Defense Health Care: Evaluation of TRICARE Pharmacy Services Contract Structure Is Warranted
Published: 2013-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD offers health care coverage--medical and pharmacy services--to eligible beneficiaries through its TRICARE program. DOD contracts with managed care support contractors to provide medical services, and separately with a pharmacy benefit manager to provide pharmacy services that include the TRICARE mail-order pharmacy and access to a retail pharmacy network. This is referred to as a carve-out contract structure. DOD's current pharmacy contract ends in the fall of 2014. DOD has been preparing for its upcoming contract through acquisition planning, which included identifying any needed changes to contract requirements.
Senate Report 112-173, which accompanied a version of the NDAA for fiscal year 2013, mandated that GAO review DOD's health care contracts. For this report, GAO examined: (1) how DOD identified changes needed, if any, to requirements for its upcoming pharmacy services contract; and (2) what, if any, assessment DOD has done of the appropriateness of its current contract structure. GAO reviewed DOD acquisition planning documents and federal regulations, and interviewed officials from DOD and its pharmacy services contractor.
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) used various methods to identify needed changes to requirements for its upcoming pharmacy services contract. During acquisition planning for the upcoming TRICARE pharmacy services contract, DOD solicited feedback from industry through its market research process to align the contract requirements with industry best practices and promote competition. For example, DOD issued requests for information (RFI) in which DOD asked questions about specific market trends, such as ensuring that certain categories of drugs are distributed through the most cost-effective mechanism. DOD also issued an RFI to obtain information on promoting competition, asking industry for opinions on the length of the contract period. DOD officials told us that responses indicated that potential offerors would prefer a longer contract period because it would allow a new contractor more time to recover any capital investment made in implementing the contract. The request for proposals for the upcoming contract, issued in June 2013, included a contract period of 1 base year and 7 option years. DOD also identified changes to contract requirements in response to legislative changes to the TRICARE pharmacy benefit. For example, the National Defense Authorization Act (NDAA) for fiscal year 2013 required DOD to implement a mail-order pilot for maintenance drugs for beneficiaries who are also enrolled in Medicare Part B. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract.
DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include incorporating all pharmacy services into the managed care support contracts--a carve-in structure--or a structure that incorporates certain components of DOD's pharmacy services, such as the mail-order pharmacy, into the managed care support contracts while maintaining a separate contract for other components. DOD officials told GAO they believe that DOD's current carve-out contract structure continues to be appropriate, as it affords more control over pharmacy data that allows for detailed data analyses and cost transparency, meets program goals, and has high beneficiary satisfaction. However, there have been significant changes in the pharmacy benefit management market in the past decade, including mergers and companies offering new services that may change the services and options available to DOD. GAO has previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Additionally, GAO has reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative. Without this type of evaluation, DOD cannot effectively demonstrate that it has chosen the most appropriate contract structure in terms of costs to the government and services for beneficiaries.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD conduct an evaluation of the potential costs and benefits of alternative structures for the TRICARE pharmacy services contract, and incorporate such an evaluation into acquisition planning. DOD concurred with GAO's recommendations.

section_title: Letter
paragraphs: In fiscal year 2012, the Department of Defense’s (DOD) military health  system offered comprehensive health care coverage—including a  pharmacy benefit—to nearly 9.7 million eligible beneficiaries through its  TRICARE program. DOD’s pharmacy benefit allows TRICARE  beneficiaries to obtain prescription drugs either from military treatment  facility pharmacies operated by DOD or from TRICARE’s mail-order and  retail pharmacies operated through the private sector. In its current  contract structure, DOD contracts with managed care support contractors  to provide medical services, and contracts separately with a pharmacy  benefit manager, Express Scripts, Inc., to operate the TRICARE mail- order pharmacy and provide access to a retail pharmacy network. DOD’s  current pharmacy services contract is set to expire in the fall of 2014, and  DOD has issued a request for proposals (RFP) for its next pharmacy  services contract, which it estimates will cost a total of $4.4 billion.
DOD has been preparing for its upcoming pharmacy services contract  through its acquisition planning process, which included identifying any  planned changes to contract requirements—the work to be performed by  the contractor. Federal regulations require agencies to perform  acquisition planning activities for all contracts to ensure that the  government meets its needs in the most effective, economical, and timely  manner possible. We have previously reported that inadequate  acquisition planning can increase the risk that the government may  receive services that cost more than anticipated, are delivered late, and  are of unacceptable quality. Federal regulations also allow agencies to  make changes to requirements in existing contracts, as needed.
