United States Government Accountability Office

Washington, DC 20548 

January 13, 2006 

The Honorable Henry A. Waxman 

Ranking Minority Member 

Committee on Government Reform

House of Representatives 

Subject: Medicare: Sponsors’ Management of the Prescription Drug Discount Card 

and Transitional Assistance Benefit

Dear Mr. Waxman: 

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

(MMA) added a prescription drug benefit to the Medicare program, which became 

effective January 1, 2006.1

 To assist Medicare beneficiaries with their prescription 

drug costs until the new benefit became available, the MMA also required the 

establishment of a temporary program, the Medicare Prescription Drug Discount 

Card and Transitional Assistance Program, which began in June 2004.2

 The drug card 

program offers Medicare beneficiaries access to discounts off the retail price of 

prescription drugs at the point of sale. All Medicare beneficiaries, except those 

receiving Medicaid drug coverage, were eligible to enroll in the drug card program.3

Certain low-income beneficiaries without other drug coverage qualified for an 

additional benefit, a transitional assistance (TA) subsidy that can be applied toward 

the cost of drugs covered under the drug card program.4

 1

Pub. L. No. 108-173, §101, 117 Stat. 2066, 2071, 2072. 

2

Pub. L. No. 108-173, §101, 117 Stat. 2066, 2071, 2131. Throughout this report, we refer to the Medicare 

Prescription Drug Discount Card and Transitional Assistance Program as the drug card program. 

Beneficiaries could enroll in the drug card program through December 2005. Beneficiaries can use 

their drug cards until the effective date of their enrollment in a Medicare prescription drug plan or

until May 15, 2006, whichever comes first. 

3

Not all applicants were eligible to enroll in the drug card program. CMS established an appeal process 

for those initially denied eligibility.

4

For beneficiaries who qualify for TA, the program offered a subsidy of up to $600 per year toward the 

cost of covered drugs. To qualify for TA, a beneficiary must (1) have had an income at or below 

135 percent of the federal poverty level (FPL) and (2) with certain exceptions, not have had other

prescription drug coverage through Medicaid, an employer-sponsored group health insurance 

program, an individual health insurance policy, TRICARE (the Department of Defense health care 

program for active-duty personnel, retirees, and their dependents), or the Federal Employees Health 

Benefits Program. TA funds available to beneficiaries in 2004 and 2005 can be used until the effective

date of their enrollment in a Medicare prescription drug plan or until May 15, 2006, whichever comes 

first. 

 GAO-06-299R Medicare Prescription Drug Cards
Drug cards were offered and are managed by private organizations, known as drug 

card sponsors. General drug cards were available to all eligible beneficiaries living in 

a card’s service area; there are both national and regional general cards.5

 Exclusive 

and special endorsement drug cards were available to specific beneficiary groups.6

Some drug card sponsors offered more than one drug card. The Centers for Medicare 

& Medicaid Services (CMS)—the agency within the Department of Health and Human 

Services (HHS) that manages the Medicare and Medicaid programs—administers and 

oversees the drug card program. 

In response to your request, we examined drug card sponsors’ management of the 

drug card and TA benefit and any challenges that sponsors experienced in meeting 

program requirements. Specifically, we (1) identified how drug card sponsors 

provided beneficiaries access to discounted drugs and the discounts obtained 

through these arrangements; (2) reviewed how drug card sponsors managed the TA 

benefit, including the enrollment of low-income beneficiaries and management of the 

TA subsidies; and (3) identified any benefits other than discounts on prescription 

drugs that drug card sponsors provided to beneficiaries.7

 

To address these objectives, we focused our work on general drug cards; our work 

did not include exclusive or special endorsement cards. We interviewed staff from 7 

of 32 general drug card sponsors.8

 We judgmentally selected the drug card sponsors 

we interviewed. They represented a mix of national and regional cards; varied in 

terms of total enrollment, TA enrollment, and number of beneficiary complaints 

received by CMS; and reflected different organization types (for example, pharmacy 

benefit managers (PBM),9

 health insurers, and managed care organizations). We also 

interviewed CMS officials, staff from six CMS contractors that have assisted with key 

program oversight activities, officials from HHS’s Office of Inspector General (OIG), 

 5

National cards provide beneficiaries access to discounts at pharmacies nationwide, while regional 

cards offer discounts at pharmacies within a smaller geographic area—an entire state at a minimum. 

6

Exclusive cards are cards that Medicare managed care plans offered only to their plan enrollees. 

(Some Medicare managed care plans also offered general cards open to all eligible beneficiaries, not 

just those enrolled in their plans.) Special endorsement cards serve residents of long-term care

facilities such as skilled nursing facilities; U.S. territory residents; and American Indians and Alaskan 

Natives who use Indian Health Service, Indian Tribe and Tribal Organization, and Urban Indian

Organization pharmacies.

