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.
Page 5 GAO/HEHS-99-166 Medicare HMO Use of Formularies
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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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Address Correction Requested
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)