficiary will have to pay the full cost of that prescription unless the
HMO grants an exception. According to one report, the percentage of HMOs
using closed formularies is expected to increase from about 25 percent in
1996 to about 37 percent in 1999.11

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

The HMOs we studied also manage their prescription drug expenditures by
using several types of formulary controls, such as generic substitution and
variable copayments.13 Generic substitution encourages or requires the
use of generic drugs when they are available in place of more expensive
brand-name drugs. Beneficiaries may also be required as part of the
overall benefit design to make different copayments for brand-name,
generic, and nonformulary drugs. While the use of generic substitutions
has been common for over 90 percent of all HMOs since 1996, a dramatic
increase appears to have occurred in the use of variable copayments,
which were used by about 53 percent of HMOs in 1996 and are expected to
be used by about 86 percent of HMOs in 1999.14 Twelve of the 16 HMOs in our


11
 Novartis Pharmaceuticals Corporation, Pharmacy Benefit Report, Trends and Forecasts, 1998 Edition
(East Hanover, N.J.: Novartis, 1998).
12
 Within the closed classes, this HMO encourages beneficiaries to use a subset of drugs that the HMO
has informed beneficiaries and physicians are more economical. Formularies may cover as many as
100 drug classes. One of the four classes we reviewed, antidepressants, remains open for this HMO.
13
  Another type of control is prior authorization, which requires physicians to obtain prior approval
from the HMO before prescribing certain drugs. This type of control was not common for the drugs we
studied.
14
  See Novartis, Pharmacy Benefit Report.



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study require the use of generic drugs when they are available.15 At most of
these HMOs, if beneficiaries do not choose the generic, they pay the cost
difference between the generic and brand-name drug or the cost
difference plus any copayment for the brand-name drug. Seven of the 16
HMOs also use variable copayments between brand-name and generic
drugs, charging more for brand-name drugs than for generic drugs.

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

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

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


15
  Exceptions may be authorized if medically appropriate.
16
 We reviewed the HMOs’ formularies to understand the prevalence of changes beneficiaries might
experience in Medicare HMOs and the extent to which the drugs on the resulting formularies might
vary. We did not evaluate the clinical appropriateness of the formulary changes.
17
  The total includes some duplication of drugs that were deleted from different formularies.
18
  This general class or category, like others we reviewed, was divided into different classes of drugs.
19
  We could not determine the number of deletions this transition represented for these three classes
from 1997 to 1998.



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                            drugs, 3 to 10 for anticholesterol drugs, 12 to 22 for antidepression drugs,
                            and 30 to 78 for antihypertension drugs.


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


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




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Table 1: Formulary Types and Controls
Used by 16 Medicare HMOs for                                                Copayment for       Copayment
Selected 1999 Plans                                                           brand-name        for generic        Annual dollar limit
                                        HMO           Formulary type                drugs            drugs         on all drugs
                                        1             Open                               $15              $15      Unlimited, but $1,000
                                                                                                                   for brand-name drugs
                                        2             Open                                15                  5    $1,600, with a
                                                                                                                   semiannual limit of
                                                                                                                   $800
                                        3             Closed                              10                  5a   $1,750
                                                                        b
                                        4             Partially closed                      0                 0a   Unlimited
                                                                                                               a
                                        5             Incentive-                            0                 0    Unlimited
                                                      basedc
                                        6             Closed                                0                 0a   Unlimited
                                        7             Closed                                0                 0a   Unlimited
                                                                                                               a
                                        8             Incentive-                            0                 0    Unlimited
                                                      basedc
                                        9             Closed                                0                 0a   Unlimited
                                        10            Closed                                0                 0a   Unlimited
                                                                                                               a
                                        11            Incentive-                          12                  3    Unlimited, but $2,000
                                                      basedc                                                       for brand-name drugs
                                        12            Closed                              15                  5a   Unlimited
                                        13            Closed                              10                  5a   Unlimited, but $4,500
                                                                                                                   for brand-name drugs
                                        14            Closed                              20                  5a   $2,000
                                        15            Closed                                7                 7    Unlimited
                                        16            Closed                              10                  5    Unlimited
                                        Note: Typically, copayments shown are for purchasing about a 1-month supply at a retail
                                        pharmacy.
                                        a
                                        Generics required, if available.
                                        b
                                            Formulary closed for specific drug classes but open for others.
                                        c
                                         HMO requires a copayment for nonformulary drugs. HMO 5—$30, with a $1,000 limit for
                                        nonformulary drugs; HMO 8—$10; and HMO 11—$25.



