: 

: ’ : . .-. 

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. 

OEI’s Regional Office prepared this report under the direction of Mark R. Yessian, 

Regional Inspector General. Principal OEI staff included: 

BOSI’ON 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;~TLTC~ \vit!; I’1311 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 COAll 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.. .................................................... 

Pharmacy benefit companies: the basics ................................. 

WhichHMOs usePBMs ............................................ 

How HMOs use them .............................................. 

Potential benefits of using PBMs ...................................... 

Concerns about using them ......................................... 

Overseeing PBMS’ performance ...................................... 

Recommendations ................................................ 

Comments on the draft report ....................................... 

Appendices 

1 

4 

5 

6 

7 

10 

13 

15 

18 

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, America’s 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-forservice 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>~~CSreij: 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 President’s 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 

patient’s eligibility and the compliance of the drug with the benefit’s 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 costeffectiveness 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 li*,ies in 1995. T];i:: i%vlOs indicating that the)’ use PI3Jds covered 2 4 I~~~]]~~,II 

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%Phamlaq46%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 COSCS:T’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:Ljyir“Y-l?:n-,+.- 1,*;,L,IL.i., ;y-A*L 

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 HM0s’pee-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 PBM’s programs. These include such approaches 

as using its own clinicians to review the PBM’s 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 HMO’s 

physicians, pharmacists, and patients to give feedback on the PBM’s 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 appropn’ately 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 AMCRA’s 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 AMCRA’s 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 

AMCRA’s data in any other way. 

FIGURE A 

TYPOLOGY OF HhdoS 

Numberof HMOs NUlUbh7OfAfT6WCd 

sum)nd Plans Refncamted 

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. 

Totals: 368 I 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 HMO’s 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 organization’s 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-I’THEXPERTS 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 AMCRA’s 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 HMO’s 

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 HMO’s 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 

II 

I 

Respondents 

I 

Nonrespondents 

I 

Total 

I 

% Respond 

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 AMCRA’s survey, or 

they responded but showed a “mixed tax status” when we collapsed AMCRA’s records. 

0 - 49,999 

50,ooo - 99,999 

100,ooo - 799,999 

SOO,OOO+ 

Overall 

CHI-SQUARE 

Respondents 

127 (52.0%) 

47 (19.3%) 

58 (23.8%) 

12 (4.9%) 

244 

FOR SIZE OF HMO 

Nonrespondents Total 

52 (55.9%) 179 

16 (17.2%) 63 

22 (23.7%) 80 

3 (3.2%) 15 

93 337:” 

% Respond 

70.9% 

74.6% 

72.5% 

4.9% 

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 

Medicaid Do Not Serve 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 HMO’s 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? 

.:.:.:.: ..:.:.: ......:.:,:.:. ;.:,:: :,:.:.: .‘.‘.‘.‘.‘. i.:.:.:.:.:.:.:.:.:.:.:.:.: .‘..‘......2..:..:::.:.:.:.:.:.:::::::.:::::.:::::.:.:.:.:.:. ::::::.:.j:::::.:.:.:.:.:.:.:.:.~:.: ... .:.:: ._: _. :.:.:.:.:.:.:.:.....: .‘.“.‘.‘. ........... ,. ..__. _. __. ...................(...........~...,.~,,.,.~.~.~.,.~,,.,.~.,.~.,.,.,.,. :.‘.~.‘.‘.‘.‘.‘...‘.:‘.‘.‘,‘:‘.‘.~....:.:.:.:.:.:.:.: ...................:.:::.::~:.~:.;::::~:.:,:.~.;.:.:~:;::::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? 

a. Information re rts 

submitted by the r BM 

b. Anal es by your HMO 

of data Tram the PBM 

c. Reviews of PBM 

performance by outside 

consultants 

d. On-site monitoring 

gLsocanducted by your 

Peer reviews of PBM 

programs by your HMO’s 

physicians or pharmacists 

f. Using your HMO’s 

Pharmaq and 

Therapeutics Committee 

Direct feedback about 

PBM programs from: 

h. Your HMO’s 

physicians 

i. Your HMO’s 

JdXUUlWiStS 

j. Your HMO’s enrollees 

k. Reviews of your PBM’s 

performance through 

established performance I.. 

::j::j::j::::::::::::::j:::::::::::::::::::::::::~::~:::::::: :::::.: ::y:: ::::: ._. ... ........ /. .L........ ... ........_..../..I............................ i....... .L.. 