7

We have conducted other work related to this topic. See GAO, Medicare: CMS’s Implementation and 

Oversight of the Medicare Prescription Drug Discount Card and Transitional Assistance Program,

GAO-06-78R (Washington, D.C.: Oct. 28, 2005) and Medicare: CMS’s Beneficiary Education and 

Outreach Efforts for the Medicare Prescription Drug Discount Card and Transitional Assistance 

Program, GAO-06-139R (Washington, D.C.: Nov. 18, 2005).

8

Included in the 32 sponsoring organizations are affiliated organizations, such as 11 individual Blue

Cross and Blue Shield entities that are counted as one organization.

9

Pharmacy benefit managers manage prescription drug benefits for third-party payers, such as 

employer-sponsored health plans and other health insurers. 

2 GAO-06-299R Medicare Prescription Drug Cards
and staff from selected pharmacy and pharmacist associations.10 Additionally, we 

reviewed relevant documents from drug card sponsors, CMS, and CMS contractors, 

such as drug card sponsor applications, CMS guidance, and CMS contractor reports. 

Data from CMS and CMS contractors reflected the most recent available as of 

November 2005. We conducted our work from April 2005 through January 2006 in 

accordance with generally accepted government auditing standards. 

Results in Brief 

Drug card sponsors generally built on existing arrangements that they, or their 

partner PBMs, had with drug manufacturers and pharmacies to provide beneficiaries 

access to discounted drugs. Drug card sponsors we interviewed generally reported 

little difficulty obtaining discounts for beneficiaries and meeting CMS’s requirements 

to provide pharmacy access for beneficiaries. Analyses conducted by CMS found that 

beneficiaries enrolled in the drug card program could obtain prices that were 12 to 

25 percent less than the average retail prices of brand-name drugs.11 Analyses by 

other research organizations found similar results. Some program requirements, 

however, were new and challenging for some drug card sponsors, or their partner 

PBMs, to implement. These included providing drug manufacturer discounts to 

beneficiaries at the point of sale and meeting CMS’s requirements for reporting 

detailed data on discounts obtained from drug manufacturers and pharmacies. To 

manage the TA benefit, drug card sponsors generally relied on their prior experience 

in administering insurance coverage. Drug card sponsors that we interviewed

reported some challenges with beneficiary enrollment for TA, reconciling TA subsidy 

balances with CMS, or both. Drug card sponsors’ records of TA enrollment did not 

always agree with enrollment data from CMS’s eligibility files, and some sponsors had 

difficulty maintaining accurate TA account balances. All of the drug card sponsors we 

interviewed told us they provided beneficiaries with at least one additional benefit 

beyond discounts on covered drugs, such as mail-order dispensing to lower drug 

costs and drug interaction monitoring programs to promote quality and safety. 

However, little is known about the extent to which drug card sponsors overall 

provided these additional benefits because sponsors were not required to report to 

CMS on the extent to which they provided these added benefits. 

We received comments on a draft of this report from CMS. CMS commented that 

despite the short implementation period, the drug card program was successfully 

implemented. CMS stated that the concern we raised in the draft report that the 

agency’s use of multiple data systems created challenges for some drug card 

sponsors in maintaining accurate TA balances was unclear. We revised the draft 

report to clarify that sponsors’ concerns related to a specific CMS data system. We 

identified that system and provided examples of the concerns. 

 10We interviewed staff of the National Association of Chain Drug Stores, the National Community 

Pharmacists Association, and the Arkansas Pharmacists Association.

11The national average retail price used by CMS represents the average price paid to pharmacies by 

both insured and cash-paying customers. Prices paid by insured customers are typically less than those

paid by cash-paying customers due to discounts negotiated by insurers. Data on these prices were

obtained by CMS from Verispan, a health care information firm that collects and reports data on retail 

pharmacy transactions. 

3 GAO-06-299R Medicare Prescription Drug Cards
Background 

The MMA was enacted on December 8, 2003, and shortly thereafter, by January 30, 

2004, interested organizations were required to submit their completed applications 

to become drug card sponsors to CMS. Organizations that CMS approved as drug 

card sponsors could begin enrolling beneficiaries as of May 3, 2004, and the drug card 

program took effect on June 1, 2004. As of November 2005, there were 66 active 

general drug cards sponsored by 32 different sponsoring organizations. (See table 1.) 

Many general drug cards are sponsored by PBMs, health insurers, or managed care 

organizations. 

Table 1: Active General Drug Cards by Type of Sponsoring Organization, November 2005 

Type of sponsoring 

organization 

Number of national 

cardsa

Number of regional 

cards Total general cards

PBM 18 12 30 

Health insurer/managed 

care organization 3 18 21 

Otherb13 2 15 

Total 34 32 66

Source: GAO analysis of CMS data and drug card sponsor information. 

a

Table does not reflect five approved national cards that were never marketed. b

Other includes an information technology company, a medical products company, and a claims processor, among others. 

There were nearly 3.8 million Medicare beneficiaries enrolled in general drug cards as 

of October 2005;12 about 44 percent were enrolled in both a drug card and TA, while 

about 56 percent were enrolled in a drug card only. (See table 2.) About 87 percent of 

general drug card enrollees were enrolled in national drug cards, and about 

13 percent were enrolled in regional drug cards. 