Senate Report 112-173, which accompanied the Senate Armed Services  Committee’s version of the National Defense Authorization Act (NDAA)  for fiscal year 2013, mandated that GAO conduct a comprehensive  review of DOD’s health care contracts, which include the pharmacy services contract. In this report, we review: (1) how DOD identified  changes needed, if any, to requirements for its upcoming and current  pharmacy services contracts; and (2) what, if any, assessment DOD has  done of the appropriateness of its current pharmacy services contract  structure.
To determine the steps DOD took to identify changes needed, if any, to  contract requirements, we focused on DOD’s preparation for the  upcoming contract and administration of the current contract. We  reviewed documents related to DOD’s acquisition planning, including  market research documentation and the draft and final RFP for the  upcoming contract. We also reviewed relevant federal regulations,  including the Federal Acquisition Regulation (FAR) and Defense Federal  Acquisition Regulation Supplement (DFARS), as they relate to acquisition planning. We interviewed DOD officials about their acquisition  planning efforts, including changes to the contract requirements they  determined were necessary and the reasons for those changes. We also  interviewed officials from DOD’s current pharmacy services contractor  about the department’s efforts to solicit industry feedback in making  changes to requirements for the pharmacy services contract. In addition,  we interviewed officials from the Pharmaceutical Care Management  Association (the trade group representing the pharmacy benefit manager  industry, including Express Scripts) and Pharmaceutical Strategies Group  (a pharmacy benefit consulting organization) to obtain their perspectives  on industry trends and DOD’s process for obtaining industry input.
To determine what, if any, assessment DOD has done of the  appropriateness of its current pharmacy services contract structure, we  reviewed DOD documents, including congressional testimony and  projected cost estimates related to the initial decision to contract for  pharmacy services separately from its managed care support contracts— referred to as a carve-out contract structure. In addition, we interviewed  DOD officials about the reasoning behind this decision. We also reviewed  DOD documents, including the report from the Task Force on the Future  of Military Health Care that made recommendations regarding the  structure of the pharmacy services contract, and DOD’s official response  to the report. We also interviewed DOD officials about any efforts to  determine whether the current carve-out structure continues to be  appropriate. We analyzed these documents in the context of GAO’s Cost  Estimating and Assessment Guide: Best Practices for Developing and  Managing Capital Program Costs, which provides guidance to the  federal government on cost-benefit analysis. We interviewed officials from  DOD’s three current managed care support contractors to obtain their  perspectives on the current pharmacy services contract structure. We  also reviewed health plan research literature and interviewed officials  from the two industry groups described above about industry practices.
We conducted this performance audit from February 2013 to September  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.
subsections: section_title: Background
paragraphs: TRICARE beneficiaries used the program’s pharmacy benefit to fill almost  134 million outpatient prescriptions in fiscal year 2012. Through its  acquisition process, DOD contracts with a pharmacy benefit manager— currently Express Scripts—to provide access to a retail pharmacy network  and operate a mail order pharmacy for beneficiaries, and to provide  administrative services.
subsections: section_title: TRICARE’s Pharmacy Benefit
paragraphs: Under TRICARE, beneficiaries have three primary health plan options in  which they may participate: (1) a managed care option called TRICARE  Prime, (2) a preferred-provider option called TRICARE Extra, and (3) a  fee-for-service option called TRICARE Standard. TRICARE  beneficiaries may obtain medical care through a direct-care system of  military treatment facilities or a purchased-care system consisting of  network and non-network private sector primary and specialty care  providers, and hospitals. In addition, TRICARE’s pharmacy benefit— offered under all TRICARE health plan options—provides beneficiaries  with three options for obtaining prescription drugs: from military treatment  facility pharmacies, from network and non-network retail pharmacies, and  through the TRICARE mail-order pharmacy.
TRICARE’s pharmacy benefit has a three-tier copayment structure based  on whether a drug is included in DOD’s formulary and the type of  pharmacy where the prescription is filled. (See table 1.) DOD’s formulary  includes a list of drugs that all military treatment facilities must provide,  and a list of drugs that military treatment facilities may elect to provide on  the basis of the types of services offered at that facility (e.g., cancer drugs  at facilities that provide cancer treatment).as “non-formulary” on the basis of its evaluation of their cost and clinical  effectiveness. Non-formulary drugs are available to beneficiaries at a  higher cost, unless the provider can establish medical necessity.
