Prescription Drug Benefits: Impact of Medicare HMOs' Use of Formularies on Beneficiaries

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                       Testimony
                          Before the Special Committee on Aging, U.S. Senate

For Release on Delivery
Expected at 2:30 p.m.
Tuesday, July 20, 1999
                          PRESCRIPTION DRUG

                          Impact of Medicare HMOs’
                          Use of Formularies on
                          Statement of William J. Scanlon, Director
                          Health Financing and Public Health Issues
                          Health, Education, and Human Services Division

Prescription Drug Benefits: Impact of
Medicare HMOs’ Use of Formularies on
              Mr. Chairman and Members of the Committee:

              I am pleased to be here today to discuss the prescription drug benefits
              provided by health maintenance organizations (HMO) that participate in the
              Medicare+Choice program. Currently, about 6.1 million of the 39 million
              Medicare beneficiaries are enrolled in Medicare+Choice plans, in many
              cases because they offer prescription drug benefits, which are not covered
              under fee-for-service Medicare. Medicare+Choice was intended to expand
              beneficiaries’ health plan options. Its success depends on generating
              quality-based competition among plans so more beneficiaries are attracted
              to and remain in the program.

              Over the past 2 years, this Committee has held several hearings on the
              information available to Medicare beneficiaries to enable them to make
              prudent choices about whether to enroll in a Medicare+Choice plan. Our
              previous work has identified a number of factors that make it difficult for
              beneficiaries to determine which plan offers the benefits that best meet
              their needs.1 In some cases, detailed information about plans’ benefits and
              out-of-pocket fees is provided only after a beneficiary enrolls in a plan. In
              other cases, detailed information may be available before enrollment from
              plan sales agents and member literature, but beneficiaries may find it
              difficult to compare available options because plans present the
              information in different formats and use different terms to describe
              covered benefits. Further, plan member literature, a key source of
              information for beneficiaries, has often contained inaccurate or
              incomplete benefit information. In our previous work we also noted that
              some plans described their benefits using terms like “approved” drugs or
              “preferred” drugs without defining them. In other cases, plans provided
              little information on the annual dollar limits on prescription drug coverage
              or how they calculated when a beneficiary had reached the limit. The
              value of a limit can vary significantly depending on which prices a plan
              uses to calculate the cost of a prescription. For example, if the annual limit
              is based on the retail cost of a prescription, the benefit would be worth
              less than if it was based on the wholesale cost. The lack of comparative
              information is particularly problematic in evaluating plans’ drug benefits
              because so many different aspects determine the true extent of coverage.

              Moreover, making informed choices among health plans is becoming more
              important for Medicare beneficiaries because the Balanced Budget Act of
              1997 specifies that beginning in 2002, beneficiaries will no longer be able

               Medicare+Choice: New Standards Could Improve Accuracy and Usefulness of Plan Literature
              (GAO/HEHS-99-92, Apr. 12, 1999) and Medicare Managed Care: HCFA Missing Opportunities to
              Provide Consumer Information (GAO/T-HEHS-97-109, Apr. 10, 1997).

              Page 1                                                                    GAO/T-HEHS-99-171
Prescription Drug Benefits: Impact of
Medicare HMOs’ Use of Formularies on

to change plans on a monthly basis, as they are permitted to now. If
beneficiaries experience problems with a plan or decide that another
plan’s pharmacy benefits better meet their needs, they will have a limited
time period each year to change plans, after which they will be locked in
to their decision for the remainder of the year.2

While HMOs use various techniques to help control the cost of providing
prescription drug benefits, a common technique is to use a formulary—a
list of prescription drugs, grouped by therapeutic drug class, which an HMO
prefers its physicians to prescribe. HMOs may cover only formulary drugs
or provide financial incentives, such as lower copayments, to use
formulary rather than nonformulary drugs. HMOs manage their formularies
in several ways, including deciding which formulary drugs to add or
delete, notifying beneficiaries and physicians about formulary changes,
and considering physician requests to cover deleted or nonformulary
drugs for specific beneficiaries. As prescription drug costs rise,
formularies may become an even more important tool HMOs use to control
drug expenditures. Aggressive formulary management may control
spending, but beneficiaries need to be aware of how it may affect the value
of their drug benefit.

