: 

:  .  .-. 
 :   

Department  of Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
Experiences of Health Maintenance Organizations 

with 

Pharmacy Benefit Management  Companies 

JUNE GIBBS BROWN 
Inspector  General 
April  1997 
OEI-01-95-00110  OFFICE OF INSPECTOR  GENERAJL 
The  mission  of the  Office  of Inspector  General  (OIG),  as mandated  by Public  Law  95 
452, is to  protect  the  integrity  of the  Department  of Health  and  Human  Services 
programs  as well  as the  health  and  welfare  of beneficiaries  served  by them.  This 
statutory  mission  is carried  out  through  a nationwide  program  of audits,  investigations, 
inspections,  sanctions,  and  fraud  alerts.  The  Inspector  General  informs  the  Secretary 
of program  and  management  problems  and  recommends  legislative,  regulatory,  and 
operational  approaches  to  correct  them. 
Office of Evaluationand Inspections 
The  Office  of Evaluation  and  Inspections  (OEI)  is one  of several  components  of the 

Office  of Inspector  General.  It conducts  short-term  management  and  program 

evaluations  (called  inspections)  that  focus  on  issues  of concern  to  the  Department,  the 

Congress,  and  the  public.  The  inspection  reports  provide  findings  and 

recommendations  on  the  efficiency,  vulnerability,  and  effectiveness  of  departmental 

programs. 

OEIs  Regional  Office  prepared  this  report  under  the  direction  of Mark  R.  Yessian, 

Regional  Inspector  General.  Principal  OEI  staff  included: 

BOSION REGION  l3EADOUARmRS 

Martha  B. Kvaal,  Deputy  Regional  Mary  Beth  Clarke,  Branch  Chief 

Inspector  General 

Russell  W. Hereford,  Ph.D.,  Project Leader 
Elizabeth  A. Robboy,  Program Analyst 
To  obtain  a copy  of this  report,  call  the  Boston  Regional  Office  at 617-565-1050  or 
send  a fax to  the  office  at  617-565-3751.  Department  of Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
Experiences of Health Maintenance Organizations 

with 

Pharmacy Benefit Management  Companies 

Inspector  General 
April  1997 
OEI-Ol-9540110  EXECUTIVE  SUMMARY 
PURPOSE 
To  examine  the  experiences  of health  maintenance  organizations,  particularly  those 
participating  in Medicare  or  Medicaid,  in contracting  with  pharmacy  benefit  management 
companies. 
BACKGROUND 
hiEDICAID  AND  MEDICARE  COVERAGE  OF PRE!SCRIPTION  DRUGS 
In  1994, national  expenditures  on  prescription  drugs  were  $52 billion,  up from 

$21 billion  in  1985.  The  Medicaid  program  accounted  for  $9 billion  of these 

expenditures  (8 percent  of all Medicaid  expenditures).  The  Medicare  program  has 

limited  its coverage  of outpatient  prescription  drugs  to  a few specific  categories  of drugs. 

But  recently,  many  beneficiaries  have  been  receiving  broader  outpatient  drug  coverage  as 

an  additional  benefit  offered  by Medicare-risk  health  maintenance  organizations 

(HMOS). 

PHARMACYBENEFlT  MANAGEMENT  coMPAIvIE!s 
Pharmacy  benefit  management  companies  (PBMs)  have  emerged  as significant  players 
that  can  help  payers  and  health  plans  control  rising  drug  costs  and  improve  drug  therapy 
of their  providers  and  to  their  patients.  The  HMOs,  among  others,  can  contract  with 
PBMs  for  services  ranging  from  claims  processing  to  disease  management  programs 
involving  patients,  pharmacists,  and  physicians. 
THISINQUIRY 
This  inquiry  focuses  on  the  experiences  of HMOs  in using  PBMs.  As enrollment  in 
managed  care  continues  grows  and  because  PBMs  can  significantly  affect  patients  use  of 
prescription  drugs,  it is important  for  the  Health  Care  Financing  Administration  (HCFA), 
as well  as private  payers,  to be  informed  about  the  HMOs  experiences  with  them. 
This  report  is based  primarily  on  data  from  a mail  survey  of all HMOs  in the  country,  for 
which  we had  a 71 percent  response  rate.  We  also  drew  on  discussions  with  staff  from 
the  U.S.  Department  of Health  and  Human  Services  (HHS)  and  several  State  Medicaid 
agencies;  with  non-government  experts;  and  on  a review  of the  literature. 
EXPIZIUENCES  OF  HMOs  WITH  PBMs 
WIDESPREAD  AND  GROWING  USE  OF PBMs 
Three-fourths  of  the  263  f-IhtC~  IC,FOndiyig  to  OUTSUF\.CJ CC?I;~TLT\vCi~t!;  I1311 corcpmies. 
The  number  using  PBMs  has  nearly  tripled  since  1993.  A majority  (74 percent)  of these 
HMOs  serve  Medicare  and/or  Medicaid  beneficiaries.  Nearly  all  HMOs  use  PBMs  for  services  that  affect  patients  use of prescription  drugs, 
such  as managing  formularies  and  reviewing  drug  therapy  decisions  of physicians, 
pharmacists,  and  patients. 
In the  future,  many  HMOs  will use PBMs  in ways that  influence  patient  care  even  more 
directly  through  purchasing  more  clinically. focussed  services  and  through  negotiating 
more  capitated  or  risk-sharing  contracts. 
POTENTIAL  COSTSAVINGS:  THE  BIGGEZZ Bl3NFTlT 
The  HMOs  describe  the  benefits  of using PBMs  mainly  in terms  of controlling  costs  of 
prescription  drugs.  They  also  consider  other  important  benefits  to be  improving 
physicians  prescribing  practices  and  patients  access  to  pharmacy  services. 
POTENTIAL  BIAS:  -IT-E BIGGEST  CONCERN 
The  HMOs  biggest  concern  about  PBMs is the  potential  for  bias  resulting  from  the 
PBMs  alliances  with  drug  manufacturers.  One-half  (52 percent)  of the  HMOs  contract 
with  one  of the  five,  large  PBMs,  each  of which  is owned  by or  allied  with  drug 
manufacturers. 
Other  concerns  to  HMOs  include  confidentiality  of data,  disclosure  of information  to 
patients,  and  the  HMOs  own  oversight  of the  PBMs  performance. 
MINIMAL  OVERSIGHT  OF PERFORhfANCE 
The  HMOs  rely  primarily  on  PBM-supplied  data  and  reports  for  overseeing  their  PBMs 
performance.  They  rely  less on  independent  assessments  from  their  own clinicians  and 
patients. 
The  HCFA  and  State  Medicaid  agencies  we contacted  provide  minimal  oversight  of their 
Medicare  and  Medicaid  HMOs  subcontracts  with  PBMs  or their  HMOs  pharmacy 
programs  in general. 
The  major,  private  accreditation  programs  for  managed  care  organizations  neither 
accredit  PBMs  nor  review  HMOs  pharmacy  programs  and  the  arrangements  they  may 
have  with  PBMs.  In part,  this  inattention  reflects  a lack  of quality  measures  suitable  for 
assessing  pharmacy  programs  in these  settings. 
RECOMIMENDATIONS 
Ihe  HCFA  should  take steps to ensure that its Medicare  HMOs are su#icientLy accountable 
for the qudty  of the senricestheirPBMs pm&ie  to ben@ciaries. 
The  HCFA  could  take  steps  toward  this  end  by  strengthening  its  contract  requirements 
for  Medicare  HMOs  and  by incorporating  reviews  of pharmacy  programs  in its uvtxsigt 
of the  HMOs  performance. 
ii  Similkly,  State Medicaid  agencies should  take steps to ensure  that their Medicaid  HMOs  are 
qiJicient@  accountable  for the quali@ of the servicestheir PBMs provide  to beneficiaries. 
State  Medicaid  agencies  could  take  steps  similar  to  those  suggested  above  for  HCFA  and 
its Medicare  HMOs.  The  HCFA  could  work  with  States  towards  this  end. 
l%e HCFA,  the Food and Drug Ad%ni~ation,  and the Health  Resources and Services 
AaXnidration,  working together with external organizations, should  build on existing Mo~ZY 
to develop  quality measures for pharmaq  practice  that can  be used  in munaged  care settings. 
The  pharmacy  profession  has  begun  to  develop  a framework  of standards  and  measures 

that  can  be  used  to  assess  the  quality  of pharmacy  services  and  programs.  Continued 

development  of this  framework  is essential.  It needs  to  involve  the  significant  parties 

who  have  responsibility  for  ensuring  that  pharmacy  programs  rest  on  foundations  that  are 

clinically  sound,  widely  accepted,  and  promote  improved  patient  care.  These  parties 

include  the  professional  pharmacy  and  medical  organizations,  the  private  accreditation 

organizations,  consumer  groups,  and  the  managed  care  industry. 

COh4MEN-B  ON THFi DRAFT  REPORT 

We  received  comments  on  the  draft  report  from  the  Health  Care  Financing 

Administration  (HCFA),  the  Food  and  Drug  Administration  (FDA),  and  the  Health 

Resources  and  Services  Administration  (HRSA).  We  also  solicited  and  received 

comments  from  the  Academy  of Managed  Care  Pharmacy  (AMCP),  the  American 

Medical  Association  (AMA),  the  American  Pharmaceutical  Association  (APHA),  the 

American  Society  of Health  Systems  Pharmacists  (ASHP),  the  Consumer  Coalition  for 

Quality  Health  Care,  and  HCFA  s Medicaid  Pharmacy  Technical  Advisory  Group.  We 

include  the  complete  text  of the  detailed  comments  in appendix  D.  Below  we summarize 

the  major  thrust  of the  comments  and,  in italics,  offer  our  responses.  We  made  a few 

minor  edits  in the  report  in response  to  the  comments. 

HCFA, FDA, HR!SA CO-
All three  agencies  concurred  with  our  recommendations. 
In concurring  with  the  first  recommendation,  HCFA  identified  current  requirements  for 
its contracts  with  HMOs  and  summarized  its current  approaches  for  monitoring  their 
performance.  In our view, thk  response does  not substantively address  a central concern 
raked  in this report about  HCFA  s minimal  oversight of its HMOs  pharmacy  programs  and 
their subcontracts  with PBMs.  We believe our findings  warrant more  attention by HCFA. 
Its HMO  contract,  as we point  out, could  be an important  vehicle for strengthening  Medicare 
HMOs   accountability for their pharmacy  programs. 
The  third  recommendation,  for  HCFA,  FDA,  and  HRSA  to work  with  external 
organizations  on  deveioping  quaiity  rncasures  ior  pharmacy  pracrice,  was  favurkibiy 
received  by all three  agencies.  We  encourage  the  agencies  to  meet  together  and  to 
identify  one  among  them  to  assume  lead  responsibility,  so that  enhanced  communication 
.. . 
111  and  coordination  may  facilitate  continued  progress  in developing  these  measures. 
JXIERNAL  ORGANIZATIONS  COh4MEN-B 
All the  outside  organizations  concurred  with  our  recommendations.  Some  call for 
revisions  to  the  report  or  other  actions  on  our  part.  We appreciate  that these 
organizations support our recommendations.  Unfortunately, many  of  the comments  suggest 
actions beyond  the scope  of this inquiry. 
iv  TABLE  OF  CONTENTS 

PAGE 

Executive Summa.ry 

Introduction..  .................................................... 
 1 
................................. 
 4 
Pharmacy benefit companies:  the basics 
WhichHMOs  usePBMs  ............................................ 
 5 
.............................................. 
 6 
How HMOs use them 
...................................... 
 7 
Potential benefits  of using PBMs 
......................................... 
 10 
Concerns  about using them 
Overseeing  PBMS performance  ...................................... 
 13 
................................................ 
 15 
Recommendations 
....................................... 
 18 
Comments  on the draft report 
Appendices 
A:  Methodology  ...............................................  A-l 
B:  Nonrespondent  analysis  .......................................  B-l 
C: 	 Summary  of HMOs  responses  to OIG  mail  survey  ...................  C-l 
D:  Complete  comments  on  the  draft  report  ...........................  D-l 
E:  Notes..  ...................................................  E-l  INTRODUCTION 

PURPOSE 
To  examine  the  experiences  of health  maintenance  organizations,  particularly  those 
participating  in Medicare  or Medicaid,  in contracting  with  pharmacy  benefit  management 
companies. 
BACKGROUND 
l&e  Growth of Managed  Care 
During  the  199Os, Americas  health  care  system  has  been  transformed  by the  rapid 
growth  of managed  care  systems  for  financing  and  delivering  health  services. 
Enrollments  in managed  care  plans,  particularly  health  maintenance  organizations  . 
(HMOs),  are  increasing  dramatically  as payers,  both  public  and  private,  and  consumers 
seek  to  contain  the  rising  costs  of health  care. 
This  shift  to  managed  care  has  moved  to  center  stage  for  both  the  Medicare  and 
Medicaid  programs  as well.  As public  payers  of health  care  for  the  elderly,  disabled, 
and  indigent,  States  and  the  Federal  Government,  through  the  Health  Care  Financing 
Administration  (HCFA),  have  encouraged  the  enrollment  of Medicare  and  Medicaid 
beneficiaries  into  managed  care  arrangements.  The  number  of Medicare  beneficiaries 
receiving  services  through  managed  care  plans  has  tripled  since  1990 (now  around 
4.5 million  or  12 percent  of all beneficiaries),  and  the  number  of Medicare-risk 
managed  care  programs  is increasing  rapidly. 2  Similarly,  enrollment  of Medicaid 
beneficiaries  in managed  care  arrangements  was around  39 percent  as of June  1996, up 
from  10 percent  in  1991.3  Enrollment  continues  to  grow. 
Spending  on  prescription  drug  costs  has  been  increasing  annually;  in  1994, expenditures 
on  drugs  was nearly  $52 billion,  up from  $21 billion  in  1985.  The  proportion  of these 
costs  borne  by third-party  payers  was 58 percent,  up  from  45 percent  in  1985.4 
Medicare  and  Medicaid  beneficiaries  together  constitute  the  largest  segments  of the 
outpatient  prescription  drug  market.  All  States  Medicaid  programs  cover  outpatient 
prescription  drugs  for  beneficiaries  enrolled  in managed  care  plans  and  in the  fee-for-
service  system.  The  costs  of prescription  drugs  to  Medicaid  was nearly  $9 billion,  or 
8 percent  of total  Medicaid  spending  in  1994.s  The  Medicare  program,  on  the  other 
hand,  has  limited  its outpatient  drug  coverage  to  a few categories  of drugs,  such  as 
immunosuppressants  and  cancer  drugs.  However,  Medicare  is now,  in effect,  supporting 
broader  outpatient  prescription  drug  co\leragt:  as  its  risk  FYI>~~CrSeij:  more  aiid  i;iore  on 
this  additional  benefit  to  attract  Medicare  enrollees,  many  of whom  have  no  drug 
coverage  at  all.6 
1  To  the  rising  costs  of prescription  drugs  can  also  be  added  the  estimated  billions  of 
dollars  annually  in health  costs  resulting  from  mismedication  of patients  and  their 
noncompliance  with  drug  therapies.  These  problems  are  particularly  acute  among  the 
elderly  and  are  costly  for  Medicare. 
The Evolution  of Phannucy  BenejTt Management  Companies 
Pharmacy  benefit  management  companies  (PBMs)  have  emerged  as important  players 

in the  health  care  system.  They  are  relied  upon  by many  payers  and  health  plans  to 

contain  rising  pharmacy  costs.  PBMs  bring  to  the  table  sophisticated,  on-line 

computer  systems  that  enable  them  to verify  immediately  enrollees  eligibility  and  to 

rapidly  process  prescription  claims  for  payment.  Many  PBMs  offer  other  services 

helpful  in managing  prescription  drug  benefits  such  as systems  for  delivering 

prescriptions  by mail  and  networks  of community  pharmacies  that  participate  in 

particular  health  plans.  Some  PBMs  have  teamed  their  computer  capabilities  with 

their  massive  databases  of prescription  claims  to  offer  more  sophisticated  services  such 

as formulary  management  services,  drug  use  reviews,  and  education  programs.  Finally, 

a few are  now  pioneering  disease  state  management  programs  as well  as research 

programs  to assess  cost-effectiveness  and  outcomes  of drug  therapies. 

The  influence  of PBMs  in the  marketplace  has  been  growing  steadily.  They  managed 

benefits,  in  1993, for  an  estimated  100 million  people,  around  40 percent  of the  U.S. 

population.  While  several  dozen  PBMs  are  active  in the  marketplace,  a handful  of 

firms  dominate.  Estimates  suggest  that,  in  1995, the  5 largest  PBMs  managed  benefits 

for  80 percent  of all health  plan  enrollees  served  by PBMs.~ 

lb  Potentid  in Using Pharmacy Benejit Management  Companies 
PBMs  are  attractive  to  payers  and  health  plans,  such  as HMOs,  because  of their 
potential  to  contain  escalating  pharmacy  costs.  And  PBMs  can  help  improve  health 
outcomes  for  patients  by influencing  physicians  prescribing,  pharmacists  dispensing, 
and  patients  compliance  with  their  drug  therapies. 
At  the  same  time,  the  financial  imperatives  driving  managed  care  arrangements  have 
potential  for  compromising  the  quality  of pharmacy  programs.  Quality  can  be 
compromised  by the  way payers  and  plans  structure  the  pharmacy  benefit  and  by the 
approaches  they  use  to  manage  it. 
Concerns  about  the  effect  of PBMs  on  the  quality  of pharmacy  programs  have 
intensified  because  of the  business  relationships  that  exist between  PBMs  and  drug 
companies.  In fact,  3 of the  5 largest  PBMs  are  now  owned  by drug  companies. 
Questions  of bias  and  conflict  of interest  have  been  raised  about  the  relationships 
between  PBMs  and  drug  companies.  And  issues  of potential  anti-competitive  trade 
practices  rssociated  >,iriththe  n-er~~ra~  in  pnrticxlnr,  hove  been  of  c3nce.m  tr,  the 
Federal  Trade  Commission. 
2 
 THIS  INQUIRY 
This  inquiry  focusses  on  the  recent  experiences  of HMOs  who  contract  with  PBMs. 
As managed  care  plans  continue  to grow,  HMOs  are  increasingly  important  purchasers 
of PBM  services.  The  relationships  between  HMOs  and  PBMs  are  especially 
significant  to  the  Department  of Health  and  Human  Services  (HHS)  because  of the 
growing  number  of its beneficiaries  enrolling  in HMO  programs.  The  Food  and  Drug 
Administration  (FDA)  has  questioned  the  adequacy  of drug  product  information 
disseminated  by PBMs  to physicians,  pharmacists,  and  patients  as they  manage 
formularies  and  influence  the  drug  products  prescribed  and  sold.12  And  the  Office  of 
Inspector  General  (OIG)  also  questioned  prescription  drug  marketing  practices  in a 
1994 Special  Fraud  Alert. 
We  intend  this  inspection  to  provide  pertinent  information  to  HCFA,  State  Medicaid 
agencies,  and  other  payers  who  need  to  be well  informed  about  the  extent,  nature,  and 
consequences  of HMOs  arrangements  with  PBMs. 
METHODOLOGY 
We  relied  on  four  sources  of information  for  this  report  (a fuller  description  of our 
methodology  is presented  in appendix  A). 
b 	 A mail  survey  of all HMOs  in the  country  is the  primary  source  of 
information.  We  surveyed  368 decisionmakers  (either  the  chief  executive  or 
the  head  of pharmacy  services)  responsible  for  decisions  about  PBMs  for 
their  HMOs.  Our  universe  included  26 executives  from  national  or regional 
managed  care  organizations  who  represent  their  organizations  283 affiliated 
local  plans.  The  remaining  342 executives  each  represent  local  HMO  plans 
unaffiliated  with  any  national  or  regional  managed  care  organizations.  These 
368 decisionmakers  represent  625 local  plans  nationwide,  which  served 
nearly  54 million  enrollees  in  1995.  Overall,  263 of 368 decisionmakers 
(whom  we refer  to, as HMOs  in this  report)  responded  to our  survey.  This 
is a response  rate  of 71 percent. 
b  Telephone  discussions  with  HCFA  staff  in both  headquarters  and  6 regional 
offices  and  with  Medicaid  officials  from  9 States. 
b  Discussions  with  experts  and  analysts  knowledgeable  about  managed  care, 
pharmaceutical  care,  and  pharmacy  benefit  management. 
b 	 A literature  review  including  journals  and  newsletters,  reports  and  analyses, 
government  documents,  documents  from  professional  and  trade 
organizations. 
We  conducted  this  study  in accordance  with  the  QuaZity Standards for Inrpections 
issued  by the  Presidents  Council  on  Integrity  and  Efficiency. 
3 
 PHARMACYB~FITMANAGEMENT  COMPANIES  THE  BASICS 
The  demands  for efficiencies  and  savings  in the managed  health  care marketplace  have spawned  a new player: 

the pharmacy  benefit  management  company.13  Evolving  from  their early years as prescription  claims 

processors,  PBMs  are now major  actors  on the pharmacy  scene with complex,  influential  roles in the mix of 

payers,  health  plans,  consumers,  physicians,  pharmacists,  pharmacies,  and  drug  manufacturers.  Health  plans, 

among  others,  contract  with PBMs  for particular  benefit  management  services.  PBMs services typically fall into 

three  categories: 

The Busic Saviccs  focus primarily  on the systems  management  functions  of a pharmacy  benefit: 

. CZ&r.s processing:  processing  individual  prescription  claims  for payment;  may also involve confirming  the 
patients  eligibility  and  the compliance  of the drug with the benefits  formulary. 
. On-line pharmacy  networkx  contracting  with individual  community-based  pharmacies  to form a network  of 
providers  participating  in the health  plan. 
. Mail order services:  using  mail order  pharmacies  to supply  prescription  drugs  via mail rather  than  through 
retail  pharmacy  settings. 
The Zntamediate  Services  focus on the purchasing  power of PBMs  and  their  capacity  to screen  large databases  of 
prescription  claims  for utilization  and  quality  issues.  These  services can have greater  impact  on patient  care  than 
the basic services. 
Formulary development  and  management:  evaluating  and  selecting  which drugs  to include  on the lists of 
 
preferred  drugs  (formularies)  for use by the health  plans enrollees.  PBMs  decide which drug  classes to include 
as well as which drugs  within  those  classes and  the priority  ranking  for each.  The  process  involves  applying  cost 
and  clinical  criteria  for choosing  among  the many  drugs available  from different  manufacturers.  PBMs  can also 
manage  the formularies  on  behalf  of health  plans.  They use practices  agreed  to by the health  plans  such as 
requirements  for authorization  prior  to diipensing  a particular  drug;  limits on the frequency  or numbers  of 
prescriptions  or refills allow@  and  drug  product  substitution  programs  by which pharmacists,  acting  on behalf  of 
the PBM,  dispense  different  drugs  from  those  initially prescribed. 
Drug llse review:  examining  the use of prescription  drugs  using predetermined  cost and/or  quality  criteria. 
 