See Pub. L. No. 110-181, § 703, 122 Stat. 3, 188 (codified at 10 U.S.C. § 1074g(f)). This  act provides that with respect to any prescriptions filled on or after January 28, 2008, the  TRICARE retail pharmacy program is to be treated as an element of DOD for purposes of  procurement of drugs by federal agencies under 38 U.S.C. § 8126 to ensure that drugs  paid for by DOD that are dispensed to TRICARE beneficiaries at retail pharmacies are  subject to federal pricing arrangements. manufacturers are required to refund to DOD the difference between the  federal pricing arrangements and the retail price paid for prescriptions  filled dating back to the NDAA’s enactment on January 28, 2008. As of  July 31, 2013, according to DOD, its total estimated savings from fiscal  year 2009 through fiscal year 2013 were about $6.53 billion as a result of  these refunds.
section_title: TRICARE’s Pharmacy Services Contracting Process and Roles
paragraphs: DOD’s TRICARE Management Activity is responsible for overseeing the  TRICARE program, including the pharmacy benefit. Within this office, the  Pharmaceutical Operations Directorate (hereafter referred to as the  program office) is responsible for managing the pharmacy benefit  (including the contract to provide pharmacy services), and the Acquisition  Management and Support Directorate (hereafter referred to as the  contracting office) is responsible for managing all acquisitions for the  TRICARE Management Activity. The two offices together manage the  acquisition process for the pharmacy services contract. (See fig. 2.) The  program office and the contracting office provide the clinical expertise and  acquisition knowledge, respectively, for the acquisition planning,  evaluation of proposals, and award of the pharmacy services contract.
The acquisition process for DOD’s pharmacy services contract includes  three main phases: (1) acquisition planning, (2) RFP, and (3) award.
Acquisition planning. In the acquisition planning phase, the  program office, led by the program manager, is primarily  responsible for defining TRICARE’s contract requirements—the  work to be performed by the contractor—and developing a plan to  meet those requirements. The program office also receives  guidance and assistance from the contracting office in the  development and preparation of key acquisition documents and in  the market research process. The market research process can  involve the development and use of several information-gathering  tools, including requests for information (RFI), which are publicly  released documents that allow the government to obtain feedback  from industry on various acquisition elements such as the terms  and conditions of the contract. RFIs are also a means by which  the government can identify potential offerors and determine  whether the industry can meet its needs. In addition, we have  previously reported that sound acquisition planning includes an  assessment of lessons learned to identify improvements.
Towards the end of this phase, officials in the program and  contracting offices work together to revise and refine key  acquisition planning documents.
RFP. In the RFP phase, the contracting officer—the official in the  contracting office who has the authority to enter into, administer,  modify, and terminate contracts—issues the RFP, the proposals.
Award. In the award phase, the program and contracting offices  are responsible for evaluating proposals and awarding a contract  to the offeror representing the best value to the government based  on a combination of technical and cost factors.
To monitor the contractor’s performance under the contract after award,  the contracting officer officially designates a program office official as the  contracting officer’s representative (COR), who acts as the liaison  between the contracting officer and the contractor and is responsible for  the day-to-day monitoring of contractor activities to ensure that the  services are delivered in accordance with the contract’s performance  standards. The draft monitoring plan for the upcoming pharmacy  services contract includes 30 standards—related to timeliness of claims  processing, retail network access, and beneficiary satisfaction, among  other things—against which the contractor’s performance will be  measured.
RFPs include a description of the contract requirements, the anticipated terms and  conditions that will be contained in the contract, the required information that the  prospective offerors must include in their proposal, and the factors that will be used to  evaluate proposals.
DOD has department-wide acquisition training and experience  requirements for all officials who award and administer DOD contracts,  including the pharmacy services contract, as required by law. Training is  primarily provided through the Defense Acquisition University, and is  designed to provide a foundation of acquisition knowledge, but is not  targeted to specific contracts or contract types. In addition, all CORs must  meet training and experience requirements specified in DOD’s Standard  for Certification of Contracting Officer’s Representatives (COR) for  Service Acquisitions issued in March 2010. See appendix I for more  information on the certification standards for and experience of officials  who award and administer the pharmacy services contract.
