United States General Accounting Office

GAO Report to Congressional Requesters

February 1997 PHARMACY BENEFIT

MANAGERS

FEHBP Plans Satisfied

With Savings and

Services, but Retail

Pharmacies Have

Concerns

GAO/HEHS-97-47

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-276005 

February 21, 1997

Congressional Requesters

The Office of Personnel Management (OPM) estimates that insurance

carriers in the Federal Employees Health Benefits Program (FEHBP)

covered nearly 9 million federal employees, retirees, and dependents in

1995 and that pharmacy benefit payments for its five largest plans were

about $2 billion.1

 Moreover, pharmacy benefit payments for these plans

accounted for an increasing share of their total FEHBP health care

costs—growing from 12 percent in 1990 to 19 percent in 1995.

Like a growing number of health insurers interested in controlling

prescription drug costs, FEHBP plans have contracted with companies

called pharmacy benefit managers (PBM). These companies manage

pharmacy benefits on behalf of plan sponsors, such as self-insured

employers and HMOs. By the end of 1995, about 58 percent of federal

enrollees were covered by a PBM, according to OPM.

As PBMs have assumed a bigger role in managing pharmacy benefits for

federal enrollees, questions have arisen about the effect of their costcontainment methods on the quality and availability of pharmacy services

and on other segments of the health care marketplace. Accordingly, we

were asked to provide information on (1) why FEHBP plans have contracted

with PBMs to provide pharmacy benefits, (2) what types of services and

savings the PBMs provide FEHBP plans, (3) how FEHBP plans evaluate PBM

customer service, and (4) the concerns of retail pharmacists about the

quality of PBM pharmacy services and the effect of some PBM practices on

the retail pharmacy business.2

To address these questions, we examined three FEHBP plans that

contracted with PBMs—the Blue Cross and Blue Shield Association (Blue

Cross), the Government Employees Hospital Association (GEHA), and the

Rural Carrier Benefit Plan (Rural). Together, these plans cover about

50 percent of all FEHBP employees and retirees, and each contracts with

one of the six largest PBMs. Although the Rural plan has a relatively small

enrollment compared with Blue Cross and GEHA, it is one of the few

1

OPM did not have pharmacy benefit payment data for the remaining plans, most of which were health

maintenance organizations (HMO).

2

For other related GAO products, see Blue Cross FEHBP Pharmacy Benefits (GAO/HEHS-96-182R,

July 19, 1996); Blue Cross and Blue Shield: Change in Pharmacy Benefits Affects Federal Enrollees

(GAO/T-HEHS-96-206, Sept. 5, 1996); and Pharmacy Benefit Managers: Early Results on Ventures With

Drug Manufacturers (GAO/HEHS-96-45, Nov. 9, 1995).

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fee-for-service FEHBP plans that contracts with a PBM other than MerckMedco Managed Care, Inc., or PCS Health Systems, Inc. (These companies

are referred to in this report as “Medco” and “PCS,” respectively.) We met

with representatives of each plan and the PBMs they contract with,

reviewed the contracts between the plans and PBMs, analyzed reports on

the PBMs’ performance in meeting contract requirements, and reviewed

plan customer satisfaction surveys. Appendix I contains a detailed

discussion of our scope and methodology.

This report was prepared initially at the request of, among others, the

former Chairman, Subcommittee on Oversight of Government

Management and the District of Columbia, and the former Ranking

Minority Member, Subcommittee on Post Office and Civil Service. In

addition to the other initial requesters, we are addressing this report to the

Ranking Minority Member, Subcommittee on Post Office and Civil Service,

Committee on Government Management, and the Ranking Minority

Member, Subcommittee on Civil Service, Committee on Government

Reform and Oversight, because it contains information pertaining to

matters under these Subcommittees’ jurisdictions.

Results in Brief The three FEHBP plans we studied contracted with PBMs to control rapidly

rising pharmacy benefit payments. The plans estimate that PBMs saved

them over $600 million in 1995 by obtaining manufacturer and pharmacy

discounts and managing drug utilization. These savings reduced the

pharmacy benefit costs each plan believes it would have paid without

using a PBM by between 20 and 27 percent.

The PBMs met most of the performance standards in their 1995 contracts,

and the plans believe that the PBMs have provided plan enrollees highquality pharmacy service. Surveys of plan enrollees also indicate a high

degree of satisfaction, with between 93 and 98 percent of respondents

noting satisfaction with their pharmacy benefit services.