Table 2: General Drug Card and TA Enrollment, October 2005 

General drug Drug card and TA enrollment Drug card only enrollment 

card type Number Percentage Number Percentage

Total

enrollment 

National 1,334,895 40.7 1,946,065 59.3 3,280,960 

Regional 322,779 66.2 164,531 33.8 487,310 

Total 1,657,674 44.0 2,110,596 56.0 3,768,270

Source: GAO analysis of CMS data. 

Organizations had to meet certain requirements to be approved by CMS as drug card 

sponsors. For example, a drug card sponsor had to be a nongovernmental 

organization doing business in the United States, be financially stable and reputable, 

have at least 3 years of private-sector experience in pharmacy benefit management, 

and have served at least 1 million covered lives in a similar pharmacy benefit 

program. Drug card sponsors that did not have sufficient experience with pharmacy 

benefit management were allowed to partner with PBMs to meet the drug card 

program requirements. 

 12As of October 2005, CMS reported 6.4 million enrollees across all drug card types, including general 

and exclusive cards.

4 GAO-06-299R Medicare Prescription Drug Cards
Access to Negotiated Discounts and Pharmacies

Drug card sponsors had to demonstrate their ability to meet various program 

requirements such as providing Medicare beneficiaries access to discounted drugs 

and a network of pharmacies, and must continue to show they are meeting these 

requirements. One requirement of the program is that drug card sponsors must offer 

a negotiated price13 for at least one drug in each of more than 200 drug classes that 

CMS identified as being commonly used by Medicare beneficiaries.14 According to 

CMS, nearly all prescription drugs that can be purchased at retail pharmacies are 

eligible to be covered by sponsors’ drug cards.15 The MMA specifies 9 classes of drugs 

that sponsors are not allowed to cover through their drug cards; the excluded classes 

include barbiturates and benzodiazepines, among others. Drug card sponsors must 

also contract with a sufficient number of pharmacies to ensure that their pharmacy 

networks meet the program’s network access requirements.16 On a weekly basis, drug 

card sponsors are required to report to CMS drug prices available at participating 

pharmacies.17 They also are required by CMS to report price concession information 

(which could include discounts, rebates, and other price concessions) from both drug 

manufacturers and pharmacies to CMS on a quarterly basis.18

 

 13The MMA specified that drug card sponsors shall provide access to “negotiated prices” on the drugs 

they cover. CMS regulations define negotiated price as the discounted price that takes into account 

negotiated price concessions such as discounts, rebates, and direct or indirect subsidies or

remunerations. Drug card sponsors are required to obtain rebates, discounts, or other price 

concessions from drug manufacturers and to pass on a share of these concessions to card enrollees. 

Sponsors are also required to guarantee that pharmacies provide the lower of the negotiated price or 

the usual and customary price for a covered drug. Neither the MMA nor CMS’s regulations specify any 

minimum price concession that must be passed on to enrollees. 

14Drugs that possess similar chemical structures and similar therapeutic effects are grouped into

classes. Most drugs within a class produce similar benefits, side effects, adverse reactions, and

interactions with other drugs and substances. 

15Covered drugs include prescription drugs, certain vaccines, insulin, and some medical supplies 

associated with the injection of insulin. 

16By regulation, in urban areas, at least 90 percent of a card’s enrollees must live within 2 miles of a

contracted network pharmacy; in suburban areas, at least 90 percent must live within 5 miles of a

contracted network pharmacy; and in rural areas, at least 70 percent must live within 15 miles of a

contracted network pharmacy. These access standards are based on those used in the TRICARE Retail

Pharmacy program, which provides prescription services for Department of Defense beneficiaries 

through a network of retail pharmacies.

17The drug prices reported by drug card sponsors were posted on CMS’s Price Compare Web site until 

September 30, 2005, when CMS deactivated this component of the Web site. 

18The CMS reporting requirement includes the total dollar amount of discounts obtained, the 

percentage of discounts passed through to beneficiaries, and the average dollar discount per

prescription. 

5 GAO-06-299R Medicare Prescription Drug Cards
Management of TA Benefit

Participating drug card sponsors are required by CMS to manage the TA benefit, 

including obtaining funds (TA subsidies) from CMS to reimburse pharmacies for 

covered drugs dispensed to TA beneficiaries. Sponsors must establish and use 

appropriate accounting procedures and controls to track TA spending for each 

enrollee and protect against misuse of TA funds, including the inappropriate use of 

these funds to pay for excluded drugs. In addition, drug card sponsors are required to 

manage the enrollment of TA beneficiaries, submit monthly TA expenditure 

reconciliation reports to CMS, and update CMS’s enrollment database with 

beneficiary-level enrollment, utilization, and expenditure data. 