In September 2010, DOD issued guidance to help improve defense  acquisition through its Better Buying Power Initiative. DOD’s Better Buying Power Initiative encompasses a set of acquisition principles  designed to achieve greater efficiencies through affordability, cost control,  elimination of unproductive processes and bureaucracy, and promotion of  competition; it provides guidance to acquisition officials on how to  implement these principles. The principles are also designed to provide  incentives to DOD contractors for productivity and innovation in industry  and government.
section_title: DOD Used Various Methods to Identify Changes to Contract Requirements for the Upcoming and Current Pharmacy Services Contracts
paragraphs: DOD used market research to align the requirements for the upcoming  pharmacy services contract with industry best practices and promote  competition. DOD also identified changes to the requirements for the  upcoming and current contracts in response to changes in legislation,  efforts to improve service delivery, and contractor performance.
subsections: section_title: DOD Used Market Research to Align the Requirements for Its Upcoming Pharmacy Services Contract with Industry Best Practices and Promote Competition
paragraphs: DOD solicited information from industry during its acquisition planning for  the upcoming pharmacy services contract through the required market  research process, including issuing RFIs and a draft RFP for industry  comment, to identify changes to requirements for its pharmacy services  contract. Specifically, DOD used market research to align the  requirements for the upcoming contract with industry best practices and  promote competition.
Align contract requirements with industry best practices.  DOD issued five RFIs from 2010 through 2012 related to the  upcoming contract. RFIs are one of several market research   Although DOD is not  methods available to federal agencies. required to use them, RFIs are considered a best practice for  service acquisitions in the federal government.provided DOD with the opportunity to assess the capability of  potential offerors to provide services that DOD may incorporate in  the upcoming pharmacy services contract. In many of the RFIs,   The RFIs  DOD asked questions about specific market trends so that it could  determine if changes were needed to the upcoming contract  requirements to help align them with industry best practices. For  example, DOD issued one RFI in November 2010 that asked  about establishing a mechanism that would allow for centralized  distribution of specialty pharmaceuticals and preserve DOD’s  federal pricing arrangements. Specialty pharmaceuticals—high- cost injectable, infused, oral, or inhaled drugs that are generally  more complex to distribute, administer, and monitor than  traditional drugs—are becoming a growing cost driver for  pharmacy services. According to DOD officials, the RFI responses  received from industry generally reinforced their view that the RFP  should define any specialty pharmacy owned or sub-contracted by  the contractor as a DOD specialty mail-order outlet, which would  subject it to the same federal pricing arrangements as the mail- order pharmacy.
Promote competition. DOD has also used the RFI process to  obtain information on promoting competition. DOD recognized that  a limited number of potential offerors may have the capability to  handle the pharmacy services contract given the recent  consolidation in the pharmacy benefit management market and  the large size of the TRICARE beneficiary population. DOD  contracting officials told us that, in part because of the  department’s Better Buying Power Initiative to improve acquisition  practices, they have a strong focus on maintaining a competitive  contracting environment for the pharmacy services contract,  thereby increasing the use of market research early in the  acquisition planning process. For example, DOD’s December  2011 RFI asked for industry perspectives on the length of the  contract period. DOD was interested in learning whether a longer  contract period would promote competition. DOD officials told us  that the responses they received confirmed that potential offerors  would prefer a longer contract period because it would allow a  non-incumbent more time to recover any capital investment made  as part of implementing the contract. The RFP for the upcoming  contract includes a contract period of 1 base year and 7 option  years. DOD also used the RFI process to confirm that there  were a sufficient number of potential offerors to ensure full and  open competition for the pharmacy services contract. DOD  officials told us that they found there were at least six potential  offerors, which gave them confidence that there would be  adequate competition.
section_title: DOD Identified Changes to Requirements for its Upcoming and Current Pharmacy Services Contracts in Response to Legislation, Efforts to Improve Service Delivery, and Contractor Performance
paragraphs: Since the start of the current pharmacy services contract in 2009, DOD  has identified changes to the contract requirements in response to  legislative changes to the pharmacy benefit, efforts to improve service  delivery to beneficiaries, and improvements identified through monitoring  of the current contractor’s performance. In each instance, DOD officials  needed to determine whether to make the change for the upcoming  contract, or whether to make the change via a modification to the current  contract. According to DOD officials, there were over 300 modifications  to the current pharmacy services contract; 23 of these were changes to  the work to be done by the contractor. DOD officials told us that it is not  possible to build a level of flexibility into the contract to accommodate or  anticipate all potential changes (and thus avoid modifications to the  contract), because doing so would make it difficult for offerors to  determine pricing in their proposals.