The plans’ decisions to use PBMs to control pharmacy benefit costs,

however, can shift business away from retail pharmacies. For example,

Blue Cross’s 1996 benefit change, which encouraged mail order purchases,

reduced affected enrollees’ payments to retail pharmacies by 36 percent or

about $95 million. During the same period, total payments to retail

pharmacies for all enrollees decreased by about 7 percent or about

$34 million. Moreover, PBM and plan officials, as well as industry experts,

acknowledge that any additional efforts to control FEHBP pharmacy benefit

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costs in the future might require plans to adopt more restrictive costcontainment procedures that could possibly limit enrollees’ access to

drugs and pharmacy services and lessen enrollees’ satisfaction with their

pharmacy benefits.

Background OPM contracts with almost 400 health insurance carriers to operate the

FEHBP. Under this program, health insurance carriers, including fee-forservice plans and HMOs, offer about 8.7 million federal employees, retirees,

and dependents health benefit plans that include pharmacy benefits.

In the last 10 years, several FEHBP plans have contracted with PBMs to

manage pharmacy benefits. Blue Cross, GEHA, and Rural have contracted

with PBMs to obtain both mail order and retail pharmacy services. Blue

Cross, the largest FEHBP plan, contracted with Medco in 1987 to provide

mail order services and with PCS in 1993 to provide retail services. GEHA

has used Medco to manage mail order services since 1990 and retail

services since 1993. Rural first contracted for mail order services in 1986.

It has used Caremark, Inc., to manage mail order services since 1992 and

retail services since 1993.

OPM oversees all FEHBP contracts and reviews benefit change proposals to

assess the changes’ cost-effectiveness and possible effect on the delivery

of benefits to federal enrollees. The federal health plans oversee the

activities of the PBMs and report to OPM any significant problems that could

affect the delivery of benefits to enrollees. OPM does not review or audit

PBM savings estimates unless they are submitted as justification for a

benefit change that could affect the quality of enrollees’ services.

PBMs Provide FEHBP

Plans a Range of

Cost-Control Services

Officials at the plans we visited said that they contracted with PBMs to help

control rapidly rising pharmacy benefit payments. The use of PBMs allows

the plans to pay lower prices for prescription drugs and provide a wide

range of services that typically reduce pharmacy benefit costs and improve

customer services, such as providing mail order drug services and

checking prescriptions for adverse drug interactions. According to PBM

officials, the services they offer to the FEHBP plans are generally equivalent

to those offered to private industry customers.

According to Rural officials, their decision to use a PBM to provide mail

order services in 1986 was directly linked to a need to contain pharmacy

benefit payments that were rising faster than the increase in drug

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utilization. GEHA officials also cited the need to slow the rate of increase in

their pharmacy benefit payments, which they attributed to rising drug

prices and utilization. Blue Cross officials also said that they expected PBM

services to help them control pharmacy benefit payments, which have

constituted an increasing share of total benefit payments.

The plans’ PBMs provide a variety of administrative services intended to

control costs. These include retail pharmacy network development, mail

order pharmacy operation, formulary development, and manufacturer

rebate negotiation. Table 1 describes some of the administrative services

that the PBMs provide the FEHBP plans.

Table 1: Examples of PBM Administrative Services Provided to Three FEHBP Plans

Service Description

Retail pharmacy network

development

PBMs recruit pharmacies, negotiate network drug price discounts, and monitor network

pharmacies’ customer services.

Mail order pharmacy operation PBMs operate mail order pharmacies that allow enrollees to obtain prescriptions, particularly

maintenance prescriptions, by mail.

Formulary development PBMs use pharmacy and therapeutics (P&T) committeesa to help develop formularies that list drugs

the plans prefer physicians to prescribe in each therapeutic category.

Rebate negotiation PBMs negotiate and obtain rebates from drug manufacturers in return for inclusion and low-cost

designation of their drugs on the plans’ formularies and for formulary compliance programs that

impact market share.

Claims processing PBMs process benefit claims and prepare periodic payment and drug utilization reports for plan

customers.

aP&T committees are independent groups of health care professionals that evaluate drugs in all

therapeutic categories on the basis of safety, efficacy, and substitutability.

The PBMs’ mail order pharmacies and retail pharmacy networks discount

prescriptions purchased by plan enrollees. The PBMs typically reimburse

the retail pharmacies according to a discount formula based on an

industry standard, such as the drug’s usual and customary price,3

 average

wholesale price (AWP),4

 or maximum allowable cost (MAC)5 plus a

dispensing fee. The PBMs also require network pharmacies to support other

cost-reduction techniques, such as substituting a less expensive generic

drug for a brand-name drug when an equivalent generic drug is available.