Drug Card Sponsors Generally Built on Existing Arrangements to Provide 

Beneficiaries Access to Discounted Drugs

Drug card sponsors generally built on arrangements that they, or their partner PBMs, 

had for existing business to provide Medicare beneficiaries access to discounted 

drugs. Some drug card sponsors incorporated drug manufacturer assistance 

programs for low-income individuals into the drug card program as a way to provide 

additional discounts to beneficiaries beyond those required by the MMA. While 

sponsors generally reported little difficulty obtaining discounts for beneficiaries and 

meeting pharmacy access requirements, providing drug manufacturer discounts to 

beneficiaries at the point of sale and reporting detailed data to CMS on the discounts 

obtained were new and challenging for some sponsors. 

Drug card sponsors that we interviewed, or their partner PBMs, generally relied on 

their existing business relationships for the drug card program. They did not provide 

detailed information to CMS about their arrangements with drug manufacturers and 

pharmacies because the agency did not require sponsors to disclose proprietary 

information about these relationships. According to the drug card sponsors that we 

interviewed, they sometimes sought arrangements with additional drug 

manufacturers to include a broader array of drugs, and one drug card sponsor also 

reported seeking agreements with additional pharmacies to meet program access 

requirements. 

Some drug card sponsors also built on existing drug manufacturer assistance 

programs for low-income individuals to provide additional discounts to beneficiaries 

beyond those required by the MMA. According to CMS data, eight drug manufacturers 

have agreements with sponsors of some drug cards to provide additional discounts to 

TA beneficiaries who have exhausted their TA benefit, referred to as wrap-around 

coverage.19 (See table 3.) Four of these drug manufacturers also have agreements to 

provide additional discounts to low-income beneficiaries above the TA income limit.20

 

 19Most of these drug manufacturers provided discounted drugs to low-income individuals prior to the 

Medicare drug card program. 

20The TA income limit for 2005 was $1,077 per month for a single individual in the 48 contiguous states. 

The income limit was higher in Alaska ($1,345 per month) and Hawaii ($1,239 per month). 

6 GAO-06-299R Medicare Prescription Drug Cards
Table 3: Drug Manufacturers with Wrap-around Coverage for TA Beneficiaries, September 2005 

Drug manufacturer 

Number of drug cards with

wrap-around coveragea

Number of drugs coveredb

Abbott 44 5

AstraZenecac 13 19

Eli Lillyd 45 15

Genzyme 5 1

Johnson & Johnson 22 44 

Merck 49 39

Novartisd 48 27

Pfizerc 24 55

Source: GAO analysis of CMS data from www.cms.hhs.gov/medicarereform/drugcard/mfagreements.asp (accessed on Sept. 22, 2005). 

a

Wrap-around coverage is for TA beneficiaries who have exhausted their TA benefit. b

Number of drugs covered may include multiple formulations of a single drug. c

The drug manufacturer offered discounts to low-income beneficiaries above the TA income limit, but only to enrollees of United 

HealthCare Insurance Company’s U Share Prescription Drug Discount Card. d

The drug manufacturer offered discounts to low-income beneficiaries above the TA income limit for any drug card willing to 

participate. 

While drug card sponsors that we interviewed told us that they generally experienced 

little difficulty obtaining discounts for beneficiaries and meeting pharmacy access 

requirements, there were some challenges. For example, drug card sponsors said that 

they, or their partner PBMs, often had to develop new processes to pass drug 

manufacturer discounts to Medicare beneficiaries at the point of sale. Some drug card 

sponsors volunteered that drug discount card programs managed by PBMs prior to 

the drug card program did not typically include drug manufacturer discounts, relying 

instead on discounts negotiated with pharmacies. In the drug card program, the price 

paid by beneficiaries at the point of sale reflects both drug manufacturer and 

pharmacy discounts.21 Providing drug manufacturer discounts to beneficiaries at the 

point of sale was a new process for many drug card sponsors and PBMs because 

these discounts are typically processed after the point of sale for their existing lines 

of business such as commercial insurance.22

 

Several drug card sponsors we interviewed also told us of additional challenges they 

faced. For example, some drug card sponsors said their use of open rather than more 

restrictive formularies in the drug card program limited their ability to negotiate 

larger discounts with drug manufacturers because they were unable to increase the 

 21CMS officials estimated that the majority of discounts came from pharmacies rather than from drug 

manufacturers. 

22For other programs managed by PBMs, the manufacturer discount is typically not applied at the point 

of sale, but instead is often provided in the form of a rebate to the insurer or insured group on an 

established schedule after the transaction is completed. In the drug card program, according to the 

sponsors we interviewed, PBMs periodically reimburse pharmacies for the drug manufacturer portion 

of the discounts from drug card sales, typically on a weekly or biweekly basis. On a less frequent basis, 

generally monthly or quarterly, PBMs receive payments from drug manufacturers for the 

manufacturers’ portion of the discounts on drug sales to beneficiaries. 

7 GAO-06-299R Medicare Prescription Drug Cards
market share of manufacturers’ products sold to beneficiaries.23 In addition, some 

drug card sponsors that we interviewed indicated that pharmacies sometimes 

declined to participate in the drug card program because they considered the level of 

discounts to be too high or because the pharmacy was sponsoring its own card.

