PRESCRIPTION 

DRUGS

The Number, Role, 

and Ownership of 

Pharmacy Services 

Administrative 

Organizations

Report to the Ranking Member, 

Committee on Energy and Commerce, 

House of Representatives

January 2013

GAO-13-176

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-176, a report to the 

Ranking Member, Committee on Energy and 

Commerce, House of Representatives

January 2013

PRESCRIPTION DRUGS

The Number, Role, and Ownership of Pharmacy 

Services Administrative Organizations

Why GAO Did This Study

Independent pharmacies dispensed 

about 17 percent of all prescription 

drugs in the United States in 2010. To 

obtain, distribute, and collect payment 

for drugs dispensed, pharmacies 

interact with a network of entities, 

including drug wholesalers and thirdparty payers. With limited time and 

resources, independent pharmacies 

may need assistance in interacting with 

these entities, particularly with thirdparty payers that include large private 

and public health plans. Most use a 

PSAO to interact on their behalf. 

PSAOs develop networks of 

pharmacies by signing contractual 

agreements with each pharmacy that 

authorizes them to interact with thirdparty payers on the pharmacy’s behalf 

by, for example, negotiating contracts. 

While specific services provided by 

PSAOs may vary, PSAOs can be 

identified and distinguished from other 

entities in the pharmaceutical 

distribution and payment system by 

their provision of intermediary or other 

services to assist pharmacies with 

third-party payers.

GAO was asked to review the role of 

PSAOs. In this report, GAO describes: 

(1) how many PSAOs are in operation 

and how many pharmacies contract 

with PSAOs for services; (2) the 

services PSAOs offer and how they 

are paid for these services; and 

(3) entities that own PSAOs and the 

types of relationships that exists 

between owners and the pharmacies 

they represent. GAO analyzed data on 

PSAOs in operation in 2011 and 2012, 

reviewed literature on PSAOs and 

model agreements from 8 PSAOs, and 

interviewed federal agencies and 

entities in the pharmaceutical industry.

What GAO Found

At least 22 pharmacy services administrative organizations (PSAO), which varied 

in the number and location of the pharmacies to which they provided services, 

were in operation in 2011 or 2012. In total, depending on different data sources, 

these PSAOs represented or provided other services to between 20,275 and 

28,343 pharmacies in 2011 or 2012, most of which were independent 

pharmacies. While the number of pharmacies with which each PSAO contracted 

ranged from 24 to 5,000 pharmacies, most PSAOs represented or provided other 

services to fewer than 1,000 pharmacies. Additionally, some PSAOs contracted 

with pharmacies primarily located in a particular region rather than contracting 

with pharmacies located across the United States.

While PSAOs provide a broad range of services to independent pharmacies, and 

vary in how they offer these services, PSAOs consistently provide contract 

negotiation, communication, and help-desk services. All of the model agreements 

between PSAOs and independent pharmacies that GAO reviewed stated that the 

PSAO will negotiate and enter into contracts with third-party payers on behalf of 

member pharmacies. PSAOs may also contract with pharmacy benefit managers 

(PBM), which many third-party payers use to manage their prescription drug 

benefit. In addition to contracting, PSAOs also communicate information to 

members regarding contractual and regulatory requirements, and provide 

general and claims-specific assistance to members by means of a help-desk or a 

dedicated staff person. They may also provide other services to help member 

pharmacies interact with third-party payers or their PBMs, such as managing and 

analyzing payment and drug-dispensing data to identify claims unpaid or 

incorrectly paid by a third-party payer. PSAO services are intended to achieve 

administrative efficiencies, including contract and payment efficiencies for both 

independent pharmacies and third-party payers or their PBMs. Most PSAOs 

charge a monthly fee for a bundle of services and may charge additional fees for 

other services provided to its member pharmacies. Virtually all of the fees paid 

for PSAO services are paid by member pharmacies, with PSAOs receiving no 

administrative fees from other entities such as third-party payers or their PBMs.

The majority of PSAOs in operation in 2011 or 2012 were owned by drug 

wholesalers and independent pharmacy cooperatives. Of the 22 PSAOs we 

identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent 

pharmacy cooperatives, 4 were owned by group purchasing organizations, and 3 

were stand-alone PSAOs owned by other private entities. These owners varied in 

their requirements for PSAO member pharmacies to also use services from their 

separate, non-PSAO line of business. Three PSAO owners GAO spoke with 

required PSAO members to also use their non-PSAO services. For example, one 

wholesaler-owned PSAO limited its offer of PSAO services to existing customers 

of its drug distribution line of business. All but one PSAO owner GAO spoke with 

reported that their PSAO line of business earned little to no profit. However, 

PSAO owners may operate PSAOs for a number of reasons, including helping

pharmacies gain access to third-party payer contracts and to provide benefits to 

the owner’s non-PSAO line of business.

View GAO-13-176. For more information, 

contact John Dicken at (202) 512-7114 or 

dickenj@gao.gov.
Page i GAO-13-176 Pharmacy Services Administrative Organizations

Letter 1 

Background 7

At Least 22 PSAOs Contracted with over 20,000 Pharmacies in 2011 

or 2012, the Majority of Which Were Independent Pharmacies 12

PSAOs Provide Independent Pharmacies with a Range of Services 

Intended to Achieve Administrative Efficiencies, and Most 

PSAOs Are Paid a Monthly Fee for These Services 15

Wholesalers and Independent Pharmacy Cooperatives Owned the 

Majority of PSAOs; Requirements to Use Non-PSAO Services 

Varied by Owner 24

Appendix I GAO Contact and Staff Acknowledgments 31

Tables

Table 1: Number of Pharmacies Contracting with Pharmacy 

Services Administrative Organizations (PSAO) in 2011 or 

2012 13

Table 2: Description of Other PSAO Services 20

Table 3: Ownership of Pharmacy Services Administrative 

Organizations (PSAO) in Operation in 2011 or 2012 26

Figure

Figure 1: Interactions Among Key Entities Involved in the 

Distribution of and Payment for Pharmaceuticals 11

Contents 
Page ii GAO-13-176 Pharmacy Services Administrative Organizations

Abbreviations

DOJ Department of Justice

FEHBP Federal Employees Health Benefits Program

FTC Federal Trade Commission

HHS OIG Department of Health and Human Services, Office of 

 Inspector General

NCPA National Community Pharmacists Association

NCPDP National Council for Prescription Drug Programs

PBM pharmacy benefit manager

PSAO pharmacy services administrative organization

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

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Page 1 GAO-13-176 Pharmacy Services Administrative Organizations

United States Government Accountability Office

Washington, DC 20548

January 29, 2013

The Honorable Henry A. Waxman

Ranking Member

Committee on Energy and Commerce

House of Representatives

Dear Mr. Waxman:

Independent pharmacies dispensed almost 20 percent of all prescription 

drugs in the United States in 2010, with chain pharmacies accounting for 

the majority of the remaining 80 percent.1 To obtain, distribute, and collect 

payment for the drugs they dispense, independent pharmacies interact 

with a network of entities that offer a variety of services. These entities 

include drug wholesalers that purchase and distribute drugs to 

pharmacies, and third-party payers that pay for the dispensed drugs on 

behalf of enrollees. With limited time and resources, independent 

pharmacies may need assistance in interacting with these entities, 

particularly with third-party payers that include large private and public 

health plans such as those offered by large corporations and the federal 

government through Medicare and the Federal Employees Health 

Benefits Program (FEHBP).2

 

1

There are various definitions of independent pharmacies. In this report, we use the 

definition from the National Council for Prescription Drug Programs (NCPDP), which 

defines an independent pharmacy as one to three pharmacies under common ownership. 

Chain pharmacies and pharmacies operated by a mass merchant such as Wal-Mart or a 

supermarket accounted for nearly 73 percent of dispensed prescription drugs, and mailorder pharmacies accounted for the rest. A chain pharmacy is part of a group of four or 

more pharmacies under common ownership. Mail order pharmacies are highly automated 

facilities that fill prescriptions from a central location and deliver the prescription directly to 

the consumer.

National Association of Chain Drug Stores, 2011-2012 Chain Pharmacy Industry Profile, 

(Alexandria, VA: 2011).

2

Medicare is the federally financed health insurance program for persons age 65 or over, 

certain individuals with disabilities, and individuals with end-stage renal disease. Medicare 

beneficiaries may purchase coverage for outpatient prescription drugs under the Medicare 

Part D program. The FEHBP is the largest employer-sponsored insurance program in the 

United States. Most federal employees, retirees, and their dependents participate in the 

program.

