Federal Employees' Health Benefits: Effects of Using Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies
Published: 2003-01-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 benefits 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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?
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. 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), 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. We compared these prices to cash  prices 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.
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’ formularies with the National Formulary for the Department of  Veterans Affairs (VA).
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.
subsections: section_title: Background
paragraphs: 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.
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.
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.
section_title: PBMs Achieved Savings through Price Discounts, Rebate Payments, and Managing Drug Use
paragraphs: 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.
subsections: section_title: PBMs Obtained Discounted Prices Significantly Below Those Paid by Cash-Paying Customers
paragraphs: 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. (See fig. 2.)
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  percent below the average cash price for the selected generic drugs  (compared to 47 percent for the FEHBP plans we reviewed).
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.
section_title: PBMs Further Reduced Plans’ Drug Expenditures by Passing Through Certain Manufacturer Rebates
paragraphs: 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.
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  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.
section_title: PBM Intervention Techniques Contributed to Plans’ Savings, but Are Difficult to Quantify
paragraphs: 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. 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.
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. 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  interchange. These estimates are in addition to savings associated with  rebates plans earned for drugs in the formulary.
Generic substitution involves dispensing less expensive, chemically- equivalent 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.
section_title: PBMs Provided FEHBP Enrollees Generally Unrestricted Access to Prescription Drugs, Cost Savings, and Other Benefits
paragraphs: 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-of- pocket 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.
subsections: section_title: PBMs Provided Enrollees Access to Broad Retail Pharmacy Networks and Generally Nonrestrictive Drug Formularies
paragraphs: 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.
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  categories. 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. 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. (See table 2.)
Each plan provided enrollees access to nonformulary drugs, although  sometimes with higher cost sharing requirements. 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.
section_title: PBM Savings Helped Reduce Enrollees’ Costs for Out-of-Pocket Prescription Drug Spending and Premiums
paragraphs: 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  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.)
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. 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.  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 fee- for-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.
section_title: Enrollees Also Benefit from PBM Drug Utilization Review Programs and Customer Service
paragraphs: 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  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.
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.
section_title: Pharmacies Included in PBM Retail Networks Must Accept Discounted Prices and Perform Various Administrative Tasks
paragraphs: 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  contract with other clients that cumulatively represent a large share of the  national population that purchase prescription and other nonprescription  items from retail pharmacies.
subsections: section_title: PBMs Reimbursed Retail Pharmacies Less than Cash-Paying Customers but Above Estimated Costs
paragraphs: 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 cash- paying 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.
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. 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   acquisition costs for 10 brand drugs we reviewed. 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. 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.
section_title: PBM Transactions Require Additional Administrative Tasks and Incur Higher Processing Costs for Retail Pharmacies
paragraphs: 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 FEHBP- participating PBMs are generally similar to those imposed by PBMs  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. A synthesis of multiple  studies concluded that third-party prescriptions cost from $0.36 to $1.55  more than cash transactions to process.
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.
section_title: PBMs Use Financial and Other Incentives to Steer Retail Pharmacy Customers to Mail-Order Programs
paragraphs: 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  dispensed through mail-order pharmacies—about 5 percent of  prescriptions and 17 percent of prescription sales in 2001.
section_title: Most Pharmacies Participate in PBMs’ Retail Networks
paragraphs: 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. 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. 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.
section_title: PBMs Received Compensation from Plans and Payments from Manufacturers for Their FEHBP Business
paragraphs: 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.
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  pharmacies. 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’ mail- order acquisition costs, we estimate that the discounted price for mail- order 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  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.
section_title: Concluding Observations
paragraphs: 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 trade- offs 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.
section_title: Agency and Other Comments and Our Evaluation
paragraphs: 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’  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  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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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.  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.
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). 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) or maximum  allowable cost (MAC)—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. 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 industry- reported 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- order prescription claims. 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. 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  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.
section_title: Appendix II: Comments from the Office of Personnel Management
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: The following staff made important contributions to this report:   Rashmi Agarwal, Randy Dirosa, Betty Kirksey, Carmen Rivera-Lowitt, and  Annesha White.
section_title: Related GAO Products
paragraphs: 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.