Report to the Honorable Byron L. 

Dorgan, U.S. Senate 

United States General Accounting Office

GAO 

January 2003 FEDERAL 

EMPLOYEES’ 

HEALTH BENEFITS 

Effects of Using 

Pharmacy Benefit 

Managers on Health 

Plans, Enrollees, and 

Pharmacies 

GAO-03-196 
The PBMs reviewed produced savings for health plans participating in 

FEHBP by obtaining drug price discounts from retail pharmacies and 

dispensing drugs at lower costs through mail-order pharmacies, passing on 

certain manufacturer rebates to the plans, and operating drug utilization 

control programs. For example, the average price PBMs obtained from retail 

pharmacies for 14 brand name drugs was about 18 percent below the 

average price paid by customers without third-party coverage. 

Enrollees in the plans reviewed had wide access to retail pharmacies, 

coverage of most drugs, and benefited from cost savings generated by the 

PBMs. Enrollees typically paid lower out-of-pocket costs for prescriptions 

filled through mail-order pharmacies and benefited from other savings that 

reduced plans’ costs and therefore helped to lessen rising premiums. 

 

Most retail pharmacies participate in the FEHBP plans’ networks in order to 

obtain business from the large number of enrollees covered. Pharmacy 

associations report that the PBMs’ large market shares leave some retail 

pharmacies with little leverage in negotiating with PBMs. Retail pharmacies 

must accept discounted reimbursements from PBMs they contract with and 

perform additional administrative tasks associated with claims processing. 

OPM generally concurred with GAO’s findings. The plans and PBMs 

reviewed provided technical comments, and two independent reviewers 

stated the report was fair and balanced. One pharmacy association 

expressed strong concerns, including that the report did not more broadly 

address economic relationships in the PBM industry. GAO examined 

relationships between the PBMs and manufacturers and pharmacies specific 

to their FEHBP business. However, relationships between PBMs and other 

entities for other plans were beyond the report’s scope. 

PBM Discounted Prices Compared to Prices for Customers without Third-Party Coverage, 

30-day Supply, April 2002 

FEDERAL EMPLOYEES’ HEALTH 

BENEFITS 

Effects of Using Pharmacy Benefit 

Managers on Health Plans, Enrollees, and 

Pharmacies 

www.gao.gov/cgi-bin/getrpt?GAO-03-196.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Kathryn G. 

Allen at (202) 512-7118. 

Highlights of GAO-03-196, a report to the

Honorable Byron L. Dorgan, U.S. Senate 

January 2003 

Rising prescription drug costs have 

contributed to rising employer 

health plans premiums in recent 

years. Most federal employees, 

retirees, and their dependents 

participating in the Federal 

Employees Health Benefits 

Program (FEHBP), administered by 

the Office of Personnel 

Management (OPM), are enrolled 

in plans that contract with 

pharmacy benefit managers (PBM) 

to administer their prescription 

drug benefits. 

GAO was asked to examine how 

pharmacy benefit managers 

participating in the federal program 

affect health plans, enrollees, and 

pharmacies. GAO examined the 

use of PBMs by three plans 

representing about 55 percent of 

the 8.3 million people covered by 

FEHBP plans. For example, GAO 

surveyed 36 retail pharmacies on 

prices that a customer without 

third-party coverage would pay for 

18 high-volume or high-expenditure 

drugs and compared these prices to 

prices paid by the plans and PBMs. 
Page i GAO-03-196 Pharmacy Benefits for Federal Employees 

Letter 1

Results in Brief 4

Background 6

PBMs Achieved Savings through Price Discounts, Rebate 

Payments, and Managing Drug Use 9

PBMs Provided FEHBP Enrollees Generally Unrestricted Access to 

Prescription Drugs, Cost Savings, and Other Benefits 15

Pharmacies Included in PBM Retail Networks Must Accept 

Discounted Prices and Perform Various Administrative Tasks 20

PBMs Received Compensation from Plans and Payments from 

Manufacturers for Their FEHBP Business 25

Concluding Observations 28

Agency and Other Comments and Our Evaluation 28

Appendix I Scope and Methodology 31 

Appendix II Comments from the Office of Personnel 

Management 36 

Appendix III GAO Contact and Staff Acknowledgments 38 

Related GAO Products 39 

Tables 

Table 1: FEHBP Plans and PBMs Reviewed 7

Table 2: FEHBP Plans’ Formularies Compared to VA National 

Formulary 17

Table 3: Comparison of Enrollee Cost-Sharing for a 90-day Supply 

of Retail and Mail-Order Prescription Drugs, 2002 18

Table 4: Selected High-Volume or High-Expenditure Drugs for 3 

FEHBP Plans 32

Contents 
Page ii GAO-03-196 Pharmacy Benefits for Federal Employees 

Figures 

Figure 1: PBM Relationships with Market Participants 8

Figure 2: PBM Discounted Plan Prices Compared to Cash-Paying 

Customer Prices for 30-Day Supplies, April 2002 10

Figure 3: Overview of PBMs’ Compensation and Payment Sources 26

Abbreviations 

AMP average manufacturer price 

AWP average wholesale price 

BCBS Blue Cross and Blue Shield 

FEHBP Federal Employees Health Benefits Program 

GEHA Government Employees Hospital Association 

HMO health maintenance organization 

IOM Institute of Medicine 

MAC maximum allowable cost 

NACDS National Association of Chain Drug Stores 

NCPA National Community Pharmacists Association 

NDC National Drug Code 

OPM Office of Personnel Management 

PBM pharmacy benefit managers 

SEC Securities and Exchange Commission 

VA Department of Veterans Affairs 

WAC wholesale acquisition cost 
Page 1 GAO-03-196 Pharmacy Benefits for Federal Employees 

January 10, 2003 

The Honorable Byron L. Dorgan 

United States Senate 

Dear Senator Dorgan: 

The increasing cost of prescription drugs has been a key component of 

rising employer health care costs in recent years. In 2001, total employer 

health benefit costs rose 11 percent, while prescription drug costs rose 17 

percent.1

 Many employer-sponsored health plans and insurers contract 

with pharmacy benefit managers (PBMs) to help manage their prescription 

drug benefits. PBMs negotiate drug prices with pharmacies and drug 

manufacturers on behalf of health plans and, in addition to other 

administrative, clinical, and cost containment services, process drug 

claims for the health plans. In 2001, nearly 200 million Americans had their 

prescription drug benefits managed by a PBM. Most federal employees, 

retirees, and their dependents participating in the Federal Employees 

Health Benefits Program (FEHBP), the largest employer-sponsored health 

insurance program in the United States, are enrolled in plans that contract 

with PBMs to manage their prescription drug benefits. 

Because PBMs play a critical role in managing prescription drug benefits, 

you asked us to examine PBMs’ role within the FEHBP program. In 

particular, we addressed the following questions: 

1. Do PBMs achieve savings, and, if so, how? 

2. How do FEHBP plans’ use of PBMs affect enrollees, including access 

to prescription drugs and out-of-pocket spending? 

3. How do FEHBP plans’ use of PBMs affect retail pharmacies, including 

pharmacies’ reimbursements for drugs dispensed and administrative 

requirements? 

4. How are PBMs compensated for services provided to FEHBP plans? 

 1

William M. Mercer Incorporated, Mercer/Foster Higgins National Survey of EmployerSponsored Health Plans 2001, (New York: 2002). 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-03-196 Pharmacy Benefits for Federal Employees 

To respond to these questions, we examined the use of PBMs by three 

FEHBP plans: Blue Cross and Blue Shield (BCBS), Government 

Employees Hospital Association (GEHA), and PacifiCare of California. 

Together, these plans accounted for about 55 percent of the 8.3 million 

people covered by FEHBP as of July 2002 and represented various plan 

types and PBM contractors.2

 BCBS contracted with the two largest PBMs 

in the United States for its pharmacy benefit services—Medco Health 

Solutions, a subsidiary of the pharmaceutical company Merck & Co., Inc., 

and AdvancePCS. GEHA contracted with Medco Health Solutions and 

PacifiCare of California contracted with Prescription Solutions, another 

subsidiary of PacifiCare Health Systems. 

We reviewed contracts between the PBMs and plans, financial statements 

regarding payments made between the plans and PBMs, and retail and 

mail-order prices for selected drugs from the FEHBP plans we reviewed 

and the PBMs with which they contracted. We also obtained pricing 

information from retail pharmacies, interviewed officials at the Office of 

Personnel Management (OPM),3

 and associations representing PBMs and 

retail pharmacies, and reviewed studies regarding the use of PBMs and 

prescription drug payments. Specifically: 

• To assess whether PBMs achieve cost savings, we obtained April 2002 

prices for 18 drugs that the three FEHBP plans paid to their PBMs for 

retail and mail order prescriptions.4

 We compared these prices to cash 

prices5

 that customers would pay at retail pharmacies in California, North 

Dakota, Washington, D.C., and the Virginia and Maryland suburbs of 

Washington, D.C., and to Medicaid reimbursement rates in these locations. 

In addition, we obtained plan and PBM data on drug manufacturers’ 

rebates that PBMs pass on to plans and any estimated savings resulting 

from certain PBM intervention techniques such as drug utilization reviews 

and prior authorization. 

 2

BCBS and GEHA are fee-for-service plans, while PacifiCare of California is a health 

maintenance organization (HMO). 

3

OPM has overall administrative responsibility for FEHBP and authority to contract with 

private plans, including fee-for-service insurers and HMOs, to operate the program. As of 

July 2002, OPM had contracts with 183 participating plans. 

4

These prices represent the combined enrollee and plan portion paid. 

5

Cash prices refer to the price paid for a prescription without any insurance or other thirdparty coverage. 
Page 3 GAO-03-196 Pharmacy Benefits for Federal Employees 

• To examine the effect of PBM services on enrollees’ access to drugs and 

out-of-pocket costs, we reviewed plan documents; compared the plans’ 

retail pharmacy networks to the number of licensed retail pharmacies in 

California, the District of Columbia, Maryland, North Dakota, and Virginia; 

and compared the number of drugs and therapeutic classes included on 

the plans’ formularies6

 with the National Formulary for the Department of 

Veterans Affairs (VA).7

• To examine the effect of PBMs on retail pharmacies, we interviewed 

representatives of retail pharmacies and associations and representatives 

of FEHBP plans and PBMs. We also compared the PBMs’ payments to 

retail pharmacies for selected drugs to industry-reported manufacturer 

and wholesale prices that estimate pharmacy acquisition costs. 