Further, pharmacies that did not have separate executed contractual agreements with 

PBMs specifically for the drug cards may have been unaware that they were 

participating in the drug card program, which created problems for beneficiaries 

when they tried to purchase drugs at those pharmacies. Finally, one drug card 

sponsor told us that some independent pharmacies that used Pharmacy Service 

Administrative Organizations (PSAO) to contract with PBMs did not always know 

they were participating with a particular drug card. This occurred because the 

individual pharmacies did not always recognize that the PSAO had contracted with a 

drug card sponsor on their behalf.24

 

As of November 2005, the overall quality of the quarterly price concession data 

submitted to CMS by drug card sponsors was poor, with problems such as outliers 

and missing data.25 This precluded CMS from compiling a detailed accounting of the 

amount and source of discounts and other price concessions for the drug card 

program. Some drug card sponsors that we interviewed told us that CMS’s guidance 

for reporting price concession data was unclear and not timely, and that reporting the 

data in the form required by CMS was complex. CMS officials reported that as of 

November 2005 they were continuing to work with drug card sponsors to resolve the 

problems.26

Although drug card sponsors’ reporting of quarterly price concession data has been 

problematic, CMS and other research organizations have conducted analyses of drug 

prices using data reported weekly to CMS for posting on the Price Compare Web site, 

 23A formulary is a list of approved drugs that a plan will cover. An open formulary contains no 

restrictions on what drugs are covered. The drug card program did not require open formularies, but 

most drug card sponsors offered them through their PBMs. For example, one drug card sponsor told

us that the complexity involved in using a restricted formulary would not have been practical given the 

short duration of the drug card program.

24PSAOs are organizations that sometimes represent independent pharmacies in contractual 

negotiations with entities such as PBMs or managed care organizations. 

25These data include the total dollar amount of discounts obtained by sponsors, the proportion of

discounts coming from manufacturers versus pharmacies for each sponsor, and the amount of 

discounts obtained for beneficiaries with wrap-around coverage. This information on drug card

sponsors’ price concession data was also discussed in a previous report. See GAO, Medicare: CMS’s 

Implementation and Oversight of the Medicare Prescription Drug Discount Card and Transitional 

Assistance Program, GAO-06-78R (Washington, D.C.: Oct. 28, 2005).

26As of October 2005, for the drug cards where CMS identified problems, incorrect data had been

removed from the system into which drug card sponsors reported their data. However, not all of the 

sponsors have provided corrected information. 

8 GAO-06-299R Medicare Prescription Drug Cards
which identified discounts available to drug card beneficiaries.27 A CMS analysis 

found that beneficiaries enrolled in drug cards could obtain prices as of September 

2004 that were approximately 12 to 21 percent less than the national average retail 

price for selected brand-name drugs. This analysis also found that low-income 

beneficiaries who used the TA benefit had the potential to save between 44 and 

92 percent compared to national average retail prices. A second analysis conducted 

by CMS found that beneficiaries enrolled in the drug cards could obtain prices as of 

February 2005 that were approximately 14 to 25 percent less than the national 

average retail price for cash-paying customers. Other analyses conducted by research 

organizations such as the Lewin Group and the Henry J. Kaiser Family Foundation 

found similar results.28

 

Drug Card Sponsors Generally Used Prior Experience Administering 

Insurance Coverage to Manage the TA Benefit 

Drug card sponsors, or their partner PBMs, generally relied on their prior experience 

administering insurance coverage to manage the TA benefit. Some of the drug card 

sponsors we interviewed reported challenges with managing the enrollment of lowincome beneficiaries, reconciling TA subsidy balances with CMS, or both. Audits 

conducted by a CMS contractor, IntegriGuard, found that drug card sponsors’ TA 

reports of enrollment did not always agree with enrollment data from CMS’s 

eligibility files, and some sponsors did not properly document changes they made to 

TA applications after they were signed by the Medicare beneficiary and submitted to 

the sponsor.29 Additionally, some drug card sponsors had difficulty maintaining 

accurate TA subsidy balances, particularly when beneficiaries transferred between 

drug cards or disenrolled from a drug card. Further, some drug card sponsors we 

interviewed reported confusion about which drugs were to be excluded from 

coverage. Audits conducted by IntegriGuard found that drug card sponsors had made 

approximately $1.9 million in incorrect TA payments for excluded drugs. 

Drug card sponsors were required to obtain completed TA enrollment applications 

from Medicare beneficiaries and perform an initial eligibility screen before submitting 

the applications to CMS for eligibility verification. Following CMS’s eligibility 

verification, drug card sponsors were required to notify beneficiaries of their 

 27Early in the program, some drug card sponsors experienced problems with reporting drug pricing 

data for the Price Compare Web site. CMS identified problems such as inconsistencies in sponsors’ 

reported unit prices for non-pill prescriptions—such as creams and sprays—and delays in drug card 

sponsors’ reporting of data. CMS officials reported that they worked with sponsors to standardize their 

reporting of non-pill prices, did not post some sponsors’ data on the Price Compare Web site, and took 

actions to address reporting problems. CMS officials stated that the quality of the Price Compare Web 

site data improved after the first 2 to 3 months of the drug card program. 