Legislative changes to the pharmacy benefit. Legislative  changes have been one key driver of DOD’s revisions to its  pharmacy services contract requirements. For example, one  legislative change required DOD to implement the TRICARE  Young Adult program, which resulted in DOD adding a  requirement for the contractor to extend pharmacy services to  eligible military dependents through the age of 26. This change  was made as a modification under the current contract. Another  legislative change that necessitated changes to the contract  requirements was the increase in beneficiary copayments for  drugs obtained through mail-order or retail pharmacies, enacted  as part of the NDAA for fiscal year 2013, which DOD changed  through a modification to the current contract. A third legislative  change to the pharmacy benefit was the mail-order pilot for  maintenance drugs for TRICARE for Life beneficiaries. DOD  officials incorporated this change in the requirements for the  upcoming pharmacy services contract, as outlined in the RFP.
Efforts to improve service delivery. DOD has also updated  contract requirements to improve service delivery to beneficiaries  under the pharmacy services contract. DOD initiated a  modification to the current contract to require the contractor to  provide online coordination of benefits for beneficiaries with health  care coverage from multiple insurers. Specifically, the contractor is  required to ensure that pharmacy data systems include  information on government and other health insurance coverage  to facilitate coverage and payment determinations. According to  DOD officials, this change is consistent with the updated national  telecommunication standard from the National Council for  Prescription Drug Programs, which provides a uniform format for  electronic claims processing. According to DOD officials, this  change to the contract requirements eliminates the need for  beneficiaries to file paper claims when TRICARE is the secondary  payer, simplifying the process for beneficiaries and reducing costs  for DOD. Another modification to the current contract to improve  service delivery was to require the contractor to provide vaccines  through its network of retail pharmacies. According to DOD  officials, this modification was made to allow beneficiaries to  access vaccines through every possible venue, driven by the 2010  H1N1 influenza pandemic.
Contractor performance. DOD officials told us that  improvements identified through the monitoring of contractor  performance have also led to changes in contract requirements.  Through the CORs’ monitoring of the contractor’s performance  against the standards specified in the contract, the CORs may  determine that a particular standard is not helping to achieve the  performance desired or is unnecessarily restrictive. For example,  DOD officials told us that in the current contract, they had a three- tiered standard for paper claims processing (e.g., 95 percent of  paper claims processed within 10 days, 99 percent within 20 days,  and 100 percent within 30 days). Through monitoring the  contractor’s performance, the CORs determined that there was a  negligible difference between the middle and high tiers, and  holding the contractor to this performance standard was not  beneficial. The requirements for the upcoming contract as  described in the RFP only include two tiers—95 percent of claims  processed within 14 calendar days, and 100 percent within   28 calendar days.
When making changes to contract requirements, DOD officials told us  they try to ensure that the requirements are not overly prescriptive, but  rather outcome-oriented and performance-based. For example, DOD  officials told us that they allowed the pharmacy and managed care  support contractors to innovate and apply industry best practices  regarding coverage and coordination of home infusion services.  According to DOD officials, the contract requirements regarding home  infusion are focused on the desired outcome—providing coordination of  care for beneficiaries needing these services with the physician as the  key decision maker—and DOD officials facilitated meetings between the  pharmacy contractor and managed care support contractors to determine  the details of how to provide the services. This approach is consistent  with DOD’s Better Buying Power principles that emphasize the  importance of well-defined contract requirements and acquisition officials’  understanding of cost-performance trade-offs. This approach also  addresses a concern we have previously identified regarding overly  prescriptive contract requirements in TRICARE contracts; specifically, in  our previous work on the managed care support contracts, we reported  that DOD’s prescriptive requirements limited innovation and competition  among contractors.
section_title: DOD Has Not Conducted an Assessment of Its Pharmacy Services Contract that Includes an Evaluation of the Costs and Benefits of Alternative Structures
paragraphs: Since retail pharmacy services were carved out about 10 years ago, DOD  has not conducted an assessment of the appropriateness of its current  pharmacy services contract structure that includes an evaluation of the  costs and benefits of alternative structures. Alternative structures can  include a carve-in of all pharmacy services into the managed care support  contracts, or a structure that carves in a component of pharmacy  services, such as the mail-order pharmacy, while maintaining a carve-out  structure for other components. DOD officials told us they believe that  DOD’s current pharmacy services contract structure continues to be  appropriate, as it affords more control over pharmacy data and allows for  more detailed data analyses and increased transparency about costs.  DOD’s continued use of a carve-out contract structure for pharmacy  services is consistent with findings from research and perspectives we  heard from industry group officials—that larger employers are more likely  to carve out pharmacy services to better leverage the economies of scale and cost savings a stand-alone pharmacy benefit manager can achieve.These arrangements may also provide more detailed information on drug  utilization that can be helpful in managing drug formularies and their  associated costs.