• To examine how PBMs were compensated for services they provided 

FEHBP plans, we examined the contracts between plans and PBMs and 

associated annual financial statements and financial information that 

PBMs filed with the Securities and Exchange Commission (SEC). 

While the plans and PBMs provided certain data that they considered 

proprietary, we do not report such data that can be linked to a specific 

plan or PBM but instead report aggregated drug price, cost, savings, and 

compensation data. We did not independently verify information provided 

by plans, PBMs, or pharmacies. Appendix I provides additional 

information on our scope and methodology, and a list of our related 

products is included at the end of this report. Our work was conducted 

from September 2001 through December 2002 according to generally 

accepted government auditing standards. 

 6

Formularies include lists of prescription drugs, grouped by therapeutic class (groups of 

drugs that are similar in chemistry, method of action, and purpose of use), that health plans 

or insurers encourage physicians to prescribe and beneficiaries to use. 

7

We used the VA formulary as a benchmark for comparison because the Institute of 

Medicine has determined that it is not overly restrictive. The IOM committee also 

concluded that the VA formulary is in some respects more but in many respects less 

restrictive than other public or private formularies. See David Blumenthal and Roger 

Herdman editors, VA Pharmacy Formulary Analysis Committee, Division of Health Care 

Services, Institute of Medicine, Description and Analysis of the VA National Formulary 

(National Academy Press, Washington, D.C.: 2000). 
Page 4 GAO-03-196 Pharmacy Benefits for Federal Employees 

The three PBMs we examined achieved savings for FEHBP-participating 

health plans by using three key approaches: obtaining drug price discounts 

from retail pharmacies and dispensing drugs at lower costs through their 

mail-order pharmacies; passing on certain manufacturer rebates to the 

plans; and using intervention techniques that reduce utilization of certain 

drugs or substitute other, less costly, drugs. The average price PBMs 

negotiated for drugs from retail pharmacies was about 18 percent below 

the average cash price customers would pay at retail pharmacies for 14 

selected brand-name drugs and 47 percent below the average cash price 

for 4 selected generic drugs. These price savings may overstate PBMs’ 

negotiating success because, absent a PBM, plans would likely manage 

their own drug benefits and also attempt to negotiate discounts with retail 

pharmacies. PBMs provide plans even greater savings when drugs are 

dispensed through their mail-order pharmacies. The average mail-order 

price was about 27 percent and 53 percent below the average cash price 

customers would pay at a retail pharmacy for the selected brand name and 

generic drugs, respectively. In addition to discounts, PBMs passed through 

to plans certain rebates they earned from drug manufacturers. Across the 

three plans, rebates reduced total annual drug spending by 3 percent to 9 

percent from 1998 through 2001. Although difficult to precisely quantify, 

PBMs also achieved savings through intervention techniques such as prior 

authorization and drug utilization reviews that identify excess use, 

duplicative therapies, or the availability of effective, low-cost drug 

alternatives. For example, plans reported savings in 2001 for various 

intervention techniques that ranged from less than 1 percent to 9 percent 

of their total spending on prescription drug benefits. 

FEHBP enrollees generally had unrestricted access to retail pharmacies 

and prescription drugs, savings in out-of-pocket spending, and other safety 

and customer service benefits. PBMs maintained retail pharmacy 

networks for the FEHBP plans that included most retail pharmacies—

typically 90 percent to nearly 100 percent in five jurisdictions we reviewed. 

Drug formularies administered by the PBMs were generally not overly 

restrictive; they included drugs in most major therapeutic categories and 

mechanisms existed to allow enrollees to obtain nonformulary drugs when 

prescribed by a physician, although sometimes at a higher out-of-pocket 

cost. Enrollees also shared in the savings PBMs generated for FEHBP 

plans. For example, enrollees generally paid less in out-of-pocket costs for 

drugs from the PBMs’ mail-order services than they would at retail 

pharmacies. Additional PBM savings passed on to plans translated into 

smaller premium increases for enrollees. Further, each PBM operated a 

program to review prescriptions at the point of purchase to help prevent 

Results in Brief 
Page 5 GAO-03-196 Pharmacy Benefits for Federal Employees 

potentially adverse drug interactions, and the PBMs reported that they 

generally met or exceeded contractual standards on customer service 

quality. 

Pharmacies that participate in retail networks established by FEHBP 

plans’ PBMs must accept discounted prices and undertake additional 

administrative tasks not required for cash-paying customers’ transactions. 

Although these pharmacies were reimbursed by the PBMs below the level 

paid by cash-paying customers, we estimate that PBM reimbursements 

exceeded pharmacies’ drug acquisition costs—not including overhead 

costs or any discounts or rebates some pharmacies may obtain—by an 

average of approximately 8 percent for brand-name drugs we selected for 

review. Administrative requirements to process PBM and other third-party 

prescriptions are greater than for cash transactions. For example, 

pharmacy staff must file claims electronically, may be required to contact 

physicians to approve formulary drug substitutions, or counsel patients on 

plan benefits. Also, retail pharmacies may lose market share to PBM mailorder pharmacies because some PBMs use cost incentives and enrollee 

health information to promote the use of mail order over retail 

pharmacies. Nevertheless, most retail pharmacies participate in PBM 

networks because of the large market share PBMs represent and the 

prescription and nonprescription sales generated by customers the PBMs 

help bring into the stores. Pharmacy associations report that retail 

pharmacies often have little leverage with PBMs, with negotiations only 

occurring when a large chain will not accept the PBM’s contractual terms 

or an independent pharmacy in a rural area must be included to meet 

health plans’ access requirements. 

PBMs received compensation for their FEHBP business from FEHBP 

plans and payments from pharmaceutical manufacturers through various 

methods. 

• PBMs collected fees from FEHBP plans for various administrative and 

clinical services including processing claims and conducting drug 

utilization reviews. These administrative fees, which varied by plan 

depending on contracted services, accounted for an average of about 1.5 

percent of each plan’s total drug benefit spending in 2001. 

• FEHBP plans we reviewed paid PBMs discounted prices for retail drugs 

that were virtually the same as prices PBMs paid to reimburse retail 

pharmacies. However, plans paid lower prices for mail-order drugs 

supplied by the PBM. While not disclosing their acquisition costs for mailorder drugs, PBM officials said that discounted prices paid by the plans to 
Page 6 GAO-03-196 Pharmacy Benefits for Federal Employees 

PBMs for mail-order drugs were generally higher than prices PBMs paid 

manufacturers to acquire drugs. 

• The PBMs we reviewed varied in the extent to which they retained a share 

of drug manufacturers’ rebates associated with their FEHBP business or 

passed it all on to the FEHBP plans they contracted with. The PBMs also 

received other rebates or payments from manufacturers based on their 

total business with a particular drug manufacturer. While information on 

the size of these payments was unavailable, PBMs’ public financial 

information suggests that rebates or other payments from drug 

manufacturers may be a large source of PBM earnings. 

In commenting on a draft of this report, OPM generally concurred with our 

findings. The plans and PBMs we examined reviewed the report for the 

accuracy of information regarding their arrangements and provided 

technical comments that we incorporated as appropriate. Two 

independent experts indicated that the report was fair and balanced and 

provided technical comments. An official for the National Association of 

Chain Drug Stores (NACDS) expressed strong concerns in response to our 

draft report, primarily regarding the scope of our work. An official of the 

National Community Pharmacists Association (NCPA) separately said he 

concurred with the NACDS official’s comments. A major concern was that 

the report’s focus on FEHBP plans did not adequately address the full 

scope of economic relationships in the PBM industry, including those 

between drug manufacturers and PBMs and the extent to which these 

relationships create incentives for PBMs to encourage the use of certain 

potentially higher-cost drugs. We examined contracts and relationships 

between the PBMs and drug manufacturers and pharmacies specific to 

their FEHBP line of business. However, relationships between PBMs and 

manufacturers and pharmacies for other plans were beyond the report’s 

scope. 

Most FEHBP plans contract with a PBM to help manage their prescription 

drug benefits, and those that do not contract with a PBM have internal 

components that employ techniques commonly used by PBMs, according 

to OPM officials. The three FEHBP plans we reviewed covered more than 

half of all FEHBP enrollees and paid $3.3 billion for about 65 million 

prescriptions dispensed to these enrollees in 2001. Table 1 shows plan 

enrollment and PBMs we reviewed. 

Background 
Page 7 GAO-03-196 Pharmacy Benefits for Federal Employees 

Table 1: FEHBP Plans and PBMs Reviewed 

July 2002 

Enrollment 

(percentage of total 

FEHBP enrollment) PBMs 

BCBS 4,038,671 (48.8) AdvancePCS (retail) 

Medco Health Solutions (mail order) 

GEHA 441,151 (5.3) Medco Health Solutions 

PacifiCare of California 57,042 (0.7) Prescription Solutions 

Source: OPM. 

Notes: As of July 2002, FEHBP plans covered 8.3 million people. 

Some FEHBP plans offer two benefit options, including BCBS (standard and basic options) and 

GEHA (high and standard options). 

PBMs offer health plans a variety of services including negotiating price 

discounts with retail pharmacies, negotiating rebates with manufacturers, 

and operating mail-order prescription services and administrative claims 

processing systems. PBMs also provide health plans with clinical services 

such as formulary development and management, prior authorization and 

drug utilization reviews to screen prescriptions for such issues as adverse 

interactions or therapy duplication, and substitution of generic drugs for 

therapeutically equivalent brand-name drugs. In order to provide these 

services, PBMs operate with multiple stakeholders in a complex set of 

relationships, as shown in figure 1. 
Page 8 GAO-03-196 Pharmacy Benefits for Federal Employees 

Figure 1: PBM Relationships with Market Participants 

Note: Other market interactions occur that are not represented in figure 1, including information 

exchanges among PBMs, manufacturers, wholesalers, physicians, health plans, and enrollees. 