3

The usual and customary price is the price pharmacies charge cash-paying customers whose

prescriptions are not covered by health insurers.

4

Drug manufacturers suggest a list price that wholesalers charge pharmacies. The average of the list

prices, collected for many wholesalers, is called a drug’s AWP.

5

MAC refers to a maximum price that retail pharmacies in plans’ networks may be paid for certain

generic drugs.

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Pharmacies accept these levels of reimbursement and PBM cost-reduction

practices to attract or retain the plans’ enrollees.

Two of the FEHBP plans use the PBMs’ national formularies to indicate the

prescription drugs that the plans prefer enrollees to use.6

 All of the

formularies list the drugs by therapeutic class and, in some cases, relative

price. The PBMs give physicians and enrollees copies of the formularies to

encourage the use of lower cost formulary drugs over higher cost

formulary and nonformulary drugs and to perform other formulary

compliance activities (see table 2). This ability to direct market share

within a therapeutic class allows the PBMs to obtain rebates from

manufacturers of formulary drugs. On the basis of plan estimates, the

plans we examined received over $113 million collectively in rebates in

1995. Rebates accounted for between 2 and 21 percent of the plans’

estimated savings. Because the FEHBP plans use open formularies, enrollee

reimbursement is not limited to the drugs listed on the formularies.7

In addition to obtaining rebates and price discounts, the PBMs use other

methods referred to as “interventions” to cut costs and improve pharmacy

services. These interventions include activities such as drug utilization

review (DUR), generic and therapeutic interchange programs, and disease

management programs. Table 2 describes some of the intervention

services that the PBMs provide the FEHBP plans.

6

Blue Cross does not use its PBMs’ national formularies. Rather, Blue Cross develops its own

formulary with input from its two PBMs.

7

The PBMs also offer their customers incentive-based or closed formularies. Incentive-based

formularies require enrollees to pay higher copayments if their physicians prescribe nonformulary

drugs. Closed formularies are more restrictive, limiting coverage to formulary drugs only.

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Table 2: Physician and Pharmacist Interventions Performed for Three FEHBP Plans

Intervention Description

DUR DUR programs analyze patterns of drug use to prevent contraindications and adverse interactions.

PBMs use this information to make prescription substitution recommendations to physicians and

inform plans and physicians about physicians’ prescribing patterns.

Generic substitution Generic substitution interventions switch medications from brand-name drugs to chemically

equivalent generic drugs. In some states, pharmacists can make this switch if the physician does

not indicate that the prescription must be dispensed as written.

Therapeutic interchange Therapeutic interchange interventions switch nonformulary medications to preferred formulary

drugs. Therapeutic intervention programs encourage patients to use, and physicians to prescribe,

less expensive brand-name formulary drugs considered as safe and effective as other, more

expensive brand-name drugs.

Prior authorization Prior authorization is required for medications that may be used to treat conditions or illnesses that

are not covered by a plan, are outside the Food and Drug Administration or manufacturer

guidelines, have a high potential for abuse, or are ordered in unusual quantities.

Disease management Disease management programs try to improve the care delivered to a specific group of patients,

such as those with diabetes, by recommending particular therapies or patient self-management

techniques. PBMs use physician and patient education materials to emphasize shared

responsibility and cost-effective approaches.

The PBMs’ retail network and mail order pharmacies use computerized

systems to review enrollees’ combined mail order and retail pharmacy

records and detect problems with prescriptions at the point of dispensing.

These concurrent activities can alert the pharmacist when a drug may

adversely interact with other drugs a patient is using. They can also

identify situations when a generic or formulary alternative to the

prescribed drug is available or when the drug duplicates an existing

prescription. If the review identifies a nonrecommended, redundant, or

potentially harmful drug, a pharmacist or technician contacts the

prescribing physician. Figures 1 and 2 depict the mail order and retail

dispensing processes at Caremark.

Page 6 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
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Figure 1: Mail Order

Prescription-Dispensing Process

Page 7 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
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Figure 2: Retail Network

Pharmacy-Dispensing Process

The PBMs’ retrospective DUR programs study the combined retail and mail

order drug utilization patterns of the plans’ enrollees to identify other

Page 8 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
B-276005 

instances in which physicians may have prescribed inappropriate

medications or enrollees may not be using prescribed drugs properly.