 
 

Page 2 GAO-13-176 Pharmacy Services Administrative Organizations

To address independent pharmacies’ need for assistance with third-party 

payer interactions, both existing entities—such as drug wholesalers—as 

well as new entities began providing a variety of administrative services to 

independent pharmacies. These administrative services included, for 

example, managing pharmacies’ claims payments from third-party 

payers. Entities that provide administrative services to independent 

pharmacies to assist such pharmacies in interacting with third-party 

payers are called pharmacy services administrative organizations 

(PSAO). While specific services provided by PSAOs may vary, PSAOs 

can be identified and distinguished from other entities in the 

pharmaceutical distribution and payment system by their provision of 

intermediary services to assist pharmacies with third-party payers.

PSAOs develop networks of member pharmacies by signing contractual 

agreements with individual pharmacies. These agreements set forth the 

duties and obligations of the PSAO to each pharmacy and vice versa, and 

generally authorize PSAOs to interact with third-party payers on behalf of 

the members in their network. Among the responsibilities established 

between the PSAO and the pharmacy, the PSAO is frequently given the 

responsibility to contract on behalf of the pharmacy with third-party 

payers.3 Independent pharmacies may want the assistance of a PSAO 

due to the complexity of the contract terms and financial interactions with 

multiple third-party payers. As an intermediary, a PSAO may also provide 

other services that assist pharmacies in working with third-party payers. 

Because these other services may vary by PSAO, pharmacies may 

belong to multiple PSAOs’ networks that provide complementary 

services. For example, a pharmacy may belong to one PSAO network 

that contracts with third-party payers on its behalf and belong to another 

PSAO network that assists the pharmacy with reconciling claim payments 

from third-party payers.4

 

3

These agreements may also establish specific requirements for a PSAO’s use and 

disclosure of personal health information created, maintained, received, or transmitted by 

the PSAO on behalf of the pharmacy, and provide for the security of such information. 

Information subject to such requirements may include but not be limited to protected 

health information under federal law. See, 45 C.F.R. Part 164, Subpart E (2011).

According to industry reports, 80 percent of 

4

While independent pharmacies may obtain complementary services from multiple 

PSAOs, according to model agreements we reviewed, some PSAOs require that a 

pharmacy use the PSAO’s third-party contracting services exclusively. In these instances, 

a pharmacy cannot obtain third-party contracting services from more than one PSAO, 

although the pharmacy may obtain other services from another PSAO.
 

Page 3 GAO-13-176 Pharmacy Services Administrative Organizations

independent pharmacies obtain services from a PSAO.5 In addition, 

nearly 80 percent of the independent pharmacies surveyed by the 

Department of Health and Human Services, Office of Inspector General 

(HHS OIG) for its 2008 study reported obtaining PSAO services.6

Although PSAOs are focused on assisting independent pharmacies, their 

services may also benefit third-party payers. In addition, PSAO services 

may also benefit pharmacy benefit managers (PBMs), which many thirdparty payers use to help manage their prescription drug benefit, including 

developing contracts that set forth the terms and conditions for 

pharmacies to dispense prescriptions to health plan enrollees. According 

to PBMs, PSAOs make it easier for third-party payers or their PBMs to 

interact with multiple independent pharmacies by serving as a single point 

of contact. In addition, by providing access to multiple independent 

pharmacies, PSAOs enable third-party payers or their PBMs to expand 

and maintain networks in certain geographic areas—such as rural and 

underserved areas—where independent pharmacies are more likely to be 

located. Thus, PSAOs help third-party payers or their PBMs build 

networks of pharmacies to meet the needs of health plans and their 

enrollees and, in some cases, to satisfy federal requirements.7

You expressed interest in knowing more about the role of PSAOs in the 

network of entities that interact to distribute and pay for prescription 

drugs. In this report, we describe: (1) how many PSAOs are in operation 

and how many independent pharmacies contract with PSAOs for

services; (2) the services PSAOs offer to independent pharmacies and 

how they are paid for these services; and (3) the entities that own PSAOs 

 

5

Fein, Adam, Pembroke Consulting, Inc. 2011-12 Economic Report on Retail and 

Specialty Pharmacies, (Philadelphia: January 2012). An unpublished report by a trade 

association also included this statistic.

6

Department of Health and Human Services, Office of Inspector General, Review of 

Medicare Part D Contracting For Contract Year 2006 (A-06-07-00082), (Washington, DC: 

2008).

7

For example, to participate as Medicare Part D sponsors, health plans are required to 

have a contracted pharmacy network sufficient to ensure that at least 70 percent of 

Medicare beneficiaries in the sponsor’s rural service area, on average, live within 15 miles 

of a retail or other specified type of pharmacy participating in the sponsor’s network. See

42 C.F.R. § 423.120(a) (2011). Consequently, it may be necessary for a sponsor to 

contract with independent pharmacies, which are more common in rural areas than chain 

pharmacies.
 

Page 4 GAO-13-176 Pharmacy Services Administrative Organizations

and the types of relationships that exist between PSAO owners and the 

independent pharmacies with which they contract. 

To determine how many PSAOs are in operation and how many 

independent pharmacies with which they contract, we reviewed literature 

on PSAOs, and conducted interviews with various entities including key 

entities in the pharmaceutical industry and federal agencies that have 

conducted work involving PSAOs. We also analyzed National Council for 

Prescription Drug Programs (NCPDP) data from February 2011. NCPDP 

collects and maintains a database of in-depth pharmacy information from 

both pharmacies and PSAOs.8 Specifically, we conducted a 

comprehensive literature review that included materials published through 

October 2012.9 We also obtained and reviewed published and 

unpublished reports we identified through Internet searches for 

information related to PSAOs and an interview with a pharmaceutical 

trade association. We conducted a total of 24 interviews with various 

entities including federal agencies—HHS OIG and the Federal Trade 

Commission (FTC)—trade associations, pharmaceutical industry experts, 

three independent pharmacy owners, and a sample of PSAOs and 

PBMs.10

• PSAO sample: Our sample of PSAOs to interview included the 

5 largest PSAOs based on the number of pharmacies they contracted 

with according to NCPDP data, as well as 5 additional PSAOs that 

varied by the number of pharmacies they represented and by 

ownership. According to NCPDP data, these 10 PSAOs represented 

over 17,000 pharmacies.

 

8

NCPDP is a not-for-profit accredited standards development organization whose 

membership includes various entities in the pharmaceutical industry.

9

Our review included reports that discussed PSAOs specifically or PSAOs in conjunction 

with independent pharmacies or third-party payers.

10The HHS OIG examined independent pharmacies’ experiences contracting with 

Medicare Part D Prescription Drug Plan sponsors in 2006. As part of this work, the HHS

OIG collected information about the PSAOs associated with the independent pharmacies 

included in its study. The FTC is one of two federal agencies responsible for enforcing 

federal antitrust laws and has conducted reviews of PSAOs.

We contacted a total of 20 independent pharmacies from the NCPDP data to request 

interviews. These independent pharmacies varied by location (urban vs. rural) and by the 

PSAO that provided them services. Of these 20 pharmacies, 3 responded to our request 

for an interview.
 

Page 5 GAO-13-176 Pharmacy Services Administrative Organizations

• PBM sample: Our sample of PBMs to interview included the three 

largest PBMs as of March 2012, as defined by prescription volume, 

according to Atlantic Information Services data.11 Combined, these 

PBMs represented about 60 percent of total prescription volume in the 

United States.

Finally, we analyzed NCPDP data and reviewed other available 

information, such as industry reports. We analyzed NCPDP data to 

determine the total number of PSAOs in operation in 2011 by first 

identifying potential PSAOs in the NCPDP data and then verifying 

whether the entity was a PSAO by reviewing its website and other 

available information.12 We considered an entity to be a PSAO if it 

contracted to provide intermediary or other services that assist 

independent pharmacies in working with third-party payers or their PBMs.

We developed this criterion on the basis of information we gathered from 

the literature review and interviews with key entities, including an industry 

expert and a PSAO. Using our list of PSAOs, we then searched the 

NCPDP database to determine the total number and types of pharmacies 

that each of the PSAOs represented in 2011.13

We determined that the data used in this report were sufficiently reliable 

for our purposes. However, there are some limitations to the NCPDP 

data, including that these data may not contain the complete universe of 

PSAOs or independent pharmacies. For example, according to NCPDP 

officials, smaller independent pharmacies that do not conduct electronic 

transactions may not be included in the NCPDP data. Multiple entities we 

We reviewed NCPDP data 

for reasonableness and consistency, including screening for outliers. We 

also reviewed documentation and spoke with NCPDP officials about 

steps taken to ensure data reliability.

 

11Atlantic Information Services, a publishing and information company, reports data 

compiled from the company’s quarterly survey of PBMs. These data contain information 

on the PBM membership, prescription volume, and drug spending, among other things.

12In some cases, we could not determine whether an entity was a PSAO on the basis of 

available information and contacted the entity directly to confirm whether it was a PSAO.