Health plans are primarily responsible for overseeing PBM activities and 

for reporting to OPM any problems that could affect benefits service 

delivery to enrollees. OPM oversight responsibilities include negotiating 

plan benefits and changes, monitoring drug benefit service delivery, 

reviewing customer service reports, conducting on-site visits with 

pharmacy benefit managers, and handling appeals and complaints from 

FEHBP enrollees regarding their pharmacy benefits. 

PBM

Health plan

Enrollee

Retail

pharmacy

Pharmaceutical

manufacturer

Administrative services

Discounts/rebates

Clinical management

Payment for drugs

Administrative fees

Payment for retail drugs

Clinical information

Electronic claims

Discounted retail drug prices

Mail-order drugs

Mail-order drug cost share

Payment for mail-order drugs

Clinical programs/data

Rebates/fees

Discounted mail-order drugs

Source: GAO analysis based on plan and PBM data and literature review.
Page 9 GAO-03-196 Pharmacy Benefits for Federal Employees 

PBMs achieved savings for FEHBP plans primarily by obtaining price 

discounts for drugs, obtaining rebate payments from manufacturers, and 

employing various intervention techniques to control drug utilization and 

cost. In comparison to cash-paying customer prices, PBMs we reviewed 

obtained significant discounts from retail pharmacies and offered even 

greater discounts when prescriptions were dispensed through mail-order 

pharmacies. In addition, PBMs passed on to plans some or all 

manufacturers’ rebates associated with the FEHBP plans’ contracts and 

used intervention techniques that reduced plan spending on drug benefits. 

In comparison to prices cash-paying customers without third-party 

coverage would pay at retail pharmacies, the PBMs we examined achieved 

significant discounts for drugs purchased at retail pharmacies and offered 

even greater discounts through their mail-order pharmacies. The average 

price PBMs obtained for drugs from retail pharmacies was about 18 

percent below the average price cash-paying customers would pay at retail 

pharmacies for 14 selected brand-name drugs and 47 percent below the 

cash price for 4 selected generic drugs. For the same quantity, the average 

price paid at mail order for the brand and generic drugs was about 27 

percent and 53 percent below the average cash-paying customer price, 

respectively.8

 (See fig. 2.) 

 8

In addition to greater discounts, mail-order programs also save money for plans because 

only one dispensing fee is assessed for a typical 90-day supply of drugs rather than three 

dispensing fees for each of three 30-day supplies at retail pharmacies. Accounting for the 

dispensing fee savings for a 90-day supply, effective average discounts from cash-paying 

customer prices rise slightly from 27.3 to 27.7 percent for the selected brand drugs and 

from 52.5 to 59.1 percent for the selected generic drugs. Two of the three plans we 

reviewed limit coverage for prescriptions dispensed at retail pharmacies to a 30-day supply. 

The third plan limits coverage for retail prescriptions up to an initial 34-day supply but 

allows up to a 90-day supply for subsequent prescriptions under its lower option; it allows 

90-day supplies for all prescriptions under its higher option. We did not survey retail 

pharmacies for drug prices for a 90-day supply. 

PBMs Achieved 

Savings through Price 

Discounts, Rebate 

Payments, and 

Managing Drug Use 

PBMs Obtained 

Discounted Prices 

Significantly Below Those 

Paid by Cash-Paying 

Customers 
Page 10 GAO-03-196 Pharmacy Benefits for Federal Employees 

Figure 2: PBM Discounted Plan Prices Compared to Cash-Paying Customer Prices 

for 30-Day Supplies, April 2002 

Note: Most mail-order pharmacies dispense at larger volumes, typically a 90-day supply. Average 

mail-order discounts from cash-paying customer prices increase slightly if prescriptions are dispensed 

for a 90-day supply rather than for a 30-day supply. 

Moreover, PBMs we reviewed obtained greater discounts from retail 

pharmacies than did state Medicaid programs, which represent another 

major purchaser of drugs through retail pharmacies. We estimate that the 

average reimbursement rate for drugs by 5 Medicaid programs we 

reviewed was about 11 percent below the average price cash-paying 

customers would pay at retail pharmacies for the selected brand-name 

drugs (compared to 18 percent for the FEHBP plans we reviewed) and 23 

In dollars

0

10

20

30

40

50

60

70

80

90

14 brand-name drugs 4 generic drugs

Average retail price negotiated with PBM for plan and enrollees

Average mail-order price negotiated with PBM for plan and enrollees

Average cash-paying customer price

7.08

88.59

72.85

64.44

14.90

7.86

Source: GAO analysis of plan prices from three FEHBP plans and cash-paying customer prices at 36 pharmacies in California, 

North Dakota, and the Washington, D.C., area.
Page 11 GAO-03-196 Pharmacy Benefits for Federal Employees 

percent below the average cash price for the selected generic drugs 

(compared to 47 percent for the FEHBP plans we reviewed).9

While PBMs negotiated prices significantly lower than a cash-paying 

customer would pay, these discounts may overstate the level of savings 

plans achieve from using PBMs since no benchmark exists to accurately 

determine what discounts plans would obtain without a PBM. In the 

absence of a PBM, FEHBP plans could obtain some level of drug price 

discounts from retail pharmacies and drug manufacturers but would also 

directly incur the costs associated with undertaking these responsibilities. 

Also, PBMs can negotiate deeper discounts for plans with smaller 

networks of retail pharmacies because the pharmacies can anticipate 

receiving a higher concentration of the plans’ enrollees. For example, 

BCBS introduced its basic option in 2002 that includes a smaller network 

of retail pharmacies—about 70 percent as many pharmacies as its 

standard option—and deeper discounts in its retail pharmacy payments 

compared to its standard option. 

PBMs also passed through to the FEHBP plans they contracted with some 

or all of drug manufacturer rebates associated with their FEHBP business. 

Over the past 4 years, we estimate that the plans we reviewed received 

rebate payments that effectively reduced plans’ annual spending on 

prescription drugs by 3 percent to 9 percent. The share of rebates PBMs 

pass through to plans varies and is subject to contractual agreements 

negotiated between PBMs and the plans.10

Rebates and formularies are interrelated. Drug manufacturers provide 

PBMs certain rebates depending not only on inclusion of their drugs on a 

plan’s formulary but also on the PBMs’ ability to increase a manufacturer’s 

market share for certain drugs. Formulary incentives, such as lower 

 9

Medicaid reimbursement and cash-paying customer prices are for California, North 

Dakota, Washington, D.C., and the Virginia and Maryland suburbs of Washington, D.C. 

10Under FEHBP, plans may negotiate rebates as part of contractual agreements with PBMs. 

In contrast, as a condition of Medicaid coverage for outpatient drugs, manufacturers are 

required to provide state Medicaid programs with certain rebates. For brand name drugs, 

Medicaid rebates must be a minimum of 15.1 percent of the average manufacturers’ price 

(AMP). For the 14 brand name drugs we reviewed, we estimate that the minimum Medicaid 

rebate would reduce costs by an average of at least 12 percent. For generic drugs, Medicaid 

rebates must equal 11 percent of the AMP, which we estimate would reduce costs by an 

average of about 2 percent for the 4 generic drugs we reviewed. Moreover, states may 

negotiate additional rebates with manufacturers in order to reduce costs. 

PBMs Further Reduced 

Plans’ Drug Expenditures 

by Passing Through 

Certain Manufacturer 

Rebates 
Page 12 GAO-03-196 Pharmacy Benefits for Federal Employees 

enrollee cost sharing for certain drugs compared to competing 

therapeutically equivalent drugs, encourage the former’s use. 

Manufacturers may pay higher rebates when formularies have stronger 

incentives to use specific drugs. Therefore, PBMs may be able to provide 

other health plans with higher rebates if their formularies are more 

restrictive than those of the FEHBP plans we examined. 

Although PBM intervention techniques help contain plans’ cost increases 

by managing drug utilization and identifying opportunities to dispense less 

expensive drugs, their full impact on savings is not easily quantifiable. The 

FEHBP plans and PBMs we reviewed reported savings for individual 

intervention techniques ranging from less than 1 percent to 9 percent of 

plans’ total drug spending in 2001.11 Because plans varied in their use of 

intervention techniques and employed different cost savings 

methodologies, these estimates may not be comparable across plans. 

Techniques plans most commonly used included concurrent drug 

utilization review, prior authorization, therapeutic brand interchange, and 

brand to generic substitution. The reported cumulative effect of several 

techniques for one plan amounted to 14 percent of drug spending. 

Measuring cost savings from PBM intervention techniques is difficult for 

various reasons, including: 

• Savings methodologies did not reflect the effect intervention techniques 

may have over time on enrollees’ utilization patterns and physicians’ 

prescribing practices. That is, there may be a sentinel effect from PBMs’ 

reviews whereby enrollees and physicians may stop filling or prescribing 

drugs that do not meet PBMs’ utilization review or refill criteria, but the 

extent to which these behavior changes occur is beyond the scope of 

PBMs’ data systems. 

• Plans and PBMs we reviewed did not consistently measure the number or 

costs of drugs not dispensed as a result of PBM interventions that result in 

drug substitutions, denials for adverse drug interaction, or other 

interventions, making it difficult to estimate savings from certain 

intervention techniques. 

• Plans did not systematically measure savings when the primary goal of the 

intervention technique was patient safety and compliance with drugs’ 

clinical guidelines. 

 11Plans did not have estimates for all of their intervention techniques. 

PBM Intervention 

Techniques Contributed to 

Plans’ Savings, but Are 

Difficult to Quantify 
Page 13 GAO-03-196 Pharmacy Benefits for Federal Employees 

Among various intervention techniques, concurrent drug utilization and 

prior authorization provided some plans the largest quantifiable savings. 

The following are examples of intervention savings estimates reported by 

plans we reviewed. 

• Drug utilization review includes the PBM examining prescriptions 

concurrently at the time of purchase to assess safety considerations, such 

as potential adverse interactions, and compliance with clinical guidelines, 

including quantity and dose. These reviews can also occur retrospectively 

to analyze enrollees’ drug utilization and physicians’ prescribing patterns. 