When retrospective DUR activities identify inappropriate prescribing or

drug usage, such as incorrect dosages or durations of therapy, PBMs

typically contact the physicians and encourage the use of more costeffective drugs or appropriate therapies.

The PBMs also try to help the plans contain spending for chronic

conditions, such as asthma and diabetes, by developing disease

management programs to manage the care of enrollees with specific

illnesses. For example, two PBMs indicated that they notify enrollees and

their physicians about the method they consider most effective for treating

asthma. Such disease management activities try to educate both enrollees

and their physicians about more cost-effective treatments and monitor

compliance with the interventions. The treatment programs are intended

to help reduce the risk of complications and costly additional care, such as

unnecessary diagnosis-related emergency room visits.

FEHBP Plans Report

That PBM Services

Yield Substantial

Savings

The three FEHBP plans estimate that the PBMs saved their plans over

$600 million in pharmacy benefit costs in 1995. Although each of the plans

used different approaches to estimate savings and in some cases may have

defined savings sources differently, the savings for all three plans are

based on the plans’ estimates of what they would have paid for

prescription drugs and related services without a PBM. The estimates were

prepared by plan or PBM officials using PBM savings data. Although two

plans told us that they validated some of the PBM data, none of the

methodologies used to estimate savings has been examined by

independent auditors. Moreover, according to OPM officials, OPM does not

review or audit the savings unless they relate to plan benefit changes that

could affect enrollee services.

Blue Cross estimated that its 1995 FEHBP pharmacy savings totaled about

$505 million. Pharmacy benefit payments in 1995 totaled about $1.4 billion.

Figure 3 shows the percentage of total savings that Blue Cross attributed

to different PBM services.

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Figure 3: 1995 Blue Cross FEHBP

Pharmacy Savings

52.3% • Retail and Mail Order Pharmacy

Discounts

21.2%•

Manufacturer Discounts

•14.3%

MAC

•

7.2%

Prior Approval

•

2.7%

Intervention Program

2.0%

DUR

0.4%

COB

Source: Blue Cross and Blue Shield Association.

The following describes the savings that Blue Cross attributed to PBM

services:

• Retail and mail order pharmacy discounts accounted for about

$264 million in savings.8

 For retail, total savings resulted from the

difference between the reimbursement amount PCS paid pharmacies for

individual prescriptions and the drugs’ usual and customary prices. Mail

8

Retail pharmacy savings do not include savings from the use of generic drugs for which PCS has set a

maximum reimbursement limit for pharmacies.

Page 10 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
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order savings resulted from discounts off AWP that Blue Cross negotiated

with Medco.

• MAC savings accounted for approximately $72 million in savings. These

savings resulted from the difference between the reimbursement amount

PCS paid the pharmacies for certain generic drugs and the drugs’ usual and

customary prices.9

• Manufacturer rebates accounted for about $107 million in savings and

represent the guaranteed manufacturer discounts that PCS and Medco

negotiated with drug manufacturers for including their products on their

formulary. Blue Cross received 90 percent of the total rebates, and the

PBMs retained the remaining 10 percent as an administrative fee and

incentive to increase the amount of discounts.

• DUR accounted for about $10 million in savings that resulted from clinical

activities the PBMs performed. Savings include the sum of the prices of

prescriptions reversed or denied because of DUR alerts.10

• Medco’s intervention program accounted for about $13.5 million in

savings, which were derived, in part, from the use of less expensive

brand-name drugs.

• The prior approval program accounted for about $36.5 million in savings.

Blue Cross determined savings from this program by calculating the cost

of prescriptions denied reimbursement or never filled by enrollees who

received a prior approval form.11 This program covers 13 drugs that

require Blue Cross approval before dispensing.

• The coordination of benefits (COB) program accounted for about $2 million

in savings. Blue Cross computed savings from this program by determining

the total reductions in the amount Blue Cross was responsible for paying

for claims that were also covered in part by other insurers. COB is an

industrywide method used to avoid paying duplicate benefits to an

individual covered by another insurer.

GEHA estimated that its 1995 FEHBP pharmacy savings totaled about

$85 million. Prescription drug payments in 1995 totaled about $226 million.