13Pharmacies in the NCPDP database may choose from among several primary codes 

that indicate the type of pharmacy it is. For example, a pharmacy may classify itself as a 

community pharmacy that stores, prepares, and dispenses medicinal preparations and 

prescriptions for a local patient population or it may classify itself as a long-term care 

pharmacy that dispenses preparations delivered to patients residing within an intermediate 

or skilled nursing facility.
 

Page 6 GAO-13-176 Pharmacy Services Administrative Organizations

interviewed reported that there is no one comprehensive data source for 

information on PSAOs; however, several entities, including the HHS OIG, 

reported using NCPDP to determine the number of independent 

pharmacies in operation, the number of PSAOs in operation, or the 

affiliations between pharmacies and PSAOs. Due to NCPDP data 

limitations, we also reviewed industry reports and other sources of 

information, such as PSAO websites, to supplement these data when 

answering our research objectives. These supplemental data provided 

the number of PSAOs in operation and the number of pharmacies they 

contracted with in 2011 or 2012, which may vary from the data reported 

by NCPDP. Consequently, we report a range in the number of 

pharmacies represented by PSAOs in 2011 or 2012. Additionally, since 

PSAOs can represent other types of pharmacies, such as small chains, in 

addition to independent pharmacies and pharmacies can have 

agreements with multiple PSAOs for different services, the number of 

pharmacies that we report as being represented by PSAOs may be 

greater than the total number of independent pharmacies operating in the 

United States.

To describe the services provided by PSAOs and how PSAOs are paid 

for these services, we interviewed officials from the various entities noted 

above and reviewed agreements between PSAOs and independent 

pharmacies. In conducting our interviews with PSAOs and independent 

pharmacies, we asked about how payment for PSAO services were made 

and received, including the frequency and amount of payments. We also 

obtained model agreements from eight of the ten PSAOs we interviewed.

We reviewed these agreements to determine the duties and obligations of 

each PSAO to its member pharmacies. In addition, we reviewed the 

duties and obligations of member pharmacies joining the PSAO network 

as well as the payment and termination provisions included in each 

agreement. The information obtained from these interviews and 

agreements may not be generalizeable due, in part, to variation in the 

types of services offered by different PSAOs.

To determine the entities that own PSAOs and the types of relationships 

that exist between PSAO owners and the independent pharmacies they 

represent, we analyzed NCPDP data, reviewed industry reports and 

PSAO websites, and interviewed the various entities noted above. 

Specifically, using NCPDP data, we obtained the contact information for 

each PSAO, which in some cases indicated the owner of the PSAO. 

Where it did not indicate the owner, we reviewed industry reports that 

included ownership information for some PSAOs, reviewed the PSAO’s 

website, or contacted the PSAO directly. We reviewed NCPDP data for 
 

Page 7 GAO-13-176 Pharmacy Services Administrative Organizations

reasonableness and consistency, including screening for outliers. We 

also reviewed documentation and spoke with NCPDP officials about 

steps taken to ensure data reliability. We determined that the data used in 

this report were sufficiently reliable for our purposes. In addition, we 

spoke with PSAOs, independent pharmacies, and other industry 

stakeholders as noted above about the relationships existing between 

PSAOs and the pharmacies that they represent.

We conducted this performance audit from June 2012 through January 

2013 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. Because we did not 

evaluate the policies or operations of any federal agency to develop the 

information presented in this report, we did not seek comments from any 

agency.

The distribution of and payment for prescription drugs involves 

interactions among multiple entities. These entities include drug 

wholesalers, independent pharmacies, PSAOs, and third-party payers 

and their PBMs. Interactions among these entities facilitate the flow of 

and payment for drugs from manufacturers to consumers.

Drug wholesalers (hereafter referred to as wholesalers) purchase bulk 

quantities of drugs from pharmaceutical manufacturers and then distribute 

them to pharmacies, including independent pharmacies. For example, a

wholesaler may fill an order from an independent pharmacy for a 

specified quantity of drugs produced by manufacturers and deliver the 

order to the pharmacy. In addition to supplying drugs, some wholesalers 

offer ancillary services to independent pharmacies such as helping them 

manage their inventory. Three wholesalers—AmerisourceBergen 

Corporation, McKesson Corporation, and Cardinal Health Inc.—

accounted for over 80 percent of all drug distribution revenue in the 

United States in 2011.14

 

14Fein, 2011-12 Economic Report. 

Background 

Drug Wholesalers
 

Page 8 GAO-13-176 Pharmacy Services Administrative Organizations

Independent pharmacies are a type of retail pharmacy with a store-based 

location—often in rural and underserved areas—that dispense 

medications to consumers, including both prescription and over-thecounter drugs.15 In this report, we define independent pharmacies as one 

to three pharmacies under common ownership. Approximately 21,000 

independent pharmacies constituted almost 34 percent of the retail 

pharmacies operating in the United States in 2010.16 Although 

independent pharmacies offer other products such as greeting cards and 

cosmetics, prescription drugs account for the majority of independent 

pharmacy sales. These sales accounted for almost 17 percent of the 

$266 billion in prescription drug sales in the United States in 2010.17

Independent pharmacies primarily purchase drugs from wholesalers 

(although they may also purchase them directly from manufacturers) and 

represented slightly over 15 percent of wholesalers’ total sales to retail 

pharmacies in 2010.

In 

addition to products, independent pharmacies provide patient-care 

services such as patient education to encourage patients’ appropriate use 

of medications. According to a 2009 survey of pharmacists, independent 

pharmacies spend the majority of their time dispensing prescription drugs 

and providing patient-care services.

18

 

15Retail pharmacies are store-based retail locations that dispense medications to the 

public.

Independent pharmacies are an important part of a 

wholesaler’s customer portfolio because, in addition to purchasing drugs, 

independent pharmacies may also pay the wholesaler to provide logistical 

functions and ancillary services such as direct delivery of drugs to 

individual stores and inventory management. Thus, a wholesaler’s 

relationship with an independent pharmacy may result in multiple 

16Chain pharmacies and pharmacies operated by a supermarket or mass merchant such 

as Wal-Mart comprised the remaining 66 percent of retail pharmacies operating in the 

United States in 2010. National Association of Chain Drug Stores, 2011-2012 Chain 

Pharmacy Industry Profile, (Alexandria, VA: 2011).

17Other types of pharmacies that accounted for the remaining 83 percent of prescription 

drugs dispensed in 2010 included chain pharmacies, pharmacies operated by a mass 

merchant such as Wal-Mart or a supermarket, and mail-order pharmacies.

National Association of Chain Drug Stores, 2011-2012 Chain Pharmacy Industry Profile, 

(Alexandria, VA: 2011).

18Center for Healthcare Supply Chain Research, 2011-2012 HDMA Factbook: The Facts, 

Figures and Trends in Healthcare, (Arlington, VA: 2011).

Independent Pharmacies 

and PSAOs
 

Page 9 GAO-13-176 Pharmacy Services Administrative Organizations

business opportunities for the wholesaler and administrative efficiencies 

for the pharmacy. After receipt of drugs from a wholesaler or 

manufacturer, pharmacies then fill and dispense prescriptions to 

consumers, such as health plan enrollees. These latter prescriptions are 

dispensed according to contractual terms agreed upon with each 

enrollee’s health plan, that is, with each third-party payer or its PBM.

According to the National Community Pharmacists Association (NCPA), 

payments based on the contractual terms of third-party payers or their 

PBMs significantly affect the financial viability of independent pharmacies. 

Consequently, these pharmacies must carefully choose which contracts 

to accept or reject. Accordingly, most independent pharmacies rely on 

PSAOs to negotiate directly, or to make recommendations for negotiating 

contracts on their behalf with third-party payers or their PBMs. When a 

PSAO enters into a contract with a third-party payer or its PBM, the 

pharmacies in its network gain access to the third-party payer or PBM 

contract—and the individuals it covers—by virtue of belonging to the 

PSAO’s network.

Third-party payers accounted for almost 80 percent of drug expenditures 

in 2010, which represents a significant shift from 30 years ago when 

payment from individual consumers accounted for the largest portion of 

expenditures.19 Third-party payers include private and public health plans 

such as those offered by large corporations and the federal government 

through Medicare and the FEHBP, many of which use PBMs to help them 

manage their prescription drug benefits. As part of the management of 

these benefits, PBMs assemble networks of retail pharmacies, including 

independent pharmacies, where the health plan’s enrollees can fill 

prescriptions.20

 

19Agency for Healthcare Research and Quality, Prescription Medicines—Mean and 

Median Expenses per Person With Expense and Distribution of Expenses by Source of 

Payment: United States, 2010. Medical Expenditure Panel Survey Household Component 

Data. Generated Interactively. Accessed December 19, 2012. 