In its December 2007 report, the Task Force on the Future of Military  Health Care recommended examining an alternative structure for the  pharmacy services contract.health care system, the task force reviewed DOD’s pharmacy benefit  program, recommending that DOD pilot a carve-in pharmacy contract  structure within one of the TRICARE regions with a goal of achieving  better financial and health outcomes as a result of having more integrated  pharmacy and medical services. The managed care support contractors  we spoke with expressed similar concerns. However, DOD did not agree  with the task force’s recommendation. In its response, DOD assessed the   In addition to other aspects of DOD’s  benefits of the current structure and affirmed the department’s  commitment to this structure.
Potential cost savings. In its response to the task force report,  DOD did not concur with the recommendation to pilot a carve-in  pharmacy contract structure, in part because of the cost savings  achieved through the carve-out. Specifically, DOD stated that the  carve-out arrangement is compatible with accessing federal  pricing arrangements and other discounts available for direct  purchases. DOD stated in its response that, under a carve-in  arrangement, even on a pilot basis, it would lose access to  discounts available for direct purchases, including some portion of  the $400 million in annual discounts available for drugs dispensed  at retail pharmacies under the NDAA for fiscal year 2008. DOD  officials told us that this loss would result from the managed care  support contractor being the purchaser of the drugs, rather than  DOD. DOD also stated that it would possibly lose access to the  volume discounts obtained for drugs purchased for the mail-order  pharmacy and military treatment facility pharmacies under a  carve-in structure. DOD officials told us that these disadvantages  of a carve-in structure remain the same today. Additionally, during  this review, DOD noted that dividing the TRICARE beneficiary  population among contractors under a carve-in would dilute the  leverage a single pharmacy benefit manager would have in the  market. For example, DOD would lose economies of scale for  claims processing services provided by the pharmacy contractor,  resulting in increased costs.
However, research studies have found, and officials from  TRICARE’s managed care support contractors told us, that a  contract structure with integrated medical and pharmacy services  could result in cost savings for DOD. For example, one recent  study found that employers with carve-in health plans had   3.8 percent lower total medical care costs compared to employers  with pharmacy services carved out. The researchers attributed  the cost difference, in part, to increased coordination of care for  the carve-in plans, leading to fewer adverse events for patients,  resulting in fewer inpatient admissions; they reported that plans  with a carve-out arrangement had 7 percent higher inpatient  admissions. Similarly, representatives from one managed care  support contractor we spoke with stated they thought they could  achieve similar cost savings to what DOD currently has through its  federal pricing arrangements by using integrated medical and  pharmacy services as a means of reducing costs in a carve-in  arrangement. Being able to analyze integrated, in-house medical  and pharmacy data may help health plans to lower costs by  identifying high-cost beneficiaries, including those with chronic  conditions such as asthma and diabetes, and targeting timely and  cost-effective interventions for this population.
Potential health benefits from data integration. In  recommending that DOD pilot a carve-in pharmacy contract  structure, one of the task force’s goals was to improve health  outcomes as a result of integrated medical and pharmacy  services. DOD noted in its task force response that it could  achieve this goal under the current carve-out contract structure by  including requirements in the pharmacy services contract and  managed care support contracts requiring data sharing between  the contractors.
While the current contract requires the pharmacy and managed  care support contractors to exchange data for care coordination,  current TRICARE managed care support contractors told us there  continue to be challenges with data sharing to facilitate disease  management. Contractors expressed similar concerns about  sharing medical and pharmacy data as part of our previous work  related to DOD’s managed care support contracts. Additionally,  during this review, officials from one of the managed care support  contractors told us that they continue to find it challenging to  generate data that provide a holistic view of beneficiaries when  medical and pharmacy data remain separate. Representatives  from another managed care support contractor told us that their  disease management staff faced challenges in analyzing  pharmacy data for groups of patients they were managing. They  also told us that if these staff had more complete and real-time  access to pharmacy data, as they would under a carve-in  structure, they could be more proactive in assisting DOD’s efforts  to identify patients who should participate in disease management  programs. Additionally, researchers have found that disease  management interventions may be challenging to conduct in a  carve-out arrangement due to the lack of fully integrated medical  and pharmacy data.