Prospective  review screens  individual  prescriptions  before  they are filled to identify  quality  or utilization  problems. 
Retrospective  review occurs  after  prescriptions  are filled and  the claims submitted  for payment.  It involves 
screening  large numbers  of claims  to identify  inappropriate  prescribing  or dispensing  practices,  possible 
fraudulent  activity, or noncompliance  by patients with their drug  therapies. 
Education:  intervening  with physicians,  pharmacists,  and  patients  to change  drug  therapy  practices. 
 
The Enhrmecd  Servicer  are the most  recently  developed  services that involve  PBMs  substantively  in the ways 
drugs  are used  and  in managing  patients  care. 
Outcomes/cost-effectiveness  research:  using  the PBMs massive  databases  to inform  research  on the cost-
 
effectiveness  or outcomes  of drugs  and  drug  therapies. 
Disease state management:  managing  the dii  of groups  of patients  through  improved  drug  therapies, 
 
particularly  focussing  on those  chronic  diseases,  such as diabetes  and asthma,  which can be effectively  treated  by 
prescription  drugs  but which can  result  in costly illness without  adequate  management. 
4 
 WHICH  HMOs USE PBMs 
Three-fourths  of the 263 HMOs responding to our suxvey contract with PBM 
companies.  The number using PBMs has nearly tripled since  1993.  They served 
45 percent of all enrollees in HMOs in 1995. 
Figure 1 
EXTENTOF  USE  OF  PBMs BY  HtVloS 
HMOs resp01~Jingthat use PBMs 
Covered lives: 11.3 milliion 
HMOs respondingthat da not use PBMs 
N-64 
Covered lives: 18.6 million 
Sources:OIG di  surveyof HMOs,June1996 
ndQHWAMCRA19954WWOdHdlhkrsMredory. 
A majority  of the  HMOs  using  PBMs: 
b  serve  Medicare  and/or  Medicaid  beneficiaries  (74 percent);14 
b  contract  with  one  of the  five,  large  PBMs,  each  of which  is owned  by or  allied 
with  drug  manufacturers  (52 percent);  and 
b  are  for-profit  plans  (61 percent).15 
A larger  proportion  (77 percent)  of the  unaffiliated,  local  HMOs  use  PBMs  than  do 
the  local  plans  affiliated  with  national  or regional  managed  care  organizations 
(46 percent).r6 
The  number  of enrollees  affected  by PBMs  is significant  and  will likely  continue  to  be 
so.  The  i%vlOs  indicating  that  the)  use  PI3Jds  covered  2 4 I~~~]]~~,lIiI* ,ies in  1995.  T];i::
estimate  no  doubt  underreports  the  actual  number,  because  data  were  not  reported  by 
all HMOs,  and,  since  then,  enrollments  in HMOs  have  been  increasing  steadily.17 
5  HOW  HMOs  USE PBMs 
Nearly all HMOs use PBMs for services that-affect the use of prescription  drugs by 
patients.  Most rely on PBMs to develop  or manage  their formularies  and to review 
drug use by physicians, pharmacists,  and patients. 
All but  four  HMOs  use  their  PBMs for  services  other  than  claims  processing.  Nearly 
all HMOs  contract  for  multiple  services:  an  average  and  a median  per  HMO  of 7 of 
11 different  types  of services  (see  service  types  in Figure  2).  Nearly  all  HMOs  use  at 
least  one  of the  basic  services  (97 percent)  and  at least  one  of the  intermediate 
services  (96 percent).  Far  fewer  (41 percent)  contract  for  either  of the  enhanced 
services.  Those  HMOs  that  serve  Medicare  and/or  Medicaid  beneficiaries  do not 
differ  significantly  in their  use  of services  from  those  HMOs  that  do not.18 
Figure 2 
PROPORTIONOFHMOSUSINGPBMSERVICE&BYTYPEOFSERVICE 

Basic savias 
!M%aaimsPkdg 
74%Phamlaq
46%hbilordcrXClViCCS 
lntclmuliatc  savim 
84%RcmqcbeDUR 

81%PmspcukDrugUseRcvim(DUR)maoagcment 

7l%FamutaryumnqmaM 

62 % Formulay  dcvdapnent 

5696EMllCdOllOFindividualpmvidasandlorpIicnts 

4296Ekhcaththrough~bascdoutrcach~ 

N==199HMOs 

Sounx  OIGmailsumqofHMOs,Junc19%. 

In the years ahead, many HMOs expect to use PBMs in ways that influence patient 
care even more  directly.  They are likely to use services that are more clinically 
focussed  and to use more  capita&d  or risk-sharing contract arrangements. 
Fifty-two percent  of the  HMOs  are  considering  changes  in the  mix of services  they  will 

purchase  from  PBMs.  Most  commented  specifically  about  adding  disease  state 

management  programs  and  various  educational!v  focussed  intewention  programs 

targeted  to  providers  and  patients.  Approximately  40 percent  may  negotiate  contracts 

that  increase  their  PBMs  share  of financial  risk. 

6 
 POTENTIAL, BENEFITS OF USING  PBMS 
HMOs describe  the benefits of using PBMs mainly in terms of controlling 

prescription  drug costs and, to a lesser extent, overall health care costs. 

Improving physician prescribing is the second most important  benefit to the HMOs. 

Figure 3 
POTENTIAL  BENEFlTS  OF  USING  PBMs 
Control drug costs 
Control overall costs 
Improve presaibing 
I 
Improve dispensing 
Improve patient axnplianca 
lmprwe  access 
L 
0%  20%  40%  60%  80%  100% 
Containiw  costs:  l%e HMOs report that the biggest benefit of using PBMs ir their 
ability to help conbvl  prescription dug  costs.  Nearly ail (80 pemnt)  think PBMs help 
themcontainthesecosrstoeirheragreat~(35percent)oramodemte~(44 
percent).  Slightly more than half(55 percent)  think PBMs hep  to either a great or a 
modenzte  degree in containing ovemil health care costs. 
Dnrg COSCST:r,c fcrmu!zrizs  dewloped  by PR$,?skz-,,t:thy potentjzl  tn rezlix 
savings  in drug  product  costs.g  PBMs  negotiate  with  manufacturers  for  discounts 
and  rebates  on  drugs  in return  for including  the  companies  products  on  the  PBMs  formularies.20  The  PBMs,  in turn,  can  share  a portion  of these  rebates  with  the 
HMOs.  PBMs  also  negotiate  with  community  pharmacies  for  lower  dispensing  fees 
and  drug  reimbursement  levels.  In return,  the  pharmacies  become  participating 
providers  in the  retail  networks  managed  by the  PBMs  for  the  HMOS.~ 
In addition,  HMOs  can  purchase  other  services  from  PBMs  that  have  the  potential  to 
lower  costs.  PBMs  can  manage  formularies  for  HMOs  using  techniques  such  as prior 
approval  programs  or substitution  programs  that  favor  lower  priced  drugs.  And  by 
profiling  physicians  prescribing  practices  to  identify  patterns  of costly  drug  use,  PBMs 
can  help  HMOs  lower  utilization  of high  priced  drugs.22 
Several  HMOs  specifically  commented  to  us about  the  ways they  had  realized  savings 
from  their  PBMs.  Only  one  HMO  specified  an  estimate  of actual  savings  achieved: 
10 to  25 percent  gross  savings  from  pharmacy  discounts  and  formulary  rebates.  A 
recent  study  of PBMs,  conducted  under  contract  with  HCFA,  found  it difficult  to 
determine  and  substantiate  cost  savings  attributable  to  PBMs.  Often  the  data  are 
unavailable  because  PBMs  consider  them  proprietary,  and  common  baselines  for 
comparing  data  do  not  exist.23 
Overall health  costs:  PBMs  may  lower  health  costs  overall  as they  improve 
patients  drug  use  more  generally.  Some  PBMs  are  launching  disease  state 
management  programs, 24which,  as noted  above,  are  increasingly  attractive  to  HMOs 
for  their  potential  to lower  overall  health  care  costs  for  patients  targeted  for  these 
initiatives.  The  extent  of savings  in health  care  costs,  like  savings  in drug  costs,  has 
been  difficult  to  document.= 
Immvinn  ~IURtheravv:  llae HMOs  think that PBMs are helpjid  in improving the 
prewibikg  pm&~  of physikians.  Neanly two-third  (65 percent)  think PBMs he@ 
physicians  to either a great extent (I6 percent)  or a rnodkmte extent (49 pemmt).  They see 
PBMs as l&s he&id  in improving the carepnnkied by phamaci&  or the compliance  of 
patient5  with their drug regbnens. 
PBMs  have  the  capacity,  with  their  sophisticated,  on-line  computer  systems  and  their 
large  databases  of prescription  information,  to help  HMOs  improve  the  quality  of drug 
therapy  of physicians,  pharmacists,  and  patients.  They  can  identify  poor  prescribing 
and  dispensing  practices  of providers  and  can  identify  those  patients  who  are  not 
complying  with  their  drug  regimens. x  They  can  identify  potential  problems  before 
prescriptions  are  dispensed;  they  can  profile  patterns  of drug  use  retrospectively.  And, 
once  having  identified  inappropriate  drug  use,  PBMs  can  intervene  individually  with 
patients,  pharmacists,  or  physicians  through  one-on-one  interventions  or through 
broadly  based  education  programs  such  as newsletters  or targeted  mailings  to groups 
of providers  or patients. 
Yet  HMQs  do  no:  reFo:i  :;;:z!:i:i~ e>;:exb,,c  p:  (,\.f  pp,  ,,5:; f-r, >::-~(~cc-i:Ljyir1Y,*-;Ll,?,I:nL-.i,.+, .;-y-*AL 
providers  about  drug  therapy.  Not  quite  half  (43 percent)  report  the; use  PBMs  to 
intervene  with  individual  physicians  to improve  the  quality  of their  prescribing.  Very  few (15 percent)  use  PBMs  to intervene  with  individual  patients  identified  as being 
noncompliant  with  the  prescribed  drug  therapy.  Most  do not  use PBMs  to  conduct 
broadly  based  education  to  improve  drug therapy  that  is targeted  to the  HMOs 
providers  (62 percent)  or  to  their  enrollees  (78 percent). 
Disease  management  programs,  as noted  above,  have  potential  to lower  overall  health 
care  costs  by targeting  specific  groups  of patients  with  expensive  chronic  illnesses  that 
are  amenable  to  treatment  with  prescription  drugs.  These  programs  are  still in their 
infancy  in most  settings.  Their  potential  for  containing  costs  and  improving  therapy  is, 
as yet,  unproven. 
The  HMOs  report  using  PBMs  most  frequently  for  profiling  physicians  prescribing 
patterns  (79 percent);  profiling  dispensing  patterns  of pharmacies/pharmacies 
(66 percent);  and  for  screening  individual  prescriptions  for  therapeutic 
contraindications  at  the  point  of dispensing  (76 percent). 
Im~mvin~  access:  Slight& more than one-half  (56 pemmt)  of the HMOs  think 
PBMs are at least moderately  usefir  in improving access to phumacy  services. But HMOs 
rate this beru@  as least wejid  of a/L- approximateij  20 penmat think PBMs either are not 
at all usejid  (13pemmt)  in improving access or respond that they do not know  (8 
percent). 
In  using  PBMs  for  mail  order  services  or for  the  PBMs networks  of retail  pharmacies, 
HMOs  can  expand  the  access  of consumers  to drug  products.  Yet  some  argue  that 
these  arrangements  are  reducing  the  profitability  of retail  pharmacies,  thereby  forcing 
many  to  close.  CONCERNS  ABOUT  USING  PBMIs 
The HMOs biggest concern about PBMs is the potential  for bias resulting from their 
alliances with drug manufacturers.  They are also concerned  about  confidentiality 
issues  and about their own oversight of the PBMs performance. 
Figure 4 
CONCERNS  ABOUT  USING  PBMs 
Potential for bias  -
Limited peer review 
lnsuffident accountability -
Disclosure -
ConfidenUaMyof data  -
Fragmentation of services -
Inadequate drug information -
0%  20%  40%  80%  80%  100% 
    

Notat All  DonYKnow
IUI 
Soufc~OIGmsilsurveyofH~June1QS6. 
Potential  for bias:  lSty  (30) percent  of the HMOs  are very concernedabout 
bias.  The HMOs  ident@  bias as their most seriousconcern3 tinm  as often as any other 
concem. 
This  high  degree  of concern  is all the  more  striking  when  one  considers  that  these 
HMOs  are  among  those  who  are  currently  contracting  with  PBMs;  they  are  not  among 
those  who  have  chosen  to  manage  the  benefit  themselves.28 
The  concern  is that  PBMs  may  bias  their  programs  to  favor  their  industry  partners 
and,  in so doing,  compromise  the  quality  of the  HMOs  drug  use  practices  and  the  patient  care  they  provide.  Particularly  vulnerable  areas  include  formularies,  drug  use 
review  programs,  educational  interventions,  and  cost-effectiveness  research. 
Forrnularies:  Vulnerabilities  can  arise  if PBMs  are  not  sufficiently  independent 
of the  manufacturers  interests  when  developing  their  formularies  and  if they  do not 
pay  sufficient  attention  to  therapeutic  considerations  when  choosing  which  drugs  to 
include .2g Similarly,  when  managing  formularies  for  the  HMOs,  PBMs  can  use 
substitution  programs  in which  the  drugs  dispensed  differ  from  those  prescribed.  The 
quality  of patient  care  can  be  compromised  if these  programs  are  primarily  marketing 
efforts  conducted  by PBMs  on  behalf  of their  industry  partners3  rather  than 
clinically  sound  practices,  guided  by predetermined  protocols  that  promote  quality 
drug  use. 
Drug  use review programs:  The  underpinnings  of drug  use  review  programs  are 
the  criteria  and  standards  that  guide  the  screening  of claims  and  the  profiling  of 
prescribing  and  dispensing  patterns  of providers.  The  frameworks  underlying  the 
reviews  can  be  structured  to  emphasize  cost  savings  factors  over  quality  considerations. 
Vulnerabilities  can  arise  when  PBMs  choose  the  criteria  and  interpret  the  data  for  the 
HMOs  while  also  having  financial  interests  in the  results  of these  reviews? 
Educational  interventions:  PBMs  can  intervene  directly  with  providers  and 
patients  to  educate  them  about  drug  products,  drug  use, and,  increasingly,  about 
managing  particular  diseases.  These  interventions  are  guided  by protocols  for  drug 
use  and  information  about  drug  products.  The  quality  of patient  care  can  be 
compromised  if these  efforts  become  marketing  tools  for  PBMs  and  manufacturers 
rather  than  clinical  tools  for  improving  drug  therapies.32  The  quality  of drug  product 
information  disseminated  by PBMs  to  physicians,  pharmacists,  and  patients  is a minor 
issue  for  the  HMOs  responding  to  our  survey  (see  Figure  4).  But  government 
regulators  and  some  professional  organizations  have  concerns  about  the  product 
information  distributed  by PBMs.~~ 
Cost-effectiveness reseurch:  The  PBMs  databases  have  significant  value  for 
outcomes  studies  and  cost-effectiveness  research  on  drugs  and  drug  therapies.  This 
kind  of research  is becoming  more  and  more  important  in drug  product  marketing  and 
for  decision-making  by PBMs,  among  others,  about  which  drugs  to position  on 
formularies  or which  drugs  to  use when  treating  specific  illnesses.  The  potential  for 
bias  in this  research  poses  vulnerabilities  for  these  kinds  of clinically  significant 
decisions.34 
11 
 CimMentiu&  issues= The HMOs  are somewhat  concemed  about  conjidendaliry 
ksues  associated  with using PBMs.  About  one-fourth  (23 percent)  are concerned,  to 
either a rrwdemte  or a great extent, about PBMs disckxbag confidential patient 
infomation.  And  about  one-fourth (24 percent)  are equally concerned  about  HMOs  not 
disclosing their arrangements with PBMs to endle~. 
Confidentiality  of patient data:  The  PBMs databases  are  rich  sources  of 
information  about  which  patients  are  using  which  drugs  and  which  physicians  are 
prescribing  which  drugs. 35 Increasingly,  PBMs  are  gaining  access  to  patients  medical 
data  as well  as their  pharmacy  records,  so the  databases  can  be  linked  for  clinical 
services  such  as disease  management  programs.%  Questions  arise  about  whether 
PBMs  adequately  safeguard  these  data,  particularly  patient-identifiable  information, 
from  employers  or  drug  manufacturers,  for  example.37  Most  HMOs  are  not 
concerned  about  this  issue  (see  Figure  4).  Several  said  they  secure  patient 
information  through  specific  language  in their  PBM  contracts.  Yet  questions  linger, 
because  HMOs,  as one  indicated  to  us, would  not  necessarily  know  of breaches  of 
these  confidentiality  provisions  by their  PBMs. 
Disclosure  to patients:  How  much  information  HMOs  should  disclose  to 
enrollees  about  their  use of PBMs  and  their  practices  for  managing  the  drug  benefit  is 
germane  to  the  larger,  national  debate  over  patients  rights  to  know  details  of their 
HMOs  policies  and  practices.  Disclosing  pharmacy-related  information  is relevant 
here,  because,  as we have  seen,  physicians  prescribing  choices,  and  thus  the  quality 
and  extent  of drug  therapies  available  to  patients,  are  significantly  influenced  by the 
ways in which  HMOs  structure  and  manage  their  pharmacy  program  with  the 
PBMs? 
Insu@ient  accountabilitv  and limited  txer  review:  The HMOs second  rrwst 
se&m  concern about  PBMs a&k  with the adequacy  of their own ovem&ht of the PBMs 
perf onruznce  Neaj,  one-M  (32percent)  are conch  to eiiher a moderate  or a great 
eWnt,  that HMOs  receive information from PBMs thut is iitsuj@ierU for holding them 
accountable.  And  one-third  (34pemmt)  are similajt  concemed  that the HM0spee-r 
mvieivs of PBMpmgmms  are limited 
The  number  of HMOs  greatly  concerned  about  oversight  are  fewer  than  those 
similarly  concerned  about  potential  bias.  But  about  the  same  number  are  moderately 
concerned  about  the  adequacy  of peer  review  and  accountability  (see  Figure  4).  It is 
noteworthy,  however,  that  among  those  HMOs  who  have  few concerns  about  using 
PBMs,  several  specifically  commented  that  they  would  be  much  more  concerned  were 
it not  for  the  protections  their  HMOs  have  adopted.  These  include  such  practices  as 
tight  contractual  language,  using  their  own  clinicians  to  review  PBM  programs,  or  not 
relying  on  PBMs  for  particular  services  like  educational  interventions  or  formulary 
development. 
12 
 OVERSEEING  PBMs PERFORMANCE 
The HMOs rely primarily on PBM-supplied data and reports for overseeing  their 
PBMs performance.  They rely less on independent  assessments  of the PBMs 
performance  from their own clinicians and patients. 
In overseeing  the  performance  of their  PBMs,  almost  all HMOs  (1) receive  written 
reports  from  their  PBMs  (99 percent)  and  (2)  use  their  own  staff  to analyze  these  data 
(97 percent).  3g Most  HMOs  (approximately  82 percent)  consider  these  approaches 
either  moderately  or very  useful.  Some  buy the  PBMs  reports  off the  shelf.  Others 
customize  them  or develop  their  own;  a few said  they  can  access  the  PBMs  raw data 
to  do  their  own  analyses.  The  reports  typically  feature  utilization  and  cost  data  or 
profiles  of drug  use.  Nearly  two-thirds  (63 percent)  of the  HMOs  use  performance 
measures  or  guarantees  to  oversee  their  PBMs;  a few commented  specifically  that  they 
use these  indicators  and  other  data  to benchmark  their  PBMs performance  with  those 
of other  HMOs. 
A few HMOs  commented  specifically  about  the  importance  of an  HMO  conducting  its 
own  independent  assessments  of its PBMs programs.  These  include  such  approaches 
as using  its own  clinicians  to  review  the  PBMs  formularies,  drug  use protocols  or drug 
product  information  the  PBM  sends  to  clinicians  and  patients.  They  also  include 
approaches,  such  as surveys  and  grievance  procedures,  that  enable  the  HMOs 
physicians,  pharmacists,  and  patients  to give feedback  on  the  PBMs programs. 
Our  data  indicate,  however,  that  the  HMOs  rely  less on  these  kinds  of independent 
assessments  than  they  do  on  PBM-supplied  data  and  reports.  For  example,  24 percent 
of the  HMOs  do not  use their  own Pharmacy  and  Therapeutics  Committee  to peer 
review  their  PBMs programs;  38 percent  do  not  perform  their  own drug  use  reviews 
of PBMs analyses;  51 percent  do not  conduct  on-site  monitoring  visits;  and  65 percent 
do not  use  outside  consultants  to  review  their  PBMs  programs. 
Overall,  it is not  clear  from  our  review  just  how  substantive  and  independent  are  the 
efforts  by HMOs  to oversee  the  performance  of their  PBMs.  Nor  is it clear  the  extent 
to which  HMOs  balance  their  concerns  about  cost  containment  with  the  effects  their 
PBMs  may  have  on the  quality  of their  pharmacy  programs.40 
The HCFA  and State Medicaid agencies we contacted  provide minimal oversight of 
their Medicare and Medicaid HMOs subcontracts  with PBMs or their HMOs 
pharmacy programs in general. 
The  HCFA  does  not  have  requirements  specific  to  the  content  or  management  of the 
pharmacy  benefits  offered  by its  Medicare  HMOs.  Neither  does  it include  clinical  or 
management  reviews  of the  HMOs  pharmacy  benefit  during  its certification  or  annual 
monitoring  of the  HMOs.  The  HCFA  does  have  guidelines  for  the  content  of the 
13  HMOs  marketing  materials,  and  it does  address  pharmacy  benefits  in its reviews  of 
these  materials. 
The  Medicaid  agencies  we contacted,  in those  States  that  include  pharmacy  services  in 
their  Medicaid  HMO  contracts,  also  have  no  requirements  specific  to the  HMOs 
subcontracts  with  PBMs,  and  few for  the  HMOs  pharmacy  programs  generally.  Most 
typically,  the  States  require  only  that  the  HMOs  not  use formularies  more  restrictive 
than  the  Medicaid  fee-for-service  formularies.  They  generally  do not  monitor  either 
the  PBMs  activities  or  the  HMOs  pharmacy  programs. 
The major, private accreditation  programs for managed  care organizations neither 
accredit PBMs nor review HMOs pharmacy programs  and the arrangements  they may 
have with PBMs.  In part, this inattention reflects a lack of quality measures  suitable 
for assessing  pharmacy  programs  in these settings. 
These  accreditation  programs  include  those  of the  Joint  Commission  on Accreditation 

of Health  Organizations  (JCAHO),  the  National  Committee  for  Quality  Assurance 