A pharmacy becomes a member of a third-party payer’s 

or its PBM’s network by entering into an agreement with the third-party 

payer or its PBM. It does so either directly or through a PSAO that has 

negotiated with that third-party payer or its PBM on the pharmacy’s 

behalf. Contract terms and conditions may include specifics about 

http://meps.ahrq.gov. 

20PBMs may also provide health plans with clinical, cost containment, and administrative 

services such as claims processing.

Third-Party Payers and 

PBMs
 

Page 10 GAO-13-176 Pharmacy Services Administrative Organizations

reimbursement rates (how much the pharmacy will be paid for dispensed 

drugs), payment terms (e.g., the frequency with which the third-party 

payer or its PBM will reimburse the pharmacy for dispensed drugs), and 

audit provisions (e.g., the frequency and parameters of audits conducted 

by the third-party payer, its PBM, or designee), among other things.21

The reimbursement rate that third-party payers or their PBMs pay 

pharmacies significantly affects pharmacy revenues. Retail pharmacies 

participating in a PBM’s network are reimbursed for prescriptions below 

the level paid by cash-paying customers (those whose prescriptions are 

not covered by a third-party payer). In addition, pharmacies must 

undertake additional administrative tasks related to transactions for 

customers who are covered by third-party payers that are not required for 

cash-paying customer transactions. For example, for customers covered 

by third-party payers, pharmacy staff must file claims electronically and 

may be required to counsel them on their health plan’s benefits. However, 

most retail pharmacies participate in PBM networks because of the large 

market share PBMs command, which represents potential pharmacy 

customers. The five largest PBMs operating in the first quarter of 2012 

represented over 330 million individuals.22

 

21Audits of pharmacies by a third-party payer or its PBM may include an on-site inspection 

of various aspects of the pharmacy including inspections of its dispensing records to 

ensure compliance with regulatory and contractual requirements.

In addition, retail pharmacies 

benefit from the prescription and nonprescription sales generated by 

customers that PBMs help bring into their stores. (See fig. 1 for a diagram 

of the network of entities in the distribution of and payment for 

pharmaceuticals.)

22This number includes duplication because every PBM involved in providing services to 

an individual includes that individual in its count of covered lives. As such, individuals may 

be counted multiple times across all PBMs. Atlantic Information Services, 

http://www.aishealth.com. 
 

Page 11 GAO-13-176 Pharmacy Services Administrative Organizations

Figure 1: Interactions Among Key Entities Involved in the Distribution of and Payment for Pharmaceuticals

Note: Arrows represent some of the financial interactions that occur between key entities involved in 

the distribution of and payment for pharmaceuticals. The dashed lines represent nonfinancial 

interactions between PSAOs and third-party payers or their PBMs on behalf of independent 

pharmacies.
 

Page 12 GAO-13-176 Pharmacy Services Administrative Organizations

At least 22 PSAOs, which varied in the number and location of 

pharmacies to which they provided services, were in operation in 2011 or 

2012.23 In total, depending on different data sources, these 22 PSAOs 

represented or provided other services to between 20,275 and 28,343 

pharmacies in 2011 or 2012.24 (See table 1.) The number of pharmacies 

contracted with each PSAO across these sources ranged from 24 to 

5,000 pharmacies; however, according to NCPDP data most contracted 

with fewer than 1,000 pharmacies. The largest 5 PSAOs combined 

contracted with more than half of all pharmacies that were represented by 

a PSAO in 2011 or 2012. Because pharmacies may change their PSAO, 

the number of pharmacies contracting with each PSAO fluctuates as 

PSAOs enroll and disenroll pharmacies.25

 

23In determining the number of PSAOs in operation, we found a PSAO that did not identify 

itself as such, PSAOs that represented other types of pharmacies that were not

independent, and a PSAO that did not appear in the NCPDP database. We included these 

PSAOs when determining the number of PSAOs in operation and the number of 

pharmacies represented by them in 2011 or 2012.The PSAO that did not identify itself as 

such met our criteria for inclusion because it provided intermediary and other services that 

assisted independent pharmacies in working with third-party payers or their PBMs. 

Additionally, of the two PSAOs that represented other types of pharmacies, one 

represented small chain pharmacies while the other represented members of a franchise. 

Finally, one PSAO did not appear in the NCPDP database but was identified by another 

source. We contacted the organization to confirm that it was a PSAO.

For example, according to one 

PSAO, member pharmacies will change PSAOs whenever they think that 

another PSAO can negotiate better contract terms with third-party payers 

or their PBMs. Some PSAOs contracted primarily with pharmacies 

located in a particular region. These PSAOs generally represented fewer 

pharmacies than PSAOs representing pharmacies across the United 

States. For example, the Northeast Pharmacy Service Corporation 

24Since no single comprehensive source on PSAOs exists, we used several sources—

including 2011 NCPDP data, and 2012 industry reports, PSAO websites and PSAO 

interviews—to determine the range in the number of independent pharmacies represented 

by these PSAOs in 2011 or 2012. These data were self-reported and varied in terms of 

the PSAOs identified and the number and types of pharmacies represented by each 

PSAO. Additionally, the number of pharmacies represented across all PSAOs may be 

larger than the total number of independent pharmacies in operation in 2011 or 2012. This 

is because pharmacies may join multiple PSAOs that offer complimentary services and 

PSAOs may represent small chain pharmacies in addition to independent pharmacies.

25All but one of the PSAO-pharmacy model agreements we reviewed included termination 

provisions that provided a member pharmacy the right to terminate the agreement—and 

thus leave the PSAO. Typically, a member pharmacy may terminate its relationship with 

the PSAO by providing the PSAO with 30 to 90 days written notice. However, some 

PSAOs require member pharmacies to meet an initial contract period before they may 

submit a termination notice.

At Least 22 PSAOs 

Contracted with over 

20,000 Pharmacies in 

2011 or 2012, the 

Majority of Which 

Were Independent 

Pharmacies 
 

Page 13 GAO-13-176 Pharmacy Services Administrative Organizations

represented 250 independent pharmacies while the RxSelect Pharmacy 

Network represented from 451 to 569 independent pharmacies.

Table 1: Number of Pharmacies Contracting with Pharmacy Services Administrative Organizations (PSAO) in 2011 or 2012

PSAO 

Number of pharmacies 

contracting with each PSAO 

according to NCPDP data (2011)

Range in number of pharmacies 

contracting with each 

PSAO across all data sources 

(2011-2012)

Good Neighbor Pharmacy Provider Network

a

4,198 3,600-5,000

Access Health 3,635 3,000-3,850

LeaderNET 1,901 1,900-2,000

EPIC Pharmacy Network, Inc. 1,830 1,830-2,000

Third Party Station 1,814 1,814-2,500

United Drugs 1,102 1,102-2,000

MHA Long Term Care Pharmacy Network 1,025 1,025-1,100

Third Party Network 952 952-1,027

American Pharmacy Network Solutions 938 750-938

TriNet Third Party Network 777 777-1,200

RxPr1de / Managed Pharmacy Care 675 b 675-3,300

Managed Care Connection 619 c 619-630

Medicine Shoppe International 456 d 456-600

RxSelect Pharmacy Network 451 451-569

FamilyCare Pharmacy Member Network 441 441

GeriMed Long Term Care Network, Inc. 291 291

Innovatix Network, LLC 177 177

Progressive Pharmacies, LLC 104 40-104

Valu Merchandisers Company 75 75

Pharmacy Select 26 26

United Pharmacist Network, Inc. 24 24-265

Northeast Pharmacy Services Corporation N/A e 250

Total 21,511 20,275-28,343

Source: GAO analysis of National Council for Prescription Drug Programs (NCPDP) data, interviews with PSAOs, PSAO websites, and 

industry reports.

Notes: The number of pharmacies associated with each PSAO is self-reported across all sources and 

a pharmacy may contract with multiple PSAOs that provide complementary services. As such, the 

number of pharmacies contracting with PSAOs may be larger than the total number of independent 

pharmacies in the market. In addition, not all pharmacies and PSAOs are contained in NCPDP and

other data sources. The number of pharmacies associated with each PSAO according to the PSAO 

website may be approximate. For example, MHA Long Term Care Pharmacy Network states that 

“more than 1,100 pharmacies” are represented by its PSAO. Finally, although the majority of 

pharmacies represented by PSAOs are independent pharmacies, some PSAOs contract with small 

chains and franchise pharmacies. A franchise pharmacy is an independently owned pharmacy that 
 

Page 14 GAO-13-176 Pharmacy Services Administrative Organizations

has signed a franchise agreement with a franchisor to receive services such as training, marketing, 

and other support.

a

The ranges presented are based on all sources of data used, including NCPDP data, interviews with 

PSAOs, PSAO websites, and an industry report. These data are self-reported by the PSAOs and may 

vary by source. Additionally, some PSAOs may have appeared in only one source and therefore do 

not have a range of pharmacies that they represent in this table.

b

RxPr1de is owned by Managed Pharmacy Care, both of which appear in the NCPDP database. 