Two plans estimated savings from drug utilization review ranging from 6 

percent to 9 percent, with about 60 percent to 80 percent of the savings 

from concurrent reviews, including claim denials from the PBM to prevent 

early drug refills and safety advisories to caution pharmacists about 

potential adverse interactions or therapy duplications.12 The remaining 

estimated savings are from retrospective reviews. 

• Prior authorization requires enrollees to receive approval from the plan 

or PBM before dispensing certain drugs that treat conditions or illnesses 

not otherwise covered by plans, have high costs, have a high potential for 

abuse, or are ordered in unusual quantities. Some plans may also require 

prior authorization for nonformulary drugs. Each of the plans we reviewed 

required prior authorization for certain drugs such as growth hormones 

and a drug used to treat Alzheimer’s disease. Two plans reported savings 

from prior authorization ranging from 1 percent to 6 percent of plan 

spending for drugs that either were not dispensed or were substituted for 

with less costly alternatives. 

• Therapeutic interchange encourages the substitution of less expensive 

formulary brand-name medications considered safe and effective for more 

expensive nonformulary drugs within the same drug class. Two plans 

reported savings ranging from 1 percent to 4.5 percent from therapeutic 

 12Savings from concurrent utilization review may be reduced if an enrollee subsequently 

obtains a prescription or refill. One PBM estimated savings for claims denied for early 

refills only if a refill had not been obtained within 14 days. 
Page 14 GAO-03-196 Pharmacy Benefits for Federal Employees 

interchange. These estimates are in addition to savings associated with 

rebates plans earned for drugs in the formulary.13

• Generic substitution involves dispensing less expensive, chemicallyequivalent generic drugs in place of brand name drugs. Where a PBM 

specifically intervened by contacting the physician to change a 

prescription from requiring a brand name to allowing a generic drug, one 

plan reported savings of less than 1 percent of the plan’s total drug 

spending. The other two plans said they do not have readily available data 

to measure savings from PBM interventions for generic drugs. All three 

plans reported more general information on their generic drug use, but the 

extent to which generic drugs are used cannot solely be attributed to 

PBMs because plan benefit design and physician prescribing patterns also 

influence generic drug use. On average, the plans we reviewed reported 

that generic drugs were dispensed more often by retail pharmacies (about 

45 percent of all drugs dispensed) than by mail-order pharmacies (about 

34 percent). The difference in use of generic drugs may in part reflect 

differences in the types of drugs that are typically dispensed through retail 

and mail-order pharmacies. For drugs where a generic version was 

available, the retail and mail-order pharmacies dispensed generic drugs at 

more similar rates—on average 89 percent of the time for retail 

pharmacies and 87 percent of the time for mail-order pharmacies. 

 13While plans reported savings from therapeutic interchange, concerns have been raised 

that in some cases PBMs’ relationships with manufacturers and retail pharmacies influence 

PBM interventions, such as substituting higher-cost drugs when lower-cost therapeutic 

equivalent drugs are available. Medco Health Solutions and Advance PCS filings with the 

SEC indicate that the Department of Justice is undertaking an industrywide investigation to 

examine PBM relationships with pharmaceutical manufacturers and retail pharmacies and 

PBMs’ programs related to drug formulary compliance, which includes rebates and other 

payments made by manufacturers to PBMs. The SEC filings show that the Department of 

Justice is also investigating payments made by PBMs to retail pharmacies or others in 

connection with PBM interventions. 
Page 15 GAO-03-196 Pharmacy Benefits for Federal Employees 

PBMs we reviewed generally provided enrollees with access to a nearby 

pharmacy, maintained formularies for plan enrollees that included drugs 

in most major therapeutic categories, and provided access to 

nonformulary drugs when medically necessary. The FEHBP plans passed 

on savings generated by the PBMs to enrollees in the form of lower out-ofpocket costs for prescription drugs in certain instances, such as through 

lower cost sharing for drugs obtained through mail-order pharmacies, and 

a smaller increase in premiums for all enrollees than might occur absent 

the PBM savings. Enrollees also benefited from PBM intervention 

programs to prevent potentially dangerous drug interactions and customer 

service that generally met or exceeded quality standards established in 

contracts negotiated with the FEHBP plans. 

Nearly all FEHBP enrollees had a retail pharmacy participating in their 

plan within a few miles of their residence. Two of the plans required the 

PBM to assure that at least 90 percent of enrollees had at least one 

pharmacy located within 5 miles of their residences. The PBMs for these 

plans reported to us they exceeded plans’ access standards and that close 

to 100 percent of enrollees live within 5 miles of a network pharmacy. The 

third plan did not have a specific contractual access standard, but plan 

officials said they have verified that well over 90 percent of enrollees live 

within 5 miles of a network pharmacy. We also compared the PBMs’ 

networks statewide in five states to the total of licensed retail pharmacies 

and found high levels of pharmacy participation. In most instances, we 

estimate that more than 90 percent to nearly 100 percent of licensed retail 

pharmacies participated in the PBM networks.14

Enrollees also had few restrictions on which drugs they could obtain. 

While the plans’ formularies varied with respect to the number of drugs 

covered, they included prescription drugs in most major therapeutic 

 14The states are California, the District of Columbia, Maryland, North Dakota, and Virginia. 

Estimates of pharmacy participation rates are approximate because of ongoing changes in 

the number of pharmacies licensed in each state and included in each PBM network and 

because PBM retail pharmacy networks may include a small number of nonretail 

pharmacies, such as hospital pharmacies. In 2002, BCBS began offering a basic option to 

FEHBP enrollees that includes about 70 percent as many pharmacies nationwide as the 

BCBS standard option but still meets contractual standards for a retail pharmacy to be 

located within a few miles of nearly all basic option enrollees. More than 200,000 people 

are in BCBS’s basic option compared to about 3.8 million people in the standard option. 

PBMs Provided 

FEHBP Enrollees 

Generally 

Unrestricted Access 

to Prescription Drugs, 

Cost Savings, and 

Other Benefits 

PBMs Provided Enrollees 

Access to Broad Retail 

Pharmacy Networks and 

Generally Nonrestrictive 

Drug Formularies 
Page 16 GAO-03-196 Pharmacy Benefits for Federal Employees 

categories.15 To provide a benchmark for comparing the breadth and depth 

of the FEHBP formularies, we compared the three formularies to the 

outpatient prescription drugs included in the Department of Veterans 

Affairs (VA) National Formulary, considered by the Institute of Medicine 

to be not overly restrictive.16 Each plan included over 90 percent of the 

drugs listed on the VA formulary or a therapeutically equivalent 

alternative, and included at least one drug in 93 percent to 98 percent of 

the therapeutic classes covered by VA.17 (See table 2.) 

 15Formularies may be developed by the plan with suggestions for changes from a PBM, or 

entirely by a PBM and used by the plan. BCBS and PacifiCare designed their own 

formularies, while GEHA used a formulary developed by Medco Health Solutions. 

Decisions on inclusion of drugs in a formulary are typically made by a pharmacy and 

therapeutics committee composed of physicians and pharmacists. Plan officials and 

documents described such committees as being designed to evaluate the safety, efficacy, 

and cost of drugs in all therapeutic categories before recommending drugs for inclusion on 

the formulary. Plans we reviewed had no or few committee members affiliated with the 

plan or PBM. 

16See Blumenthal and Herdman, Description and Analysis of the VA National Formulary.

17BCBS excluded from its formulary 7 percent of the VA therapeutic classes, which contain 

drugs to treat insect stings, itching, psoriasis and other skin disorders, erectile dysfunction, 

certain types of rheumatoid arthritis, fungal eye infections, lung diseases where mucous 

complicates the condition, constipation, and a topical anesthetic and water inhaler. GEHA 

excluded from its formulary 2 percent of the VA therapeutic classes, which contain drugs 

to treat opiate (e.g., heroin, morphine) dependence, constipation, and a topical anesthetic. 

PacifiCare of California excluded from its formulary 5 percent of the VA therapeutic 

classes, which contain drugs to treat various infections, opiate (e.g., heroin, morphine) 

dependence, psoriasis and other skin disorders, erectile dysfunction, and inflamed gingiva. 

PacifiCare of California’s formulary also did not include several injectable drugs that are 

covered separately under the plan’s medical benefit. 
Page 17 GAO-03-196 Pharmacy Benefits for Federal Employees 

Table 2: FEHBP Plans’ Formularies Compared to VA National Formulary 

Plan 

Percent of VA 

formulary drugs 

included in plan 

formulary

Percent of VA 

formulary drugs not 

in plan formulary but 

having a therapeutic 

equivalent in plan 

formulary 

Percent of VA 

formulary’s 

therapeutic 

classes covered 

by plan 

formularya

BCBS 80 16 93

GEHA 97 2 98

PacifiCare of California 79 15 95

Source: GAO analysis of 2002 BCBS, GEHA, and PacifiCare of California formularies and the VA 

National Formulary. 

a

A VA therapeutic class was considered included if the plan formulary listed one or more VA drugs or 

a therapeutically equivalent alternate within the VA therapeutic class. 

Each plan provided enrollees access to nonformulary drugs, although 

sometimes with higher cost sharing requirements.18 GEHA provided 

coverage to all nonformulary drugs at no additional cost to enrollees. 

BCBS had additional cost sharing requirements for nonformulary and 

certain formulary drugs under its basic option plan. Enrollees must pay a 

flat $25 copayment for formulary brand drugs but must pay the greater of a 

$35 copayment or 50 percent of the plan’s cost for nonformulary brand 

drugs (known as coinsurance). BCBS required the enrollees to pay the 

same 25 percent coinsurance for formulary and nonformulary drugs under 

its standard option plan. PacifiCare of California did not impose additional 

cost sharing for nonformulary drugs but generally required enrollees (or 

their physicians) to demonstrate the medical necessity and lack of 

effective alternative formulary drugs prior to approving coverage of a 

nonformulary drug. 