28See the Lewin Group, Assessment of Beneficiary Savings in the Medicare Drug Discount Card

Program (Falls Church, Va.: August 2004) and Henry J. Kaiser Family Foundation, Medicare Drug 

Discount Cards: A Work in Progress (Menlo Park, Calif.: July 2004). 

29CMS contracted with IntegriGuard, a Medicare program integrity contractor, to conduct audits of

drug cards. 

9 GAO-06-299R Medicare Prescription Drug Cards
eligibility status and right to appeal, as well as to determine the beneficiary’s required 

coinsurance amount.30 See figure 1 for an overview of the TA enrollment process. 

Figure 1: Medicare Beneficiary Enrollment Process for TA

Notes: CMS contracted with MAXIMUS, an organization with experience in enrollment and eligibility issues for state Medicaid 

programs, to manage beneficiary appeals of TA eligibility denials. Enrollment of new beneficiaries ended December 31, 2005. 

CMS established a process for Medicare beneficiaries who were initially denied 

eligibility for the TA subsidy to appeal the decision. As of August 2005, approximately 

76,000 TA eligibility denials were appealed and adjudicated;31 58 percent of these 

were reversed during reconsideration.32 Reasons for the initial denials varied, but 

most often it was because the beneficiary appeared to fail the TA income 

requirements (41 percent), be enrolled in another Medicare drug card (25 percent), or 

have other prescription drug coverage (22 percent). 

Several drug card sponsors we interviewed told us they experienced problems with 

the TA enrollment process, including reconciling enrollment and eligibility data with 

CMS. For example, one drug card sponsor told us that when coverage changes in one 

state’s Medicaid program led to the loss of Medicaid prescription drug coverage for 

some low-income Medicare beneficiaries in the state, there were delays in enrolling 

these individuals in the drug card program. The delays resulted because the CMS 

eligibility verification system continued to reflect these individuals as having 

 30The MMA established the following coinsurance amounts for TA beneficiaries: 5 percent of the drug

price for beneficiaries at or below 100 percent of the FPL, and 10 percent for beneficiaries above 

100 percent and up to and including 135 percent of the FPL. 

31There were 1.6 million Medicare beneficiaries enrolled in general drug cards and TA as of August 

2005. 

32Of the reversed denials, 61 percent were initially denied by CMS; 39 percent by drug card sponsors. 

10 GAO-06-299R Medicare Prescription Drug Cards
Medicaid drug coverage, which would have made them ineligible for enrollment in a 

drug card. In addition, 8 of 23 audits conducted by IntegriGuard found that TA 

enrollment data as reported on drug card sponsors’ monthly TA reports did not 

always agree with CMS’s eligibility data files for the same period of time. Further, 10 

of the 23 IntegriGuard audits found that drug card sponsors did not always properly 

document changes they made to TA applications after they were signed by 

beneficiaries and initially submitted to the sponsor. For example, when drug card 

sponsors followed up with beneficiaries about missing or incorrect information on 

applications, they did not always document why or on what date they made changes 

to the applications. 

Drug card sponsors generally managed TA funds as they, or their partner PBMs, 

managed insurance benefits for their existing lines of business. This included 

operating a real-time claims adjudication system that facilitates the reimbursement of 

pharmacies for drugs purchased by TA beneficiaries and applies the correct 

beneficiary coinsurance at the point of sale. As shown in figure 2, once the TA 

beneficiary pays the 5 or 10 percent coinsurance and receives drugs at the pharmacy, 

the pharmacy files a claim, which is paid by the PBM. The PBM, if it is not the 

sponsoring organization, then sends an invoice for TA claims to the drug card 

sponsor. The drug card sponsor, in turn, draws down TA funds from its CMS account 

for claims paid to the PBM. To account for the TA funds expended, drug card 

sponsors are required to enter beneficiary-level expenditure data into CMS’s 

enrollment database and provide a monthly report to CMS reconciling their paid 

pharmacy claims to TA funds drawn from the sponsor’s CMS account. 

Figure 2: Flow of Funds and Reporting for TA 

Note: Step 3 in the figure would not apply if the sponsoring organization is a PBM itself. 

11 GAO-06-299R Medicare Prescription Drug Cards
According to audits conducted by IntegriGuard and discussed by some drug card 

sponsors we interviewed, some sponsors had difficulty maintaining accurate TA 

subsidy balances for beneficiaries who transferred between cards or disenrolled from 

the program. IntegriGuard audits of 23 drug cards found that sponsors of 11 of these 

cards had allowed some beneficiaries to receive subsidies that exceeded their TA 

limit. CMS officials largely attributed the problem to beneficiaries transferring

between cards. Some drug card sponsors told us that CMS’s Enrollment and 

Eligibility Verification Systems (EEVS) contributed to these difficulties, pointing to 

problems they experienced when they attempted to reconcile their enrollment data 

with CMS. For example, one drug card sponsor told us that it did not have the ability 

to check enrollment information in EEVS in real time. Another drug card sponsor 

reported that its TA claims payment system operated in real-time, but that it relied on 

TA eligibility data updates from CMS that were provided in periodic batch files. 