                                        Beneficiaries may also want to consider the trade-offs between certain
                                        factors in considering plans’ coverage. As seen in table 1, some HMOs offer
                                        open or incentive-based formularies that cover any drugs beneficiaries
                                        may need but require copayments and limit the annual amount they will
                                        pay for drugs. In contrast, other HMOs use closed formularies that limit the
                                        drugs they cover but require small copayments and have higher annual
                                        limits. For example, one HMO that has an open formulary and variable




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                        copayments for brand-name and generic drugs limits the total amount
                        annually it will pay for all drugs. In comparison, another HMO in the same
                        market has a closed formulary, a lower copayment for brand-name drugs,
                        and a higher annual limit. In this example, a beneficiary would need to
                        consider the trade-offs between having an open formulary with less
                        generous copayment and annual limit amounts and having a closed
                        formulary with more generous copayment and annual limit amounts. For
                        some beneficiaries, having a closed formulary might not be a negative
                        factor if the formulary included the drugs they used and was extensive in
                        the drugs it included relative to other HMO formularies in the same market.
                        The HMO’s lower copayment for brand-name drugs could also be an
                        attractive feature for beneficiaries who use a brand-name drug with no
                        generic equivalent. For other beneficiaries, however, a lower copayment
                        for brand-name drugs and a slightly higher annual limit would not
                        outweigh the benefit of an open formulary that would include any drug
                        they might need.


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


How HMOs Notify         Notifying beneficiaries about formulary changes is an important means for
Beneficiaries Affects   ensuring that beneficiaries know about potential changes to their current
Impact of Formulary     drug treatment and its cost. It can also reduce those instances in which
                        beneficiaries first learn of a formulary change at the pharmacy counter.
Changes                 For most of the HMOs we studied, formulary changes can occur and be



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implemented at different times throughout the year. As a result, for these
HMOs, notification of formulary changes is an ongoing process.


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

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

All of the HMOs we examined send physicians copies of formularies at least
once a year, as well as periodic newsletters that include information on
formulary changes and other health-related issues. Eight of the 16 also
send physicians letters notifying them of specific beneficiaries affected by



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                         formulary changes. Although the HMOs provide this information to
                         physicians, officials for most of the HMOs acknowledged that physicians
                         who are associated with several HMOs do not realistically have time to keep
                         up with formulary changes for multiple plans. As a result, the burden of
                         informing many physicians when drugs are deleted from formularies falls
                         on the beneficiary.


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

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

                         The HMOs in our study vary considerably in the processes they use to
                         consider exceptions for nonformulary drugs. Beneficiaries enrolled with 2
                         of the 16 HMOs are not affected by formulary changes because the HMOs use



                         Page 13                          GAO/HEHS-99-166 Medicare HMO Use of Formularies
                                      B-279239




                                      open formularies. Thus, physicians in these plans can prescribe
                                      nonformulary drugs without going through an exception process. At the
                                      other 14 HMOs, requests for nonformulary drugs are handled in different
                                      ways. Table 2 summarizes the exception processes for the 16 HMOs.

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



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

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

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



                                      Page 14                                   GAO/HEHS-99-166 Medicare HMO Use of Formularies
              B-279239




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

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


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

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




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




              Page 15                          GAO/HEHS-99-166 Medicare HMO Use of Formularies
Contents



Letter                                                                                          1


Appendix I                                                                                     18

Scope and
Methodology
Appendix II                                                                                    20

P&T Committees
Appendix III                                                                                   22

Sample HMO
Notification Letter
Tables                Table 1: Formulary Types and Controls Used by 16 Medicare                10
                        HMOs for Selected 1999 Plans
                      Table 2: Processes Used by Selected Medicare HMOs for Making             14
                        Nonformulary Drug Exceptions




                      Abbreviations

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


                      Page 16                      GAO/HEHS-99-166 Medicare HMO Use of Formularies
Page 17   GAO/HEHS-99-166 Medicare HMO Use of Formularies
Appendix I

Scope and Methodology


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

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

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

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




             Page 18                         GAO/HEHS-99-166 Medicare HMO Use of Formularies
Appendix I
Scope and Methodology




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




Page 19                         GAO/HEHS-99-166 Medicare HMO Use of Formularies
Appendix II

P&T Committees


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

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

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

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



              Page 20                                  GAO/HEHS-99-166 Medicare HMO Use of Formularies
Appendix II
P&T Committees




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




Page 21                        GAO/HEHS-99-166 Medicare HMO Use of Formularies
Appendix III

Sample HMO Notification Letter


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

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


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


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




(108356)       Page 22                                 GAO/HEHS-99-166 Medicare HMO Use of Formularies
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