FEHBP enrollees benefited from cost savings generated from PBM 

services through lower costs for mail-order prescriptions, lower cost 

sharing linked to PBMs’ discounts obtained from retail pharmacies, and a 

lower increase in premiums overall. PBM mail-order pharmacy programs 

often provided for lower out-of-pocket costs for 90-day supplies of drugs 

than an enrollee would pay for the same prescriptions filled at a retail 

 18OPM indicates that, in conducting annual negotiations with plans, it seeks to ensure 

enrollee access to nonformulary drugs although such access may involve higher cost 

sharing requirements. 

PBM Savings Helped 

Reduce Enrollees’ Costs 

for Out-of-Pocket 

Prescription Drug 

Spending and Premiums 
Page 18 GAO-03-196 Pharmacy Benefits for Federal Employees 

pharmacy. The GEHA high option plan and PacifiCare of California 

imposed lower cost-sharing requirements for mail order while the BCBS 

standard option plan imposed a flat copayment for mail order but required 

enrollees to pay 25-percent coinsurance at retail. The flat copayments 

provided an incentive for enrollees to use mail order for more expensive 

brand drugs. Only the GEHA standard plan included the same cost sharing 

requirements for both retail and mail order. (See table 3.) 

Table 3: Comparison of Enrollee Cost-Sharing for a 90-day Supply of Retail and Mail-Order Prescription Drugs, 2002 

Plan Option Enrollee’s cost share at retail pharmacy 

Enrollee’s cost share at mail-order 

pharmacy 

Standard 25% coinsurance $10 copayment generic 

$35 copayment brand 

BCBS 

Basica

 $30 generic 

$75 brand 

Greater of 50% coinsurance or 

$105 copayment for nonformulary brand 

Mail-order not available 

High $15 generic 

$45 single-source brandc

$90 multisource brandd

Second and subsequent refills are greater of 

50% coinsurance or applicable copayment 

$10 generic 

$35 single-source brandc

$50 multisource brandd

GEHAb

Standard $15 copayment generic 

50% coinsurance brand 

$15 copayment generic 

50% coinsurance brand 

PacifiCare of 

Californiab

HMO $15 copayment generic 

$45 copayment brand 

$10 copayment generic 

$30 copayment brand 

Source: GAO analysis of BCBS, GEHA, and PacifiCare of California prescription drug benefits 

literature. 

a

BCBS basic option limits initial prescription to a 34-day supply with a $10 copayment for generic 

drugs, $25 copayment for brand-name drugs, and the greater of 50 percent coinsurance or $35 for 

nonformulary brand-name drugs. Continuing prescriptions and refills can be for up to a 90-day supply 

with the enrollee paying the higher cost share amount. 

b

GEHA and PacifiCare of California limit the quantity of drugs dispensed through retail pharmacies to 

a 30-day supply; therefore, we tripled the copayments required for a 30-day supply. 

c

Brand-name drugs available from only one manufacturer, no generic equivalent available. 

d

Brand-name drugs available from more than one manufacturer and have a generic equivalent 

available. 
Page 19 GAO-03-196 Pharmacy Benefits for Federal Employees 

The interaction between a plan’s benefit design and PBM cost savings can 

also affect the amount of enrollees’ out-of-pocket costs for prescription 

drugs.19 For example, in instances where a plan required enrollees to pay a 

coinsurance rate representing a portion of the actual drug cost, enrollees 

shared directly in price discounts PBMs obtained from pharmacies. To 

illustrate, for a hypothetical drug with an undiscounted cash price of $64, 

and a PBM-obtained discount price of $52, an enrollee in a plan with a 25-

percent coinsurance requirement would pay $13 rather than $16. In 

contrast, where a plan’s benefit design provides for a fixed copayment, 

such as $15 per prescription, enrollees would pay the same regardless of 

the discount that PBMs obtained. 

PBM savings were also passed on to enrollees in the form of premiums 

that were less than they otherwise would be. Fee-for-service FEHBP plan 

premiums are based on past years’ claims data for FEHBP enrollees.20

Consequently, PBM reductions in plan claims costs for prescription drugs 

translate into lower premiums for enrollees in later years. For example, we 

estimate that PBM savings in the form of rebates passed on to the two feefor-service FEHBP plans we examined between 1998 and 2000 translate 

into about a 1-percent decrease from what the plans’ future premiums 

would have been. In contrast to savings through cost sharing and other 

benefit design features that accrue only to those enrollees who use the 

prescription drug benefit, PBM savings in the form of premium savings 

accrue to all enrollees, regardless of whether they use prescription drugs. 

Each FEHBP plan’s PBM provided a drug utilization review program to 

screen prescription drug therapies for such problems as adverse 

interactions, incorrect dosages, or improper duration of treatment. PBMs 

maintained a centralized database on each enrollee’s drug history and 

shared this information electronically with pharmacies at the time the 

 19A plan’s pharmacy benefit design includes the drugs a plan will cover through its 

formulary, the quantities in which drugs will be dispensed, the sources from which drugs 

may be obtained, and enrollee’s cost-sharing requirements, such as copayments. 

20For most HMOs, the premium rate is based on rates charged to the two employer groups 

closest in size to the plan’s FEHBP enrollment. Because these premiums are based on the 

HMO’s overall premium setting strategies and not just the FEHBP claims experience, the 

extent to which rebates and other PBM savings for the plan’s FEHBP business would yield 

lower premiums depends on the HMO’s current market strategies for setting competitive 

premiums and passing on lower costs in the form of lower premiums to FEHBP and 

similarly sized groups. About 30 percent of FEHBP enrollees are covered under an HMO 

plan. 

Enrollees Also Benefit 

from PBM Drug Utilization 

Review Programs and 

Customer Service 
Page 20 GAO-03-196 Pharmacy Benefits for Federal Employees 

prescription was filled. PBMs are often the only entity with complete 

information on a patient’s medications—particularly when enrollees are 

prescribed medication by more than one physician or fill prescriptions at 

different pharmacies. We have previously reported that automated drug 

utilization systems linked to a centralized database provide a more 

thorough prospective review and more benefits than reviews based on 

manual or local systems.21

PBMs provide customer service when they interact directly with FEHBP 

enrollees, such as when enrollees contact the PBMs to seek information 

about their prescriptions, resolve problems with having their prescription 

drugs filled, or obtain drugs through the mail-order pharmacy. Customer 

service quality is measured against customer service standards negotiated 

between each FEHBP plan and PBM. These standards included such 

measures as phone call answer time, mail-order prescription turn-around 

time and accuracy rates, and customer satisfaction as measured through 

enrollee surveys. Data provided by the PBMs indicate that they generally 

met or exceeded these standards, although we did not independently 

verify these data.22

Retail pharmacies that participate in the PBM networks used by FEHBP 

plans are affected by PBM policies and practices. For example, PBMs 

reimbursed pharmacies at levels below cash-paying customers, but above 

the pharmacies’ estimated drug acquisition costs. Processing PBM or other 

third-party prescriptions involves additional administrative requirements 

compared to cash transactions, and some PBMs may draw business away 

from retail pharmacies by providing savings and other incentives to 

encourage pharmacy customers to use PBMs’ mail-order pharmacies. 

Nevertheless, participation in the PBM retail networks is important for 

pharmacies because the PBMs serving the FEHBP plans we reviewed also 

 21U.S. General Accounting Office, Prescription Drugs: Automated Prospective Review 

Systems Offer Potential Benefits for Medicaid, GAO/AIMD-94-130 (Washington, D.C.: 

Aug. 5, 1994). 

22Contracts called for the PBMs to regularly report to the plans their actual performance in 

relation to the standards and usually provided plans with the right to audit these 

performance reports and impose penalties or terminate the contract if PBM performance 

fell below the standards. In a few recent instances, financial penalties were imposed when 

performance temporarily fell short of a standard. For example, one PBM paid a penalty of 

$40,000 for failing to meet the plan standard concerning call answer time during 2 months 

of 2001, but the PBM met the standard during the remainder of the year. 

Pharmacies Included 

in PBM Retail 

Networks Must 

Accept Discounted 

Prices and Perform 

Various 

Administrative Tasks 
Page 21 GAO-03-196 Pharmacy Benefits for Federal Employees 

contract with other clients that cumulatively represent a large share of the 

national population that purchase prescription and other nonprescription 

items from retail pharmacies. 

PBMs for the three FEHBP plans we reviewed reimbursed retail 

pharmacies at rates below what a cash-paying customer would pay but 

still above the pharmacies’ estimated acquisition costs. The average price 

paid for a typical 30-day supply was nearly 18 percent below the cashpaying customer price for 14 selected brand-name drugs and 47 percent 

below the average case price for 4 selected generic drugs. As a result, the 

gross margin earned by retail pharmacies on the PBM transactions is 

lower on average than for cash-paying customers.23

We estimate that these PBM discounted prices are higher on average than 

the pharmacies’ cost to acquire these drugs. Retail pharmacies typically 

purchase drugs from intermediary wholesale distributors and, to a lesser 

extent, from drug manufacturers directly. Because no data source exists to 

identify pharmacies’ actual acquisition costs for drugs, we used the 

wholesale acquisition cost (WAC) and added a mark-up of 3 percent to 

estimate pharmacy acquisition costs for drugs purchased from 

wholesalers.24 Accordingly, for the three FEHBP plans we reviewed, we 

estimate that the prices that the PBMs paid to retail pharmacies provided 

an average margin of about 8 percent above the pharmacies’ average 

 23In 2001, about 16 percent of all prescriptions were purchased by customers who paid the 

entire cost without any third-party coverage, and the remainder were paid by customers 

with third-party payers, including Medicaid, according to the National Association of Chain 

Drug Stores. 

24WAC is a published, industry-reported measure of the average price manufacturers charge 

wholesalers. According to retail pharmacy representatives, wholesalers sell drugs to retail 

pharmacists for about 1 to 3 percent above WAC on average. WAC does not include rebates 

or discounts manufacturers may offer to wholesalers. 