(NCQA),  and  the  Utilization  Review  and  Accreditation  Commission  (URAC).41  42 

This  lack  of attention  to  pharmacy  issues  results,  in part,  from  these  organizations 

having  focussed  initially  on  establishing  a process  suitable  for  medical  operations  in 

managed  care  settings.  Of necessity,  pharmacy-related  issues  have  not  been  a top 

priority. 

To  some  extent,  too,  their  inattention  reflects  an  underappreciation  of the 

contributions  of pharmacy  to  patient  care  and  a lack  of quality  measures  suitable  for 

assessing  pharmacy  programs  in these  settings.  In  recent  years,  several  pharmacy 

organizations  have  been  working  to  redefine  the  essence  of outpatient  pharmacy 

practice  to  emphasize  the  clinical  contribution  of pharmacists  as members  of the 

health  care  team.  This  process  continues;  it is a major,  long-term  effort  involving 

restructuring  academic  curricula,  negotiating  reimbursement  systems  for  pharmacists 

clinical  services,  and  educating  accreditation  groups  and  other  health  care  providers, 

payers,  and  the  public  about  the  role  and  significance  of pharmaceutical  care. 

Pharmacy  has  been  slow to  develop  quality  measures  of performance  that  can  be  used 

by these  accrediting  groups,  by payers,  and  by health  plans.  The  process  is inherently 

difficult.  It has  been  perhaps  more  so for  pharmacy,  which  has  been  focussed  on 

redefining  the  essence  of outpatient  practice.  The  process  has  also  demanded  input 

from  several  large,  national  pharmacy  organizations,  which,  at times,  have  had 

different  and  sometimes  competing  interests.  Nonetheless,  these  organizations, 

concerned  with  quality  issues  in outpatient  settings,  recognize  the  importance  of 

developing  quality  assurance  programs  for  the  clinical  dimensions  of pharmacy 

practice.  Several  have  developed  guidelines  or  standards  for  use  among  their  own 

membership.  43 And  they  have  begun  recently  to  meet  together  to  explore  areas  of 

commonality  and  to  re::,ch  out  tc? ::l;:jo:  pay33  and  the  r,:;:ion:i! 2i:creditafion 

organizations. 

14 
 RECOMMENDATIONS 

Our  inspection  does  not  provide  a basis  for  assessing  the  effectiveness  of PBM  services 
purchased  by HMOs.  Nor  does  it provide  a basis  for  determining  that  pharmacy 
benefit  management  by PBMs  is more  or less preferable  for  achieving  high  quality 
pharmacy  programs  in HMOs.  Our  inquiry  does,  however,  offer  sufficient  basis  for 
concluding  that  payers,  when  overseeing  the  performance  of their  HMOs,  need  to 
devote  attention  to their  HMOs  pharmacy  programs  and  their  use  of PBMs.  We  base 
this  conclusion  on  the  following: 
b 	 The  HMOs  use various  approaches  for  overseeing  their  PBMs performance. 
But  the  effectiveness  of these  efforts  in holding  PBMs  accountable  for  the 
quality  of their  services  is not  clear. 
b 	 The  Medicare  and  Medicaid  programs,  both  large  public  payers,  devote  little 
attention  to the  arrangements  of their  HMOs  with  PBMs  or  to  their  HMOs 
pharmacy  programs  more  generally.44  And,  as we have  seen,  neither  payers 
nor  the  public  can  count  on  the  private  accreditation  organizations  for 
assurances  of quality  and  accountability  in the  HMOs  pharmacy  programs. 
b 	 Yet,  pharmacy  programs  have  a significant  impact  on  the  quality  of patient 
care.  This  is true  whether  HMOs  manage  these  programs  using  PBMs  or 
internally  by themselves.  This  impact  can  be  positive  or  detrimental.  It is not 
surprising  that  the  HMOs  described  here,  who  are  demonstrably  committed 
users  of PBMs,  are  generally  positive  about  their  experiences. 
What  is significant  to  us is the  degree  to which  they  have  concerns  about  PBMs 
in areas  that  bear  directly  on  the  quality  of patient  care.  Yet  many  of these 
HMOs  are  using  PBMs  for  more  clinically  oriented  services  and  will be 
negotiating  more  capitated  or risk-sharing  contracts  with  them.  These  trends 
signal  the  PBMs growing  involvement  with  and  responsibility  for  patient  care. 
These  observations  lead  us to  emphasize  the  importance  of HMOs  being  accountable 
for  the  quality  of the  pharmacy  programs  managed  by their  PBMs.  Payers  have 
responsibility  for  ensuring  that  their  HMOs  offer  high  quality  care  to  patients. 
Accordingly,  we offer  three  recommendations.  The  first  two  address  the  Medicare  and 
Medicaid  programs  funded  by HCFA  and  the  States;  they  call  for  operational  action 
steps  that  can  be  undertaken  now.  The  third  addresses  a larger  issue  of pharmacy 
practice  that  requires  attention  of public  and  private  organizations  over  the  long  term. 
THE  MEDICARE  PROGRAM 
l&e HCFA  should  take steps to ensure that its ilk&care  HMOs  are sujjkiently 
accountable  for the qdity  of the servicestheirPBMs provide  to benejiciuries.  It is important  for  HCFA  to  pay  more  attention  to  pharmacy  issues  in its Medicare 
HMOs  for  several  reasons.  First,  as noted  elsewhere,  mismedication  problems  affect 
the  elderly  especially,  and  the  Medicare  program,  in large  measure,  bears  the  costly 
consequences  of these  problems.  Second,  an  increasing  number  of Medicare-risk 
HMOs  are  offering  prescription  drug  coverage  as an  additional  benefit  because  of its 
popularity  with  beneficiaries.  While  coverage  for  these  benefits  is not  included  in the 
basic  capitated  rate  paid  to  the  HMOs,  the  plans  fund  these  benefits  with  savings  from 
the  HCFA  capitated  payments.  And,  finally,  as we have  seen  here,  many  HMOs  use 
PBMs  to  help  manage  the  prescription  drug  use  of Medicare  beneficiaries. 
The  HCFA  could  take  steps  to ensure  greater  accountability  by strengthening  its 
contract  requirements  for  Medicare  HMOs  and  by incorporating  pharmacy  reviews  in 
its oversight  of the  HMOs  performance.  It could,  for  example: 
b 	 develop  language  for  Medicare  contracts  that  sets forth  assurances  that  the 
HMOs  should  obtain  in their  subcontracts  with  PBMs  and  that  specifies  the 
responsibilities  the  HMOs  must  assume  in overseeing  their  PBMs  performance. 
This  language  could  address  specific  approaches  for  reducing  the  vulnerabilities 
the  HMOs  associate  with  the  use  of PBMs  that  we report  here.  The  HCFA 
could  take  such  steps  as requiring  rigorous  and  systematic  evaluation  of the 
PBMs  services,  independent  review  of the  PBMs formularies,  drug  use 
protocols,  and  education  materials  about  drug  products.  It could  specify 
language  to  protect  the  confidentiality  of patient-identifiable  information 
contained  in the  PBMs  databases. 
b 	 include,  as part  of the  ongoing  oversight  of Medicare  contracts,  a review  of the 
effectiveness  of the  HMOs  oversight  of the  quality  of PBM  services. 
It could  take  such  steps  as reviewing  the  HMOs  subcontracts  with  PBMs  to 
ensure  that  the  HMOs  are  complying  with  the  contractual  requirements  or 
reviewing  the  HMOs  evaluations  of PBM  services  including  the 
appropriateness  of drug  formularies  for  the  elderly.  And  it could  incorporate 
questions  about  satisfaction  with  the  pharmacy  benefit  in the  surveys  being 
developed  for  use with  beneficiaries  enrolled  in HMOs. 
THE  MEDICAID  PROGRAM 
State Medicaid agenciesshould take steprto ensurethat itsMedicaid  HMOs  are 
s@kiimtly accountablefor the quality of the services their PBMs provide  to benejkiakx 
It is important  for  States  to  pay  more  attention  to the  pharmacy  programs  in their 
Medicaid  HMOs.  Pharmacy  benefits  continue  to  be  a significant  component  of the 
Medicaid  programs  in  all  States.  As  S:r: tcs  transition  to  managed  care  arrangements 
for  beneficiaries,  their  risk  contracts  with  HMOs  typically  include  pharmacy  services. 
As we have  seen  here,  many  HMOs  report  using  PBMs  to manage  the  drug  benefit 
16  for  their  Medicaid  beneficiaries. 

State  Medicaid  agencies  could  take  steps  similar  to those  suggested  above  for  HCFA 

and  its Medicare  HMOs.  The  States  rely  on  approaches  for  holding  their  HMOs 

accountable  that  are  similar  to those  used  by HCFA  with  its Medicare  contracts.  The 

States  have  requirements,  for  example,  for  the  HMOs  quality  assurance  programs  and 

for  their  subcontracts.  The  States,  too,  monitor  the  HMOs  and  oversee  their 

marketing  activities.  The  HCFA  could  work  with  the  States  in achieving  greater 

accountability  for  their  Medicaid  HMOs. 

THE  PRACTICE  OF  PHARMACY 

l%e HCFA,  the FDA, and the HeaLth Resources and Services Admtitration  (HRSA), 
wonking together with external organizations, should build on existing @arts  to develop 
qudity  measure  forphannacy  pmctice  thut can be used in nunaged  care settings. 
We  have  called  here  for  greater  accountability  for  the  quality  of the  pharmacy 

programs  managed  for  HMOs  by PBMs.  Although  ours  has  not  been  a study  of 

pharmacy  practice  per  se, our  consideration  of the  quality  issues  associated  with  PBMs 

has  led  us inevitably  to  consider  the  HMOs  accountability  for  the  quality  of their 

pharmacy  practices.  We  conclude  that  developing  an  underlying  framework  of 

standards  and  measures  for  assessing  the  quality  of pharmacy  services  and  programs  is 

essential.  Lacking  such  a framework,  HMOs  will find  it more  difficult  to  hold  their 

PBMs  accountable,  and  the  payers  and  the  public  will find  it more  difficult  to  assure 

themselves  of the  quality  of these  pharmacy  programs. 

This  task  will not  be  an  easy  one.  We  have  noted  in the  report  some  of the  difficulties 

facing  the  pharmacy  profession  as it struggles  with  these  issues.  Their  efforts  are 

further  complicated  by the  need  for  these  quality  measures  to take  into  account 

individual  practice  as well as organizational  practices,  management  processes  as well 

as clinical  processes,  and  closed  practice  settings,  such  as staff  model  HMOs,  as well 

as more  open  arrangements. 

Developing  this  framework  will require  leadership  from  both  the  public  and  private 

sectors,  especially  the  profession  of pharmacy  itself  which  has  responsibility  as a 

profession  to  ensure  that  the  payers  and  the  public  receive  quality  pharmacy  care. 

The  HCFA,  as the  single,  largest  payer  for  health  care  in the  country;  the  FDA,  with 

its responsibilities  for  drug  product  information  and  dissemination;  and  HRSA,  which 

has  long-standing  interest  in the  health  professions,  can  encourage  and  support  the 

efforts  of the  pharmacy  organizations.  It is important  for  this  process  to  engage  other 

payers,  professional  medical  organizations,  private  accreditation  organizations, 

consumer  groups,  and  the  managed  care  industry.  All have  important  perspectives  to 

contribute.  All  these  parties  have  responsibility  to ensure  that  pharmacy  programs 

rest  on  foundations  th;:t  are  clir:icall jr sound,  v~idelv_I accepted,  and  promote  imrrowd 

patient  care. 