Managed Pharmacy Care identifies itself as a PSAO, but RxPr1de does not. RxPr1de does serve as 

an intermediary between independent pharmacies and pharmacy benefit managers (PBM), therefore, 

we consider RxPr1de a PSAO for purposes of this report. We combined the number of pharmacies 

represented by RxPr1de and Managed Pharmacy Care. The total number of pharmacies included in 

the range for these entities may include some duplication. We could not confirm with RxPr1de and 

Managed Care Pharmacy the number of pharmacies that they represent.

c

Managed Care Connection represents small pharmacy chains ranging in size from 25 to150 

pharmacies.

d

The Medicine Shoppe International PSAO represents members of the Medicine Shoppe pharmacy 

franchise.

e

According to NCPDP data, PSAOs provide services primarily to 

independent pharmacies. Of the 21,511 pharmacies associated with 

PSAOs in the 2011 NCPDP database, 18,103 were identified as 

independent pharmacies.

Northeast Pharmacy Services Corporation did not appear in our search of the NCPDP database, but 

was cited by another source. We contacted the organization to confirm that it is a PSAO and use 

“N/A” to indicate that there were no pharmacies represented by this entity in the NCPDP data.

26 These independent pharmacies represent 

nearly 75 percent of the total number of independent pharmacies in the 

2011 NCPDP database. This is close to an estimate reported by NCPA 

and the HHS OIG, both of which conducted surveys in which 

approximately 80 percent of responding independent pharmacies were 

represented by PSAOs.27 In addition to independent pharmacies, some 

PSAOs also contracted with small chains and franchise pharmacy 

members.28

 

26Pharmacies may choose from five designations in the NCPDP database: independent 

pharmacy, chain pharmacy, franchise pharmacy, government pharmacy, and alternate 

dispensing site, such as a physician’s office or mail-order pharmacy.

For example, Managed Care Connection provides services to 

small chain pharmacies ranging in size from 25 to 150 pharmacies under 

27In all, 24,317 pharmacies in the NCPDP database were identified as independent 

pharmacies. This is larger than the total number of independent pharmacies in operation 

in 2010 (approximately 21,000 according to industry reports). However, NCPDP 

designations are self-reported and there are different definitions for an independent 

pharmacy. 

28A franchise pharmacy is an independently owned pharmacy that has signed a franchise 

agreement with a franchisor to receive services such as training, marketing, and other 

support.
 

Page 15 GAO-13-176 Pharmacy Services Administrative Organizations

common ownership, and the Medicine Shoppe only offers its PSAO 

services to its franchise pharmacies.

PSAOs provide a broad range of services to independent pharmacies 

including negotiating contractual agreements and providing 

communication and help-desk services. These and other services are 

intended to achieve administrative efficiencies for both independent 

pharmacies and third-party payers or their PBMs. Most PSAOs charge a 

monthly fee for a bundled set of services and separate fees for additional 

services. 

While PSAOs provide a broad range of services to independent 

pharmacies and vary in how they offer these services, we found that 

PSAOs consistently offer contract negotiation, communication, and helpdesk services. Several entities, including industry experts, trade 

associations, and PSAOs we spoke with, referred to one or all of these 

services as a PSAO’s “key service(s)”—meaning that a PSAO can be 

distinguished from other entities in the pharmaceutical industry by its 

provision of these services. In addition, PSAOs may provide many other 

services that assist their member pharmacies—the majority of which are 

independent pharmacies—in interacting with third-party payers or their 

PBMs, although those PSAOs we spoke with did not provide these other 

services as consistently as their key services.

On behalf of pharmacies, PSAOs may negotiate and enter into contracts 

with third-party payers or their PBMs. Both the HHS OIG and an industry 

study reported that small businesses such as independent pharmacies 

generally lack the legal expertise and time to adequately review and 

negotiate third-party payer or PBM contracts, which can be lengthy and 

PSAOs Provide 

Independent 

Pharmacies with a 

Range of Services 

Intended to Achieve 

Administrative 

Efficiencies, and Most 

PSAOs Are Paid a 

Monthly Fee for 

These Services

PSAOs Provide a Range of 

Services to Independent 

Pharmacies Including 

Contract Negotiation, 

Communication, and HelpDesk Services

Contract Negotiation Services
 

Page 16 GAO-13-176 Pharmacy Services Administrative Organizations

complex.29

PSAOs we spoke with had different processes for negotiating and 

entering into contracts with third-party payers or their PBMs. These 

processes included following guidance or parameters established by a 

governing body such as a board of directors composed partially or 

entirely of representatives from the PSAO’s member pharmacies. In 

addition, some PSAOs’ decisions about entering into contracts are made 

by their contracting department or executive staff that base the decision 

on factors such as analyses of the contract’s proposed reimbursement 

rate and the efficiencies and value that the PSAO’s member pharmacies 

would provide to the particular market in which the contracts are offered. 

Decisions about entering into contracts may also include consultation with 

a PSAO’s advisory board composed of representatives from the PSAO’s 

member pharmacies.

All of the model agreements between PSAOs and 

independent pharmacies that we reviewed indicated, and all of the 

PSAOs we spoke with stated, that the PSAO was explicitly authorized to 

negotiate and enter into contracts with third-party payers on behalf of 

member pharmacies. By signing the agreement with the PSAO, a 

member pharmacy acknowledges and agrees that the PSAO has the right 

to negotiate contracts with third-party payers or their PBMs on its behalf.

While PSAOs may review and negotiate a wide range of contract 

provisions, PSAOs we spoke with reported negotiating a variety of 

provisions including reimbursement rates, payment terms, audits of 

pharmacies by third-party payers or their PBMs, price updates and 

appeals, and administrative requirements.30

 

29Contract review is distinct from contract negotiation as a review may not include a PSAO 

entering into a contract on behalf of member pharmacies. A PSAO may review contracts 

on behalf of member pharmacies in order to provide guidance to pharmacies wishing to 

contract with a particular third-party payer. For example, one source reported that a PSAO 

may review contracts to make its member pharmacies aware of contract terms that could 

be problematic.

Regarding these contract 

areas, PBMs and PSAOs we spoke with reported that audits and 

reimbursement rates were of particular concern to pharmacies. One 

30The entities we spoke with had various perspectives regarding negotiation. For example, 

a trade association official reported that “contract negotiation is the PSAO’s ability to 

review PBM contracts and help the pharmacy understand the contract and the 

pharmacies’ obligations per their involvement with the PBM.” One PSAO described it as 

“an arm’s length back and forth process between two parties where both agree to meet 

somewhere in the middle.” 
 

Page 17 GAO-13-176 Pharmacy Services Administrative Organizations

PSAO reported that its negotiations about a contract’s audit provisions 

were intended to minimize member pharmacies’ risks and burdens as 

audit provisions can include withholding reimbursement on the basis of 

audit findings. In addition, according to some PSAOs that we spoke with, 

reimbursement rates to pharmacies have decreased over time, and 

PSAOs and other sources we spoke with reported that PSAOs’ ability to 

negotiate reimbursement rates has also decreased over time.

Over half of the PSAOs we spoke with reported having little success in 

modifying certain contract terms as a result of negotiations. This may be 

due to PBMs’ use of standard contract terms and the dominant market 

share of the largest PBMs. Many PBM contracts contain standard terms 

and conditions that are largely nonnegotiable. According to one PSAO, 

this may be particularly true for national contracts, in which third-party 

payers or their PBMs have set contract terms for all pharmacies across 

the country that opt into the third-party payer’s, or its PBM’s network. For 

example, a national contract exists for some federal government 

programs, such as TRICARE.31

In contrast, PBMs we spoke with reported that PSAOs can and do 

negotiate effectively. PBMs and PSAOs reported that several factors may 

affect negotiations in favor of PSAOs and their members, including the 

number and location of pharmacies represented and the services 

provided by those pharmacies in relation to the size and needs of the 

third-party payer or its PBM. For example, a third-party payer or its PBM 

may be more willing to modify its contract terms in order to sign a contract 

with a PSAO that represents pharmacies in a rural area in order to 

expand the PBM’s network in that area. In addition, a third-party payer or 

its PBM may be more willing to negotiate in order to add pharmacies in a 

PSAO’s network that offer a specialized service such as diabetes care 

needed by a health plan’s enrollees. One PSAO also reported that small 

PBMs wishing to increase their network’s size may be more willing to

negotiate contract terms.