PBMs Reimbursed Retail 

Pharmacies Less than 

Cash-Paying Customers 

but Above Estimated Costs 
Page 22 GAO-03-196 Pharmacy Benefits for Federal Employees 

acquisition costs for 10 brand drugs we reviewed.25,26 These estimated 

margins on the drugs do not reflect a drug store’s profit on drug sales 

because store overhead and dispensing costs are not deducted.27 They also 

do not reflect the costs of drugs when purchased directly from 

manufacturers rather than wholesalers nor any rebates or discounts that 

pharmacies may receive from suppliers or manufacturers. Moreover, 

because WAC is an average of prices charged by manufacturers to multiple 

purchasers, it may not accurately reflect the acquisition costs for any 

individual retail pharmacy. 

PBM and other third-party transactions require pharmacy staff to 

undertake tasks not associated with cash-paying customer transactions, 

such as submitting claims electronically, responding to prior authorization 

requests, contacting physicians to approve formulary drug substitutions, 

and responding to patients’ questions about their health plan benefits. 

Pharmacists and pharmacy association representatives we interviewed 

indicated that the administrative requirements imposed by FEHBPparticipating PBMs are generally similar to those imposed by PBMs 

 25Margins on drugs represent the portion of PBM drug reimbursements (including 

dispensing fees) and enrollees’ share of costs that exceed the pharmacy’s acquisition costs 

for the selected drugs. Retail plan prices represent 10 of the 14 brand-name drugs we 

examined because the wholesale acquisition cost was not available for the other 4 brandname drugs. The PBM negotiated prices were also higher than the estimated acquisition 

costs for all four generic drugs we reviewed. 

26The U.S. Department of Health and Human Services Office of Inspector General recently 

released estimates of pharmacy acquisition costs for drugs reimbursed by state Medicaid 

programs. Using its approach to estimate the acquisition costs for the drugs we reviewed 

would result in prices that PBMs paid retail pharmacies providing an average margin of 

about 6 percent above the pharmacies’ average acquisition costs for the 10 brand drugs and 

about 14 percent above for the 4 generic drugs. See Department of Health and Human 

Services, Office of Inspector General, Medicaid Pharmacy – Additional Analyses of the 

Actual Acquisition Cost of Prescription Drug Products, (Washington, D.C.: September 

2002). 

27While it was not possible to identify the pharmacies’ overhead costs for the 18 drugs we 

reviewed, recent studies done for the California and Texas Medicaid programs estimate 

that the median dispensing costs for pharmacies participating in these states’ Medicaid 

programs were about $6.95 and $5.95 per prescription, respectively. See Myers and Stauffer 

LC, “Study of Medi-Cal Pharmacy Reimbursement,”(Missouri: June 2002) and 

“Determination of the Cost of Dispensing Pharmaceutical Prescriptions for the Texas 

Vendor Drug Program,” (Missouri: August 2002). The National Association of Chain Drug 

Stores (NACDS) estimates that retail pharmacies’ dispensing costs were on average $7.26 

per prescription in 2001. See NACDS, The Chain Pharmacy Industry Profile 2002 

(Alexandria, Virginia: 2002). 

PBM Transactions Require 

Additional Administrative 

Tasks and Incur Higher 

Processing Costs for Retail 

Pharmacies 
Page 23 GAO-03-196 Pharmacy Benefits for Federal Employees 

associated with other health plans. Several studies have found that 

pharmacy staff spent significant time addressing third-party payment 

issues. For example, based on surveys of 201 retail pharmacies, one 

consultant found that 20 percent of pharmacy staff time was spent on 

activities directly related to third-party issues.28 A synthesis of multiple 

studies concluded that third-party prescriptions cost from $0.36 to $1.55 

more than cash transactions to process.29

Compared to larger chain pharmacies, independent pharmacies may find 

PBM processing tasks particularly burdensome or costly. For example, 

independent pharmacies may be more likely to use pharmacists to process 

third-party transactions because they tend to have fewer other staff 

available, such as pharmacy technicians and clerks, according to a retail 

pharmacy association official. One study found that the average labor cost 

to process third-party prescriptions that required pharmacy staff 

intervention (such as responding to an initial claim denial) was 44 percent 

higher for an independent than a chain pharmacy. This study attributes the 

higher costs to the independent pharmacy’s greater reliance on 

pharmacists for performing certain third-party processing tasks.30

PBMs may also attempt to steer some enrollees away from retail 

pharmacies to their mail-order pharmacies. Two of the PBMs we reviewed 

send letters to some enrollees who purchase medications at a retail 

pharmacy informing them that their costs under the mail-service pharmacy 

program would be lower. These letters may include forms to facilitate the 

transfer of the prescription from the retail to the mail-order pharmacy. In 

2001, the three FEHBP plans we reviewed dispensed 21 percent of all 

prescriptions through mail order, a higher share than the industry average. 

Nationally, a growing but still small share of prescription drugs is 

 28Arthur Andersen LLP, Pharmacy Activity Cost and Productivity Study, November 1999. 

29Richard N. Herrier et al., “Case Study Using Descriptive Analysis to Estimate Hidden 

Costs In Processing Third Party Prescriptions,” Journal of the American Pharmaceutical 

Association, 40, no. 5 (September/October 2000). In addition to synthesizing other studies, 

this study also conducted time and motion measurement of retail pharmacies and based on 

this new research estimated that third-party prescriptions cost an average of $0.44 to $0.61 

more than cash transactions to process. 

30Richard N. Herrier, et al. 

PBMs Use Financial and 

Other Incentives to Steer 

Retail Pharmacy 

Customers to Mail-Order 

Programs 
Page 24 GAO-03-196 Pharmacy Benefits for Federal Employees 

dispensed through mail-order pharmacies—about 5 percent of 

prescriptions and 17 percent of prescription sales in 2001.31

Most licensed pharmacies participate in the FEHBP PBMs’ retail pharmacy 

networks, in part because PBMs represent such a substantial market 

share–nearly 200 million Americans in 2001.32 Plan and PBM 

representatives noted that access to these enrollees benefits retail 

pharmacies by increasing traffic in the stores and thus sales of 

prescriptions and nonprescription items. According to NACDS, 

nonprescription sales nationally accounted for 5 percent of total sales for 

independent pharmacies and 39 percent of total sales for chain 

pharmacies in 2001.33 However, pharmacy association representatives 

report that PBMs’ large market shares leave many retail pharmacies with 

little leverage in negotiating with PBMs. These officials indicate that retail 

pharmacies may have to “take or leave” a PBMs’ proposed contract with 

actual negotiations only occurring in instances when a large chain will not 

accept the contractual terms or an independent pharmacy without nearby 

competitors in a rural area must be included to meet health plans’ access 

requirements. While it is difficult to assess how frequently these situations 

occur, chain pharmacies constituted 37 percent of all retail pharmacies 

and the top four chain drugs stores accounted for 30 percent of all 

pharmacy sales in 2000, according to NACDS.34

 31National Association of Chain Drug Stores, The Chain Pharmacy Industry Profile, 2002 

(Alexandria, VA: 2002). 

32Independent pharmacies were somewhat less likely to participate in FEHBP PBM retail 

networks than chain pharmacies. For example, we found that all but one of the pharmacies 

not participating in two PBM retail networks in the District of Columbia were independent. 

Similarly, a 2001 survey of pharmacies in Connecticut, New Jersey, New York, and 

Pennsylvania by the Pharmaceutical Care Management Association found independent 

drug stores somewhat less likely to participate in PBM retail networks (96.5 percent) than 

chain drug stores (99.9 percent). According to a pharmacy industry representative, 

independent pharmacies may have fewer staff available to manage third-party transactions 

and contracting functions. In addition, certain PBM contract requirements can pose a 

challenge, such as requiring the use of computer systems or software that may be 

unaffordable to some small, independent pharmacies, according to another pharmacy 

industry representative. 

33National Association of Chain Drug Stores, The Chain Pharmacy Industry Profile, 2002 

(Alexandria, VA: 2002). 

34National Association of Chain Drug Stores, The Chain Pharmacy Industry Profile, 2002 

(Alexandria, VA: 2002) and Booz Allen Hamilton, Medicare-endorsed Prescription Drug 

Card Assistance Initiative, (McLean, VA: 2002). 

Most Pharmacies 

Participate in PBMs’ Retail 

Networks 
Page 25 GAO-03-196 Pharmacy Benefits for Federal Employees 

PBMs received compensation directly from FEHBP plans for 

administrative services and drug costs as well as payments from 

pharmaceutical manufacturers. (See fig. 3.) PBM earnings from 

administrative fees and payments for mail-order drugs paid by the plans 

we reviewed varied depending on contractual arrangements. In addition, 

the PBMs we reviewed varied as to whether they retained a portion of 

drug manufacturer rebates associated with the FEHBP contracts, and all 

the PBMs received other rebates or payments from drug manufacturers. 

PBMs Received 

Compensation from 

Plans and Payments 

from Manufacturers 

for Their FEHBP 

Business 
Page 26 GAO-03-196 Pharmacy Benefits for Federal Employees 

Figure 3: Overview of PBMs’ Compensation and Payment Sources 

Note: The extent to which a PBM receives compensation and payments from any one of these 

sources varies based on its contractual arrangements with plans and manufacturers. For example, 

some PBMs may contract with a separate entity to provide mail-order services. 

Specifically, the PBMs we reviewed received administrative fees, 

payments for drugs, and manufacturer rebates for their FEHBP business. 

They also received other rebates or payments from drug manufacturers 

based on their entire line of business with a particular manufacturer. 

Administrative fees. PBMs charged plans fees for a broad range of clinical 

and administrative services, including utilization reviews, prior 

authorization, formulary development and compliance, claims processing, 

and reporting. Administrative fees for plans we reviewed varied but on 

average accounted for about 1.5 percent of total plan drug spending in 

2001. 

Payments for Retail and Mail-Order Drugs. PBMs we reviewed retained 

little or no revenue from plan payments for retail drug costs and 

dispensing fees because they were largely passed through to retail 

PBM

Enrollee

Retail

pharmacy

Pharmaceutical

manufacturer Payment for 

retail drugs

Mail-order drug 

cost share

Retail drug 

cost share

Health plan Payment for retail and 

mail-order drugs

Rebates and 

other payments

Payment for

 mail-order drugs 

Formulary rebates

Administrative fees

Source: GAO analysis of plans and PBMs reviewed.
Page 27 GAO-03-196 Pharmacy Benefits for Federal Employees 

pharmacies.35 While not disclosing their acquisition costs for mail-order 

drugs, PBM officials said that plan payments were somewhat higher than 

their payments to pharmaceutical manufacturers for mail-order drugs. 