17 
 COMMENTS  ON  THE  DRAFT  REPORT 
We  received  comments  on  the  draft  report  from  the  Health  Care  Financing 
Administration  (HCFA),  the  Food  and  Drug  Administration  (FDA),  and  the  Health 
Resources  and  Services  Administration  (HRSA).  We  also  solicited  and  received 
comments  from  the  Academy  of Managed  Care  Pharmacy  (AMCP),  the  American 
Medical  Association  (AMA),  the  American  Pharmaceutical  Association  (APHA),  the 
American  Society  of Health  Systems  Pharmacists  (ASHP),  the  Consumer  Coalition  for 
Quality  Health  Care,  and  HCFA  s Medicaid  Pharmacy  Technical  Advisory  Group 
(P-TAG).  We  include  the  complete  text  of the  detailed  comments  in appendix  D. 
Below  we summarize  the  major  comments  and,  in italics,  offer  our  responses.  We 
made  a few minor  edits  in the  report  in response  to  the  comments. 
HCFA,  FDA, HRSA Comments 
All  three  agencies  concurred  with  our  recommendations. 
The  first  recommendation,  addressed  to  HCFA.,  called  for  steps  to strengthen  the 
accountability  of Medicare  HMOs  for  the  quality  of services  provided  by PBMs  to 
beneficiaries.  In its concurrence,  HCFA  identified  current  requirements  for  its 
contracts  with  HMOs  and  summarized  its current  approaches  for  monitoring  their 
performance. 
In our view, this response  does not substantively address  a central concern  raised in this 
report about  HCFA   s minimal  oversight of its HMOs  pharmacy  programs  and  their 
subcontracts  with PBMs.  Although  HCFA  concurs  with the recommendation,  its 
comments  suggest that it sees no  need  to strengthen  either its requirements  of Medicare 
HMOs for  their pharmacy  programs  and  their use of PBMs  or its approaches  to 
monitoring  these programs.  Yet, we believe our jindings  warrant more  attention by 
HCFA.  We have suggested several steps HCFA  could  take that are within its current 
regulatory responsibilities.  As  we point  out, the HMO  contract, for  example,  could  be an 
important  vehicle for  strengthening  Medicare  HMOs   accountability for  their pharmacy 
programs.  We suggest that HCFA  consider  taking additional  steps to address  these 
concerns  that bear directly on quality of care. 
The  second  recommendation  urges  that  State  Medicaid  agencies,  too,  should 
strengthen  the  accountability  of their  Medicaid  HMOs  for  the  quality  of PBM  services 
to  beneficiaries.  The  HCFA  concurs  with  this  recommendation. 
We are pleased  that HCFA  concurs  with this recommendation  and  urge that it work in 
consultation  with the State Medicaid  agencies,  which have primary  responsibility for  the 
contracts  with Medicaid  HMOs. 
The  third  recommendation,  which  calls  for  HCFA,  FDA,  and  HRSA,  to work  with 
external  organizations  on  developing  quality  measures  for  pharmacy  practice  in 
18  managed  care  settings,  was favorably  received  by all three  agencies. 
We encourage  the agencies  to meet together and  to identifi one  among  them  to assume 
lead responsibility, so that enhanced  communication  and  coordination  may facilitate 
continued  progress  in defining  these measures.  We agree with the comment  of HCFA   s 
P-TAG  that States be involved with thfi effort. 
The  HCFA  and  HRSA  each  offered  technical  comments  on  the  report.  In response  to 
HCFA   s comments,  we updated  the Medicaid  managed  care statistic to reflect enrollment 
as of June  1996.  We did not, however, recast the statistics we present  in our dticussion  of 
the HMOs   approaches  for  overseeing their PBMs  performance.  We believe our 
presentation  is valid and  correctly emphasizes the point  we make  about the degree  to 
which HMOs  rely on  independent  assessments of various kinds.  We also chose  not to 
elaborate  on  the nature  of quality measures for pharmacy  practice  as HMA  suggested;  we 
think such  definition  is more  appropnately considered  as part of the larger task to be 
accomplished  under  this recommendation. 
External Organizations  Comments 
All  the  outside  organizations  concurred  with  our  recommendations.  Most  offer 
elaboration  of points  made  in our  report  or  related  to them.  Some  call for  revisions 
to  the  report  or  other  actions  on our  part. 
For  the most part,  we have  not revised the report in response to these comments,  which, 
we believe,  call for  changes  beyond  the scope  of this inquiry.  We are pleased  that the 
comments  of the AMA,  ASHP,  APIA,  and  the Consumer  Coalition support many  of the 
points  made  in the report or elaborate on related issues.  We appreciate  the comments  of 
AMCP  but find  many  of the points raked  are beyond  the scope  and purpose  of our 
inquiry.  Our focus  on those HMOs  contracting with PBMs is important to the 
Department  and  to other payers  of managed  health  care services.  Our jindings,  and  the 
recommendations  that spring from  them, reflect in large measure  the perspectives and 
insights from  this increasingly.significant group  of health  care providers. 
19 
 APPENDIX  A 
METHODOLOGY 
We  relied  on  four  primary  sources  of information  for  this  report:  (1) responses  to  a 
mail  survey  of all HMOs  in the  country;  (2) telephone  discussions  with  HCFA  staff  in 
headquarters  and  6 regional  offices  and  with  Medicaid  officials  from  9 States; 
(3)  discussions  with  experts  and  analysts  on  managed  care,  pharmacy  and 
pharmaceutical  care,  and  pharmacy  benefit  management;  and  (4)  a literature  review 
including  journals  and  newsletters,  reports  and  analyses,  government  documents, 
documents  from  professional  and  trade  organizations.  Below,  we provide  a detailed 
description  of each  source. 
(1)  MAIL  SURVEY  OF  HMOS 
Universeof HMOs 
We  relied  initially  on  the  listing  of HMOs  contained  in the  GhYA/AMCl?A  Managed 
Health  Care Directory, 199.596,  which  contained  data  on  639 HMOs  across  the  country. 
These  HMOs  included  the  affiliated  sites  of 24 national  and  regional  managed  health 
care  organizations  as well  as HMOs  that  were  not  affiliated  with  these  national  and 
regional  organizations. 
We  telephoned  each  of the  national  and  regional  managed  health  care  organizations 
listed  in this  directory  to  (1) determine  whether  decisions  about  the  organizations  use 
of PBMs  are  made  centrally  and  apply  to  all affiliated  sites  or whether  these  decisions 
are  delegated  to  the  affiliated  sites,  (2) confirm  the  number  of HMO  sites  affiliated 
with  each  organization,  and  (3) identify  the  key  decisionmakers. 
Thus  we refined  the  initial  AMCRA  listing  of HMOs  and  ultimately  defined  a universe 
of 368 HMO  decisionmakers  to whom  we sent  our  surveys.  When  we refer  to 
HMOs  in our  report,  we are  speaking  about  these  HMO  decisionmakers,  either  the 
chief  executive  or the  head  of pharmacy  services  responsible  for  decisions  about  PBMs 
for  their  HMOs.  Our  universe  included  26 HMO  decisionmakers  from  national  or 
regional  managed  care  organizations  who  represent  their  organizations  283 affiliated 
local  plans.  The  remaining  342 HMO  decisionmakers  each  represent  local  HMO 
plans  unaffiliated  with  any  national  or  regional  managed  care  organizations.  These 
368 HMO  decisionmakers  represented  625 local  plans  nationwide. 
szmey  l+ocess 
All  HMO  decisionmakers  received  the  same  survey  questionnaire.  We  mailed  the 
survey  first  in  juic  1996;  kit  Iliai!Cd  Li  fUliOV:-Up  SUI7C4  id  ~L~~IC.S~lUil~~iit?;  i::  JUI2 
1996.  Overall,  263 of 368 HMO  decisionmakers  (whom  we refer  to  as HMOs  in this 
report)  responded  to our  survey.  This  is a response  rate  of 71 percent. 
A-l  Database  construction 
We  grouped  the  HMOs  listed  in AMCRAs  directory  into  5 categories  based  on 
whether  or  not  they  are  affiliated  with  national/regional  organizations  and  whether  or 
not  decisionmaking  is centralized  (see  Figure  A).  Thus,  we collapsed  AMCRAs  data 
for  HMOs  into  368 records,  each  representing  one  HMO  decisionmaker. 
For  the  three  types  of HMOs  (plan  fypes #I,  #2,  and  #4b)  in which  decisions  to  use  a 
PBM  are  made  at  the  local  level,  each  HMO  decisionmaker  was counted  as one 
record  in the  database.  For  the  two types  of HMOs  (plan types #3  and  #4a)  in which 
the  decision  to use  a PBM  is made  at  the  corporate  level,  we collapsed  all data  for 
affiliated  plans  into  one  record  for  each  HMO  decisionmaker. 
In categorizing  the  HMOs,  we relied  on  information  from  our  telephone  calls  and  on 
written  comments  from  survey  respondents.  If we learned  from  a respondent  that  an 
independent  plan  had  merged  with  a regional  or  national  HMO,  or that  it was no 
longer  in existence,  we changed  our  database  accordingly.  We  did  not  change 
AMCRAs  data  in any  other  way. 
FIGURE  A 
TYPOLOGY  OF  HhdoS 
Numberof  HMOs  NUlUbh7OfAfT6WCd 
Plans Refncamted 
sum)nd 
QpCOfHMO 
PfantypeXl  238  238 
Independent HMO. Decisions about using a PBM are made at the local 
level for each affiliated plan.  One sutwy  is sent to each local plan. 
Planlypc#2  95  95 
National or regional HMO.  Decisions about using a PBM are. made at 
the local level for each affhiited  plan.  One survey is sent to each local 
plan. 
-typcfl  18  227 
National or regional HMO.  Decisions about using a PBM are made at 
the corporate level for all affiliited  plans.  One survey is sent to 
headquarters representing all affhiated plans. 
Phlltypc#43  8  56 
Hybrid model. Decisions about using a PBM ate made at the corporate 
level for affiliated plans. One survey is sent to headquarters for these 
affiliated plans. 
Pfan type X4b  9  9 
Hybrid model.  Decisions about using a PBM are made at the local level  ~
for affiliated plans.  One survey is sent to each local plan. 
I 
Totals:  368  625 
A-2 
 Figure  B illustrates  the  number  of HMOs  responding  to  the  OIG  survey,  and  whether 
or  not  they  use  an  external  PBM.  The  chart  presents  the  number  of local  plans 
represented  by these  local  and  national  HMOs. 
FIGURE  B 
RESPONSES  FROM  H&lo  DECISIONMAKERS 
Number of HMOs surveyed  342 HMOs  26 HMOs  368 HMOs 
(342 plans)  (283 plans)  (625 plans) 
Number of HMOs responding to survey  241 HMOs  22 HMOs  263 HMOs 
(241 plans)  (254 plans)  (495 plans) 
Number of HMOs responding to survey  185 HMOs  14 HMOs  199 HMOs 
that use an external PBM  (185 plans)  (118 plans)  (303 plans) 
Number of HMOs responding to survey  56 HMOs  8 HMOs  64 HMOs 
that do not use an external PBM  (56 plans)  (136 plans)  (192 plans) 
Number of HMOs not responding to  101 HMOs  4 HMOs  105 HMOs 
survey  (101 plans)  (29 plans)  (130 plans) 
Use of AAUCIZAdata in OIG  analysk 
Although  the  OIG  survey  results  served  as the  foundation  for  this  report,  we used 
AMCRA  data  for  three  of our  analyses:  1) analysis  of the  nonrespondents,  2) analysis 
of the  tax status  of an  HMO,  and  3) analysis  of the  number  of lives  covered  by an 
.
HMO. 
In assigning  a tax code  to  an  HMO,  we reviewed  the  tax status  for  all  of its affiliated 
plans.  If all the  affiliated  plans  reported  a for-profit  tax status,  we called  the  tax status 
of that  HMO  for-profit;  if all the  affiliated  plans  reported  a non-profit  tax status,  we 
called  the  tax status  of that  HMO  non-profit;  and  if some  of the  affiliated  plans 
reported  for-profit  tax status  and  others  reported  non-profit  tax  status,  we  called  the 
tax  status  of that  HMO  mixed.  For  the  sake  of clarity,  we  chose  to  eliminate  from 
any  analyses  involving  tax status  the  eight  HMOs  that  we designated  as having  a 
mixed tax status.  To  determine  the  number  of covered  lives  for  each  HMO,  we 
summed  the  total  number  of covered  lives for  all of the  HMOs  affiliated  plans. 
The  information  drawn  from  the  AMCRA  database  and  from  the  OIG  mail  smvey  is 
self-reported  by  the  HMC)s.  We  did  not  veri@  this  information.  Ike  A.klCKA  data 
are  based  on  that  organizations  survey  of HMOs  which  had  a 76.8 percent  response 
rate. 
A-3 
 (2)  TELEPHONE  INTERVIEWS  WITH MEDICARE  AND  MEDICAID 
0FFIcIALs 
We  spoke  with  HCFA  staff  in Baltimore  for  both  the  Medicare  and  Medicaid 
managed  care  programs.  We  contacted  Regional  Medicare  HMO  staff  in Boston 
(Region  I), Atlanta  (Region  IV),  Chicago  (Region  V), Dallas  (Region  VI),  Denver 
(Region  VIII),  and  San  Francisco  (Region  IX).  These  Regions  include  those  with  the 
largest  numbers  of Medicare  HMOs. 
We  also  spoke  with  Medicaid  officials  in 9 States:  Arizona,  California,  Florida, 
Massachusetts,  Minnesota,  Missouri,  New York,  Ohio,  and  Rhode  Island.  These 
States  are  among  those  most  experienced  with  enrolling  beneficiaries  in Medicaid 
HMOs.  These  States,  too,  include  pharmacy  services  in their  HMOs  contracts. 
(3)  DISCUSSIONS  W-ITHEXPERTS  AND  ANALYSTS 
During  the  course  of this  inquiry,  we had  discussions  with  many  experts  and  industry 
analysts  about  PBMs  and  the  issues  associated  with  their  use.  We  spoke  with 
representatives  from  PBMs,  from  health  benefits  consulting  firms  and  large  employer 
groups,  from  professional  pharmacy  and  medical  organizations,  with  organizations 
representing  the  managed  care  industry,  with  several  national,  private  accreditation 
groups,  and  with  Federal  government  agencies  such  as the  General  Accounting  Office 
and  the  Federal  Trade  Commission. 
(4)  DOCUMENT  AND  LITERATURE  REVIEW 
Among  the  written  materials  we have  reviewed  are  government  and  non-government 
studies  on  quality  assurance  systems  and  on  pharmacy,  managed  care  pharmacy,  and 
pharmacy  benefit  management  companies;  position  papers  and  guidelines  from 
professional  pharmacy  and  medical  organizations;  national  accreditation  standards; 
court  cases  and  legal  settlements;  newsletters,  newspapers,  and  professional  journals. 
A-4 
 APPENDIX  B 
NONRESPONDENT  ANALYSIS 
An  important  consideration  with  research  based  on  surveys  of the  type  we have 

conducted  is the  bias  that  may  be  introduced  into  the  results  if the  nonrespondents 

differ  from  survey  respondents  in systematic  ways.  To  test  for  the  presence  of bias,  we 

relied  on  the  following  sources  of data:  information  contained  in the  GHAAIAMCRA 

Managed  Health  Care Directory, 1995-96  and  an  OIG  typology  of HMO 

decisionmakers. 

In collapsing  the  data  from  AMCRAs  directory  for  the  nonrespondent  analysis,  we 

concluded  that  an  HMO  served  Medicare  beneficiaries  if at least  one  of its affiliated 

plans  served  them.  We  followed  a similar  process  for  determining  an  HMOs 

Medicaid  status.  For  this  analysis  we relied  on  data  reported  by the  HMOs  to 

AMCRA. 

The  Chi-square  statistic  was used  to test  differences  between  respondents  and 

nonrespondents  by  1) tax status  of an  HMO;  2) number  of lives covered  by the 

HMOs;  3) type  of HMO  according  to  the  OIG  typology;  4) whether  or not  an  HMO 

serves  Medicare  beneficiaries;  and  5) whether  or  not  an  HMO  serves  Medicaid 

beneficiaries. 

We  determined  that  the  HMO  decisionmakers  responding  to  our  survey  did  not  differ 

significantly  from  those  not  responding  in terms  of the  following  four  variables:  the 

number  of lives  covered  by the  HMOs,  the  type  of HMO  according  to  our  typology, 

whether  or  not  the  HMO  decisionmaker  serves  Medicare  beneficiaries,  and  whether 

or  not  the  HMO  decisionmaker  serves  Medicaid  beneficiaries. 

However,  when  we tested  for  a relationship  between  the  response  of an  HMO 

decisionmaker  and  the  HMOs  tax status,  we found  that  the  chi-square  statistic  was 

significant  (6.453)  at  the  .Ol level.  When  one  finds  that  there  is a statistically 

significant  relationship  between  the  response  rate  and  a key variable,  it is important  to 

determine  the  extent  of the  impact  of the  nonresponse  bias  on  the  entire  survey.  We 

estimated  the  nonresponse  bias  for  our  key  question  DO you  contract  with  an  external 

PBM?  and  found  that  taking  into  account  the  tax status  of nonrespondents  changed 

the  answer  by less than  one  percentage  point.  Because  the  impact  was not  significant, 

it was not  necessary  to  our  adjust  other  analyses  to  reflect  the  nonresponse  bias. 

B-l  CHI-SQUARE  FOR TYPE OF TAX STATUS 
II 
Respondents  Nonrespondents  Total  % Respond 
I  I  I  I  II 
II 
Profit  I  148 (56.9%)  42 (42.0%)  190  77.9% 
I  I  I  II 
Non-Profit  112 (43.1%)  58 (58.0%)  170  65.9% 
Overall  260  100  360.  72.2% 
CHI-SQ.=6.453*  DF=l 
*=This was significant at the .Ol level. 
*=Eight  HMOs were eliminated because they either did not respond to the question about tax status in AMCRAs survey, or 
they responded but showed a mixed tax status when we collapsed AMCRAs records. 
CHI-SQUARE  FOR SIZE OF HMO 
Respondents  Nonrespondents  Total  % Respond 
0 -49,999  127 (52.0%)  52 (55.9%)  179  70.9% 
50,ooo -99,999  47 (19.3%)  16 (17.2%)  63  74.6% 
100,ooo -799,999  58 (23.8%)  22 (23.7%)  80  72.5% 
SOO,OOO+  12 (4.9%)  3 (3.2%)  15  4.9% 
Overall  244  93  337:  72.4% 
CHI-SQ.=0.775  DF=3 
**=Thittyone  HMOS were eliminated because they did not respond to the question about covered lives in SUXVITJ. 
CHI-SQUARE  FOR TYPE OF CONTROL (NATIONAL  VS. LOCAL CONTROL) 
Respondents  Nonrespondents  Total  % Respond 
LQcal  241 (91.6%)  101 (96.2%)  342  70.5% 
National/ Regional  22 (8.4%)  4 (3.8%)  26  84.6% 
Overall  263  105  368  71.5% 
CHI-SQ.=2.372  DF=l 
B-2 
 CHI-SQUARE  FOR WHETHER  HMO SERVES MEDICARE 
Respondents  Nonrespondents  Total  % Respond 
Do not serve  190 (72.2%)  80 (76.2%)  270  70.4% 
MedGre 
Serve Medicare  73 (27.8%)  25 (23.8%)  98  74.5% 
Overall  263  105  368  71.5% 
CHI-SQ.=0.598  DF=l 
CHI-SQUARE  FOR WHETHER  HMO SERVES MEDICAID 
Respondents  Nonrespondents  Total  % Respond 
MDoe dNicoati dServe  201 (76.4%)  80 (76.2%)  281  71.5% 
Serve Medicaid  62 (23.6%)  25 (23.8%)  87  71.3% 
Overall  263  105  368  71.5% 
CHI-SQ.=0.002  DF=I 
B-3 
 APPENDIX  C 