Several drug card sponsors we interviewed also reported confusion about drugs that 

were to be excluded from coverage through the drug cards, citing inadequate 

guidance from CMS. While CMS provided general guidance on classes of excluded 

drugs on previous occasions beginning in June 2004, it did not issue a comprehensive 

list of excluded drugs until November 2004. IntegriGuard audits of 23 drug cards 

found that for each, the sponsor had incorrectly used TA funds to pay for at least 

some excluded drugs. This resulted in approximately $1.9 million of incorrect TA 

payments as of November 2005, which drug card sponsors are required to repay to 

CMS.33

 

Drug Card Sponsors Provided Beneficiaries with Some Additional Benefits 

Beyond Discounts on Covered Drugs 

All seven drug card sponsors we interviewed said that they provided at least one 

benefit to Medicare beneficiaries in addition to the discounts on covered drugs. They 

extended existing PBM programs designed to lower costs and promote quality and 

safety to beneficiaries. These programs included mail-order options, efforts to 

increase the use of lower-cost generic drugs, and programs to detect potential 

problems such as allergy risks and adverse drug interactions. CMS guidance to drug 

card sponsors permitted them to provide additional products or services to 

beneficiaries, such as discounts on over-the-counter drugs at no additional cost to 

beneficiaries. However, there is little information available on the extent that these 

additional services or discounts are offered by drug card sponsors overall because 

they are not required by the drug card program, and sponsors are not required to 

report this information. 

Medicare beneficiaries could achieve additional savings over discounted retail prices 

if they used a drug card sponsor’s mail-order option or substituted lower-cost 

generics for brand-name drugs when offered. For example, one drug card sponsor we 

 33See GAO, Medicare: CMS’s Implementation and Oversight of the Medicare Prescription Drug 

Discount Card and Transitional Assistance Program, GAO-06-78R (Washington, D.C.: Oct. 28, 2005)

for information on overpayments as a result of 15 of these IntegriGuard audits that were finalized by

October 2005.

12 GAO-06-299R Medicare Prescription Drug Cards
interviewed estimated that beneficiaries could achieve an additional 5 percent 

savings on mail-order purchases of brand-name drugs. According to the sponsor, 

however, savings from the use of the mail-order option may be limited to 

beneficiaries who could afford to purchase a 3-month supply of drugs at one time, a 

typical requirement for purchases made through mail-order pharmacies. This drug 

card sponsor also reported having a program that automatically substituted generic 

drugs where allowed. Another drug card sponsor reported providing educational 

materials to beneficiaries on the savings associated with using generics. 

Drug card sponsors that we interviewed also said that they, or their partner PBMs, 

often had a variety of quality and safety programs, which they sometimes extended to 

drug card beneficiaries. For example, six of the seven drug card sponsors we 

interviewed had drug safety edits that allowed pharmacists to identify potential 

adverse drug interactions or drug allergies at the point of sale. Further, four of the 

drug card sponsors said that they conducted some form of drug utilization review, 

and one offered a program of medication therapy management.34

 

Agency Comments 

We provided a draft of this report for comment to the Administrator of CMS, and we 

received written comments. (See enc. I.) 

In responding to our draft report, CMS had several general comments. First, CMS 

reiterated our finding that drug card sponsors largely built off of existing industry 

practices to manage the drug card and TA benefit. CMS stated that the drug card 

program’s short implementation period was possible because of sponsors’ reliance on 

existing practices. Second, CMS stated that the provision of both pharmacy and 

manufacturer discounts at the point of sale, which we discussed in our draft report, 

distinguished the drug card program from other discount cards on the market. CMS 

added that a September 2004 analysis conducted by the agency, which we also

described in our draft report, found that beneficiaries enrolled in approved drug 

cards could obtain discounts of approximately 12 to 21 percent off the national 

average retail price of common brand-name drugs at the point of sale, with the 

potential for even higher discounts for low-income beneficiaries who used their TA 

benefit. Third, CMS commented that a recent evaluation conducted of the drug card 

program found that most drug card enrollees who were surveyed expressed overall 

satisfaction with their cards, especially with the breadth of the pharmacy networks, 

the enrollment process, and savings achieved. Fourth, CMS highlighted the value of 

the structure it established for the drug card program to communicate with sponsors 

and stated that it planned to operate a similar communication structure for the new 

Medicare prescription drug benefit that became effective on January 1, 2006. Finally, 

CMS noted that the agency and its contractors learned a tremendous amount about 

providing drug coverage through the drug card program, and that these lessons were 

helpful in preparing for the implementation of the Medicare prescription drug benefit 

that is currently underway. 

 34Drug utilization review programs assist with preventing and detecting inappropriate drug use such as

over- or underutilization of medications. Medication therapy management programs are designed to 

ensure that drugs prescribed for persons taking medications for multiple chronic conditions are 

appropriately used to optimize therapeutic outcomes and reduce the risk of adverse events. 