Using the average manufacturer price (AMP) as a proxy for PBMs’ mailorder acquisition costs,36 we estimate that the discounted price for mailorder drugs that plans and enrollees paid were on average higher than the 

estimated mail-order acquisition cost for some (but not all) brand-name 

drugs and all generic drugs that we reviewed. On average, the AMP was 

about 2 percent below the plan prices for 7 of the 14 brand-name drugs we 

reviewed but about 3 percent higher than the plan prices for the other 7 

brand-name drugs. The AMP was below plan prices for all four generic 

drugs we reviewed. 

Rebates. PBMs shared with the FEHBP plans certain rebates that a drug 

manufacturer provides a PBM associated with their FEHBP business, 

although the extent to which the PBMs retained a portion of these rebates 

varied, depending on the contracts negotiated between the plans and 

PBMs. We estimate the rebates retained by the PBMs we reviewed 

represented less than half of one percent of total plan drug spending. The 

plans we reviewed varied as to whether they reimbursed PBMs separately 

for administrative services in exchange for a larger share of contractual 

rebates or they received less of the contractual rebates and were charged 

low or no fees for administrative services. 

PBMs also received other manufacturer rebates or payments for services 

based on their total volume of a particular manufacturer’s drugs sold 

through FEHBP plans and other plans. For example, one PBM we 

reviewed earned additional manufacturer rebates for its efforts to increase 

drug manufacturers’ share of certain products. The PBMs also received 

fees from manufacturers for various services, such as encouraging 

physicians to change prescribing patterns, educational services to 

enrollees regarding compliance with certain drug regimens, and data 

reporting services. These rebates and other payments were a large portion 

 35The plan and enrollees share the cost of retail drugs, with the enrollee share paid directly 

to the retail pharmacy. 

36The AMP is the average price paid to a drug manufacturer by wholesalers for prescription 

drugs distributed to the retail pharmacy class of trade, after deducting customary prompt 

pay discounts. AMP was created by the Omnibus Budget Reconciliation Act of 1990 (Pub. 

L. No. 101-508, § 4401, 104 Stat. 1388, 1388-156) for determining Medicaid rebates and is not 

publicly available. It is calculated by the manufacturer and submitted to the Centers for 

Medicare & Medicaid Services, the federal agency that determines Medicaid rebates. 
Page 28 GAO-03-196 Pharmacy Benefits for Federal Employees 

of PBMs’ earnings, according to PBM officials and industry experts, but 

the actual amounts were undisclosed because they are proprietary. Public 

financial information suggests that manufacturer payments are important 

sources of earnings. For example, in financial reports submitted to the 

SEC, two of the PBMs we reviewed stated that manufacturer rebates and 

fees were key to their profitability.37

PBMs are central to most FEHBP plan efforts to manage their prescription 

drug benefits, and PBMs have helped the FEHBP plans we reviewed 

reduce what they would likely otherwise pay in prescription drug 

expenditures while generally maintaining wide access to most retail 

pharmacies and drugs. As the cost of prescription drugs continues to 

increase, FEHBP plans are likely to encourage PBMs to continue to 

leverage their purchasing power with drug manufacturers and retail 

pharmacies and pass on the savings to the plans and their enrollees. 

However, attempts to achieve additional cost savings can involve tradeoffs for plan enrollees. For example, additional savings through formulary 

management can accrue if more restrictive formularies are used, but 

enrollees would likely have unrestricted access to fewer drugs. Similarly, 

retail pharmacies may be willing to provide deeper discounts as part of 

smaller, more selective retail pharmacy networks. Smaller networks have 

the potential to draw more enrollees into participating stores but offer 

enrollees access to fewer retail pharmacies. OPM, FEHBP plans, and 

PBMs must balance these trade-offs in designing affordable and accessible 

prescription drug benefits for federal employees. 

We provided a draft of this report to OPM, the three plans and three PBMs 

we reviewed, two pharmacy associations (NACDS and NCPA), and two 

independent expert reviewers. 

In written comments, OPM generally concurred with our findings. OPM 

highlighted the advantages and trade-offs associated with FEHBP plans’ 

 37See AdvancePCS, 10-K Form filed with SEC on June 28, 2002 and Medco Health Solutions 

Form S-1, filed with SEC on April 17, 2002. A 10-K Form is an annual report that many forprofit corporations must file with SEC within 90 days of the close of their fiscal year and a 

S-1 Form is a basic registration form that may be used to register a proposed public 

offering with SEC. These publicly available documents contain audited financial statements 

and other information on a corporation’s financial condition. 

Concluding 

Observations 

Agency and Other 

Comments and Our 

Evaluation 
Page 29 GAO-03-196 Pharmacy Benefits for Federal Employees 

use of PBMs in providing affordable drug benefits and providing enrollees 

with access to prescription drugs. Appendix II contains OPM’s comments. 

The plans and PBMs reviewed the report for the accuracy of information 

regarding their arrangements and provided technical comments regarding 

information we reported about them, which we incorporated as 

appropriate. Two independent external experts on pharmaceutical drug 

pricing who were not affiliated with PBMs, pharmacies, or drug 

manufacturers indicated that the draft was fair and balanced. They also 

provided technical comments that we incorporated as appropriate. 

In oral comments, NACDS’ Vice President for Policy and Programs 

expressed strong concerns, particularly focusing on the scope of our 

work, and NCPA’s Senior Vice President for Government Affairs and 

General Counsel separately informed us that he generally concurred with 

NACDS’ comments. NACDS’ concerns included the following: 

• Our draft did not adequately address the overall PBM industry and how it 

operates, including special economic relationships that may exist between 

some drug manufacturers and PBMs. The NACDS representative stated 

that these relationships create incentives for PBMs to encourage use of 

certain manufacturers’ drugs even if they are more costly to the plan or 

enrollees. As we noted in the draft, we were asked to examine the role of 

PBMs specifically for FEHBP-participating plans and enrollees, not the 

PBM industry in general. While the savings we report through discounts, 

rebates, and certain interventions do not reflect whether PBMs encourage 

higher-cost drugs, the FEHBP plans we reviewed informed us they 

believed they saved money from using PBMs. Relationships between PBMs 

and manufacturers and pharmacies for other plans were beyond the scope 

of this report. In response to the concern about PBMs’ influence on drug 

switching, we added information based on two PBMs’ filings with the SEC 

regarding an ongoing Department of Justice investigation of certain PBMs’ 

relationships with pharmaceutical manufacturers and retail pharmacies. 

• The draft report did not include information about all three plans’ use of 

generic drugs, which is one means to reduce the overall cost of the drug 

benefit. In the draft report, we addressed savings PBMs achieve through 

direct interventions to switch from a prescribed brand drug to a generic, 

as opposed to overall generic use rates, which are affected by other 

factors such as plans’ benefit designs. To clarify our findings, we added 

information on the relative use of generic drugs among the retail and mail 

order pharmacy services for the plans we reviewed. 

• Our finding that the PBMs we reviewed retained little or no compensation 

from the payments they receive from plans for retail drugs because they 

pass these payments on in total to the retail pharmacies seemed 
Page 30 GAO-03-196 Pharmacy Benefits for Federal Employees 

inconsistent with NACDS’ experience. While PBMs’ contractual 

arrangements with other plans may differ, the contractual arrangements 

with the FEHBP-participating plans we reviewed resulted in the PBMs 

passing through to the retail pharmacies the entire payment that they 

receive from the plans. 

• Our estimate that retail pharmacies’ drug acquisition costs are on average 

about 8 percent below the payments they receive from the FEHBP plans 

we reviewed implies this is a profit and does not adequately acknowledge 

overhead costs. Our draft report stated that this estimated margin does not 

reflect a retail drug store’s profit because it does not include overhead 

costs nor certain other savings that may be available to some drug stores. 

We revised the report to better clarify this point and added information 

regarding NACDS’ and other recent studies’ estimates of overhead costs 

for retail pharmacies on a per prescription basis. 

We are sending copies of this report to the Director of the Office of 

Personnel Management, appropriate congressional committees, and other 

interested parties. We will also make copies available to others upon 

request. This report is also available at no charge on GAO’s Web site at 

http://www.gao.gov. 

If you or your staff have any questions, please call me at (202) 512-7118. 

Another contact and key contributors to this assignment are listed in 

appendix III. 

Sincerely yours, 

Kathryn G. Allen 

Director, Health Care—Medicaid 

 and Private Health Insurance Issues 
Appendix I: Scope and Methodology 

Page 31 GAO-03-196 Pharmacy Benefits for Federal Employees 

We examined the use of pharmacy benefit managers (PBM) by three 

Federal Employees Health Benefits Program (FEHBP) plans: Blue Cross 

and Blue Shield (BCBS), Government Employees Hospital Association 

(GEHA), and PacifiCare of California. Together, these plans accounted for 

about 55 percent of the 8.3 million people covered through FEHBP plans 

as of July 2002 and represented various plan types and PBM contractors.1

BCBS contracted with the two largest PBMs in the United States, Medco 

Health Solutions and AdvancePCS, for its pharmacy benefit services. 

GEHA contracted with Medco Health Solutions and PacifiCare of 

California contracted with Prescription Solutions, another subsidiary of 

PacifiCare Health Systems. 

We reviewed contracts between the PBMs and plans, financial statements 

regarding payments made between the plans and PBMs, and retail and 

mail-order prices for selected drugs from the FEHBP plans we reviewed 

and the PBMs with which they contracted. We also obtained pricing 

information from retail pharmacies, interviewed officials at the Office of 

Personnel Management (OPM), the federal agency responsible for 

administering FEHBP, and associations representing PBMs and retail 

pharmacies, and reviewed studies regarding the use of PBMs and 

prescription drug payments. 

Specifically, to assess the drug discount savings PBMs achieved, we 

selected 18 drugs that were among the drugs with the highest expenditures 

or number of prescriptions dispensed based on data reported by the plans. 