9

MAC savings include about 73 percent of all generic drugs dispensed by retail pharmacies that are

reimbursed by Blue Cross. The remaining 27 percent represent generic drugs for which Blue Cross, at

PCS’ recommendation, does not pay retail pharmacies incentives to encourage substitution because

(1) they have such narrow therapeutic ranges that variations among them could affect a patient’s

response or (2) generically available products with reliable suppliers and low cost are insufficient to

justify such incentives.

10A DUR alert could occur for several reasons, including one or more of the following: rejects for early

refill and maximum daily dose and reversals based on screens for drug interaction, duplicate therapy,

drug allergy, drug and pregnancy, drug and disease, drug and gender, drug and age, under-minimum

daily dose, and underuse.

11Savings calculations involved determining the number of months for which a specific drug is usually

prescribed.

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Figure 4 shows the percentage of total savings that GEHA attributed to

different PBM services.

Figure 4: 1995 GEHA FEHBP Pharmacy

Savings

73.9% • Retail and Mail Order Pharmacy

Discounts

•

9.4%

DUR

•

7.0%

Formulary Rebates

•

4.7%

Generic Substitution

•

4.7%

Disease Management

0.2%

Prior Authorization

Source: GEHA.

The following describes the savings that GEHA attributed to PBM services:

• Retail and mail order pharmacy discounts accounted for approximately

$63 million in savings. Total savings resulted from the difference between

Page 12 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
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the AWP that GEHA would have paid for retail and mail order drugs and what

GEHA did pay for these drugs because of the negotiated discounts.

• DUR accounted for about $8 million in savings, which resulted from the

concurrent clinical activities the PBM performed. For drugs receiving a DUR

alert, savings include the sum of the prices of prescriptions reversed or

denied before dispensing.

• Formulary rebates accounted for approximately $6 million in savings.

Under the retail and mail order programs, Medco receives discounts from

certain drug manufacturers for including the manufacturers’ products on

Medco’s national formulary. In 1995, GEHA retained 80 percent of total

rebates due to the dispensing of each manufacturer’s formulary drugs

under GEHA’s program. GEHA had a guaranteed formulary savings of

3 percent of the total ingredient cost of brand-name drugs dispensed

through the mail.

• Generic substitution accounted for about $4 million in estimated savings.

Although GEHA did not have a guaranteed generic substitution rate in 1995,

its substitution rate was higher in 1995 than 1994. The savings represent

the difference between the 1994 and 1995 generic savings. In other words,

in 1994, where applicable, generic equivalents were substituted for

brand-name drugs 68 percent of the time and, in 1995, about 77 percent of

the time. GEHA’s 1995 savings represent the difference between

brand-name and generic prices for 9 percent of the drugs dispensed at

both retail and mail order pharmacies.

• Disease management accounted for approximately $4 million in savings.

Savings resulted from multiplying a PBM-determined savings per patient per

year in overall health care costs by the number of patients enrolled in

GEHA’s diabetes program.12

• Prior authorization accounted for about $200,000 in savings, which were

determined by calculating the cost of a prescription drug that was denied

reimbursement or never filled by enrollees who received a prior

authorization form.13

Rural estimated that its 1995 FEHBP pharmacy savings totaled about

$11.6 million. Prescription drug payments in 1995 totaled about

$46 million. Figure 5 shows the percentage of total savings that Rural

attributed to different PBM services.

12Because GEHA chose not to provide medical claims data to the PBM, the PBM relied on its

experience with another client who was enrolled in its diabetes disease management program to

estimate overall savings per patient.

13According to GEHA officials, they only required prior authorization for one drug in 1995.

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Figure 5: 1995 Rural FEHBP Pharmacy

Savings

69% • Retail and Mail Order Pharmacy

Discounts

•16%

Managed Plan

•11%

DUR

2%

Formulary Substitutions

2%

Formulary Rebates

Source: Caremark.

The following describes the savings that Rural attributed to PBM services:

• Retail and mail order pharmacy discounts accounted for approximately

$8 million in savings. These savings resulted from price discounts off

drugs’ AWP for brand-name and AWP or MAC for generic pharmaceutical

products at mail order and retail pharmacies.

• DUR accounted for about $1.3 million in savings, which occurred when

Caremark did not fill prescriptions due to routine DUR alerts such as drug

allergy, patient not covered, or duplicate claim.

• Managed plan activities accounted for about $1.9 million in savings. These

savings resulted from instances when Caremark pharmacists contacted

physicians and obtained permission to substitute a generic drug for a

brand-name drug that was prescribed “Dispense as Written.” Other savings

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resulted from clinical interventions, such as recommendations for more

appropriate drug regimens or duration of drug therapy.