13 GAO-06-299R Medicare Prescription Drug Cards
In addition to these general comments, CMS provided several more specific 

comments. With respect to our finding that the overall quality of the price concession 

data reported to CMS by drug card sponsors was poor, CMS stated that it has worked 

to resolve significant quality issues. CMS said that most submissions are now 

accurate. As noted in the draft report, the overall quality of that data as of November 

2005 was poor, and we have not assessed or verified any changes in the data’s quality 

since that time. Our finding, however, highlights the importance of CMS oversight of 

sponsor-reported data. 

In our draft report, we stated that CMS’s multiple data systems created problems for 

some drug card sponsors in managing the TA subsidies. CMS said it was unable to 

interpret this concern because we did not indicate the specific systems in question or 

the actual nature of the problem. Further, CMS stated that it appeared that we simply 

repeated a concern raised by a sponsor. In response, we revised our report to clarify 

that sponsors’ concerns related to CMS’s EEVS system. Additionally, as more than 

one drug card sponsor raised concerns, we provided specific examples. 

Regarding our finding that some drug card sponsors reported confusion about which 

drugs were to be excluded from coverage, CMS stated that the categories of excluded 

drugs are defined by statute and are repeated in the drug card regulation and 

solicitation. CMS added that it was the responsibility of drug card sponsors to 

identify the specific drugs in the excluded classes and ensure that these drugs were 

not covered. As we noted in our draft report, audits of 23 drug cards conducted for 

CMS by IntegriGuard found that the sponsors of all 23 cards had incorrectly used TA 

funds to cover excluded drugs totaling $1.9 million. CMS noted in its comments that it 

provided guidance on excluded drug classes on several occasions, but acknowledged 

that it did not provide sponsors with a list of specific drugs that were to be excluded 

from coverage until November 2004, 5 months after the program began. However, 

CMS stated that it has continued to remind sponsors of their obligation. In its 

comments, CMS stated that on August 30, 2005, for example, it issued a memo to all 

drug card sponsors directing each sponsor to conduct an internal review of its drug 

card data, books, and records to identify all excluded drugs that were paid for with 

TA funds. CMS required drug card sponsors to repay TA funds that were identified 

through the internal reviews as having been improperly paid. While drug card 

sponsors are responsible for the correct use of TA funds, CMS is ultimately 

accountable for ensuring that no program monies are inappropriately spent. 

With respect to our report of delays in beneficiary enrollment caused by changes in a 

state’s Medicaid program, CMS acknowledged that it was possible for delays in state 

reporting to have led to delays in drug card enrollment. It added that the 

reconsideration process, which we discussed in our draft report, was established to 

consider different evidence regarding program eligibility and enroll beneficiaries 

affected by such concerns. 

In response to our discussion of data discrepancies between sponsors’ monthly TA 

reports and CMS’s eligibility data files for the same time period, CMS stated that this 

occurred in a small number of instances. As we discussed in our draft report, 

however, discrepancies were identified in 8 of 23 audits conducted for CMS by 

14 GAO-06-299R Medicare Prescription Drug Cards
IntegriGuard. CMS said that it has worked with drug card sponsors to identify and 

correct these deficiencies. 

Finally, CMS also provided technical comments, which we have addressed as 

appropriate. 

- - - - - 

As agreed with your office, unless you publicly announce the contents of this report 

earlier, we plan no further distribution of it until 30 days from the date of this report. 

At that time, we will send copies to the Administrator of CMS and interested 

congressional committees. We will also provide copies to others upon request. The 

report will also be available on GAO’s home page at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me at (202) 

512-7119 or kingk@gao.gov. Contact points for our Offices of Congressional Relations 

and Public Affairs may be found on the last page of this report. Key contributors are 

listed in enclosure II. 

Sincerely yours, 

Kathleen King 

Director, Health Care 

Enclosures—2 

15 GAO-06-299R Medicare Prescription Drug Cards
Enclosure I 

Comments from the Centers for Medicare & Medicaid Services 

16 GAO-06-299R Medicare Prescription Drug Cards
Enclosure I 

17 GAO-06-299R Medicare Prescription Drug Cards
Enclosure I 

Now on pp. 3, 9 and 12. 

18 GAO-06-299R Medicare Prescription Drug Cards
Enclosure I 

19 GAO-06-299R Medicare Prescription Drug Cards
Enclosure I 

20 GAO-06-299R Medicare Prescription Drug Cards
Enclosure II 

GAO Contact and Staff Acknowledgments 

GAO Contact Kathleen King, (202) 512-7119 or kingk@gao.gov

Acknowledgments In addition to the contact named above, Debra Draper, Assistant 

Director; Lori Achman; Eric Anderson; Jennie Apter; Robin 

Burke; Ann Tynan; and Syeda Uddin made key contributions to 

this report.

(290451) 

21 GAO-06-299R Medicare Prescription Drug Cards
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