In addition, several sources told us that 

the increasing consolidation of entities in the PBM market has resulted in 

a few PBMs having large market shares, which has diminished the ability 

of PSAOs to negotiate with them, particularly over reimbursement rates.

 

31The Department of Defense provides health care to active duty service members, 

retirees, and their families through the TRICARE program.
 

Page 18 GAO-13-176 Pharmacy Services Administrative Organizations

We found that PSAOs vary in their requirements for their member 

pharmacies. Two PSAO-pharmacy model agreements that we reviewed 

stated that member pharmacies must participate in all contracts in which 

the PSAO entered on behalf of members. These PSAOs and six 

additional PSAOs we spoke with reported that their member pharmacies 

must participate in all contracts between the PSAO and third-party payers 

or their PBMs. The remaining two PSAOs we spoke with reported that 

they build a portfolio of contracts from which member pharmacies can 

choose. These PSAOs negotiate contracts with various third-party payers 

or their PBMs and member pharmacies review the terms and conditions 

of each contract and select specific contracts to enter into. Most of the 

PSAO-pharmacy model agreements we reviewed contained provisions 

expressly authorizing member pharmacies to contract with a third-party 

payer independent of the PSAO. Two additional PSAOs we spoke with 

confirmed that they do not restrict member pharmacies from entering into 

contracts independent of the PSAO. All three PBMs we spoke with 

confirmed that pharmacies may contract with them if their PSAO did not 

sign a contract with them on the pharmacies’ behalf.

PSAOs serve as a communication link between member pharmacies and 

third-party payers or their PBMs. Such communication may include 

information regarding contractual and regulatory requirements as well as 

general news and information of interest to pharmacy owners. All of the 

PSAOs we spoke with provided communication services to pharmacies 

such as reviewing PBMs’ provider manuals to make member pharmacies 

aware of their contents.32

 

32Provider manuals contain details related to a pharmacy’s rights and obligations per its 

contract with the PBM.

Communication with pharmacies was provided 

by means of newsletters and the PSAOs’ Internet sites. In addition to 

communicating contractual requirements, PSAOs may also communicate 

applicable federal and state regulatory updates. For example, one PSAO 

we spoke with told us that it provides its member pharmacies with 

regulatory updates from the Centers for Medicare & Medicaid Services by 

publishing this information in its newsletter. Another PSAO we spoke with 

provided regulatory analyses that included examining and briefing its 

member pharmacies on durable medical equipment accreditation 

requirements, and fraud, waste, and abuse training requirements. 

According to the PSAO, this was to ensure that its member pharmacies 

were taking the right steps to comply with applicable regulations.

Communication Services 
 

Page 19 GAO-13-176 Pharmacy Services Administrative Organizations

PSAOs provide general assistance to pharmacies and assistance with 

issues related to third-party payers and their PBMs such as questions 

about claims, contracting, reimbursement, and audits. PSAOs may 

provide such assistance by means of a help-desk (or customer service 

department) or a dedicated staff person. For example, one PSAO we 

spoke with reported that it provides general pharmacy support services to 

help pharmacies with any needs they may have in the course of operating 

their businesses. This PSAO also had a staff person responsible for 

providing support services to member pharmacies including answering 

their questions about claims and each contract’s reimbursement rate or 

payment methodology. A PSAO may also help a pharmacy identify why a 

certain claim was rejected. 

PSAOs provide many other services that assist member pharmacies in 

interacting with third-party payers or their PBMs. For example, PSAOs 

may provide services that help the pharmacy with payment from a thirdparty payer or its PBM, comply with third-party payer requirements, or 

develop services that make the pharmacy more appealing to third-party 

payers or their PBMs. (See table 2 for a list and description of these 

services.) 

Help-Desk Services 

Other Services 
 

Page 20 GAO-13-176 Pharmacy Services Administrative Organizations

Table 2: Description of Other PSAO Services

PSAO Service Description

Assistance with claims A variety of services and tools intended to help a pharmacy submit and receive correct 

claims reimbursements. Assistance may include processing certain claims on behalf of 

pharmacies. For example, one PSAO we spoke with processed Medicare and Medicaid 

claims for member pharmacies

a

Audit assistance Educational and informational support to help pharmacies prepare and undergo audits, 

including helping pharmacies understand their rights and responsibilities when 

undergoing an audit and in responding to or appealing audit findings.

b

Central payment A service in which a PSAO receives aggregated, single payments from a third-party 

payer on behalf of its member pharmacies. The PSAO then distributes individual 

payments to its members from the single payment made by the third-party payer.

Certification in specialized care programs One or multiple certification programs that may include training, marketing, and program 

development in specialized areas including immunization/vaccination, diabetes 

management, long term care, home health, medication therapy management, patient 

safety, and quality assurance programs.

Compliance support A service that assists pharmacies comply with regulatory and credentialing (e.g., proper 

licensure and accreditation) requirements. 

Flat generics A service that provides resources for pharmacies wishing to operate a program that 

offers generic drugs for a flat fee (e.g., $4.00).

Front store layout assistance A service that assists pharmacies with the design of the “front” of the pharmacy (i.e., the 

part that customers see), including assistance with signage and placement of products to 

facilitate customer flow.

Inventory management An inventory control service to achieve a product mix intended to increase cash flow, 

improve customer service, and reduce wasteful expenses.

Marketing support A service that may include media advertising and marketing strategy consultation 

intended to increase public awareness of the pharmacy.

Reconciliation or access to a reconciliation 

vendor

A service in which a PSAO manages and analyzes pharmacies’ payment and drug 

dispensing data to identify claims that have not been paid or were paid incorrectly by a 

third-party payer. A PSAO may also provide access to a vendor that performs this 

service. 

Retail cash cards A service that provides resources for pharmacies wishing to operate a discount program 

for cash paying customers.

Source: GAO analysis of PSAO interviews and marketing materials.

Note: The PSAOs we interviewed consistently offered three key services to its member pharmacies, 

namely: contract negotiation, communication, and help-desk services. In addition, PSAOs may also 

offer the other services listed, although the PSAOs we spoke with did not provide these other 

services as consistently as their key services.

a

Although PSAOs we interviewed provided help-desk services that may have included assistance 

with claims, PSAOs varied in their provision of other claims related services.

b

Pharmacies must submit to audits conducted by third-party payers or their designee(s). Audits by a 

third-party payer may include an on-site inspection of various aspects of the pharmacy including 

inspections of its dispensing records to ensure compliance with regulatory and contractual 

requirements.
 

Page 21 GAO-13-176 Pharmacy Services Administrative Organizations

The PSAOs we spoke with varied in their provision of these other 

services although 9 of the 10 PSAOs we spoke with provided central 

payment and reconciliation services or access to reconciliation vendors 

that provided the service. However, other services were not provided as 

consistently across PSAOs. For example, only 1 PSAO reported that it 

provided inventory management or front store layout assistance.

PSAO services have changed over time to meet member pharmacies’ 

interests. In some cases, this has meant adding new services, while in 

other cases PSAOs have expanded existing services. Several PSAOs we 

spoke with reported adding services intended to increase cost efficiencies 

and member pharmacies’ revenues. For example, three PSAOs we spoke 

with reported that they began offering central pay services and two of 

these PSAOs and an additional PSAO reported that they began offering 

reconciliation services. PSAOs we spoke with also reported expanding 

existing services. For example, one PSAO reported adding electronic 

funds transfers, while two other PSAOs reported that although they were 

already providing electronic funds transfers, they increased the frequency 

of transfers to five days per week.33 This increase was made to improve 

pharmacies’ cash flow by giving them quicker access to funds owed them 

by third-party payers or their PBMs. Two PSAOs we spoke with reported 

adding certification programs, particularly vaccination/immunization 

certification programs, because of the needs of third-party payers or their 

PBMs for this service to be provided through their network pharmacies.34

 

33“Electronic funds transfers” refers to the PSAOs ability to receive funds electronically, 

such as reimbursements from a third-party payer or its PBM. For example, a PSAO that 

provides central pay may receive consolidated funds electronically from a third-party payer 

or PBM and send individual payments electronically to its member pharmacies.

34Certification programs may include training, marketing, and program development 

provided by the PSAO to the pharmacy so that the pharmacy is qualified to provide a 

specialized service. 
 

Page 22 GAO-13-176 Pharmacy Services Administrative Organizations

PSAOs provide services intended to achieve administrative efficiencies 

for both independent pharmacies and third-party payers or their PBMs. 

PSAO services enable pharmacy staff, including pharmacists, to focus on 

patient-care services rather than administrative issues that pharmacists 

may not have the time to address. PSAO services also reduce the 

number of resources that PBMs must direct toward developing and 

maintaining relationships with multiple independent pharmacies.