• Substitution of formulary drugs for nonformulary drugs by the mail order

pharmacy accounted for about $200,000 in savings.

• Formulary rebates accounted for approximately $200,000 in savings.

Caremark pays Rural an annual rebate based on a percentage of the prior

year’s drug costs.

FEHBP Plans Report

That PBM Customer

Services Meet

Performance

Standards

The FEHBP plans evaluate PBM customer service by determining the extent

to which the PBMs meet the annual performance standards in their

contracts. The performance standards are intended to ensure quality

service, and they focus on factors such as mail order turn-around time and

access to counseling and retail pharmacy services. According to plan data,

the PBMs met most of each plan’s customer service performance standards

in 1995. Furthermore, enrollees in all three plans reported high levels of

satisfaction with the quality of PBM services.14

All of the PBM contracts include performance standards for customer

services provided to the FEHBP plans and their enrollees. The mail order

contracts typically specify acceptable time frames for telephone responses

and prescription dispensing. For example, two of the plans’ contracts

require their PBMs to answer a specified percentage of the customer

service telephone calls to each plan’s mail order pharmacy within 20

seconds. All of the contracts also require the PBMs to dispense between 90

and 99 percent of all mail order prescriptions within 2 to 7 business days.

Regarding retail network access, one plan’s contract specifies that a

network pharmacy be located within 5 miles of 98 percent of the plan’s

enrollees. Although the other two 1995 contracts did not specify pharmacy

distances, one plan’s retail network had a pharmacy within 5 miles of

92 percent of the plan’s enrollees, and the other plan’s PBM was required to

contract with retail pharmacies in “agreed-upon locations.”

All of the plans use customer surveys to assess enrollees’ satisfaction with

their pharmacy benefits. In addition to reviewing the performance

reflected in the PBMs’ operating reports, the survey addresses specific

14Blue Cross contracts with the Gallup Organization to conduct quarterly retail and mail order

customer satisfaction surveys. GEHA receives the results of semiannual retail and mail order customer

satisfaction surveys from Medco. Caremark contracts with Walker Research to conduct annual

customer satisfaction surveys. The Caremark survey population is not limited to Rural enrollees, but

Caremark and Rural use the results as a performance indicator because Rural enrollees account for a

large proportion of those served. None of the plans has audited the survey results.

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issues, such as whether the enrollees felt the time their calls were on hold

was reasonable, and more general issues, such as enrollees’ overall

satisfaction with program performance.

In 1995, the plans’ surveys typically reflected high levels of enrollee

satisfaction. For example, an average of 94 percent of those who

responded to Blue Cross’s 1995 quarterly pharmacy program surveys

indicated that they were either “satisfied” or “very satisfied” with their

mail order prescription service.15 According to Caremark, 95 percent of

those who responded to its annual customer satisfaction survey described

their experiences purchasing long-term prescriptions through Caremark’s

mail order service as “good,” “very good,” or “excellent.”16 Caremark

reported that 93 percent of those responding indicated similar satisfaction

with their retail services. GEHA’s 1995 biannual patient satisfaction survey

results showed that about 98 percent of enrollee responses indicated their

overall level of customer satisfaction with retail and mail order services as

“satisfied” or “very satisfied.”

PBM Practices

Concern Retail

Pharmacies

The FEHBP plans we studied are satisfied with the savings and quality of

services provided by the PBMs, and enrollees have reported a high degree

of satisfaction with PBM pharmacy services. The National Association of

Chain Drug Stores (NACDS) and retail pharmacists, however, have raised

questions about the effect of PBM use on retail pharmacies and the quality

and availability of pharmacy services. The pharmacists’ concerns typically

focus on three areas—access to retail pharmacy services, quality of mail

order pharmacy services, and reduced reimbursement for drugs dispensed

by retail pharmacies.

Although retail pharmacists contend that FEHBP plans’ use of PBMs can limit

enrollees’ ability to obtain prescriptions at their local retail pharmacies,

plan data indicate that enrollee access to retail pharmacy services has not

been substantially limited. For example, in 1995, enrollees could purchase

discounted prescriptions at between 44,000 and 55,000 retail network

pharmacies, or between 80 and 97 percent of pharmacies nationwide, and

obtain mail order services particularly valued by enrollees who do not live

near a retail pharmacy. Furthermore, they could purchase regularly priced

prescriptions at any retail pharmacy.