SUMMARY  OF HMOS RESPONSES  TO OIG MAIL SURVEY 
All  data  presented  in this  appendix  are  derived  from  an  OIG  mail  survey  of HMOs 
conducted  in June  1996. 
C-l  l.DOCSyWrHMO  currently contract with an atemal  PBM to hdp manage pharmacy baxfits  for any of your HMOs cnmkcs? 
199 (75.7%)  263 
Those HMOs tit  responded  Yes to question 1 aLro answered questions 2-13. 
Those HMOs that responded  No to quesdon  I also answer questions 14-16. 
2 What was the enwllment  of your HMO in June, 19%? 
180,918  70,000  377,708  350  395.3400  189 
a.  Serve Medicare beneficiaries?  107 (53.8%)  89 (44.7%)  3 (1.5%)  199 
b.  Sem  Medicaid beneficiaries?  111 (55.8%)  87 (43.7%)  1 (0.5%)  199 
c.  Serve commercial enrollees?  191 (%.O%)  7 (3.5%)  1 (0.5%)  199 
d.  Use a PBM contract for Mcdicuc  beneficiaries?  89 (44.7%)  106 (53.3%)  4 @W  199 
e.  Use a PBM contract for Medicaid  beneficiaries?  96 (48.2%)  103 (51.8%)  _- 199 
f.  Use a PBM contract for commercial  enrollees?  190 (95.5%)  8 (4.0%)  1 (0.5%)  199 
c-2  5. Which PBM(s) has a contrad with your HMO for 19967 
6. Has your HMO changed PBMs since 1993? 
..:....:~....:...........:2. .... .:.:.....:. .::,.:.:. .:...:.:._.::._.::...: :..:_::.:.:: ._:::._::...:: :..:.:..:...:..::.....:.:::......:....:::... ..:.::.....:.::.(.,:.::.;...:..::_.:...:,:.:..:,. .::.:.:. _... ::.:..:., ::.~_ :~:.::. ,_...:.,_.,:j.~_:~:..:, :.,:_..,,: ..~:...:.~..: .i...~:..:.. ....:.:.,.....:..:.~....:.:...,...~,..:.....,:..:.......~:.:. .....:..., ......:..~ . -::..::,:.:...:,:.::..~.:,:::..::, :...: _..::.. :..:_...:... :..::.:.:...::.:,::.:::.:.:::..::~:..:::.:...:..::::.. ..:...:..::.:.:.:.:  ................. .. ..:.:::.::~:.~:.;::::~:.:,:.~.;.:.:~:;::::i:i::~:
~~~~~:ia~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~:~i:~~~~~~~~~~~~~~~~~~~~~~~  ~~~~~~~~~~~ 
..........i,.,.......,....,. ,........... ........................... ............................ ... ................. .............. .~:..i..  ... ... .......\............... ,.,.....,~,~,~,~,~.~..,~.~,~,~,~.,~..~..,..~..,..,.~....,..~...,. ~... .,..~............ :.:.:.:.:.:.:.:.:.:...:.:.:.:.:.:.:.:.:.:.:.:.: 
29 (43.3%)  38 (56.7%)  __  67; 
 = Those HMOs which reported contracting with a PBM for four years or less were eliminated.  8.lsthissavice mix signUicanUydifferentfrom 23 years ago? 
40(2&O%)  101 (70.6%) 
 = Those HMOs which reported contracting with a PBM for two years or less were eliminated. 
9.LhyouthinkyourHMOwiUchangethe  current  sexvice mix over  the next ample  of years? 
,:~:j:~:j~::,jy::,:.:,:.:~::.:,:.:,:.::.j:,:.:,:.:,:.:,:.:,.:,:.:,:.:,:.:,:.:,:.:,:.:~::.:,~.,:.:,~,,:.:,:.:,:.:,:.:~ .,,,.,,,,,,,.,.~.,.,.,., :::::.: ::y:: ::::: ::.:_::.: ::::::::.::::::.:.:.: :.:.::.:.:.::.:.:.: :/:.: ::.:L::.:.i.:.:.:. .. ... ........_..../..I............................  i.......  .L.. 
alx~~~~iiiij~~~~~~  ~~~~~~~~~~~~ 
23 (11.6%)  199 
a.  Information re  rts  60 (33.7%)  84 (47.2%)  26 (14.6%)  4 (2.2%)  178 
submitted by the r BM  I  I 
b.  Anal  es by your HMO  70(39.3%)  72(40.4%)  23 (129%)  3 (1.7%)  178 
of data Tram the PBM  I  I 
c.  Reviews of PBM  6 (3.4%)  10 (5.6%)  1 24(13.5%)  1 12(6.7%)  178 
performance by outside 
consultants 
d.  On-site monitoring  14 (7.9%) 
gLsocanducted  by your 
Peer reviews of PBM  --  -- 
programs  by your HMOs 
physicians or pharmacists 
f.  Using your HMOs  50(28.6%)  42(24.0%)  6 (3.4%)  175 
Pharmaq  and 
Therapeutics Committee  + 
30 (17.4%)  46(26.7%)  1 16(9.3%)  1 7 (4.1%)  172 
Direct feedback about 
PBM programs from: 
h.  Your HMOs 
physicians 
48 (27.3%)  39(222%)  44 (2!i.O%)  3 (1.7%)  176 
i.  Your HMOs  43p4.42)  50(28.4%)  1 X(14.8%)  1 8(4.5%)  176 
JdXUUlWiStS 
j.  Your HMOs enrollees  54(30.7%)  43 (24.4%)  1 31(17.6%)  1 8 (4.5%)  176 
k.  Reviews of your PBMs  33 (19.0%)  42 (24.1%)  20 (11.5%)  5 (2.9%)  64(36.8%)  10 
performance through  (5.7%) 
established performance
I.. 
* = Those HMOs which report contracting with a PBM for less than one year and/or report using a PBM for only claims 
processing were eliminated. 
c-4  a.  Using PBMs may help contain prescription  70  88 (44.4%)
drug costs.  (35.4%) 
b.  Using PBMs may help contain overall  27  80(41.0%)
health care costs.  (13.8%) 
I  I 
c.  Using PBMs may help improve physicians  32  97 (49.0%)  54(27.3%)  9 (4.5%)  6 (3.0%)  198 
prescribmg practices.  (16.2%) 
d. 	 Using PBMs may help improve the  23  74(37.6%)  69 (35.0%)
pharmaceutical care provided by phannacists.  (11.7%) 
e.  Using PBMs may help improve enrollees  12 (6.1%)  81 (41.3%)  70 (35.7%)
compliance with their drug therapies. 
Improve a- to pbarmaca~ticaiisemica 
f.  PBMs may help improve access to  46  64(32.8%)  45 (23.1%)  25  195 
pharmaceutical  setvices for HMO  enrollees.  (23.6%)  (12.8%)  (7.;5%) 
.A,..........i _...... :.:.:.:.:.:.:.:. i.A ......... .A.. ...i..... ...A....... .al..... ........ .....A.._..........   .:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.::::::::: E.:.:.: .:i:.:.:.:.:.:.:.:.:.:.:.:: 
~;  l~~~~~~  ~~~~  :@j# 
@g$$..@~;~#g &>  i.:.:.A~:...:.. :.:A.:.~ :....:.:...:~... . ..:.:..n.:...::.....~....:.....:....:~A.......>:... ~..........,:......:/ ,,..: :Y..~..An.~,:....~..:.,... .:~..,:....:... .:.....:~...,~........,:~....~...,.....:~...,~A......,::....:,.:~ ::.:~:~ :~g~. .~  . ,...A  . . . . . . . _......  i.....  A....  g::::$::::&:::::::::::::::$:y:s:  
a. 	Potential  fur bias.  PBMs alliincea with drug  61  8 (4.0%)  199 

20 
manufacturers may influence decisions about drug products in  ;;9.6%)  $5.656)  (30.7%)  (10.1%) 

ways that compromise optimal drug therapy. 

b. Fmgm&ation  of aavia~  Using PBMs may contribute to  10 (5.1%)  23  58  101  6 (3.0)%)  198 

fragmentation of patients health care.  (11.6%)  (29.3%)  (51.0%) 

cIhitedpeureview.  Users of PBMs ma  not exercise  11 (5.6%)  66  49  198 

sufficient independent peer review of the P8 h4.sclinical  &%)  (33.3%)  (24.7%)  ;:a%) 

decisions. 

dInd4qnate  -psuduct fufosmatiou.  HMO9  physicians  6 (3.1%)  22  69  24  1% 

and pattents m%ase  drub theraT  decisions on product- (11.2%)  (35.2%)  g&3%)  (12.2%) 

spectfic mformation from  BMs w ich, unlike drug 

manufacturers, need not comply with the Federal 

requirements for drug labeling and advertising. 

ewegadbgtheamfidentiautyofpatientdata.  20  55  89  9 (4.5%)  199 

Confidential, patient-identifiable mfonuation  contained in  (10.1%)  ?3.1%)  (27.6%)  (44.7%) 
PBM databases may be disclosed to others, such as employers 
or drug manufacturers, without the fully informed consent of 
patients. 
t Diadoaur~  HMOs may not inform enrollees about using a  16 (8.0%)  $S.l%) go%)  199 
PBM and its alliances with drug manufacturer(s).  fl5.68)  !:3.2%) 
PBM accouutability.  The information HMOs receive from  20  43  71  57  7 (3.5%)  198 
k BMs may be too limited for HMOs to hold them sufficiently  (10.1%)  (21.7%)  (35.9%)  (28.8%) 
accountable for their performance. 
-
c-5  Contracting with a different PBM 
 89 (44.7%)  199 
Sharing with PBM of increased financial risk 
 81 (40.7%)  199 
Managing drug benefit intemallv 
 53 (26.6%)  199 
Other changes 
 23 (11.6%)  199 
emons  14-16 were asked oniy of those 64 HMOs 
 thaf responded  No IO question I, 
Le., HMOs that do not current& contract 
with an memal  PBM. 
14 (22.2%)  39 (61.9%) 
 10 (15.9%)  63 
30 (49.2%)  30 (49.2%)  I 
 1 (1.6%)  I  61 
C-6  APPENDIX  D 

COMMENTS  ON  THE  DRAFT  REPORT 
In this  appendix,  we present  in full the  comments  from  the  Health  Care  Financing 
Administration,  the  Food  and  Drug  Administration,  and  the  Health  Resources  and 
Services  Administration.  We  also  solicited  and  received  comments  from  the  Academy 
of Managed  Care  Pharmacy,  the  American  Medical  Association,  the  American 
Pharmaceutical  Association,  the  American  Society  of Health  Systems  Pharmacists,  the 
Consumer  Coalition  for  Quality  Health  Care,  and  the  Medicaid  Pharmacy  Technical 
Advisory  Group  of the  Health  Care  Financing  Administration. 
D-l  DEPARTMENT  OF  HEALTH  ck HU.MhS  SER\.ICEj 
The  Admlnlstra!:: 
Washmgton.  0 C  22251 
DATE:  MARI  I  1997 
FROM: 	 Bruce C. Vladeck 
Administrator 
SUBJECT: 	 Office of  Inspector General (OIG) Draft Report: Experiences of Health 
Maintenance  Organizations with Pharmacy Benefit Management 
Companies (OEI-0 l-95-00 110) 
TO: 	 June Gibbs Brown 
Inspector General 
We reviewed the above-referenced  report pertaining to the use of pharmacy benefit 
management companies by health maintenance organizations.  Our detailed comments on 
the report ticommendations  are attached.  Thank you for the opportunityto  review and 
comment on this report. 
Attachment 
.  .,  ,,  .a*  : .-. . Health Care Financinp Administration (HCFAI Comments on 

Ofice  of InsDectorGeneral (OIGI Draft ReDort:Exneriences of Health 

Maintenance Orpanizations (HMOs) with PhaxmacvBenefit Management Comnanies 

/PBMsY* tOEI- I-95-00 110) 

OIG Recommendation 
HCFA should take steps to ensure that its Medicare HMOs are sufficiently 
accountable for the quality of the services their PBMs provide to beneficiaries. 
. 

HCFA Resnonse  . 
We concur.  HCFA conducted an assessment of the PBM industry and its impact on costs 
and quality of care on Medicaid and Medicare services, as well as on the larger 
phaxmaceutic+ market. The PBM industry has experienced considerable growth, both in 
2 
terms of number of firms and number of people for whom the PBMs provide services.  As 
a beneficiary-centered purchaser of health services, HCFA is entirely focused on 
achieving the optimal value for our beneficiaries in terms of cost and quality.  However, 
HCFA is limited in its regulatory oversi@t and evaluation of pharmacy in Medicaid and 
Medicare managed care programs. Under Medicare, HCFA currently requires contracting 
HMOs to include specific provisions in their contracts with subcontractors that detail a 
listing of services covered for Medicare enrollees, a description of payment or incentive 
arrangements, an agreement not to bill Medicare members except for applicable copays, 
deductibIes or coinsurance, and an agreement to participate in HMO quality assurance 
and utilization review activities.  These provisions apply to all subcontracting 
relationships, including PBMs.  HCFA monitors HMOs on a periodic basis during which 
random samples of all subcontracts are reviewed to ensure compliance. HCFA can 
encourage states to strengthen their contractual arrangements to ensure that oversight 
mechanisms are in place.  HCFA will also continue to monitor managed care 
organizations oversight of PBMs performance as well as ensure that subcontracting 
.
relationships meet HCFAs contracting requirements. 
OIG Recommendation 
State Medicaid agencies should take steps to ensure that their Medicaid HMOs are 
sufiiciently  accountable  for the quality of the services their PBMs provide to 
beneficiaries,  Page 2 
We concur.  Given HCFAs regulatory  limitations for oversight of pharmacy in Medicaid 
and Medicare managed care programs, we believe the best way to address this issue is to 
develop guidelines that would provide states with technical assistance in developing  their 
contractual  language and performance  standards for the subcontractor relationship 
between HMOs and PBMs. 
HCFA, the Food and Drug Administration,  and the Health Resources and Services 
Administration,  working together with external organizations, should build on 
existing efforts to develop quality measures for pharmacy practice that can be used in 
r  managed care settings. 
We concur.  This is an excellent opportunity  for these Federal agencies to work together 
to improve the management  of the drug benefit to beneficiaries  through developing 
quality  measures  as well as monitoring the quality of service delivered to ensure feedback 
of results.  In this regard, HCFA can ensure performance measures forpharmacy services 
are included  in its strategy for quality assurance for HMOs.  Further, the group can also 
identify  incentives  that ensure measurable  improvements in outcomes of patient care, 
ensure increased  accountability,  and achieve higher beneficiary  satisfaction. 
Page 1 - Medicaid managed care enrollment statistic of 24 percent is outdated.  The 
more recent number would be 39 percent as of June 30, 1996. 
Page  13 - You state that 24 percent of HMOs do not use their own Phaxmacy 
Therapeutic  Committees  to peer review their PBMs programs.  It also holds that 
76 percent do conduct this type of activity.  In your report, you indicate that 38 percent 
do not perform their own drug use reviews of PBICfsanalyses,  but this indicates that 
62 percent do conduct this type of analysis.  Further, you cite that 5 1 percent do not 
conduct on site review.  This means that 49 percent do conduct on site reviews.  These 
statistics  could be cited based on order of maptude  so as to avoid negative overcast.  DEFARTMENT  OF HEALTH  & HUMAN  SEAVICES~  Public Heawl scnke 
Food End OrliP 4dministrath 
Memorandum 
t+em  DeputyCommissionerfor b%&nttgm and!3ptcms, FDA  DEPARTMENT  OF HEALTH  &aHUMAN  SERVICES  Public Health Service 
Health Resources and 
Services Administration 
Rockville MD 20857 
JAN 3 0  1997 
. 
TO:  Inspector  General 
FROM:  Acting Deputy  Administrator 
SUBJECT:  Office of Inspector  General (OIG) Draft Report  -
Experiences  of Health Maintenance  Organizations  with Pharmacy.Benefit 
Management  Companies  - OEI-01-95-00110 
Attached,  in accordance  with your December  12, 1996 request,  are HRSAs comments  on the 
subject draft report. 
Thomas  G. Morford 
Attachment  HEALTH RESOURCES AND SERVICES  ADMINISTRATION 

COMMENTS  ON 

OFFICE OF INSPECTOR  GENERAL  (OIG) 

EXPERIENCES  OF HEALTH MAINTENANCE  ORGANIZATIONS 

WITH PHARMACY BENEFIT  MANAGEMENT  COMPANIES 

OEI-01-95-00110 

GENERAL  COMMENT 

The report  provides a description  of pharmacy  benefit management 
companies  and the services  they provide  to payers and 
(PBMs), 
health  plans.  The main use of PBMs is in controlling  costs of 

prescription  drugs.  While costs  should  be an important 

consideration,  costs should not be the only  factor considered  in 

the decision  making process.  Also the report  points out the lack 

Of sufficient  accountability  for the quality  of services provided 

to beneficiaries.  Various publications  have documented  drug 

misadventuring  and the associated  cost to the health care system, 

as well as pharmacists  filling prescriptions  that would produce  a 

potentially  harmful adverse  reaction.  The Department  recently 

launched  a public-private  plan designed  to improve patient 

understanding  of prescription  drugs  and reducing  misuses  of 

medications. 

OIG RECOMMENDATION 

HCFA,  FDA and HRSA working  together  with  external  organizations, 

should build on existing efforts  to develop  quality measures  for 

pharmacy  practice  that can be used in managed  care settings. 

A RESPONSE 

We concur.  HRSA has a variety  of initiatives  underway  to 
reformed 
evaluate  the role and effectiveness  of managed  care in a 
health  care system insuring  access  to quality  health care 
services.  This recommendation  is a reasonable  extension  of these 

ongoing  activities. 

Page  iii., second paragraph.  Insert  the following  after 

81. ..improved patient care.81  Quality  measures  should reflect,  as 

a minimum,  consumer perception,  clinical  measure  payout/revenue 

ratios  and provider  evaluations. 

.  1650 King Street  .  Suite  402  1 rU..ak-i~,  Virginia  22314 
IANAGEDCAREPHARMACY~ 
 (703) 683-8416  .  l-SOO-TAP-AMCP  A Fax: (703) 683-8417
esident 
)hn Hopkins. R.Ph. 
xky  Mountain HMO 
-and Junction, CO 
70) 244-7775 
mident-Elect  January  3,1997 
,well T. Stetier. R.Ph..  M.B.A. 
Xi  Health Systems,  Inc. 
zottsdale. AZ 
02) 314-8370 
June Gibbs Brown 

Inspector  General 

39  President 

Ian Zimmerman.  R.Ph..  M.B.A 
 Department  of Health and Human Services 

xidolph.  NJ 

Office of Inspector  General 

01) 989-8721 
Washington,  DC 20201 

assurer 
even G.Avey,  MS..  R.Ph.  Dear Ms. Brown: 

ospactlve  Health, Inc. 
NIc1y,UT 
01) 943-4977  The Academy  of Manaked Cqre Pharmacy  (AMCP)  is pleased to have 

the opportunity  to offer comments  on the Office of hispector  Generals 

+wcior 
 (OIG) drafI report, OEI-01-95-00 110, entitled  hkperience  of HeaZfh 

any Barenbaum.  R.Ph. 

Maintenance  Organizations  with Pharmacy  Benefit Management 

tlmage 

heeling, IL 
 Companies. 

47) 520-7823 
AMCP is the national  professional  society  dedicated  to the concept  and 

rector 
qelo  Giambrone.  Pharm.D.  practice  of pharmaceutical  care in managed  health care environments. 

liHealth 
AMCPs  mission  is to promote  the development  and application  of 

abank. CA 
18) 238-6057  pharmaceutical  care in order to ensure appropriate  health care outcomes 

for all individuals.  Its sole purpose  is to represent the views and interests 

bctor 
 of managed  care phaxmacy.  The Academy  has more than 3,500 members 

m  M. Mednick. R.Ph. 

nationally  who are part of more than 600 health  care organizations, 

lie Falls, NJ 

91) 890-0822  including  the leading health maintenance  organizations  (HMOs) and 

pharmacy  benefit  management  (PBMs) companies,  that provide 

:ecutive  Director  comprehensive  pharmacy  coverage  to the millions  of Americans  served 

dith A. Cahill, C.E.B.S. 

by managed  care. 

rdemy  of Managed  Care  Pharmacy 

axandria. VA 

30) TAP-AMCP 
?puty Executive  Director 
ginia  S. Sweeter 

ademy  of Managed  Care  Pharmacy 

axandria. VA 

00) TAP-AMCP  We commend  the Inspector  Generals Office for turning  its attention  to the role that PBMs play 

in the delivery  of quality,  cost-effective  pharmaceutical  care.  We believe  the draft report begins 

to explore the substantive  interaction  between PBMs and their HMO clients  and agree, in 

general, with the three recommendations  the report makes.  However,  we recognize  that since the 

report is based primarily  on responses to survey questions  by HMO administrators,  a full 

understanding  of the relationships  that exist between PBMs and their HMO clients  may not have 

been possible  to achieve.  We offer our comments  in the spirit of expanding  on that 

understanding  and clarifying  some items that may be misinterpreted. 

1. There is general satisfaction  with the level of performance  HMOs receive  from PBMs as 
evidenced  by the extent of use of PBMs by managed care organizations.  PBMs have a level of 
performance  and quality that is attractive  to HMO clients not only for their cost-savings 
potential,  but also for optimizing  patient care through  use of  patient  and provider  profiling, 
academic  detailing,  and automated  advisories  to prescribers  and dispensers.  Often PBMs offer 
disease state management  services to clients so that drug regimens  produce the best patient 
outcomes;  this may entail  greater, rather than reduced, outlays  for prescription  items, but with 
cost savings ramifications  for total patient expenditures  by clients.  PBMs offer expertise  in the 
management  of the pharmacy  benefit not always available  within  individual  health care 
organizations.  These include a focus on pharmaceutical  care tools such as monitoring  for patient 
drug compliance,  drug interaction,  allergies and identifying  potential  or actual drug related 
problems.  They also include the use of sophisticated,  automated  databases  and information 
systems. 
2.  In order to comprehend  the entire operating  environment  within  which PBMs function,  it is 
necessary  to broaden the scope of inquiry for input.  We believe  that to achieve  a true 
understanding  of the dynamics  at work, the following  parties need to have opportunity  to explain 
how they interact with PBMs: 
PBMadministrutors:  the report suffers from not having  comments  from people who work in 
PBMs and who can be responsive  first-hand to such issues as accountability,  oversight, 
safeguards,  patient satisfaction,  and value-added  services demanded  by HMO a&non-HMO 
clients. 
Empfoyer group purchasers:  This prevalent  sector of PBM clients  helps shape how PBMs 
operate.  Employer  purchasers  recognize the buyers market they operate in regarding  purchase  of 
PBM services.  Fueled by competitive  pressures, PBMs listen  carefully  to what this important 
client base asks for in terms of both base-line cost considerations  and provision  of quality 
services to their employees.  Because employers  are making  purchasing  decisions  based on what 
will be made available  to their own personnel,  they are very sensitive  to performance/quality 
concerns.  Many of the innovations  PBMs introduce  into their operating  procedures  spring fi-om 
requests made by employers  who demand accountability  in a number of different  ways.  Pharmacies  in the community  under contract  with PBMs: PBMs cannot operate without 
extensive  networks  of participating  retail pharmacies.  These are the backbone of the delivery 
mechanism.  As they provide  the means for the HMO to provide the pharmacy  benefit to 
enrollees,  the interaction  between the PBM and pharmacies  under contract have a direct impact 
on the relationship  between  PBMs and their HMO clients. 
Individualproviders:  PBMs, through  use of their patient  and provider profiles,  are able to alert 
physicians  and pharmacists  to potentially  dangerous  situations  that would alter the prescribers 
choice of drug.  Providers  views of PBM/HMO  interactions  could be enlightening. 
3.  Contrary  to statements  in the report, PBMs are held accountable  by their clients.  The keen 
competitive  marketplace  that PBMs operate in demands  that they be responsive  to client 
concerns.  If PBMs cannot  demonstrate  quality  performance,  their clients  go to their competitors. 
Accountability,  forced by competitive  pressures,  is further demanded by an array of external 
entities.  In the case of HMO clients,  the PBM routinely  must answer to HMQ representatives 
responsible  for the quality  of care provided  to enrolled  populations.  This may be the medical 
director, the pharmacy  director,  or the quality  assurance team.  These individuals  are responsible 
for the health plan meeting  quality  standards  set by such respected external accrediting  bodies as 
the National  Committee  for Quality  Assurance  or by state oversight  agencies concerned  about 
both quality  of care and financial  solvency.  Also; state Boards of Pharmacy  have increased  their 
oversight  of PBMs due to nonresident  licensure  statues in some states which cause all PBMs 
with dispensing  facilities  to come under the scrutiny  of multiple  boards. 
: 
Both HMO and employer  group clients  are particularly  sensitive  to achieving  both cost 
efficiencies  and patient  satisfaction.  Often such performance/quality  accountability  mechanisms 
are spelled out in the contracts  between PBMs and their clients.  These accountability 
mechanisms  typically  include: 
- accessibility  of pharmacies  to the covered  population 

- information  systems capabilities  and consistency 

-provision  of clinical  services  such as formulary  management  assistance,  alerts to prescribers  of 

potential  and actual drug-related  problems,  and drug .use evaluation 

- profiling  of patient usage 

-profiling  of prescriber  patterns 