PSAO services are intended to help independent pharmacies achieve 

efficiencies particularly in contract negotiation. For example, independent 

pharmacies and PBMs we spoke with told us that PSAO contract 

negotiation services eased their contracting burden and allowed them to 

expand the number of entities with which they contracted. As a member 

of a PSAO, pharmacies may no longer have to negotiate contracts with 

multiple third-party payers or their PBMs operating in any given market. 

Independent pharmacies also told us that PSAOs provide other services 

that create both administrative and cost efficiencies for them. For 

example, one pharmacist told us that the marketing services provided by 

his PSAO relieved him of advertising costs because the PSAO provided 

advertising circulars to its PSAO-franchise members. Another 

independent pharmacy reported that its PSAO provides services such as 

claims reconciliation less expensively than the pharmacy could perform 

on its own.

Similar to independent pharmacies, PBMs we spoke with reported that 

PSAO services create administrative efficiencies for them, including 

efficiencies in contracting, payment, and their call centers. PSAO services 

create contracting efficiencies because they provide PBMs with a single 

point through which they can reach multiple independent pharmacies. For 

example, the PBMs we spoke with each had over 20,000 independent 

pharmacies in their networks, however, each PBM only negotiated 

contracts with 15 to 19 PSAOs, representing a majority of the pharmacies 

in its network. PBMs also reported that PSAO services create payment 

efficiencies when PSAOs provide central payment services. One PBM 

reported that instead of mailing checks to hundreds of individual 

pharmacies, the PBM made one electronic funds transfer to the PSAO, 

which then distributed the payments to its members. Finally, PBMs 

benefit from reduced call center volume because PSAOs often provide 

similar support directly to member pharmacies. For example, a call that 

may have gone to the PBM about a claim that was not paid may instead 

go to the pharmacy’s PSAO, which will help the pharmacy understand 

any issues with the claim. PSAOs may also aggregate member 

pharmacies’ issues and contact the PBM to discuss issues on behalf of 

PSAOs Provide Services 

Intended to Achieve 

Administrative Efficiencies 

for Independent 

Pharmacies and ThirdParty Payers or Their 

PBMs
 

Page 23 GAO-13-176 Pharmacy Services Administrative Organizations

multiple pharmacies and relay pertinent information back to those 

pharmacies.

While creating efficiencies by acting on behalf of multiple pharmacies, 

PSAOs must ensure that their arrangements do not unreasonably restrain 

trade, thereby raising antitrust concerns.35 The FTC and the Antitrust 

Division of the Department of Justice (DOJ) are the federal agencies 

responsible for determining whether a particular collaborative 

arrangement may be unlawful and for enforcing applicable prohibitions.36

According to FTC officials, such a determination is dependent on multiple 

factors including the geographic region that a PSAO is operating in and 

the health care program (e.g., Medicare Part D) with which a PSAO is 

contracting. These factors affect the PSAO’s ability (and the abilities of 

the pharmacies the PSAO represents) to affect the terms of a contract or 

the pricing of a good. For example, a group of rural pharmacies may more 

effectively influence contract negotiations than a single pharmacy 

operating in an urban area with many competitors. PSAOs we spoke with 

were aware of potential antitrust issues and reported taking measures to 

minimize them. For example, two of the PSAOs we spoke with reported 

developing their PSAO’s organizational structure to ensure compliance 

with antitrust laws.

Although PSAOs’ charges to member pharmacies for their services may 

vary depending on how the services are provided, 8 of the 10 PSAOs we 

spoke with charged a monthly fee for a bundled set of services. For 

example, 1 PSAO charged $40 to $80 per month for a bundle of services 

that included contract negotiation, communication with member 

pharmacies, help-desk services, business advice, and limited audit 

support. In comparison, another PSAO’s monthly fee ranged from $59 to 

$149 per month depending on the combination of services that the 

 

35Applicable federal antitrust laws include the Sherman Act, July 2, 1890, c. 647, 26 Stat. 

209 (codified as amended at 15 U.S.C. §§ 1 et seq.); the Clayton Act, Oct. 15, 1914, c. 

323, 38 Stat. 730 (codified as amended at 15 U.S.C. §§ 12 et seq.); and the Federal 

Trade Commission Act, Sept. 26, 1914, c. 311, 38 Stat. 717 (codified as amended at 

15 U.S.C. §§ 41 et. seq.).

36FTC issues commission or staff advisory opinions and DOJ issues business review 

letters in response to requests to review specific proposed collaborative arrangements. 

According to agency officials, the review of a given collaborative arrangement is generally 

done by the agency with the most expertise with that type of arrangement.

Most PSAOs Charge a 

Monthly Fee for Bundled 

Services and Additional 

Fees for Other Services
 

Page 24 GAO-13-176 Pharmacy Services Administrative Organizations

pharmacy requested. One of the remaining PSAOs we spoke with 

charged an annual fee rather than a monthly fee, while the other PSAO 

did not charge any fees for its PSAO services. The latter PSAO provided 

PSAO services as a value-added service to members of its group 

purchasing organization, for which it charged a monthly fee.37

Virtually all of the fees for PSAO services are paid for by member 

pharmacies. All of the PSAOs we spoke with reported that they did not 

receive any type of fees from other entities such as an administrative fee 

from a third-party payer or its PBM. Similarly, all of the PBMs we spoke 

with told us that they did not pay PSAOs for their services. However 1 of 

the 3 PBMs we spoke with reported that it paid part of a pharmacy’s 

dispensing fee to 1 of the 16 PSAOs with which it contracted rather than 

to the pharmacy.

Other 

services that are offered by most, but not all, PSAOs we spoke with are 

either provided within the bundle or as separate add-on services. PSAOs 

may also charge fees for individual services that are based on the type or 

value of that service.

The majority of PSAOs in operation in 2011 or 2012 were owned by 

wholesalers and independent pharmacy cooperatives.38 In addition, these 

PSAO owners varied as to whether they require member pharmacies to 

also use the non-PSAO services they offer.

 

37A group purchasing organization negotiates on behalf of a group of pharmacies to get 

discounts and rebates from suppliers of prescription drugs, such as drug manufacturers. 

In some cases, an organization will operate both a group purchasing organization and a 

PSAO. 

38Independent pharmacy cooperatives are organizations composed of independent 

pharmacies that may, for example, operate a group purchasing organization or provide 

other services to their members. 

Wholesalers and 

Independent 

Pharmacy 

Cooperatives Owned 

the Majority of 

PSAOs; Requirements 

to Use Non-PSAO 

Services Varied by 

Owner 
 

Page 25 GAO-13-176 Pharmacy Services Administrative Organizations

Wholesalers and independent pharmacy cooperatives owned the majority 

of the PSAOs in operation in 2011 or 2012. Specifically, of the 

22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were 

owned by independent pharmacy cooperatives (“member-owned”), 

4 were owned by group purchasing organizations, and 3 were standalone PSAOs owned by other private entities. (See table 3.) Three of the 

5 largest PSAOs were owned by the 3 largest wholesalers in the U.S.: 

AmerisourceBergen Corporation, Cardinal Health Inc., and McKesson 

Corporation. Across all sources included in our review, the PSAOs owned 

by these wholesalers represented 9,575 to 12,080 pharmacies, and 

PSAOs owned by independent pharmacies represented 4,883 to 8,882

pharmacies. According to one industry report, the services provided by 

member-owned PSAOs are similar to those offered by wholesaler-owned 

PSAOs.39 One PBM we spoke with noted that because of the financial 

backing of wholesaler-owned PSAOs, their PSAOs generally offer central 

payment services more often than PSAOs owned by other types of 

entities. This strong financial backing is necessary to offer these services 

because there is a considerable liability and risk in providing a central 

payment service.

 

39Fein, 2011-12 Economic Report. 

Wholesalers and 

Independent Pharmacy 

Cooperatives Owned the 

Majority of PSAOs
 

Page 26 GAO-13-176 Pharmacy Services Administrative Organizations

Table 3: Ownership of Pharmacy Services Administrative Organizations (PSAO) in Operation in 2011 or 2012

PSAO 

(ranked largest to smallest by number of pharmacies represented) Ownership type (owner name)

Good Neighbor Pharmacy Provider Network Wholesaler (AmerisourceBergen Corporation) 

Access Health Wholesaler (McKesson Corporation) 

LeaderNET Wholesaler (Cardinal Health Inc.)

EPIC Pharmacy Network, Inc.

a

Member-owned (EPIC Pharmacies, Inc.)

Third Party Station Wholesaler (Wholesale Alliance, LLC)

United Drugs Member-owned (American Associated Pharmacies)

MHA Long Term Care Pharmacy Network Group purchasing organization 

(Managed Health Care Associates, Inc.)

Third Party Network Wholesaler (H.D. Smith Wholesale Drug Co.)