According to DOD officials, any changes to the current contract structure  would result in less efficient and inconsistent pharmacy service delivery  across the three TRICARE regions, as officials observed when the retail  pharmacy benefit was part of the managed care support contracts. One of  DOD’s reasons for the initial carve-out was a concern that pharmacy  services were not being consistently implemented across the TRICARE  regions. For example, DOD officials told us that two health plans in  different TRICARE regions were able to have different preferred drugs  within the same therapeutic class, and while both drugs may be included  on DOD’s formulary, beneficiaries in different parts of the country were  not being consistently provided with the same drug. In addition, according  to DOD, beneficiaries were dissatisfied with a benefit that was not  portable across TRICARE regions—specifically, retail pharmacy networks  differed by region, so beneficiaries who moved from one TRICARE region  to another would have to change retail pharmacy networks. With one  national pharmacy services contract, DOD officials said they can ensure  that the formulary is implemented consistently and that beneficiaries have  access to the same retail pharmacy network across the TRICARE  regions.
Since the current pharmacy services contract structure was implemented  almost 10 years ago, DOD has not incorporated an assessment of the  contract structure that includes an evaluation of alternative structures into  its acquisition planning activities. DOD officials told us that they consider  their task force response to be an assessment of the current contract  structure. While the response included a justification for the current  structure, it did not include an evaluation of the potential costs and  benefits of alternative structures, such as carving in all or part of the  pharmacy benefit. In addition, the acquisition plan for the upcoming  contract described two alternative carve-out configurations (separate  contracts for the mail-order and retail pharmacies and a government- owned facility to house drugs for the mail-order pharmacy contract).  However, the plan similarly did not include an evaluation of the potential  costs and benefits of these options, nor did the plan include an evaluation  of any carve-in alternatives. DOD officials told us there are no current  plans to conduct such an evaluation as part of the department’s  acquisition planning efforts.
DOD officials also told us that they continue to believe the current  structure is appropriate because the current carve-out structure provides  high beneficiary satisfaction and is achieving DOD’s original objectives,  namely consistent provision of benefits, access to federal pricing  arrangements, and transparency of pharmacy utilization and cost data.  Further, officials told us that the current carve-out structure is more  efficient to administer with one pharmacy services contractor than the  previous carve-in structure that involved multiple managed care support  contractors.
While DOD officials believe the current structure is appropriate, there  have been significant changes in the pharmacy benefit management  market in the past decade. These changes include mergers, as well as  companies offering new services that may change the services and  options available to DOD. For example, representatives from one  managed care support contractor we spoke with told us that they can  offer different services to DOD today than they were able to offer when  pharmacy services were part of the managed care support contracts.
While the contractor had previously sub-contracted with a separate  pharmacy benefit manager to provide pharmacy services under its  managed care support contract, this contractor’s parent company now  provides in-house pharmacy benefit management services for its  commercial clients. Additionally, according to the parent company of  another managed care support contractor, its recent decision to bring  pharmacy benefit management services in-house will enhance its ability  to manage total health care costs and improve health outcomes for clients  who carve in pharmacy services.
As we have previously reported, sound acquisition planning includes an  assessment of lessons learned to identify improvements. The time  necessary for such activities can vary greatly, depending on the  complexity of the contract. We have also reported that a comparative  evaluation of the costs and benefits of alternatives can provide an  evidence-based rationale for why an agency has chosen a particular  alternative (such as a decision to maintain or alter the current pharmacy  services contract structure). We have reported that such an evaluation  would consider possible alternatives and should not be developed solely  to support a predetermined solution.
section_title: Conclusions
paragraphs: With each new pharmacy services contract, DOD officials have the  opportunity to conduct acquisition planning activities that help determine  whether the contract—and its current structure—continues to meet the  department’s needs, including providing the best value and services to  the government and beneficiaries. These activities can include changing  requirements as necessary, learning about current market trends, and  incorporating new information and lessons learned. Acquisition planning  can also incorporate an assessment of the pharmacy services contract  structure that includes an evaluation of the potential costs and benefits of  alternative contract structures. Incorporating such an evaluation into the  acquisition planning for each new pharmacy services contract can provide  DOD with an evidence-based rationale for why maintaining or changing  the current structure is warranted. Without such an evaluation, DOD  cannot effectively demonstrate to Congress and stakeholders that it has  chosen the most appropriate contract structure, in terms of costs to the  government and services for beneficiaries.