,~~~,y,.,.~.,.,.“.‘,.,.,.,.,.,.,.,.,.,.,.~.,.,.,,,.,.,.,.~.,,,.,,,,,,,.,.~.,.,.,., ::::::::::::::.:::::::::::::::::::::::::::::i::: 

alx~~~~iiiij~~~~~~ ~~~~~~~~~~~~ 

23 (11.6%) 199 

60 (33.7%) 84 (47.2%) 26 (14.6%) 4 (2.2%) 178 

I I 

70(39.3%) 72(40.4%) 23 (129%) 3 (1.7%) 178 

I I 

6 (3.4%) 10 (5.6%) 1 24(13.5%) 1 12(6.7%) 178 

14 (7.9%) 

50(28.6%) 42(24.0%) 6 (3.4%) 175 

+ 

30 (17.4%) 46(26.7%) 1 16(9.3%) 1 7 (4.1%) 172 

48 (27.3%) 39(222%) 44 (2!i.O%) 3 (1.7%) 176 

43p4.42) 50(28.4%) 1 X(14.8%) 1 8(4.5%) 176 

54(30.7%) 43 (24.4%) 1 31(17.6%) 1 8 (4.5%) 176 

33 (19.0%) 42 (24.1%) 20 (11.5%) 5 (2.9%) 64(36.8%) 10 

(5.7%) 

* = 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%) 

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%) I I 

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 _....:.:.:.:.:.:.:.:. A.... ...

.i.. .......l....... ...._..... .:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.::::::::: i. ......A ......A.. a.. .......A..... 

E 

....i...........

::::::::::::::::: ~; l~~~~~~ ~~~~ 

@$@#g&> i.. ..........A .../ A.. ..........A. .A. ...................................... 

:@j# 

:~:~:~:::~:~:~:::~:~:::::~:~:~:::::::~:~g~~ ::::::::::::::s ........ ..............n................. g$..~;~ .,.,Y,.,.,...,.,.,.,.,. ::::::::.:.:.:.:.>..,:.~:.~ .~.~.~.:,~.~ :::::::::::$y: ..A.. n.......... . . . ,...A . . . . . . . _...... i..... A.... g$&

a. Potential fur bias. PBMs’ alliincea with drug 61 20 8 (4.0%) 199 

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.s’clinical &%) (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. 

Confidential, patient-identifiable mfonuation contained in 

PBM databases may be disclosed to others, such as employers 

(10.1%) ?3.1%) (27.6%) (44.7%) 

or drug manufacturers, without the fully informed consent of 

patients. 

t Diadoaur~ HMOs may not inform enrollees about using a PBM and its alliances with drug manufacturer(s). 

16 (8.0%) 

fl5.68) $S.l%)!:3.2%) go%) 199 

PBM accouutability. The information HMOs receive from 

k BMs may be too limited for HMOs to hold them sufficiently 

accountable for their performance. 

20 

(10.1%) 

43 

(21.7%) 

71 57 

(35.9%) (28.8%) 

7 (3.5%) 198 

ewegadbgtheamfidentiautyofpatientdata. 20 55 89 9 (4.5%) 199 

-

c-5 
Contracting with a different PBM 

Sharing with PBM of increased financial risk 

Managing drug benefit intemallv 

Other changes 

emons 14-16 were asked oniy of those 64 HMOs 

Le., HMOs that do not current& contract 

14 (22.2%) 39 (61.9%) 

30 (49.2%) 30 (49.2%) I 

C-6 

89 (44.7%) 199 

81 (40.7%) 199 

53 (26.6%) 199 

23 (11.6%) 199 

thaf responded “No” IO question I, 

with an memal PBM. 

10 (15.9%) 63 

1 (1.6%) I 61 
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 

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 HCFA’s 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, 

2 
Page 2 

We concur. Given HCFA’s 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 for’pharmacy 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 PBICfs’analyses, 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. 
DEF’ARTMENT OF HEALTH & HUMAN SEAVICES~ 

Food End OrliP 4dministrath 

Public Heawl scnke 

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 HRSA’s 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 (PBMs), and the services they provide to payers and 

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 

evaluate the role and effectiveness of managed care in a reformed 

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 

,well T. Stetier. R.Ph.. M.B.A. 

Xi Health Systems, Inc. 

zottsdale. AZ 

02) 314-8370 

39 President 

Ian Zimmerman. R.Ph.. M.B.A 

xidolph. NJ 

01) 989-8721 

assurer 

even G.Avey, MS.. R.Ph. 

ospactlve Health, Inc. 

NIc1y,UT 

01) 943-4977 

+wcior 

any Barenbaum. R.Ph. 

tlmage 

heeling, IL 

47) 520-7823 

rector 

qelo Giambrone. Pharm.D. 

liHealth 

abank. CA 

18) 238-6057 

‘bctor 

m M. Mednick. R.Ph. 

lie Falls, NJ 

91) 890-0822 

:ecutive Director 

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

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 

January 3,1997 

June Gibbs Brown 

Inspector General 

Department of Health and Human Services 

Office of Inspector General 

Washington, DC 20201 

Dear Ms. Brown: 

The Academy of Manaked Cqre Pharmacy (AMCP) is pleased to have 

the opportunity to offer comments on the Office of hispector General’s 

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

Maintenance Organizations with Pharmacy Benefit Management 

Companies. 

AMCP is the national professional society dedicated to the concept and 

practice of pharmaceutical care in managed health care environments. 