15Blue Cross’s customer survey for its retail pharmacy program did not contain a comparable measure

for its retail pharmacy services.

16Although Caremark’s survey does not specifically target Rural enrollees, Rural officials believe that

the results are indicative of Rural enrollees’ experience.

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Retail pharmacists also have raised questions about the quality of mail

order services because mail order pharmacists cannot provide face-to-face

counseling to patients and lack access to information about all the

medications an enrollee is using. We found, however, that although mail

order pharmacists at the plans we studied do not provide face-to-face

patient counseling, they do provide telephone counseling 24 hours a day.

In addition, both retail network and mail order PBM pharmacists for these

plans have access to integrated drug utilization records that include all the

prescriptions each enrollee has received through the plans’ retail network

and mail order pharmacies. As a result, pharmacists at these locations

appear equally able to detect potentially adverse drug interactions or

inappropriate prescriptions before dispensing a drug. In addition, both of

the mail order pharmacies we observed use a variety of quality assurance

processes to ensure that enrollees receive the correct drug and number of

prescriptions. These processes include automated scans that match

prescriptions to drug quantities, names, and mailing labels. Typically,

these and most other pharmacy activities are performed by pharmacists or

trained pharmacy technicians supervised by pharmacists.

Lastly, retail pharmacists contend that FEHBP plans’ use of PBMs can affect

retail pharmacies’ business in two ways. First, plan designs can provide

enrollees with financial incentives to use mail order services. Second,

cost-containment strategies can rely too heavily on retail pharmacy

discounts.

A pharmacy benefit change instituted by Blue Cross in 1996 illustrated the

retail pharmacists’ concerns. This change affected the way many federal

enrollees obtain prescription drugs. Blue Cross’s attempt to increase

savings by encouraging mail order purchases produced an unexpectedly

rapid increase in mail order prescriptions, resulting in a 36-percent

reduction or about $95 million in payments for affected enrollees to retail

pharmacies during the first 5 months of 1996. Total payments to all retail

pharmacies for prescriptions dispensed to all enrollees in Blue Cross’s

federal health plan, including those affected by the benefit change,

decreased about $34 million or about 7 percent during that period. Rural

experienced a similar shift when the plan implemented a comparable

benefit change in 1989. According to Rural officials, this change also

resulted in an immediate and substantial increase of between 35 and

40 percent in the number of prescriptions filled by mail order.

Nevertheless, in 1995, over two-thirds of all prescriptions at the Blue Cross

and GEHA federal health plans continued to be filled by retail pharmacies.

Page 17 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
B-276005 

However, payments to retail pharmacies differed between the two plans.

About 70 percent of Blue Cross’s prescription payments17 went to its retail

network pharmacies; over two-thirds of GEHA’s prescription payments

went to its mail order pharmacy.

Concerns about the size and effect of PBM pharmacy discounts are

reflected in reports that pharmacy profit margins are decreasing as PBMs

and managed care organizations account for a greater share of pharmacy

business. Moreover, an industry trade publication reported that the

number of independent pharmacies decreased by 1,800 or about

7.2 percent in 1995.18 However, the publication also notes that many of

these pharmacies were purchased by major drug chains and then absorbed

into the chains’ nearest pharmacies.

Although the future impact of PBM use on federal enrollees and retail

pharmacies is unclear, additional efforts to control FEHBP plans’ pharmacy

benefit costs could affect retail pharmacies and federal enrollees. For

example, if the number of retired FEHBP enrollees continues to grow,

payments for maintenance drugs might increase and the plans might

decide to provide additional incentives to use mail order services for

maintenance prescriptions. This type of benefit change could allow the

plans to take further advantage of large mail order discounts but could

also result in further declines in the plans’ payments to retail pharmacies.

Moreover, if plans adopt additional actions to control pharmacy benefit

costs, such as adopting restrictive formularies and more aggressive

therapeutic interchange programs or reducing reimbursement rates and

the size of the retail network, these actions could affect enrollees’ access

to drugs. Such actions could also affect enrollees’ satisfaction with their

pharmacy benefits as well as the retail pharmacies’ business.

Agency and Other

Comments

We obtained comments on a draft of this report from OPM, Blue Cross,

GEHA, Rural, Medco, and Caremark. We also obtained comments from

NACDS on the section of the report that addressed the concerns of retail

pharmacies. In general, they found the report to be accurate and complete

and provided specific technical comments, which we incorporated into the

report where appropriate.