-provision  of academic  detailing  to physicians  to help them become acquainted  with the 

capabilities  and limitations  of certain  prescription  products 

-jointly  administered  PBMIclient  patient  satisfaction  surveys 

- client discounts  through  passing  on of manufacturer  rebates 

-negotiated  standards  for such performance  factors as dispensing  error rates, telephone 

answering  speed, and dispensing  turn-around  times. 
 In order to forestall  costs associated with redundant  performance/quality  review, the Health  Care 
Financing  Administration  should look for ways to partner with existing  approaches  used by 
PBMs and their clients to assure quality and performance  for Medicare  and Medicaid 
beneficiaries. 
4.  The report leads the reader to assume, incorrectly,  that PBMs develop  a forrnulary  that clients 
must operate  under.  This is not the case.  Most established  HMOs retain authority  for formulary 
decisions;  the PBM provides  advice in implementing  the individual  plans formulary.  The plans 
formulary  is the product of intensive,  ongoing  work by a Pharmacy  and Therapeutics  (P&T) 
Committee  comprised  of health care professionals  involved  in patient treatment.  Changes  to a 
plans formulary  are not discretionary  and must be made only by the P&T Committee.  It is the 
responsibility  of the PBM to manage the client-developed  formulary. 
Where the PBMs client  is an employer-based  group, that client,  in some cases, may not have the 
ability  or desire to provide  its own P&T Committee  and formulary  program.  In those situations, 
it will utilize  the PBMs P&T Committee  recommendations,  and, adopt one of a variety  of 
formularies  which the PBM may offer.  To service this need, most PBMs regularly  maintain  a 
P&T Committee  composed  of independent  health care professionals  to evaluate  therapeutic 
products  for inclusion  on the preferred list of drugs. 
5.  The report mistakenly  suggests that PBMs retain most of the rebates paid by manufacturers; 
this is not the case.  Ordinarily  the disposition  of manufacturer  rebates is decided  by contract 
negotiation  between the PBM and the individual  client.  One of the nations  largest PBMs with 
the most experience  with HMOs reports that 100% of the rebates are returned  to the HMO, 
unless they  specifically  agree to a different  arrangement. 
6.  We believe  the report should be explicit  in stating that PBMs are not empowered  to make 
therapeutic  substitutions  to prescriptions  without receiving  authorization  from the prescriber, 
and, in some instances,  from the patient. 
7.  The report cites confidentiality  of patient data as one potential  concern  of,using  PBMs, but 
fails to note the benefits  that result from the appropriate  use of patient prescription  and medical 
data.  As the report notes, PBM databases are richsources  of information  about which  patients 
are using which  drugs.  This information,  used by physicians,  pharmacists,  and health  plan and 
PBM administrators,  benefits  patients  by assuring proper drug selection.  This is particularly 
effective  when the information  is transferred  electronically.  Access to such data helps health 
care professionals  share practical  information  regarding  how the prescribed  drug may either 
benefit  or harm the patient  because of potential  drug interactions,  similarity  with other 
prescription  drugs the patient may already be taking,  or compliance  with drug therapy.  This 
information  helps physicians  and pharmacists  make informeddecisions  about whether  or not a 
particular  medication  is appropriate  for a particular  patient.  Managed care organizations  and PBMs recognize  and respect patient confidentiality  as a 
desirable  and firmly-established  principle.  AMCP supports  steps that health plans and PBMs 
already take to protect patient privacy  regarding  their medical  and prescription  records, including 
use of computer  passwords and secure networks.  AMCP believes  managed  care organizations 
and PBMs must not release personally-identifiable  data without  the prior knowledge  and consent 
of the patient.  (See enclosed  position  statement  on electronic  transfer  of prescription 
information.)  Additionally,  PBMs are subject to the laws of various  states governing 
confidentiality  of patient  information.  As such, they are very conscious  of their responsibility 
with regard to protecting  the confidentiality  patient  records. 
8. Ownership  of a PBM by a drug manufacturer  is irrelevant  to the question  of whether  quality 
care is being provided.  The report states that drug company  ownership  of a PBM may represent 
a conflict  of interest and raise concerns  about anti-competitiveness.  While we believe  this is a 
valid concem,.we  believe  safeguards  already  exist that prevent  its happening.  Regulatory 
oversight  by both state courts and the Federal Trade Commission  have prompted  strict adherence 
to these safeguards  so that PBMs and their owners operate  independently.  Additionally,  the P&T 
Committee  composition  and decision-making  authority  over formularies  assures an independent 
group of clinical  experts controls  the choice  of preferred  drugs.  We recommend  the report 
reinforce  the need for PBMs to have quality  safeguards  in place to avoid conflict  of interest, 
rather than suggest PBM ownership  by drug companies  is prima facia  evidence  of anti-
competitive  actions. 
9.  The reports bibliography  would lead a reader to Some very negative  pieces on managed&e.   
AMCP would be pleased to suggest additions  for the listing  that would result in a more balanced 
literature  reference  set. 
In conclusion,  we look forward to working  with the Department  of Health and Human  Services 
as it pursues its objectives  of assuring  that quality,  responsible  health  care is made available  to its 
constituents.  We would be pleased to meet with representatives  of the agency to describe the 
efforts AMCPs Task Force on Quality  Initiatives  is developing-and  explain the work of the 
AMCP-led  Quality  Council  comprised  of representatives  from all of the national  pharmacy 
associations. 
Thank you again for the opportunity  to offer our comments. 
Sincerely, 
Enclosure  AmericanMedicalAssociation 
Physiciansdedicatedta the healthof America 
JesseS.l&son,PhD  515 North Stab Street  3124644427 
PrincipaElconomist  Chicago, Ulinois 60610  312-464-5849 Fax 
center for 
I-hhh  Policy Research 
December 30, 1996 

June Gibbs Br0wn 

Wpector  General 

Department of Health & Human Services 

Washington, DC  20201 

My Dear General: 

Your report,  Experiences of Health Maintenance Organizations with Pharmacy Benefit 
Management Companies, 8which you sent to John Seward, MD, Bxecutive Vice 
President of the American Medical Association (AMA) for review and comment, was 
referred to me for review. 
The, report is indeed timely and examines a facet -- HMO contracti.ng with Pharmacy 
benefit management companies (PBMs) -- 0f the managed care industry which.deserves 
further scrutiny.  The AMA shares the concern expressed by many of the HMOs about 
the potential for bias nzsuhing from the PBMs alliances with drug manufacturers. 
The AMA has a clear position regarding potential conflicts of interest inherent in 
managed care cost containment involving prescription drugs.  Limits should be pIaced on 
the extent to which managed care plans use incentives or pressures to lower prescription 
drug costs.. Financial incentives and other approaches are permissible when they promote 
cost-effectiveness, not when they require withholding medically necessary care.  Managed 
care plans must adhere to the requirement of informed consent that patients-be given full 
disclosure of material information.  This requires that managed care plans inform 
potential subscribers of incentives or pressures to lower proscription drug costs. 
Patients must be informed of the methods used by their managed care plans to limit 
prescription drug costs such as the existence of formularies, the provisions for cases in 
which the physician prescribes a drug that is not included in the formulary, and the 
incentives or other mechanisms used to encourage physicians to cbnsider costs when 
prescribing drugs.  In addition plans should disclose any relationships with PBMs or 
pharmaceutical companies that could influence availability of prescription drugs to 
patients.  Thank you for the opporttmity to review  the report.  We agree with your 
recommendations for the Medicare anti Medicaid ptograms and the practice of pharmacy. 
We encourage you to continue your scrutiny of this and other practices that could place 
the financial interests of health care providers above the welfare of their patients. 
  Jesse S. Hixson 
/-
cc: Kirk B. Johnson, JD  American  2215  Constitution Avenue,  NW 
Pharmaceutical  Washington,  DC 20037-2985  The National  Professional 
Association  (202)  628-4410  Fax (202)  783-2351  Society of Pharmacists 
January 23,  1997 

The Honorable June Gibbs Brown 

Inspector General 

U.S.  Department of Health & Human Services 

Room 5250 Cohen Building 

Washington, DC  20201 

Re: OEI-01-95-00110 

Dear Ms. Brown: 

On behalf of the American Pharmaceutical Association (APhA), the national professional 
society of pharmacists, I would like to express my appreciation for this opportunity to 
comment on the draft report,  Experience of Health Maintenance Organizations with 
Pharmacy Benefit Management Companies.  
This report is a timely and concise examination of an important aspect of health care 
delivery: the management of prescription drug benefits by pharmacy benefits managers 
(PBMs).  Your  staff  deserve  credit  for  adopting  the  market-savvy  approach  of 
interviewing customers of PBMs, and for having gone to some lengths to solicit input 
from a variety of organizations in preparing this study.  We are proud that your report 
references the APhA Principles of Practicefor  PharmaceuticalClzreand the Guidelines 
forA4edication Incentive Programs, two important consensus documents speaking to the 
appropriate management of drug benefits in todays health care system.  In sum, your 
staff has done an excellent job  capturing key  elements of drug therapy  management 
despite the modest amount of information for evaluation which is available from the 
PBMs themselves. 
The Pivotal Role of the Pharmacist.  While the study examines the experience of health 
maintenauce organizations with pharmacy  benefits managers,  it  is important  for  the 
reports audience to understand that PBM performance depends to a great extent on the 
performance of the pharmacists serving the PBMs enrollees.  When it comes to patient 
care, the functional unit of the PBM is the pharmacist.  Nowhere is this more evident 
than in the area of quality measurement and assurance. 
Pharmacists  at  the  patient  interface,  loosely  organized  in  networks  created  and 
administered by the benefits managers,  are key to the delivery  of cost effective,  high 
quality pharmacy services.  Unfortunately,  certain features of these networks not Only 
fail to support high quality pharmacy practice, but tend instead to undermine quality. 
1 
 Ms. June Gibbs Brown 
January 23,  1997 
Consider, for example, that most pharmacists work for a number of PBM networks. 
Each of these PBMs depends on the pharmacist to perform at a high level,  and each 
PBM attempts to impose its own administrative and other requirements to achieve this 
end.  Yet neither the pharmacist,  nor any one of the individual PBMs with which the 
pharmacist is under contract,  can reconcile the many conflicting requirements  of the 
competing PBMs.  In fact,  one of the dominant realities of contemporary  pharmacy 
practice  is that the  practitioner  must  divert  time  and attention  from  patient  care  to 
contend with the conflicting demands of different PBMs.  It is unlikely that individual 
action by any PBM can resolve this fundamental problem.  A solution may depend on 
action to eliminate these  inefficiencies by  standard-setting organizations  such  as the 
National Council of Prescription Drug Programs (NCPDP). 
Inasmuch  as  PBMs  repackage,  sell,  and  may  someday  be  held  accountable  for 
pharmacists pharmaceutical care services, it is imperative for those reading your report 
to  understand  the  need  for  the  PBM to  support  quality  pharmacy  practice  by  the 
pharmacists they employ and with whom they contract.  In particular,  PBMs must be 
challenged to integrate their network of community-based pharmacists (who tend to have 
strong  personal  relationships  with  patients)  into  the  best  practices  of  their  clinical 
pharmacy centers, which are capable of providing valuable information to patients and 
their physicians. 
Economic  Disincentives  for  Oualitv  Pharmaceutical  Care.  It  is  critical  for  your 
examination of the services and impact of PBMs (and managed pharmaceutical benefits 
in general) to include reference to economic issues related to drug benefits.  Your study 
mirrors  the reality  that  virtually  all HMOs  and their  PBMs have  used cost  control 
measures,  including restricted  networks  and  discounted  fee  structures,  as  the  most 
common mechanism to manage the drug benefit.  While we certainly  respect the role 
these strategies play in achieving one of the-aims of drug benefit management -drug 
product cost containment- it will be hazardous to-the-health of elderly and low income 
Americans if this limited objective remains the primary preoccupation of PBMs. 
PBMs have  aggressively  undertaken  drug  product  cost containment  for  many  years 
without a  rigorous  analysis  of  its  impact  on patient care.  hiledicare and  Medicaid 
officials would be wise to insist on measures to guard against the very real threat that 
short-term  measures  to  control  drug  product  prices  and  consumer  access  to 
pharmaceuticals may inadvertently increase morbidity, mortality,  and total health costs. 
2 
 Ms. June Gibbs Brown 
January 23,  1997 
It is especially important that those responsible for managing drug benefits utilized by 
vulnerable populations, such as the elderly and poor, provide appropriate incentives for 
providers to offer pharmaceutical care services.  Previous reports issued by the HHS 
Office  of  Inspector  General  (OIG)  have  called  for  expanding the  clinical  role  of 
community pharmacists to optimize patient outcomes and total health care costs.  One 
OIG report issued in 1991 spoke directly  to the need to change the payment strategies 
within pharmacy  benefits  to  more  appropriately  align economic incentives  with  the 
imperative of quality care.  This practical recommendation has now been echoed in the 
Action Pkm for  the Proyision of Useful PrescriptionMedicine Infonnution, which was 
formally endorsed by the HHS Secretary on January 13, 1997. 
While some progress has been achieved toward this end, payment for pharmaceutical care 
lags  far  behind  PBMs  standard  strategy  of  deeply  discounting  drug  product 
reimbursement.  It is an  inescapable business reality  that these steady  reductions in 
product-related payments must force pharmacies to become volume distributors, speeding 
- up the dispensing of low- or no-margin drug products to the point where there simply is 
no time to educate patients about compliance or other aspects of their  drug therapy. 
Pharmacists are extremely concerned that this trend is rapidly eroding their capacity to 
deliver needed caregiving  services to  the growing number of older  and low income 
Americans enrolled in private and public plans administered by PBMs. 
Poor Oualitv Oversight of Manaped Pharmaceutical Benefits.  The report on pages 13-14 
speaks to the lack of review or oversight activities, by either HCFA or State Medicaid 
officials, of PBMs and the quality of their services.  APhA commends OIG for raising 
this issue, and urges that the report assign a higher priority to improved quality oversight 
of pharmacy  services,  both  within  Federal  programs  and in  all  quality  review  and 
accreditation organizations.  In fact,  there are troubling signs that -quality oversight of 
Medicaid prescription drug benefits is actually weaker today than it.was four years ago. 
The first problem is structural: maintaining separate -fee for service and managed care 
Medicaid drug benefits programs fragments encounter data and impedes quality oversight 
of drug benefits.  Retrospective drug use review (DUR) programs examine prescribing 
and utlization data to identify potential quality problems (e.g., identifying prescribers or 
dispensers associated with potentially hazardous practices).  The best of these programs 
venture outside the confines of the drug benefit by merging drug utilization data with 
other health care utilization data to investigate potential causes and costs of drug-related 
morbidity and mortality.  When a large share of Medicaid prescription utilization data 
is captured and maintained by managed care entities, Medicaid quality officials camrot 
access the information, and quality oversight is undermined. 
3  Ms. June Gibbs Brown 
January 23,  1997 
Another problem is HCFAs practice in recent years to routinely waive the only existing 
quality requirements for Medicaid drug benefits --the Drug Use Review (DUR) program 
that just took effect in 1993--when approving State requests to provide Medicaid benefits 
to low income individuals through managed  care  organizations.  It  remains unclear 
whether the managed care organizations operating under these waivers are accountable 
to public officials to provide an equivalent quality oversight mechanism in lieu of the 
Federal DUR safeguards.  This area deserves further attention by the OIG. 
With respect to prospective DUR (one element  of the Federal DUR  statute),  PBMs 
generally have grafted these features on to the online systems originally developed for 
claims adjudication (please see page eight of the report).  Much more thought needs to 
go into such systems before they can be valid and reliable as a quality improvement tool 
for pharmacists.  For  example,  the text  of  the  OIG report  should  note the  lack of 
uniformity of criteria used to generate warning messages pertinent to individual patients 
therapies.  The result of such inconsistencies is a barrage of conflicting messages sent 
to the pharmacist.  It is fair to say that the content of these warnings depends to a great 
extent on the identity of the company managing the patients drug benefit, rather than on 
established scientific knowledge of drug interactions, dosage problems, and the like. 
Recent research  (accepted for  publication  in  a  peer  reviewed  medical journal)  has 
confirmed the existence of conflicts between the DUR programs serving public health 
programs.  More troubling still is the revelation in this article that such programs all too 
often alert the pharmacist to clinical dangers which are not supported by the scientific 
literature.  This  phenomenon  of  false positive  messages  --messages  alerting  the 
pharmacist to a danger which either does not exist, or is clinically unimportant -- remains 
a problem which is at once well-known but much neglected by software vendors, PBMs 
and others.  When commercial software programs repeatedly cry  Ywolf on dozens of 
occasions daily many pharmacists become inured to these-warnings, and are more likely 
to miss meaningful alerts generated by the computer. 
Equally worrisome is the tendency for some of these software packages to fail to generate 
alerts which are well-substantiated.  To the extent that warnings, and the absence of 
appropriate warnings,  are  taken seriously  by  pharmacy  practitioners  (who may  then 
contact the prescriber),  such inconsistencies simply promote prescribing and dispensing 
behavior which is scientifically unfounded.  These defects in commonly used prospective 
DUR programs  explain much of  the  limited  impact  of  these  software  programs  in 
preventing adverse drug events, and deserve a serious mention in the report. 
4 
 Ms. June Gibbs Brown 
January 23,  1997 
In sum, to avoid further diminution of what OIG has correctly identified as inadequate 
quality  oversight  of  drug  benefit  programs,  managed  care  contractors  should  be 
accountable to precisely document the quality oversight efforts they offer in lieu of the 
statutory  DUR  program.  Another  improvement  would  be  an  obligation  for  such 
contractors to cooperate with State Medicaid officials by sharing data on drug utilization 
in a mutually agreeable format.  Finally,  OIG could usefully inquire into the substance 
and documented accomplishments of these parallel programs --both in Medicaids fee for 
service and managed care drug benefit programs-- and recommend enhancements. 
Measures  of  Oualitv of  Pharmacv  Practice.  Existing  tools  for quality  oversight  in 
managed care, particularly  pharmacy performance measures, remain primitive.  These 
must be improved to extend beyond simple analyses of parameters, such as per member 
per  month  prescription  drug charges,  that  offer  no  true  insight into  the quality  of 
prescribing or patient care.  APhA concurs with your recommendations, and particularly 
recommendation #3, which calls on Federal agencies to actively engage the private sector 
to expand existing efforts to define and utilize quality measures for pharmacy services. 
It is true that these efforts lag behind the progress being made to define relevant and 
valid measures of quality for hospitals, health plans,  and physicians.  However, AI%4 
and other pharmacy organizations have been working both individually and collectively 
for some time to define a framework for quality measurement and to communicate to 
quality assurance and accreditation organizations the need to improve their performance 
measures of pharmacy and drug therapy.  We enthusiastically encourage the Health Care 
Financing Administration (HCFA),  the Health Resources and Services Administration 
(HRSA),  the Centers  for  Disease Control  and  Prevention  (CDC) and other  Federal 
agencies to join us in this important effort. 
In  this  regard,  please  note  the  Association  will  be  expanding its quality  initiatives 
considerably in 1997.  Within the context of a new center of activity, APhA will offer 
a clearinghouse for information pertinent to the quality of pharmacy practice,  and will 
initiate research to identify and validate proposed.measures of quality.  APhA intends to 
develop  programs  which  recognize  and  reward  excellence  in  services  provided  by 
pharmacists in all practice settings.  We believe that this effort,  coordinated with the 
work of other organizations in pharmacy and the health professional community,  will 
help build understanding of the importance of quality measurement and improvement and 
stimulate the delivery of health-promoting pharmaceutical care. 
Confidentialitv.  The issues raised in the report pertaining to patient confidentiality are 
also extremely  important.  Appropriate  protection  against unauthorized disclosure of 
sensitive personal information must be guaranteed,  while at the same time permitting 
practitioners  the  opportunity  to  exchange  information  about  prescribing,  patient 