section_title: Recommendations for Executive Action
paragraphs: To provide decision makers with more complete information on the  continued appropriateness of the current pharmacy services contract  structure, and to ensure the best value and services to the government  and beneficiaries, we recommend that the Secretary of Defense direct the  Assistant Secretary of Defense (Health Affairs) to take the following two  actions:  conduct an evaluation of the potential costs and benefits of alternative  contract structures for the TRICARE pharmacy services contract; and  incorporate such an evaluation into acquisition planning.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for comment. DOD generally  concurred with our findings and conclusions and concurred with our  recommendations. DOD also commented that based on past experience  with alternative contract structures, it is confident that the current contract  structure is the most cost efficient and beneficial.
In response to our recommendation that DOD conduct an evaluation of  the potential costs and benefits of alternative contract structures for the  TRICARE pharmacy services contract, DOD commented that there is a  lack of data to support inferences that a carve-in arrangement would  result in cost savings to the government, and noted that the full  development of two separate RFPs would be necessary to provide a valid  cost comparison. While detailed cost estimates can be a useful tool for  DOD, they are not the only means of evaluating alternative structures for  the pharmacy services contract. For example, as we noted in our report,  DOD has previously used RFIs to obtain information from industry to  inform its decisions about the pharmacy services contract, and this  process also may be helpful in identifying costs and benefits of alternative  contract structures.
In response to our recommendation that DOD incorporate such an  evaluation into acquisition planning, DOD commented that it included an  evaluation of its past contract experience into acquisition planning for the  upcoming pharmacy services contract. However, as noted in our report,  the acquisition plan for the upcoming contract did not include an  evaluation of the potential costs and benefits of alternative contract  structures, and DOD did not directly address how it would include such an  evaluation in its acquisition planning activities. We continue to emphasize  the importance of having an evidence-based rationale for why maintaining  or changing the current structure is warranted. With each new pharmacy  services contract, DOD officials have the opportunity to determine  whether the contract continues to meet the department’s needs, including  providing the best value to the government and services to beneficiaries.
In addition, DOD stated in its comments that our report did not address its  direct-care system and noted that carving pharmacy services back into  the managed care support contracts would fragment the pharmacy  benefit and undermine its goal of integrating all pharmacy points of  service. Our review was focused on DOD’s purchased-care system for  providing pharmacy services, although we did provide context about the  direct-care system as appropriate. Furthermore, we did not recommend  any specific structure for DOD’s pharmacy services contract, but rather  that DOD evaluate the costs and benefits of alternative structures such  that it can have an evidence-based rationale for its decisions.
DOD’s comments are reprinted in appendix II. DOD also provided  technical comments, which we incorporated as appropriate.
We are sending copies of this report to appropriate congressional  committees; the Secretary of Defense; the Assistant Secretary of Defense  (Health Affairs); and other interested parties.  In addition, the report will  be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-7114 or at draperd@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 who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Certification Standards for and Experience of TRICARE Pharmacy Services Contract Officials
paragraphs: Department of Defense (DOD) officials who award and administer the  TRICARE pharmacy services contract are required to meet relevant  certification standards applicable to all DOD acquisition officials and,  according to DOD officials, some of these officials also have pharmacy- specific experience. The training and related education and experience  requirements are tailored to different levels of authority and, due to the  size and complexity of the pharmacy services contract, the contracting  officer and program manager for the pharmacy services contract are  required to be certified at the highest levels, which require the most  training and experience. In addition, all contracting officer’s  representatives (COR) must meet specific training and experience  requirements based on the complexity and risk of the contracts they will  be working with, and the two CORs for the pharmacy services contract  are also required to meet the highest COR certification level. For  example, the CORs for the pharmacy services contract must complete at  least 16 hours of COR-specific continuing education every 3 years, which  is twice the amount required for low-risk, fixed-price contracts. DOD’s  department-wide acquisition training is primarily provided through the   Training is designed to provide a  Defense Acquisition University.foundation of acquisition knowledge but is not targeted to specific  contracts or contract types. Beyond DOD’s required training, the  contracting officer, program manager, and CORs also have specialized  experience in pharmacy and related issues. See table 2 for the specific  certification standards for and pharmacy-specific experience of the  officials responsible for awarding or administering the pharmacy services  contract.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Janina Austin, Assistant Director;  Lisa Motley; Laurie Pachter; Julie T. Stewart; Malissa G. Winograd; and  William T. Woods made key contributions to this report.