Combined, these 18 high-volume/high-expenditure drugs represented 12 

percent of all prescriptions dispensed to enrollees of the selected FEHBP 

plans and 16 percent of total plans’ drug expenditures in 2001. In selecting 

these drugs, we also sought to ensure a distribution of generic and brand 

drugs for a range of treatment conditions sold by different drug 

manufacturers. Table 4 lists the drugs included in our price comparisons. 

 1

BCBS and GEHA are fee-for-service plans, while PacifiCare of California is a health 

maintenance organization (HMO). 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 32 GAO-03-196 Pharmacy Benefits for Federal Employees 

Table 4: Selected High-Volume or High-Expenditure Drugs for 3 FEHBP Plans 

Drug name (strength) and dosage form 

Condition for which drug is 

useda

Brand 

Aciphex (20 mg), tablets Ulcers 

Allegra (180 mg), tablets Allergies 

Celebrex (200 mg), capsules Arthritis 

Celexa (20 mg), tablets Depression 

Claritin (10 mg), tablets Allergies 

Fosamax (70 mg), tablets Osteoporosis 

Lipitor (10 mg), tablets Cholesterol 

Lotensin (20 mg), tablets High blood pressure 

Norvasc (5 mg), tablets High blood pressure 

Paxil (20 mg), tablets Depression 

Premarin (0.625 mg), tablets Osteoporosis 

Prevacid (30 mg), capsules Ulcers 

Prilosec (20 mg), capsules Ulcers 

Zocor (20 mg), tablets Cholesterol 

Generic 

Albuterol (90 mcg), aerosol Asthma 

Atenolol (50 mg), tablets High blood pressure 

Furosemide (40 mg), tablets High blood pressure 

Hydrocodone with Acetaminophen (5-500 mg), tablets Pain 

Source: Rx List at http://www.rxlist.com/. 

a

These drugs may also be used be used to treat conditions other than those listed in the table. 

At our request, the plans provided prices paid as of April 2002 for the most 

common strength, dosage form, and quantity dispensed for these drugs at 

retail pharmacies (typically, a 30-day supply) and at mail-order pharmacies 

(typically, a 90-day supply).2

 Prices represent the plan and enrollees’ share 

of the drug ingredient cost—expressed as a discount from an industry 

standard price such as the average wholesale price (AWP)3

 or maximum 

 2

We were unable to obtain the retail and mail-order price for one drug from one plan 

because the drug was not available on the plan’s formulary at the specified strength. 

3

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. 
Appendix I: Scope and Methodology 

Page 33 GAO-03-196 Pharmacy Benefits for Federal Employees 

allowable cost (MAC)4—plus a dispensing fee. We did not independently 

verify the accuracy of these plan-reported prices. 

To compare prices negotiated with PBMs for retail and mail-order 

prescriptions to cash prices a customer without third-party coverage 

would pay at retail pharmacies, we surveyed 36 pharmacies in California, 

North Dakota, Washington, D.C., and the Virginia and Maryland suburbs of 

Washington, D.C., from April 18 through April 30, 2002. We selected the 

locations to be geographically diverse, specifically including California 

because it is the only state in which PacifiCare of California operates, 

North Dakota to include a state with a low population density, and the 

Washington, D.C., metropolitan area because it includes a large number of 

FEHBP enrollees. We randomly selected 12 pharmacies in each of these 

areas, including both large chain pharmacies and independent or small 

chain pharmacies. We determined that each of the pharmacies surveyed 

participated in the retail networks for each of our selected FEHBP plans 

serving that area. From each pharmacy, we obtained prices for a 30-day 

supply of the 18 selected drugs. These prices are applicable only to the 

pharmacies surveyed and at the time they were obtained. 

We also compared prices plans paid to retail and mail-order pharmacies to 

the pharmacies’ estimated acquisition costs. Retail pharmacies typically 

purchase drugs from intermediary wholesale distributors and—to a lesser 

extent—drug manufacturers, while PBM-owned mail-order pharmacies 

more typically purchase drugs from manufacturers. Since no data source 

exists to identify pharmacy acquisition costs, we estimated retail 

pharmacies’ acquisition costs for drugs purchased from wholesalers using 

the wholesale acquisition prices (WAC) reported in Red Book, a 

compilation of drug pricing data published by Medical Economics 

Company, Inc., as of April 2002.5

 We added 3 percent to WAC to estimate 

the wholesalers’ margin, based on information provided by retail 

pharmacy officials. To estimate mail-order pharmacies’ acquisition costs 

for drugs purchased directly from drug manufacturers, we used industryreported and confidential average manufacturers’ price information (AMP) 

obtained from the Centers for Medicare & Medicaid Services. We selected 

WAC and AMP prices for our 18 selected drugs using the most common 

national drug code reported by the plans for reimbursing retail and mail-

 4

MACs represent upper limit prices that an insurer or health plan will reimburse for 

generically available or multiple source medications. 

5

Red Book CD-ROM, vol. 24 (April 2002). 
Appendix I: Scope and Methodology 

Page 34 GAO-03-196 Pharmacy Benefits for Federal Employees 

order prescription claims.6 The acquisition costs we have estimated cannot 

be generalized beyond the drugs we reviewed. Also, the acquisition costs 

we reported are based on averages for the drugs we reviewed, and 

individual pharmacies or mail-order operations may have higher or lower 

acquisition costs. 

To assess enrollee access to prescription drugs, we compared the number 

of retail pharmacies in the plans’ retail pharmacy networks to the total 

number of licensed retail pharmacies in California, the District of 

Columbia, Maryland, North Dakota, and Virginia. To examine the breadth 

and depth of each plan’s formulary, we compared each plan’s formulary to 

the National Formulary developed by the Department of Veterans Affairs 

(VA). Although the VA formulary was designed for the veteran-specific 

population, it is considered by the Institute of Medicine as not overly 

restrictive based on its comparison with other formularies and clinical 

literature.7

 We obtained the National Formulary from the VA’s Pharmacy 

Benefits Management Strategic Healthcare Group. The VA formulary 

contains approximately 1,200 items, including generic, brand name, and 

over-the-counter drugs, devices, and supplies. We requested that VA 

officials remove devices, supplies, and drugs that are usually prescribed 

on an in-patient basis or are available over-the-counter because the 

FEHBP plans we reviewed cover inpatient drugs as part of the hospital 

benefit and do not cover drugs available over-the-counter. The resulting 

list included 513 outpatient prescription drugs representing 162 

therapeutic classes. To examine the breadth and depth of each plan’s 

formulary relative to these outpatient prescription drugs from the VA 

formulary, we determined whether each of the drugs and therapeutic 

classes included on the list of drugs drawn from the VA formulary was also 

included on each of the plan formularies. Each plan also provided us with 

examples of therapeutically equivalent drugs included on the plan’s 

formulary for drugs that did not have an exact match on the VA formulary 

 6

National Drug Codes (NDCs) are the universal product identifiers for drugs for human use 

and are unique for each chemical entity, dosage form, manufacturer, strength, and package 

size. 

7

See IOM, Description and Analysis of the VA National Formulary. The IOM used several 

criteria to assess the restrictiveness of the VA formulary, including how the VA formulary 

compares to formularies used in other public and private health care systems, and how it 

compares to reasonableness standards in the literature. The IOM committee also 

concluded that the VA formulary is in some respects more but in many respects less 

restrictive that other public or private formularies. The VA formulary does not contain 

specific types of drugs, such as pediatric drugs, that typically would be covered by the 

FEHBP plans we reviewed. 
Appendix I: Scope and Methodology 

Page 35 GAO-03-196 Pharmacy Benefits for Federal Employees 

list. We considered a VA therapeutic class to be included on a plan 

formulary if at least one of the VA drugs in that class or a therapeutically 

equivalent drug was listed in the plan formulary. For VA therapeutic 

classes not included on a plan formulary, we used National Institutes of 

Health and Medco Health Solutions on-line databases to analyze the types 

of medical conditions treated by the excluded drugs within these classes. 
Appendix II: Comments from the Office of Personnel Management 

Page 36 GAO-03-196 Pharmacy Benefits for Federal Employees 

Appendix II: Comments from the Office of 

Personnel Management 
Appendix II: Comments from the Office of Personnel Management 

Page 37 GAO-03-196 Pharmacy Benefits for Federal Employees 
Appendix III: GAO Contact and Staff 

Acknowledgments 

Page 38 GAO-03-196 Pharmacy Benefits for Federal Employees 

John Dicken (202) 512-7043 

The following staff made important contributions to this report: 

Rashmi Agarwal, Randy Dirosa, Betty Kirksey, Carmen Rivera-Lowitt, and 

Annesha White. 

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 
Related GAO Products 

Page 39 GAO-03-196 Pharmacy Benefits for Federal Employees 

VA and DOD Health Care: Factors Contributing to Reduced Pharmacy 

Costs and Continuing Challenges. GAO-02-969T. Washington, D.C.: 

July 22, 2002. 

Medicare Outpatient Drugs: Program Payments Should Better Reflect 

Market Prices. GAO-02-531T. Washington, D.C.: March 14, 2002. 

Prescription Drugs: Prices Available Through Discount Cards and From 

Other Sources. GAO-02-280R. Washington, D.C.: December 5, 2001. 

Medicare: Payments for Covered Outpatient Drugs Exceed Providers’ 

Cost. GAO-01-1118. Washington, D.C.: September 21, 2001. 

VA Drug Formulary: Better Oversight Is Required, but Veterans Are 

Getting Needed Drugs. GAO-01-183. Washington, D.C.: January 29, 2001. 

Prescription Drugs: Adapting Private Sector Management Methods for a 

Medicare Benefit. GAO/T-HEHS-00-112. Washington, D.C.: May 11, 2000. 

Prescription Drug Benefits: Applying Private Sector Management 

Methods to Medicare. GAO/T-HEHS-00-84. Washington, D.C.: March 22, 

2000. 

Pharmacy Benefit Managers: FEHBP Plans Satisfied With Savings and 

Services, but Retail Pharmacies Have Concerns. GAO/HEHS-97-47. 

Washington, D.C.: February 21, 1997. 

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