AMCP’s mission is to promote the development and application of 

pharmaceutical care in order to ensure appropriate health care outcomes 

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

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

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

including the leading health maintenance organizations (HMOs) and 

pharmacy benefit management (PBMs) companies, that provide 

comprehensive pharmacy coverage to the millions of Americans served 

by managed care. 
We commend the Inspector General’s 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 prescriber’s 

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 plan’s formulary. The plan’s 

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 

plan’s 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 PBM’s 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 PBM’s 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 nation’s 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 anticompetitive actions. 

9. The report’s 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 AMCP’s 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 

PrincipalEconomist Chicago, Ulinois 60610 

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: 

3124644427 

312-464-5849 Fax 

Your report, “Experiences of Health Maintenance Organizations with Pharmacy Benefit 

Management Companies, 8’which 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 PBM’s 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 

Association (202) 628-4410 Fax (202) 783-2351 

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: 

The National Professional 

Society of Pharmacists 

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 today’s 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 

report’s audience to understand that PBM performance depends to a great extent on the 

performance of the pharmacists serving the PBM’s 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 HCFA’s 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 patient’s 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 Medicaid’s 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 report’s recommendations. Please don’t 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 

Department’s 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%rdedtoMedlcareandMedieaidbeneficlaxiesbyF’BMs. 

The iqut of he&h profcssionais such as pharmacists who axedirectly responsible for drug managemext 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 dcvolopmat 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 thac’PBMshave, 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 

ASHP’Brckvmt guidaxce documents is cmhcd. Referenw to and reliance upon these documet@. and those published by other’crcdiblc 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~vcntcd’hadtbapBMpaymest~~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 education 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 ConsumerCoalition 

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 report’s 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 plan’s 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 

Brian W. Lfndberg. Executive Director -.e*> 
June Gibbs Brown Correspondence 

Page Two 

utilization review pro,cess, and complete information on an enrollee’s 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 report’s 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 
REGiON FAX 84107869184 

PI 10 .--

- - FEB-24$ $NJ EVALANDINSPECT FAX NO,NO,2024010556 . P. 02 , 7121f lb:51 OIG OEI 1 

c. 

i: 

OEPARTMENT OF HUMAN SEFIVICCS WINILES M. P&bhER. DIREC?‘~ 

June QibbsEfowrl 

hspedof General 

Clfke of lnspeotw General 

Department of Heatth and Human Servfces 

Wa6hlngton, D.C. 2om 

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 

AdvisoryOroup(P-TAG). 

�  Thedefinition ol gu&itycan be quitewiebfe and needs to be analyzed from 

~Mtipie vieupMss i.e., beneficiary,p&yw, @-widerand heatth Cwtoomes. 

7 ’ �  Caution is urgedtfwtthe qualitymeawes developedfor uwby Medicare . amay or IMy not be applicable(in total or in pwt) to Medicaid. ficperm 

withHEDfSrevealthat. Iha mportk~nguageseemsto htpHythat Medicafd 

&Odd fofhawtheMedllm lead. PwhapeWc&d be statedthat Medicald 

can learnfromMm butstatesalsoneed 10addressqualityissuesthat 

are uniqueti the MedWd popufatff, 

. 01G recommends that HCFA, FDA, and the tiealth Reswrces and Service8 

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. 

HOOVER STATE OFF IGk BUIl.OING �  DES MOINES. (OWA 50319-01 i4 

MS-. . . 
P, 11 

FEB-24-97 HON 17:12 OIG OEI REGION I FAXNO, 84107869184 

Jp-12-w ww lb:52 EVALANDINSPECT ( F@jNO, ?024?10556 , P,03 

. I 

he GibbsBrown 

February5‘1997 

Page Tvm 

Owmll, I believethe mportaccurately t33figctsthe currentatatw of the relationshipbeb?en HMO88d PBMS. 

OonafdVU.Herman 

AdmimcK 

DIVISION OF MERtCALSERVICESand 

Chair,Phmnacylectmical Ad&my G6.p 

, ; 0H:JM:vh . . . ‘.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. Medicare’s 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 HCFA’s 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. 

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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, 

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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 

GAO’s 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: 

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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 anticompetitive 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 anticompetitive 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? 

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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 HMO’s 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. 

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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. 

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Another recent, independent study of one large purchaser’s 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 physician’s 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 Don’t,” 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. 

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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 

Medco’s 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 Medco’s 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 Merck’s 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 company’s products through 

the PBM]. These capabilities [to switch market share] are what we’re 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) 

(3) 

(4) 

(5) 

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. 

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 costsavings 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.) 

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. 

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., “ComputerBased 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 company’s 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 Merck’s market share. Expanding our information base is 

critical to these goals. (See Nancy A. Nichols, “Medicine, Management, and 

Mergers: An Interview with Merck’s P. Roy Vagelos,” Harvard Business Review, 

106. 

Another news report summarizes comments of a drug manufacturer executive about his 

company’s 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-Lilly’s 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 Lilly’s 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: “Who’s 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.) 

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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 Idaho’s health plans. As part of the deal, Caremark will gain access to 

“medical and prescription drug patient data that will facilitate the company’s 

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 

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. 

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i 
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 Apha’s 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 AMA’s 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 “anticriticism 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.) 

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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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