My comments will focus on a report we are issuing to your Committee
today that examines how Medicare HMOs manage drug formularies to
control drug expenditures and the implications for beneficiaries. We
gathered information from 16 HMOs located in three markets—Los Angeles,
Miami, and Philadelphia—which account for a significant share of
Medicare enrollment. These 16 HMOs represented more than 25 percent of
all beneficiaries enrolled in Medicare HMOs. Our findings are based on our
analysis of the policies and procedures the HMOs used to make formulary
decisions, notify health care providers and beneficiaries about formulary
changes, and consider physician requests for nonformulary drugs. We also
analyzed how each HMO’s formulary changed from November 1997 to
January 1999.

In summary, evaluating the prescription drug benefits Medicare HMOs offer
is an 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 benefit. Comparing
plans can be difficult because the types of formularies HMOs use and the
way in which they are managed differ considerably. The choices

 Beneficiaries will have 6 months in 2002 and 3 months in following years to change their enrollment

Page 2                                                                         GAO/T-HEHS-99-171
                     Prescription Drug Benefits: Impact of
                     Medicare HMOs’ Use of Formularies on

                     beneficiaries make can have a significant impact on the value of their drug
                     benefit and their 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 they set on beneficiaries’ coverage. Further,
                     beneficiaries in some plans may not learn about formulary changes until
                     they 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

                     HMOs use formularies to control their drug expenditures by limiting the
HMOs Use Different   number of drugs a plan will cover and using financial incentives to
Approaches to        encourage the use of formulary drugs. Formularies can be open,
Manage Formularies   incentive-based, or closed. Open formularies are often referred to as
                     ”voluntary” because beneficiaries are not penalized financially if their
                     physicians prescribe nonformulary drugs. Incentive-based formularies
                     generally offer beneficiaries lower copayments for preferred formulary or
                     generic drugs. A closed formulary limits coverage to formulary drugs only
                     and requires enrollees to pay the full cost of nonformulary drugs
                     prescribed by their physician.

                     The HMOs we studied rely extensively on the deliberations of pharmacy
                     and therapeutics (P&T) committees to determine which drugs to add to or
                     delete from their formularies. Typically, 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, safety, and
                     whether the drug is therapeutically equivalent to drugs already on the
                     formulary. Most of the P&T committees for the HMOs we studied also
                     consider a drug’s cost.

                     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.

                     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 certain
                     classes but will cover all drugs outside of those classes. Two of the HMOs
                     examined have open formularies in which beneficiaries pay the same

                     Page 3                                                     GAO/T-HEHS-99-171
                   Prescription Drug Benefits: Impact of
                   Medicare HMOs’ Use of Formularies on

                   copayment amount 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 formulary controls, such as generic substitution and variable
                   copayments. Generic substitution encourages or requires the use of
                   generic drugs when they are available in place of a more expensive
                   brand-name drug. Beneficiaries may also be required as part of the overall
                   benefit design to make different copayments for brand-name, generic, and
                   nonformulary drugs. Twelve of the 16 HMOs in our study require the use of
                   generic drugs when they are available, and 7 of the 16 also use variable

                   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
                   requiring them to pay the full price of the drug. However, 15 of the 16 also
                   added drugs to their formularies in at least one of 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 as they did in
                   November 1997. With one exception, the HMOs continued to offer several
                   alternatives for physicians to prescribe in each class.