compliance, and other patient care concerns.  Establishing different criteria for access 
5  Ms. June Gibbs Brown 
January 23,  1997 
and sharing of data by and among health care professionals, as distinguished from PBMs 
and other  administrative  entities,  would be  a  fruitful  approach to resolution  of  this 
problem.  APhA has developed recommendations in the context of implementation of the 
Health  Insurance  Portability  and Accountability  Act,  available upon  request,  which 
address this issue more fully. 
Again, please accept my congratulations for producing such a substantive contribution 
to the emerging literature on this important subject.  APU  is committed to assisting OIG 
and others challenged by the reports recommendations.  Please dont hesitate to contact 
me or my  staff for additional information, or for clarification of any element of our 
comments. 
6 
 ASEP  le,UUZ/UUP 
Januaty 6.1997 

June Gibbs Brown 

IaspceterGencral 

Dqmttmnt  of Health and Human Services 

5250 Cohen Building 

,330 Indmdcnce  Avenue, S.W. 

washhlgtoa,  DC  20201 

JkarMs.  Brown: 

The Atneriw  So&y  of Health-System E&umacists appnciates  the opportunity to comment on 

the draft report xefcrcncui above.  ASHP is the 30,000  momb8r natload  pfofaional  organiza

@onthat repseats  @amaciats  who praulee ia hospitals, health maintenance ofgmization~, 

., 	long-&mcarefaciUties,homccam,andothercwaponen  ts of health cam networks.  Because the 
HMO en-t  rcpraseats oat of the fastest growing scgmcnts of our mcmbcrship, we have a , 
particularh%erestinthesuhjectmattcrofthcdraftmport.  . 
ASHP is in generalagteaam twitbthcrecoalmmdatlonBcon~edinthedraftreport.  Quality 
of cam and patiat  outcomes arc the primaty consideration of our membership, and we share the 

Departments coaeom that mat containmemnot  buzomc the ddver of h&&h cum dclivay,  as 

opposed to the natural and inevitah~omsult of prudent health care practices.  We also share the 

concernexp~sadinthtdroft~Chatrherewdscsav~~potcntialforbiassterrrmkrgfrom 

the relationship of a phm  bon&t  maaagcment company (PBM) to a specific phmtid 

manufacturer.  Where wc have suggestions in addition to the recommendations arrived at in the 

ataftnportisiathoptopos~fforf;bdaral~~agenciesto&~lapayardstickforthc 

accountability of  Medicare and h&ii&i  HMOs for the quality of the services tiadctecl  by PBMs 

to bencficiarics.  while  this is a totally Icgitimate objective ovcralf, aud one that ASHP can 

support, westrongiy  eueoura& the acpartment  to co&borate  with &sting  cndontiallng  and 

standards writing bodies that aheady possess the most in-depth expcricnce and data on the 

subject of health cam quality. 

7272  WEONSIN  AVENUE  w  BEHESDA, MD  20814  m  301-657-3000  8  FAX: 301-652-8278  0x/07/07  12:42  e3Ql  667 1616  ASEP 
QJooJ/uuo 
JuneGiiBrown  .. 
t 
\  January 61997 
6.  . 
pase2 
lb  National Committee for Quality Assutanct (NCQA)  is an accmd&ion  body considerably 
knowledgeable of and zsponslllo  for stand&&d  quality of cam in HMOs. The Joint 
Gxnmission  on Accreditatioxof Healthcam organithtian  (JCAHO), t2~ national acxm%&g 
body for hospitals aad other health cam organizatim~, also has 00Wlc  involvomcmtin this 
ma  ASHPhasbcMIavalunrary~~~tobottrN%QAandJCAHOonotandatQptltintntto 
phannacellticalcareandpharmacy~. 
~OCglUli#tiOXlS~tbalOgidS~~ 
for~~$reconoerrrs~in~odnrA~~wd~bticlvaluablcsouFctsofinfo~

tion for the Health Cam Financing Adminiseradon (HCFA) ia assessingthe qdity  of services 

al%rdedtoMedlcareandMedieaidbeneficlaxiesbyFBMs. 

The iqut  of he&h profcssionais such as pharmacists who axedirectly responsible for drug man

agemext in HMOs, whether or not 0ffiliatod with PBM6,is also escndal  to safeguard against 

shppageinthequalityofth  c scrvlw  t  ix these environments  For example. ASIIP has 

been aotive in the development of spcclfii standards as well 8s generrd guidance on the dcvolop

mat  of formulsry systems and their management, which have formed the basis for mnt 

s  ataxe  of accaptable practice in HMOs. The forfm&ry m  as a moaus of local, informed, 
t 	 int&diacipllnary dccisi~+naking  about the best therapeutic agents (drugs) to have available, was 
pioneer& in hospitals.  ASHP has a long history of fbtering  that sort of fozmulaty system, and 
we stand ready to advise the Department and others on standards to ensum the operation of such 
good fdimularysystems.  Our published standards (which generatiy arc not hospital-specEc)  am 
aimedar~primatygoalof~~thtrapy,withcORbeinganimportantbut~xdary 
coxcem.  It appears to ASXP thacPBMshave, to date. focused on the cost-minimization aspects 
offonuularies  and less on the goal of optim&g  therapy. We welcome the opportunity to share 
our expertise with practitioner groups md other intemsted ocgadations  with the objective of 
developing guideIines to assess and &sure the quality of pharmacy servicesprovided  by PBMs. 
-
Con&lerablo valuable material ahzady exists on the subject, and as a starting poiu&a list of 
ASHPBrckvmt  guidaxce documents is cmhcd.  Referenw to and reliance upon these docu
met@. and those published by othercrcdiblc standards writing bodies, wili render the task of 
dcvcloping reasoxable guldeiiIle0 foeBIt!&  usedby HMOSless onerousthatrit  may currently 
appear. 
From a more practical business viewpoint, HMOs must lcam to be better negotiators with PBMs 
for quahty scTyices,realEng  that, ultimately, they will be competing for padents on the basis of 
quality just as they now compete for customers (i.e., employers) on a cost basis.  An underlying 
problem that must be addxusscdis that, because of their short-term focus on low mimbursement 
rates forprescription  medicines, PBMs have geucraily not provided incentives for ambulatory 
care pharmacists to provide various cognitive services that help HMO beneficiaries make the best 
I 
use of-medications. Thus, while money may bo saved in drug expen$iturcs, overall health care  01/07/87  It:42  f$SOl 667 1616  ASHP  EbOO4/006 
Juuo C3ibbsBrown 
January 6,197 
page3 
costs ~,beiugixucnsai  bocaxsa of subscqucntiatcrvcnti~  to deal with adverse events t&  a 
.  pharmaclstcouldhave~vcntcdhadtbapBMpaymest~~o~theptopacncouragt-
I 	
maxt  This is a s&n~  ique  for Medicaroand Medicaid beneficiaries scrvuiby  HMOs, and we 
urgeyoutostrcr@mtispointinttlercpo~  Tos- there is a dofiite  role for educa
tion hem. ASHP would support offom to foster the eduoation of consum- @adents and 
employers) regard@  the nature axd bmefit of phmmcmicti  cam semi=  that they sboald 
expectfmmthelrHM0. 
ASEIPlooks fawad  to working with the Dqwtmcah  HCFA, NC@,  JCAHO, and private 
sectorpbarmaqorganizationstoaddressthcooncemsraisedinthadraft~  Pltastcallus 
for additional wmmcnts, and advise us of a do  thatwe may play in tbc upcoming prooms. 
&Pmph  A. Oddis, Sc.D.
Executive Vice President  01/07/W  12:42  =601  667 1616 
 9 
ConsumeCr oalition 
for QualityHeaIthCam 
December 30, 1996 
June Gibbs Brown 
Inspector General 
Office of the Inspector General 
Department of Health and Human Services 
330 Independence Avenue, S.W. 
Washington DC,  20201 
Dear Inspector General Brown: 
The Consumer Coalition for Quality Health Care appreciates the opportunity to comment on 
your draft report,  Experiences of Heaith Maintenance Organizations with Pharmacy Benefit 
Management Companies. n  The Consumer Coalition represents national consumer groups with 
an interest in advancing policies and programs that protect and improve the quality health care 
for alf Americans.  During the holiday season we did not have adequate time to solicit the 
views of our membership but we are confident that the following comments on the draft report 
reflect current member thinking. 
The Consumer Coalition enthusiastically endorses the reports recommendations.  The 
importance of outpatient prescription drugs, particularly for the elderly population, and the 
extensive use of pharmacy benefit management companies (PBMs) by HMOs argue for 
expanded government oversight of the services these companies provide within HMO delivery 
systems.  Government and private payer contracts with HMOs should include language that 
require HMOs to evaluate the performance of PBMs.  Public and private payers should 
conduct independent evaluations of HI4Os to ensure that systems of quality accountability have 
been established between the HMO and PBM subcontractors.  In principle, the Consumer 
Coalition believes that HMOs should be held responsible for the performance of all its 
subcontractors, including PBMs. 
The Consumer Coalition recommends that the evaluation of HMO arrangements with PBMs 
highlight issues of direct relevance to the consumer.  Chief among these are formulary 
development, marketing of drug benefits, the appeals system for reduction or denial of 
prescription drugs, and patient conficientiaIity. 
The oversight of HMO arrangements with PBMs should start with the appropriateness of drug 
formularies, particularly in light of the ownership of PBMs by drug manufacturers.  Next, 
HMO marketing and benefit coverage materials should be required to include a clear 
description of a plans drug benefit, the specific contents of any drug formuIary, the drug 
1275 K Street N.W., Suite 602    Washingto&  DC  20005    (202) 789-3606    Fax (202) 898-2359 
-.e*> 
Brian W. Lfndberg. Executive Director  June Gibbs Brown Correspondence 
Page Two 
utilization review pro,cess, and complete information on an enrollees right to appeal a drug 
benefit decision.  PBMs should also be evaluated for maintaining systems that safeguard patient 
confidentiality. 
Finally, the Consumer Coalition is in agreement with the reports recommendation that explicit 
quality measures be developed for pharmacy practice.  Current HMO licensing/accreditation 
standards and Medicare/Medicaid conditions of participation do not include quality measures 
for pharmacy practice, leaving au important component of medical practice within HMO 
delivery systems unregulated.  The development of explicit quality standards for pharmacy 
practice should become a priority for government regulators, private accrediting bodies, 
payers, and consumer groups with appropriate input from the pharmacy profession. 
Once again, the Consumer Coalition appreciates the opportunity to comment on the draft 
report. 
Sincerely, 
+M 
Brian Lindberg 5 
Executive Director  PI 10  .--

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Dear  Ms. 0mm: 
This  is in reply to your letter of December2,1996 requestingreviewand 
commenton the draftinspectionrepart,Experiencesof He&h Maitienanoe 
Or@ucizations  WI  PharmacyBenefitManagementCc~~panies/ You submitted 
the reportto MB in My  aptachy  as  Chairof the MediiId  l=Wmacy  TeCtInkal 
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AdmInistrattonbuild6n existing@RX@io de~&p  qualkymea~ure6fOr 
pharmacypracticein managedcare settings.The P-TAG suggeststhat 
states  be fnvolved  in tnis effart,  Perfwps,the P-TAG couldalso be a 
contrtblltor. 
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.  .  .a  APPENDIX  E 

NOTES 
1.  Nationally,  enrollment  in HMOs  grew from  approximately  36 million  to 58 million 
between  1990 and  1995.  (See  American  Association  of Health  Plans,  1995  AAHP  Hit40 
PPO  7?end.s Report,  Washington,  D.C.) 
2.  By mid-1996,  the  number  of risk  plans  contracting  with  HCFA  had  grown  to 
nearly  220.  Medicares  risk  contracts  have  become  more  attractive  to HMOs,  which 
operate  in a highly  competitive  marketplaces  and  face  continuing  pressures  to  hold  down 
costs  and  generate  revenues.  The  HCFAs  average  payments  to its risk  contractors,  per 
enrollee,  have  continued  to  increase  (10.1 percent  in  1996 and  5.9 percent  in  1997). 
For  recent  discussion  of Medicare-risk  contracts,  see: 
Medicare  Risk  Payments  Rise  5.9%.., News and  Strategies for  Managed  Medicare  & 
Medicaid,  2 (September  9, 1996)  19: 1. 
New Ideas  for  Medicare  Risk,  Perspectives,  Medicine  and Health,  July  1, 1996. 
Louise  J. Sargent  et al., Overview  of Medicare  for  Managed  Care  Professionals, 
Journal  of Managed  Care  Pharmacy,  2 (March/April  1996) 2: 165-172. 
Health  Care  Financing  Administration,  Medicare  Managed  Care MonthZy Report,  July 
1996. 
Value Line,  July  5, 1996, Medical  Services  Industry,  656. 
3.  U.S.  General  Accounting  Office,  Medicare  and  Medicaid:  Opportunities to Save 
Program  Dollars  by Reducing  Fraud  and Abuse,  Testimony  of Sarah  F. Jaggar,  Director, 
Health  Financing  and  Policy  Issues,  Health,  Education,  and  Human  Services  Division, 
before  the  Subcommittee  on  Human  Resources  and  Intergovernmental  Relations  of the 
Committee  on  Government  Reform  and  Oversight,  U.S.  House  of Representatives, 
March  22, 1995. 
Jane  E. Sisk, PhD.  et  al., Evaluation  of Medicaid  Managed  Care, Journal  of the 
American  Medical  Association,  276  (July  3, 1996)  1: 50-55. 
E-l  See  also  comments  on  the  draft  report  (appendix  D)  from  the  Health  Care  Financing 
Administration. 
4.  James  S. Genuardi  et al., Changing  Prescription  Drug  Sector:  New  Expenditure 
Methodologies,  Health  Care  Financing  Review,  17 (Spring  1996) 3:  192. 
5.  U.S. Department  of Health  and  Human  Services,  Health  Care  Financing 
Administration,  Bureau  of Data  Management  and  Strategy,  Medicaid  Vendor  Payments 
by Type  of Service,  1993-1995. 
6.  With  few exceptions,  Medicare  has not  generally  paid  for  outpatient  prescription 
drugs  under  Part  B.  Coverage  for  drugs  is allowed  by some  Medigap  policies,  which  can 
* 	 be  purchased  separately  by beneficiaries.  But because  many  beneficiaries  have  no  drug 
coverage,  risk  HMOs  that  offer  prescription  drug  benefits  are  very  appealing  to 
beneficiaries.  Nearly  two-thirds  of these  risk  plans  now  offer  prescription  coverage. 
Although  HCFA  does  not  pay  for  this benefit  directly,  it does  pay  for  it indirectly:  the 
prescription  drug  benefit  is considered  an  additional  benefit,  one  that  is supported  with 
excess  Medicare  profits  to  the  HMOs,  which  they  would  otherwise  return  to  HCFA. 
For  additional  information  on  drugs  and  Medicare,  see: 
HCFA,  Medicare  Managed  Care Monthly Report,  July  1996. 
I 1995  Guide  to Health  Insurance  for  People  with Medicare,  Publication  No. 
HCFA-02110,  revised  January  1995. 
Stephen  H. Long,  Prescription  Drugs  and  the  Elderly:  Issues  and  Options,  158 
Health Affairs,  Spring  (II)  1994. 
Lynn  Etheredge,  Consultant,  Pharmacy  Benefit  Management:  The Right Rx?, Research 
Agenda  Brief  sponsored  by the  Health  Insurance  Reform  Project  at  George 
Washington  University,  Washington,  DC,  1995. 
7. For  fuller  description  of issues  associated  with  mismedication,  noncompliance,  and 
drug  use  among  the  elderly,  see: 
Adverse  Drug  Reactions  in the Elderly:  Hearing  before  the Special  Committee  on Aging, 
United States Senate,  104th  Cong.,  2nd  Sess., March  28,  1996. 
U.S. General  Accounting  Office,  Prescription Drugs  and  the EMerIy:  Many  Still Receive 
Potentially Harmful  Drugs Despite Recent  Improvements, 
E-2 
 GAO/HEHS-95-152,  July  1995. 
Jeffrey  A. Johnson  et  al., Drug-Related  Morbidity  and  Mortality:  A Cost-of-Illness 
Model, Archives  of Internal  Medicine,  155 (October  9, 1995),  1949-1956. 
Stephen  H. Long,  Prescription  Drugs  and  the  Elderly:  Issues  and  Options,  Health 
Afsirs  158 Spring  (II)  1994. 
Robert  McCarthy,  Patient  Compliance:  Strategies  to  Overcome  a Costly  Problem, 
Medical  Utilization Management  24  (July  11, 1996)  14: 5-8. 
Stephen  C. Montamat,  M.D.  et al., Management  of Drug  Therapy  in the  Elderly, 
The New England  Journal  of Medicine,  321 (August  3, 1989) 5, 303-309. 
Sharon  M. Willcox  et  al., Inappropriate  Drug  Prescribing  for  the  Community-Dwelling 
Elderly,  Journal  of the American  Medical Association,  272  (July  27, 1994)  4: 292-296. 
U.S. General  Accounting  Office,  Pharmacy  Benefit  Managers:  Early Results on 
Ventzues, with Drug  Manufactureq  HEHS-96-45,  November  1995.  Our  analysis  reflects 
GAOs  estimates  of the  five  largest  PBMs  at  the  time  of its report:  Medco  Containment 
Services,  Inc.;  Diversified  Pharmaceutical  Services  (DPS);  PCS  Health  Systems,  Inc.; 
Caremark  International,  Inc.;  Value  Health/Value  Rx. 
It is important  to  note,  however,  that  estimates  of the  size of PBMs  vary  and  are  subject 
to change  in this  rapidly  evolving  marketplace. 
9.  Benefit  structure  includes  such  items  as co-payments  and  deductibles,  breadth  and 
depth  of the  formulary,  and  prior  authorization  requirements.  Approaches  to  managing 
the  benefit  include  those  such  as generic  and  therapeutic  interchange  programs; 
developing  and  applying  criteria  and  standards  guiding  utilization  reviews;.drug  therapy 
protocols,  educational  interventions,  and  cost-effectiveness  studies. 
10.  The  three  PBMs  owned  by drug  companies  are  Medco  Containment  Services,  Inc., 
purchased  by Merck  & Co.  for  $6.6 billion  in  1993; Diversified Pharmaceutical  Services 
(DPS),  purchased  by SmithKline  Beecham  Corporation  for  $2.3 billion  in  1994; and  PCS 
Health  Systems,  Inc.  (PCS),  purchased  by Eli  Lilly  and  Company  for  $4 billion  in  1994. 
The  other  two  largest  PBMs,  Caremark  International,  Inc.  and  Value  Health/Value  Rx, 
are  not  owned  by drug  companies,  but  have  strategic  alliances  and  partnerships  with 
them. 
For  fuller  descriptions  of these  relationships,  see: 
E-3 
 U.S.  General  Accounting  Office,  Pharmacy  Benefit  Managers. 
Lynn  Etheredge,  Pharmacy  Benefit  Management:  The Right Rx? 
Week& Pharmacy  Reports--The  Green  Sheet, 45 (January  22, 1996) 4. 
11.  The  Federal  Trade  Commission  reviewed  the  Lilly-PCS  merger  of  1994 for  its anti-
competitive  implications.  The  Commissioners,  in a 3-l  vote  with  one  recusal, 
subsequently  approved  a consent  agreement  with  Lilly  that  requires  the  company  to 
maintain  an  open  formulary  that  includes  any  drug  approved  by an  independent 
Pharmacy  and  Therapeutics  (P & T)  Committee  and  requires  that  PCS accept  discounts, 
etc.  offered  by Lilly  competitors  for  drugs  on the  open  formulary  and  to reflect  these 
discounts  in the  forrnulary  rankings.  Finally,  the  agreement  prohibits  PCS  from  sharing 
proprietary  information  with  Lilly.  This  requirement  has  become  known  as the  firewall 
provision.  The  Commission  stated  its intentions  to  continue  to  monitor  this  and  other 
mergers.  (See  Federal  Trade  Commission,  FTC  Gives  Final  Approval  to  Lilly  Order; 
Pledges  Continued  Monitoring  for  Anticompetitive  Practices,  FTC  News, July  31, 1995.) 
The  consent  agreement  has  been  widely  criticized.  One  Commissioner  dissented  at  the 
time  of the  agreement,  and  numerous  consumer  and  pharmacy  organizations  complained. 
In July  1996, the  Commission  was again  petitioned  on  this  issue  by a pharmacy  trade 
organization,  charging  that  drug  manufacturer  ownership  of PBMs  continues  to be  anti-
competitive  and  harmful  to  consumers.  It urges  the  FTC  to  modify  and  strengthen  the 
1995 consent  agreement. 
12.  In  1994, the  Food  and  Drug  Administration  met  with  representatives  from  several 
PBMs  and  drug  manufacturers  to  discuss  information  that  is disseminated  about  drug 
products  by the  PBMS.  It also  convened  a public  hearing  in October  1995 on  the  topic 
of Pharmaceutical  Marketing  and  Information  Exchange  in the  Managed  Care 
Environment  to  help  inform  its deliberations  about  regulating  drug  marketing  and 
promotion  by drug  manufacturers  and  PBMs.  (See  FDA,  Transcript  95N.0228, 
October  19, 1995.) 
13.  For  a general  oveniew  of PBMs,  see: 
U.S.  Department  of Health  and  Human  Services,  Health  Care  Financing 
Administration,  Assessment  of the  Impact  of Pharmacy  Benefit  Managers,  Contract 
No.  HCFA-95-023/PK,  September  30, 1996. 
U.S.  General  Accounting  Office,  Pharmacy  Benefit  Managers. 
Lynn  Etheredge,  Pharmacy  Benefit  Management:  The Right Rx? 
E-4 
 Anita  M. McGahan,  Industry  Structure  and  Competitive  Advantage,  Harvard  Business 
Review, November-December  1994, 115-124. 
13.  Most  (87 percent)  HMOs  that  serve  Medicare  and  Medicaid  beneficiaries  use  their 
PBM  to  manage  the  beneficiaries  prescription  drug  benefits. 
15.  The  for-profit  plans  are  statistically  more  likely  to  use  PBMs  than  the  non-profit 
plans  (Chi-square=6.709,  DF=  1, significant  at  the  .Ol level).  There  is also  a statistically 
significant  difference  between  the  number  of for-profit  and  non-profit  HMOs  responding 
to  our  survey  (Chi-square=6.453,  DF=l,  significant  at the  .Ol level).  (See  appendix  B.) 
When  we estimated  the  effect  of the  nonresponse  bias  on  this  question  of whether  or  not 
there  was  an  association  between  an  HMOs  tax status  and  whether  or not  it contracts 
with  an  external  PBM,  we found  that  taking  into  account  the  tax status  of the 
nonrespondents  affected  the  percentages  less than  one  percent. 
16.  Of  the  263 HMOs  responding  to  our  survey,  199 report  they  use  PBMs 
(75  percent).  These  199 HMOs  represent  303 local  plans.  Some  of these  local  plans 
(185)  are  unaffiliated  with  any  national  or  regional  managed  care  organizations.  The  rest 
(118)  are  local  plans  affiliated  with  national  or  regional  managed  care  organizations  (see 
appendix  A). 
17.  Thirty-one  (31)  of the  368 HMOs  did  not  report  data  on  the  number  of covered  lives 
for  the  AMCRA  data  base. 
Twenty-seven  percent  (53/199)  of the  HMOs,  covering  8 million  lives, suggest  they  may 
manage  their  pharmacy  benefits  in-house  over  the  next  few years.  Twenty-two  percent 
(14/63)  of the  HMOs  not  using  PBMs,  covering  nearly  1 million  lives, suggest  they  may 
contract  with  PBMs  in the  next  couple  of years. 
18.  The  Omnibus  Budget  Reconciliation  Act  of  1990 (OBRA  90) exempts  HMOs  from 
having  to  conduct  prospective  and  retrospective  drug  use reviews  under  the  federally 
mandated  Drug  Use  Review  Program  for  Medicaid. 
19.  Formularies  (which  are  lists of drugs  approved  for  reimbursement  by payers)  can  be 
extremely  important  tools  for  managing  the  costs  of prescription  drug  benefits.  They  also 
can  have  significant  impact  on  the  quality  of pharmacy  programs  and  their  consequences 
for  patients  health  outcomes. 
The  consequences  of formularies  for  cost  and  quality  are  controversial.  They  are  the 
focus  of significant  interest  by payers,  regulators,  consumer  and  industry  groups,  and 
researchers. 
E-5  For  some  recent  discussion  of these  issues, see: 
Naomi  Freundlich,  Formularies:  Friend  or  Foe?,  Harvard  Health  Letter, 
July  1995; 
Susan  D. Horn,  PhD.  et al., Intended  and  Unintended  Consequences  of HMO 