17Unlike GEHA’s payments, the Blue Cross payments do not include the copayments that patients paid

to retail pharmacies for their prescription drugs.

18Marie Griffin, “Showing Strength, Back-to-Basics Approach Enables Drug Chains to Reach New

Heights,” Drug Store News, April 29, 1996, p. 59.

Page 18 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
B-276005 

Copies of this report will be made available to the Director of OPM; officials

of Blue Cross, GEHA, Rural, Medco, PCS, and Caremark; and others upon

request.

This report was prepared by John C. Hansen, Assistant Director; Jennifer

Weil Arns, Evaluator-in-Charge; and Mary W. Freeman. Please call Mr.

Hansen at (202) 512-7105 if you or your staff have any questions.

Bernice Steinhardt

Director, Health Services Quality

 and Public Health

Page 19 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
B-276005 

List of Requesters

The Honorable Joseph Lieberman

Ranking Minority Member

Subcommittee on Post Office

 and Civil Service

Committee on Governmental Management

United States Senate

The Honorable John L. Mica

Chairman

The Honorable Tim Holden

Ranking Minority Member

Subcommittee on Civil Service

Committee on Government Reform

 and Oversight

House of Representatives

The Honorable Barbara A. Mikulski

United States Senate

The Honorable Benjamin Gilman

House of Representatives

The Honorable James Moran

House of Representatives

Page 20 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Page 21 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Contents

Letter 1

Appendix I 

Scope and

Methodology

24

Tables Table 1: Examples of PBM Administrative Services Provided to

Three FEHBP Plans

4

Table 2: Physician and Pharmacist Interventions Performed for

Three FEHBP Plans

6

Figures Figure 1: Mail Order Prescription-Dispensing Process 7

Figure 2: Retail Network Pharmacy-Dispensing Process 8

Figure 3: 1995 Blue Cross FEHBP Pharmacy Savings 10

Figure 4: 1995 GEHA FEHBP Pharmacy Savings 12

Figure 5: 1995 Rural FEHBP Pharmacy Savings 14

Abbreviations

AWP average wholesale price

COB coordination of benefits

DUR drug utilization review

FEHBP Federal Employees Health Benefits Program

GEHA Government Employees Hospital Association

HMO health maintenance organization

MAC maximum allowable cost

NACDS National Association of Chain Drug Stores

OPM Office of Personnel Management

PBM pharmacy benefit manager

PCS PCS Health Systems, Inc.

Page 22 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Page 23 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
Appendix I 

Scope and Methodology

To understand why the FEHBP plans we studied had contracted with PBMs

for pharmacy benefit services, we met with representatives of OPM, Blue

Cross, GEHA, and Rural to discuss their reasons for contracting with PBMs

and the goals they hope to achieve through PBM contracts. We also

obtained prescription and total benefit payment data from the plans and

OPM.

To identify PBM services, we reviewed recent PBM contracts, OPM open

season benefit brochures, and plan and PBM benefit literature. We also

observed operations at Medco’s Tampa, Florida, and Caremark’s

Richmond, Virginia, mail order pharmacies and met with plan and PBM

officials to discuss these services in detail. To determine the means used

to assess PBM performance, we examined contracts and planning

documents to identify performance standards such as telephone response

times and time required to fill prescriptions. We also interviewed plan and

PBM officials to discuss PBM performance assessment, and we reviewed

activity reports to determine whether the PBMs are meeting performance

requirements.

Regarding concerns about the effect of PBM use, we met with plan officials

to discuss their satisfaction with PBM savings and obtain savings estimates.

We also obtained copies of customer surveys and questions used to assess

enrollee satisfaction. However, the reported results of these customer

satisfaction surveys have not been verified by the plans or OPM. We met

with representatives of NACDS to discuss their views on the effect of PBMs

on retail pharmacies. In addition, we reviewed the Health Care Financing

Administration’s report, Assessment of the Impact of Pharmacy Benefit

Managers, dated September 30, 1996. We also examined Blue Cross

prescription utilization and drug payment data to determine the effects of

the 1996 pharmacy benefit change on payments to retail pharmacies.

Because much of the information contained in the PBM contracts is

proprietary and confidential, we have not specified individual

manufacturer discounts and rebates. Moreover, because actual drug prices

are proprietary, we did not compare mail order and retail drug prices.

We conducted our study between March 1996 and January 1997 in

accordance with generally accepted government auditing standards.

(108298) Page 24 GAO/HEHS-97-47 FEHBP Pharmacy Benefits
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