                   Beneficiaries interested in determining the value of a plan’s prescription
Differences in     drug benefit need to consider a number of factors. Differences in the types
Formulary          of formularies, the drugs they include, and formulary controls used by the
Management Have    HMOs can affect whether a beneficiary’s drugs are covered and how much
                   they will cost. Beneficiaries may also be affected by differences in the
Implications for   methods the HMOs use to notify them about formulary changes and how
Beneficiaries      they consider physician requests for exceptions from formulary deletions.

                   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 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

                   Page 4                                                     GAO/T-HEHS-99-171
Prescription Drug Benefits: Impact of
Medicare HMOs’ Use of Formularies on

that affect them, as do five of the nine HMOs that send formularies on
request. In contrast, four of the nine HMOs do not notify beneficiaries about
formulary changes. As a result, beneficiaries may not learn that their drug
has been dropped from a formulary and that they will have to pay the full
price for the drug until they are standing at the counter of their local drug

Beneficiaries are most directly affected by a formulary decision when the
drug they have been accustomed to using is deleted from their HMO’s
formulary and their plan only covers 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

For a beneficiary whose drug is nonformulary, a physician must decide
whether an alternate drug on the formulary is appropriate for the
beneficiary’s care. 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 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
open formularies. At the other 14 HMOs, requests for nonformulary drugs
are handled in different ways. 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 tried the formulary alternative
during a trial period and that the beneficiary experienced either 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 will
grant exceptions for 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. The
physician’s prescribing of a nonformulary drug is not an issue as long as
the beneficiary remains enrolled in the plan. Although an HMO’s use of

Page 5                                                      GAO/T-HEHS-99-171
              Prescription Drug Benefits: Impact of
              Medicare HMOs’ Use of Formularies on

              grandfathering could enhance the value of a drug benefit to many
              beneficiaries, this policy was not described in plan materials the HMOs
              provided beneficiaries.

              The success of Medicare+Choice is predicated on quality-based
Conclusions   competition. However, Medicare+Choice cannot realize its potential
              unless beneficiaries are well-informed about their enrollment options. To
              fully evaluate the prescription drug benefits offered by different plans,
              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 evaluating a
              combination of factors, including the type of formulary an HMO uses and
              whether it covers the drugs they use, whether the HMO requires
              beneficiaries to share in the cost of prescriptions through copayments, and
              whether the HMO limits the amount of their drug benefit. This knowledge
              also helps beneficiaries determine how well an HMO keeps them informed
              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 help beneficiaries compare Medicare+Choice plans and make informed
              health care decisions, they need clear and easily understood information
              that includes the drugs the formularies cover, how formulary changes are
              handled, and policies and procedures for requesting coverage for
              nonformulary drugs. While particular formulary changes are not
              predictable, beneficiaries do enroll in Medicare+Choice plans with the
              knowledge that Medicare contracts do not allow benefits to be reduced
              during the course of the contract year. Beneficiaries thus also need a clear
              understanding of which formulary changes would constitute a reduction of
              drug benefits and therefore would be unallowable during a contract year.

              Previously we recommended that the Health Care Financing
              Administration (HCFA) require (1) standard formats and terminology for
              important aspects of managed care organizations’ marketing materials,
              including benefits descriptions, and (2) that literature distributed by
              organizations follow these standards. While HCFA has made some progress
              in standardizing important aspects of plans’ materials, it has not yet
              required Medicare+Choice organizations to provide a single standard and
              comprehensive document that describes plan benefits and beneficiaries’
              rights and responsibilities as plan members.

              Page 6                                                     GAO/T-HEHS-99-171
                   Prescription Drug Benefits: Impact of
                   Medicare HMOs’ Use of Formularies on

                   Mr. Chairman, this concludes my prepared statement. I will be happy to
                   answer any questions you or other Members of the Committee may have.

                   For future contacts regarding this testimony, please call William J. Scanlon
GAO Contacts and   at (202) 512-7114 or John Hansen at (202) 512-7105. Other individuals who
Acknowledgments    made key contributions include Joel Hamilton and David Michaels.

(101867)           Page 7                                                     GAO/T-HEHS-99-171
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