American Pharmacy Network Solutions Member-owned (American Pharmacy Cooperative, 

Inc.)

TriNet Third Party Network Group purchasing organization (PBA Health)

RxPr1de / Managed Pharmacy Care Member-owned b

Managed Care Connection Wholesaler (Cardinal Health Inc.)

Medicine Shoppe International

a

Wholesaler (Cardinal Health Inc.)

RxSelect Pharmacy Network

a

Member-owned (Pharmacy Providers of Oklahoma)

Family Care Pharmacy Member Network Wholesaler (JM Smith Corporation) c

Gerimed Long Term Care Network, Inc. Group purchasing organization (Gerimed, Inc.)

Innovatix Network Group purchasing organization (Innovatix Group 

Purchasing Organization) 

Progressive Pharmacies, LLC Wholesaler (Frank W. Kerr Company)

Valu Merchandisers Company Member-owned (Associated Wholesale Grocers)

Pharmacy Select Stand alone pharmacy services company 

(Pharmacy Providers Services Corporation)

United Pharmacist Network, Inc. Stand alone pharmacy services company

Northeast Pharmacy Services Corporation Stand alone pharmacy services company

Source: GAO analysis of National Council for Prescription Drug Programs (NCPDP) data, pharmaceutical industry reports, PSAO 

websites and interviews.

Notes: Although the majority of pharmacies represented by these PSAOs are independent 

pharmacies, some PSAOs represent small chains and franchise pharmacies. Pharmacies are listed 

by size on the basis of the number of pharmacies each represented according to NCPDP data from 

February 2011, with the exception of Northeast Pharmacy Services Corporation, which did not appear 

in the NCPDP data. For the purposes of this report, PSAOs that are owned by independent pharmacy 

cooperatives are referred to as “member-owned.” 

a

Cardinal Health Inc. operates three separate PSAOs that serve different segments of its business. 

LeaderNET provides services to its drug distribution customers, Medicine Shoppe International

provides services to members of its pharmacy franchise, and Managed Care Connection provides 

services to small independent chains.
 

Page 27 GAO-13-176 Pharmacy Services Administrative Organizations

b

RxPr1de is owned by Managed Pharmacy Care. Managed Pharmacy Care identifies itself as a 

PSAO, but RxPr1de does not. RxPr1de does serve as an intermediary between independent 

pharmacies and pharmacy benefit managers (PBM), therefore, we consider RxPr1de a PSAO for 

purposes of this report.

c

PSAO owners may operate PSAOs for a number of reasons, including to 

benefit another, non-PSAO line of their business. The wholesalers we 

spoke with provided various reasons for offering PSAO services, such as 

wanting to assist independent pharmacies in gaining access to third-party 

payer or PBM contracts, or to help pharmacies operate more efficiently. 

Additionally, one wholesaler noted that it created its PSAO because thirdparty payers and independent pharmacies indicated there was a need for 

PSAO services in the market. These third-party payers wanted a sole 

source for reaching multiple pharmacies, while independent pharmacies 

wanted a facilitator to assist them with reviewing third-party payer 

contracts. Other pharmaceutical entities noted that wholesalers may have 

an interest in developing relationships with independent pharmacies, 

which are potential customers of the wholesaler’s drug distribution line of 

business. By obtaining multiple services from a wholesaler, an 

independent pharmacy may be less likely to switch wholesalers. 

Additionally, by having their PSAOs assist independent pharmacies with 

entering multiple third-party payer or PBM contracts, wholesalers may 

benefit from the increased drug volume needed by independent 

pharmacies to serve the third-party payer’s or PBM’s enrollees. Other 

types of PSAO owners also provided a number of reasons for providing 

PSAO services, for instance, a number of these owners stated that they 

began offering PSAO services as a market-driven response to the growth 

of third-party payers and PBMs. In fact, one PSAO owner we spoke with 

stated that it reluctantly began offering these services at the request of 

customers of its group purchasing services, who wanted help navigating 

the issues and complexities of third-party payer and PBM contracting.

Family Care Pharmacy Network is run by QS/1, a division of the JM Smith Corporation. The JM 

Smith Corporation is focused on various areas of healthcare and technology and operates six 

divisions, including its original division that provides drug distribution services.
 

Page 28 GAO-13-176 Pharmacy Services Administrative Organizations

The owners of PSAOs we spoke with varied as to whether they require 

PSAO member pharmacies to also use services from a separate nonPSAO line of their business. Of the nine PSAO owners we spoke with that 

had a separate non-PSAO line of business (e.g., drug distribution or 

group purchasing), six did not require their PSAO member pharmacies to 

use services from that non-PSAO line of business.40

While most PSAO owners do not require their member pharmacies to use 

services from their primary line of business, member pharmacies may 

choose to do so. In this case, a pharmacy must contract and pay for 

PSAO and other services separately. In fact, according to one wholesaler 

we spoke with, approximately 36 percent of its drug distribution 

customers were also members of its PSAOs.

Of the remaining

three, one wholesaler-owned PSAO limited its offer of services to 

pharmacies that were existing customers of its drug distribution line of 

business, while two member-owned PSAOs reported requiring their 

PSAO member pharmacies to join their group purchasing organizations.

Officials from the wholesaler-owned PSAO stated that their limiting the 

availability of PSAO services to existing customers ensures that their 

PSAO already has basic information about their member pharmacies and 

a salesperson who serves as each member pharmacy’s point of contact.

41 Pharmacies may be 

required to submit an application to join a PSAO network. PSAO 

applications we reviewed requested information about the pharmacy’s 

licensing, services provided, and insurance. Additionally, applications 

asked pharmacies to indicate whether they had been investigated by the 

HHS OIG, had filed for bankruptcy, or had their pharmacy’s state license 

limited, suspended, or revoked. PSAOs stated they used the information 

provided in applications to verify that the pharmacies applying for 

membership in their network are licensed by their state and in good 

standing.

 

40Member-owned PSAOs may also operate group purchasing organizations and provide 

other non-PSAO services to their members.

41Pharmacies may choose to obtain PSAO services from their wholesaler, but not all do 

so. Instead, some pharmacies may choose to join another PSAO.

PSAO Owners Vary As to 

Whether They Require 

Member Pharmacies to 

Use Their Non-PSAO 

Services
 

Page 29 GAO-13-176 Pharmacy Services Administrative Organizations

Most PSAOs we spoke with operated their PSAO separately from any 

separate non-PSAO line of business. For example, most wholesalers we 

spoke with stated their PSAO staff and drug distribution staff are distinct 

and do not interact. One of these wholesalers reported its PSAO has a 

distinct corporate structure, management team, sales organization and 

financial component from its drug distribution line of business. However, 

nearly all of the PSAO owners we spoke with operate their PSAO as a 

subsidiary of their non-PSAO line of business. For example, two PSAOs 

were organized as subsidiaries of a member-owned buying group, while 

another PSAO operated as a branded service under the owner’s nonPSAO line of business.

Most PSAO owners reported that PSAO services are not a profitable line 

of business. Only 1 of the 10 PSAO owners we spoke with stated that its 

PSAO service was profitable. Other PSAO owners reported little to no 

profit earned from the PSAO services they provided.42 For those PSAOs 

that are not profitable, the cost of operating them may be subsidized by 

the owner’s non-PSAO lines of business. As previously noted, it may be 

the case that offering PSAO services may benefit the owner’s non-PSAO 

line of business even if the PSAO service itself is not profitable. For 

example, one member-owned PSAO we spoke with also owned a group 

purchasing organization to which its members must belong in order to 

obtain PSAO services. The group purchasing organization may benefit 

from increased membership driven by pharmacies that want to obtain its 

PSAO services.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Secretary of Health 

and Human Services, the Chairman of the Federal Trade Commission,

and interested congressional committees. In addition, the report will be 

available at no charge on the GAO website at http://www.gao.gov. 

 

42One PSAO owner that we spoke with did not provide information regarding the 

profitability of its PSAO. 
 

Page 30 GAO-13-176 Pharmacy Services Administrative Organizations

If you or your staff have questions about this report, please contact 

John E. Dicken at (202) 512-7114 or DickenJ@gao.gov. Contact points 

for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report. GAO staff members who made key 

contributions to this report are listed in appendix I.

Sincerely yours,

John E. Dicken

Director, Health Care
Appendix I: GAO Contact and Staff 

Acknowledgments

Page 31 GAO-13-176 Pharmacy Services Administrative Organizations

John E. Dicken, (202) 512-7114 or DickenJ@gao.gov

In addition to the contact named above, Rashmi Agarwal and Robert 

Copeland, Assistant Directors; George Bogart; Zhi Boon; Jennel Lockley; 

Laurie Pachter; and Brienne Tierney made key contributions to this 

report.

Appendix I: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(291039)
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