Cost-Containment  Strategies:  Results  from  the  Managed  Care  Outcomes  Project, 
and  Managed  Care  Outcomes  Project:  Study  Design,  Baseline  Patient 
Characteristics,  and  Outcome  Measures,  The American  Journal  of Managed  Care, 
II (March  1996) 3: 253-264 and  237-247. 
Bryan  L. Walser  et  al., Do Open  Formularies  Increase  Access  To  Clinically 
Useful  Drugs ?,I Health Aflairs,  15 (Fall  1996) 3: 95-107. 
20.  Drug  manufacturers  are  relying  less on  price  increases  for  improving  their  profits 
and  more  on  increasing  market  share  through  their  arrangements  with  PBMs,  which 
develop  and/or  control  the  formularies  used  by large  purchasers  such  as HMOs. 
For  their  part,  PBMs  are  interested  in getting  the  best  price  for  the  products  on  their 
formularies,  so they  can  compete  more  successfully  for  contracts  with  purchasers  such  as 
HMOS. 
For  a historical  overview  of the  pharmaceutical  industry  and  changes  resulting  from 
PBMs,  see  Anita  M. McGahan,  Industry  Structure  and  Competitive  Advantage. 
21.  Some  argue  that  PBMs practices  can  be  anti-competitive  and,  in fact,  encourage 
higher  costs  to  consumers.  As we have  noted  above,  these  issues  were  central  to  the 
review  of the  Lilly-PCS  merger  by the  Federal  Trade  Commission. 
22.  For  a discussion  of the  cost-effectiveness  of DUR  programs,  see  Stephen  B. 
Soumerai,  Sc.D.  and  Helene  L. Lipton,  Ph.D.,  Computer-Based  Drug-Utilization 
Review--Risk,  Benefit,  or Boondoggle  ?, The New England  Journal  of Medicine,  332 (June 
15, 1995) 24:  1641-1645. 
A recent  GAO  report  documented  savings  attributable  to drug  use  review  programs  in 
five  State  Medicaid  programs.  See  U.S. General  Accounting  Office,  Prescription Drugs 
and Medicaid:  Automated  Review Systems Can  Help  Promote  Safety, Save Money, 
GAO/AIMD-96-72,  June  1996. 
23.  Health  Care  Financing  Administration,  Assessment  of the Impact  of Pharmacy  Benefit 
Managers,  Contract  HCFA-95-023/PK. 
E-6 
 Another  recent,  independent  study  of one  large  purchasers  experiences  documents  the 
significant  savings  that  it achieved  by using  its two  PBMs  to  implement  a benefit  change. 
See  U.S. General  Accounting  Office,  Blue  Cross FEHBP  Pharmacy  Benefits, 
GAO/HEHS-96-182R,  July  1996. 
24.  Disease  management  programs  are  being  developed  by drug  manufacturers,  health 
plans,  and  specialty  care  organizations  as well  as by PBMs.  These  programs  are  widely 
discussed:  what  they  are,  what  they  do, what  will be  their  value  and  consequences  in 
terms  of cost  and  quality  of health  care.  For  recent  discussion  of these  issues,  see: 
Robert  McCarthy,  Disease  Management:  A Critical  Look,  Medical  Utilization 
Management,  December  21, 1995. 
Kenneth  Moss,  DSM: A Concept  Coming  Into  Focus,  Perspectives, Medicine  & 
Health,  50 (August  12, 1996) 32. 
George  Anders,  Drug Makers  Help  Manage  Patient  Care,  The Wall Street 
Journal,  May  17, 1995. 
25.  In using  PBMs,  HMOs  carve  out the  management  of the  benefit,  thereby  making  it 
more  difficult  and  less likely  for  plans  and  payers  to  assess  the  impact  of pharmacy  costs 
on overall  health  care  costs.  With  a carved  out  benefit,  pharmacy  costs  are  treated 
separately  from  other  health  care  costs,  and  pharmacy  data  and  medical  data  are  often 
not  linked  together. 
It is important  to  recognize  that  reducing  overall  health  care  costs  may  require  increased 
expenditures  on  prescription  drugs,  as, for  instance,  may  be  true  for  the  emerging  disease 
management  programs. 
26.  A few PBMs  are  now  developing  computer  connectivity  with ,physicians. offices.  This 
capability  will enable  on-line  discussion  between  the  PBM  and  the  physician  about  the 
appropriate  drug  therapy  for  a patient  before  s/he  leaves  the  physicians  office  with  a 
prescription. 
27.  For  a fuller  description  of PBMs  and  their  influence  on  costs  and  market  share,  see: 
Charles  Beever,  Why PBMs  Work--And  Why  They  Dont,  In  Vivo, 
12 (November  1994)  10: 8-13. 
Health  Care  Financing  Administration,  Assessment  of the Impact  of Pharmacy 
Benefit Manag&,  Contract  HCFA-95-023/PK. 
E-7 
 28.  Examining  concerns  about  bias  on  the  part  of HMOs  who  deal  directly  with  drug 
manufacturers  was beyond  the  scope  of this  inquiry. 
29.  The  GAO,  reporting  in  1995 on  its examination  of PBMs,  found  that  changes  in 
Medcos  formularies  favored  Merck  products  between  1993 and  1995.  Because  of the 
proprietary  nature  of the  financial  negotiations  between  Medco  and  other  drug 
companies,  GAO  could  not  confirm  these  changes  resulted  without  Medco  having 
considered  other  competitors  products.  See  GAO,  Pharmacy  Benefit  Managers. 
The  motivation  behind  the  acquisition  of PBMs  by drug  manufacturers  has  been 
described  by senior  executives  from  the  companies  involved: 
Merck  products  are  Medcos  house  brand.  Part  of the  secret  to success  will be  to 

develop  Merck  medicines  for  categories  in which  we are  not  now 

represented...Consider  what  happens  if instead  of having  20 products  on  the 

formulary  we have  40.  The  more  Merck  products  on  the  formulary,  the  greater 

our  power  on  the  market  and  the  more  plan  sponsors  will save.  (See  Nancy  A. 

Nichols,  Medicine,  Management,  and  Mergers:  An  Interview  with  Mercks  P. 

Roy  Vagelos,  Harvard  Business  Review, November-December  1994, 113.) 

[The  senior  executive  from  another  drug  company  owning  a PBM]  said there  has 

been  some  progress  [in boosting  market  share  of the  companys  products  through 

the  PBM].  These  capabilities  [to switch market  share]  are  what  were  building, 

and  we want  to  give  that  a fair  shot.  The  article  summarized  another  executive 

from  the  same  company  as saying  Lilly also  hopes  to  shift  patients  to  Lilly  drugs 

by hooking  up  doctors  offices  to pharmacies  via  computer.  Then  when  the  doctor 

orders  a certain  drug,  the  pharmacist  will be  able  to  urge  an  alternative...  (See 

ES.  Browning  and  Thomas  M. Burton,  PCS Gets  Rx for  Write-Down  After  Its 

Weak  Performance,  The  Wall Street Journal,  July  30, 1996.) 

30.  Concern  about  these  practices  has  been  widespread  among  professional 
organizations  and  government  agencies  concerned  with  consumer  protection,  fraud  and 
abuse,  and  with  drug  product  information.  For  examples: 
(1) 	 The  American  Medical  Association  has  recently  adopted  several  policies 
and  recommendations  focussed  on  acceptable  professional  practice  for  drug 
formulary  systems,  responsibilities  of Pharmacy  & Therapeutics 
Committees,  therapeutic  interchange,  and  prescription  switching.  See 
Resolution  501, Opposition to Payment for  Presctiption Switching, June  1995; 
AMA  Policy  A-95, Managed  Care  Cost Containment  Involving Prescription 
Drugs,  AMA  Policy  165.896, Drug Issues in Health  System Reform,  1994,  and 
AMA  Policy  125.991,  Drug Formulaties  and  Therapeutic  Interchange,  1993. 
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 (2)  The  American  Pharmaceutical  Association  adopted  in  1995 its Guidelines 
for Medication  Incentive Programs  to  provide  guidance  to pharmacists  when 
dealing  with  incentive  programs  sponsored  by drug  companies,  PBMs,  and 
other  third-parties  to influence  choice  of drug  product  dispensed. 
Programs  may  include  coupon  programs,  therapeutic  switch  programs, 
academic  detailing,  and  the  like. 
(3)  The  Attorneys  General  of several  States  have  joined  together  in negotiating 
consent  agreements  with  several  drug  manufacturers  in recent  years. 
Disclosure  issues,  particularly  with  respect  to PBMs  and  drug 
manufacturers,  were  addressed  in the  1995 17-State  consumer  protection 
settlement  negotiated  with  Merck  & Co.,  Inc.  and  Medco  Containment 
Services,  Inc.  While  not  admitting  to  any  legal  wrong  doing,  the  companies 
agreed  to several  provisions  including  (1) full disclosure  of the  company 
relationships  and  drug  product  manufacturer  when  pharmacists  telephone 
physicians  about  switching  prescriptions,  (2) substantiation  of claims  of cost-
savings  resulting  from  the  switch,  (3) written  notification  of consumers 
about  the  switch  programs,  the  ownership  of the  PBM,  and  their  rights  to 
refuse  the  switch,  and  (4) extent  to which  Medco  will keep  confidential  the 
patient  information  in their  files  and  that  it might  make  this  information 
available  to  employers.  (See  In the Matter ofMerck  & Co.,  Inc.  and  Medco 
Containment  Services, Inc.,  No.  C6-95-10614,  Ramsey  Co. Dist.  Ct., 
Agreement  (Assurance  of Discontinuance)  and  Order  Approving  Assurance 
of Discontinuance  (October  25, 1995), State  of Minnesota,  Office  of the 
Attorney  General.) 
(4)  The  Office  of Inspector  General,  in the  U.S.  Department  of Health  and 
Human  Services,  raised  questions  about  prescription  drug  marketing 
practices,  including  switch  programs,  in a  1994 Special  Fraud  Alert, 
Prescription Drug Marketing Schemes. 
(5)  The  Food  and Drug Administration,  as noted  above,  is considering  its 
regulatory  responsibilities  vis a vis drug  product  information  disseminated 
by PBMs  and  standards  to guide  cost-effectiveness  research.  See  also 
David  A. Kessler,  M.D.,  et al., Therapeutic-Class  Wars--Drug  Promotion  in 
A Competitive  Marketplace,  The New England  Journal  of Medicine,  331 
(November  17, 1994)  10: 1350-1353. 
See  also:  Milt  Freudenheim,  Not Quite  What  Doctor  Ordered,  The New York  Times, 
October  8, 1996, D-l. 
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 31.  The  American  Medical  Association,  the  American  Pharmaceutical  Association,  and 
Pharmaceutical  Research  and  Manufacturers  of America  (then  known  as the 
Pharmaceutical  Manufacturers  Association)  emphasized  the  importance  of using  DUR 
programs  to  enhance  the  quality  of patient  care  in their  Principles of Drug  Use Review 
(DUR)  issued  in  1991. 
Moreover,  the  Federal  Omnibus  Budget  Reconciliation  Act  of  1990 (OBRA  90) 
mandates  DUR  programs  for  Medicaid.  It states  the  purpose  of these  DUR  programs  is 
to improve  the  quality  of pharmaceutical  care  by ensuring  that  prescriptions  are 
appropriate,  medically  necessary,  and  that  they  are  not  likely  to result  in adverse  medical 
results.  (See  Federal  Reg-bter, 59 (September  23, 1994)  184: 48811.)  Further,  in an  effort 
to  ensure  the  credibility  of the  reviews,  the  law requires  that  standards  for  review  be 
consistent  with  three  authoritative  compendia  and  with  peer-reviewed  medical  .literature. 
Finally,  the  statute  requires  these  predetermined  standards  be available  to  the  public  and 
to  pharmacists  and  physicians.  (It  is important  to note  that  OBRA  90 specifically  exempts 
HMOs  from  the  Federal  requirements  for  prospective  and  retrospective  reviews  for 
Medicaid  outpatient  drugs.  It does  not,  however,  preclude  States  from  imposing  their 
own  DUR  requirements  on  HMOs.) 
For  views  on  the  potential  conflict  of interest  in the  DUR  programs  of PBMs  and  the 
importance  of disclosure  principles,  see  Stephen  B. Soumerai,  SC-D. et  al., Computer-
Based  Drug-Utilization  Review--Risk  Benefit,  or Boondoggle?,  The New EngZand 
Journal  of Medicine. 
32.  These  efforts  include  one-on-one  interventions  by PBMs with  providers  or patients, 
including  disease  state  management  programs,  as well  as more  broadly  based  education 
programs  directed  to  groups  of providers  or  patients. 
33.  See  Note  12. 
34. 	 Gina  Kolata,  New Frontier  In Research:  Mining  Patient  Records,  Z%eNew York 
limes,  August  9, 1994, A21. 
Questions  arise  about  the  credibility  and  validity  of this  research,  whether  conducted  by 
PBMs,  drug  manufacturers,  or  others,  because  there  is no consensus  on  standards  for 
conducting  these  studies  to  ensure  the  validity  and  objectivity  of the  results.  The  FDA 
addressed  this  issue  in its public  hearing  on  Pharmaceutical  Marketing  and  Information 
Exchange  in Managed  Care  Environments  in October  1995. 
35.  Having  access  to  these  databases  figured  prominently  in the  manufacturers  decisions 
to  purchase  the  PBMs  in  1993 and  1994. 
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 A former  drug  company  executive,  who  oversaw  his companys  acquisition  of a large 
PBM,  commented  in an  inteniew: 
We  saw a tremendous  opportunity  to  create  a new  model  for  the  pharmaceutical 
industry  that  would  simultaneously  improve  the  quality  of health  care,  help  contain 
costs,  and  increase  Mercks  market  share.  Expanding  our  information  base  is 
critical  to  these  goals.  (See  Nancy  A. Nichols,  Medicine,  Management,  and 
Mergers:  An  Interview  with Mercks  P. Roy  Vagelos,  Harvard  Business  Review, 
106. 
Another  news  report  summarizes  comments  of a drug  manufacturer  executive  about  his 
companys  programs  with  its PBM: 
[He]  listed  several  steps  Lilly plans  to  take  to  ensure  the  continued  growth  of 
Prozac  in the  U.S. during  1995, including  tie-ins  with-Lillys  pharmacy  benefit 
management  subsidiary  PCS... Analysis  of patient  pharmaceutical  care  data  can 
help  identify  people  who  are  being  treated  for  what  appear  to  be  unrelated 
ailments  but  are  in fact  symptoms  of depression.  As a result,  information  can  help 
us develop  depression  management  programs  for  our  managed  care  customers 
that  include  Prozac...In  one  PCS database,  we also  found  that  half  of the  50,000 
people  taking  an  antidepressant  remained  on  their  medication  for  less  than  90 
days...PCS  information  can  help  ensure  that  patients  continue  Prozac  for  as long 
as they  need  it....PCS is also  pursuing  a number  of other  relationships,  including 
the  development  of capabilities  involving  mail  order  and  other  delivery  systems 
and  new  interventions  that  encourage  physicians  to  switch prescriptions,  Taurel 
said.  We believe  that  PCS will be  most  successful  in changing  prescriptions  in the 
retail  sector  that  still comprises  the  overwhelming  majority  of scripts  in the  U.S. 
The  article  further  mentions  Lillys physician  education  program  for  antidepressant 
therapy,  its development  of a clinical  labs  network,  and  the  introduction  of its electronic 
prescription  network  linking  pharmacies  with  physicians  offices  (which  will transmit 
prescription  data  including  information  on .the  physician,  the  patient,  and  the  ICD-9 
code).  (See  F-D-C  Reports--The  Pink  Sheet,  May  22, 1995, 11-13.) 
See  also:  Whos  Reading  your  Medical  Records?,  Consumer  Reports,  October  1994, 
628-632. 
36.  Examples  of the  PBMs  with  integrated  databases  include  DPS,  PCS,  Caremark,  and 
Express  Scripts. 
Diversified  Pharmaceutical  Services  (DPS)  had  its beginnings  in an  HMO  before  it was 
sold  to SmithKline  Beecham.  It maintains  integrated  databases  of patients  pharmacy 
and  medical  information.  And  PCS Health  Systems bought  an  interest  in a company  that 
coordinates  patient  information  among  hospitals,  physicians,  and  other  providers.  (See 
Greg  Muirhead,  The  ABCs  of PBMs,  Drug  Topics,  September  5, 1994, 68, 78.) 
E- 11  The  same  pharmacy  publication  reports  on  a recently  established  link  between  medical 
and  pharmacy  data  for  another  PBM  as follows: 
Caremark  and  [Blue  Cross]  Idaho  are  forming  a new  PBM  as a joint  venture,  to 
target  markets  within  Idaho.  The  PBM  will begin  with  282,000 members  enrolled 
in BC Idahos  health  plans.  As part  of the  deal,  Caremark  will gain  access  to 
medical  and  prescription  drug  patient  data  that  will facilitate  the  companys 
outcomes  research  initiatives  and  on-going  development  of disease  management 
programs.  (See  Greg  Muirhead,  Network  Notes,  Drug  Topics, September  4, 
1995, 40.) 
Finally,  according  to  Weekly Pharmacy  Reports--The  Green  Sheet,  Express  Scripts  will 
integrate  what  is happening  on  the  pharmacy  side  with  the  medical  data  from  the  patient 
side  through  its Practice  Patterns  Science  subsidiary.  (May  27, 1996, 3.) 
37.  Some,  but  not  all, States  have  legislation  governing  medical  record  confidentiality 
and  patient  consent.  These  requirements  vary  widely  and  are  increasingly  inadequate  i 
an  era  of computerized  medical  records,  interstate  electronic  transfers  of information, 
and  changes  in health  senices  delivery  systems.  These  deficiencies  concern  a growing 
number  of consumer  groups,  professional  organizations,  and  State  and  Federal 
regulators.  Among  efforts  to  seek  a Federal  remedy  is a recent  legislative  mandate  to 
HHS,  contained  in the  recent  health  insurance  reform  legislation,  to study  ways to 
protect  confidentiality.  Other  legislative  proposals  addressing  medical  records 
confidentiality  have  been  under  consideration  in the  Congress. 
For  further  elaboration  on the  issue  and  recent  Federal  activity,  see: 
Beverly  Woodward,  PhD,  Sounding  Board:  The  Computer-Based  Patient  Record 

and  Confidentiality,  The New England  Journal  of Medicine, 

333 (November  23, 1995) 21:  1419-1422. 

Leigh  Page,  All sides want  confidentiality,  but  dispute  the how to,American 

Medical  News, January  1, 1996, 1,7. 

Insurance  Bill Forces  Privacy  Issue, Medicine  & Health,  50 (August  12, 1996) 
32:  1. 
38.  The  legislatures  in many  States  and  the  Congress  have  been  inundated  recently  with 
legislative  proposals  for  regulating  managed  care  plans  in ways intended  to  inform  and 
protect  consumers.  For  a summary  of recent  activity,  see  Backlash:  How  Worried 
Should  Health  Plans  Be?,  Perspectives,  Medicine  & Health,  June  3, 1996. 
See  also  Note  30 for  comment  about  recent  activity  of States  Attorneys  General. 
E- 12 
 Finally,  several  professional,  consumer,  and  research  organizations  have  articulated 
guidelines  and  principles  addressing  patients  rights  and  responsibilities  in managed 
health  care  settings.  While  they  address  health  care  generally,  most  are  applicable  to 
pharmacy  services  in particular.  Among  these  publications  are: 
(1) 	 National  Health  Council,  Putting Patients First - Patients Rights & 
Responsibilities,  Washington,  D.C. 
(2) 	 National  Consumers  League,  Questions To Ask  - Taking Charge  of Your 
Health,  Washington,  D.C.  The  section  entitled  Questions  to Ask  About 
Your  Health  Plan  includes  several  questions  about  health  plans  pharmacy 
benefits,  in particular. 
(3) 	 American  Pharmaceutical  Association,  Guidelines for Medication  Incentive 
Programs,  Washington,  D.C.,  1995.  See  also  Aphas  Principles of Practice 
for  Pharmaceutical  Care,  1995. 
(4) 	 Council  on  Ethical  and  Judicial  Affairs,  American  Medical  Association, 
Ethical  Issues  in Managed  Care, Journal  of the American  Medical 
Association,  273  (January  25, 1995) 4: 330-335.  This  document  includes 
guidelines  addressing  principles  for  disclosure  of plans  benefits  packages 
and  financial  incentives  for  physicians.  See  also  AMAs  Policy  A-95, 
Managed  Care  Cost  Containment  Involving  Prescription  Drugs. 
(5) 	 Institute  of Medicine,  Improving  the Medicare  Market  -Adding  Choice  and 
Protections,  National  Academy  Press,  Washington,  D.C.,  1996.  This  report 
makes  recommendations  specific  to the  Medicare  managed  care  program. 
Among  them  are  recommendations  that  specify  the  types  of information 
that  should  be  made  available  to beneficiaries  about  the  health  plan 
benefits,  including  pharmacy,  and  that  call for  the  prohibition  of anti-
criticism  clauses  or gag rules. 
39.  This  analysis  excludes  those  HMOs  that  purchase  only  claims  processing  services  and 
those  who  have  contracted  with  a PBM  for  less than  one  year. 
40.  The  recently  issued  HCFA  report  on  PBMs  states: 
Quality.  As in other  sectors  of the  health  care  arena,  competition  among  PBMs 
for  clients  centers  on  price,  not  quality.  Purchasers  (i.e.,  plan  sponsors)  are  not 
insisting  on  sophisticated  quality  measurements  and  reporting  requirements  from 
PBMs  because  their  attention  is riveted  on  containing  drug  costs.  (See  Contract 
HCFA-95-023/PK,  September  30, 1996, 124-125.) 
E- 13 
 41.  States  do  not  license  PBMs,  although,  of course,  they  all license  managed  care 
organizations.  Several  State  legislatures  have  standing  committees  or  special  task  forces 
focussed  on  managed  care. 
The  National  Association  of Insurance  Commissioners  (NAIC)  is developing  a series  of 
model  acts  and  regulations  for  State  insurance  agencies  to  use with  health  plans.  These 
models  do  not  address  pharmacy  or PBMs  directly,  although  they  could  apply  indirectly. 
These  model  acts  focus  on  the  adequacy  of managed  care  plan  networks,  professional 
credentialing  verification,  grievance  procedures,  confidentiality  of health  information, 
utilization  review,  and  quality  assessment  and  improvement. 
42.  The  JCAHO  does  review  pharmacy  programs  based  in hospitals  and  home  care 
organizations  and  free-standing  pharmacies  that  serve  long-term  care  facilities. 
43.  Among  the  organizations  developing  guidelines  and  standards  are: 
Academy  of Managed  Care  Pharmacy:  Guidelines for  Good  Managed  Care 
Pharmacy  Practices,  1995. 
American  Pharmaceutical  Association:  Principles of Practice for Pharmaceutical 
Care,  1995;  Guidelines for Medication  Incentive  Programs,  1995. 
American  Society  of Health-System  Pharmacists:  Practice  Standards  of ASHP, 
1995-96. 
44.  A recent  study  focussed  on  the  practices  of several  large,  private  employer  groups 
who  use  PBMs.  The  researchers  report  a striking  lack  of familiarity  among  these  private 
sector  payers  with  their  PBMs policies  and  practices.  Only  half  discussed  closed  or  open 
formulary  choices  with  their  PBMs;  none  reported  having  input  into  the  formulary 
development  or  knowledge  of the  criteria  used  by the  PBMs  in developing  their 
formularies.  The  researchers  conclude  by urging  greater  accountability  for  PBMs  and 
identify  approaches  for  achieving  it.  (See  Kevin  A. Schulman,  MD  et al.,  The  Effect  of 
Pharmaceutical  Benefits  Managers:  Is It Being  Evaluated?,  Annals  of Internal  Medicine, 
124 (May  1996)  10: 906-913.) 
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