Prescription Drugs: Overview of Approaches to Control Prescription Drug Spending in Federal Programs
Published: 2009-06-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Millions of individuals receive prescription drugs through federal programs. The increasing cost of prescription drugs has put pressure to control drug spending on federal programs such as the Federal Employees Health Benefits Program (FEHBP), Medicare Part D, the Department of Veterans Affairs (VA), the Department of Defense (DOD), and Medicaid. Prescription drug spending within the FEHBP in particular, which provides health and drug coverage to about 8 million federal employees, retirees, and their dependents, has been a significant contributor to FEHBP cost and premium growth. The Office of Personnel Management (OPM), which administers the FEHBP, predicted that prescription drugs would continue to be a primary driver of program costs in 2009. GAO was asked to describe approaches used by the FEHBP to control prescription drug spending and summarize approaches used by other federal programs. This testimony is based on prior GAO work, including Prescription Drugs: Oversight of Drug Pricing in Federal Programs (GAO-07-481T) and Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices Used by Other Countries and U.S. Private Payers and Federal Programs (GAO-07-358T) and selected updates from relevant literature on drug spending controls prepared by other congressional and federal agencies.
section_title: What GAO Found
paragraphs: FEHBP uses competition among health plans to control prescription drug spending, giving plans an incentive to rein in costs and leverage their market share to obtain favorable drug prices. Most FEHBP plans contract with pharmacy benefit managers (PBMs) to help administer the prescription drug benefit. In a 2003 report, GAO found that the PBMs reduced drug spending by: negotiating rebates with drug manufacturers and passing some of the savings to the plans; obtaining drug price discounts from retail pharmacies and dispensing drugs at lower costs through mail-order pharmacies operated by the PBMs; and using other techniques that reduce utilization of certain drugs or substitute other, less costly drugs. While OPM does not negotiate drug prices or discounts for FEHBP, it attempts to limit spending through annual premium and benefit negotiations with plans, including the encouragement of spending controls such as generic substitution. Other federal programs use a range of approaches to control prescription drug spending. (1) Medicare--the federal health insurance program for the elderly and disabled--offers an outpatient prescription drug benefit known as Medicare Part D that uses competition between plan sponsors and their PBMs to limit drug spending, in part through the ability to negotiate prices and price concessions with drug manufacturers and pharmacies. Plans are required to report these negotiated price concessions to the Centers for Medicare & Medicaid Services (CMS), to help CMS determine the extent to which they are passed on to beneficiaries. (2) VA and DOD pharmacy benefit programs for veterans, active duty military personnel, and others may use statutorily mandated discounts as well as negotiations with drug suppliers to limit drug spending. VA and DOD have access to a number of prices to consider when purchasing drugs--including the Federal Supply Schedule prices that VA negotiates with drug manufacturers--paying the lowest of all available prices. (3) The Medicaid program for low-income adults and children is subject to aggregate payment limits and drug payment guidelines set by CMS. Medicaid does not negotiate drug prices with manufacturers, but reimburses retail pharmacies for drugs dispensed to beneficiaries at set prices. An important element of controlling Medicaid drug spending is the Medicaid drug rebate program, under which drug manufacturers are required by law to provide rebates for certain drugs covered by Medicaid. Under the rebate program, states take advantage of prices manufacturers receive for drugs in the commercial market that reflect discounts and rebates negotiated by private payers. In addition, Part D, VA and DOD, and Medicaid use techniques similar to FEHBP to limit drug spending, such as generic substitution, prior authorization, utilization review programs, or cost-sharing requirements.

section_title: Letter
paragraphs: I am pleased to be here as you examine approaches to control the rising  spending for prescription drugs within the Federal Employees Health  Benefits Program (FEHBP). As you know, the FEHBP provides health  coverage, including prescription drug coverage, to about 8 million federal  employees, retirees, and their dependents. As with other public and  private employer-sponsored health plans, prescription drug spending has  been a significant contributor to FEHBP cost and premium growth.  Projected increases in the costs of prescription drugs alone would have  accounted for about a 3 to 5 percent annual increase in FEHBP premiums  from 2002 through 2007. The Office of Personnel Management (OPM), the  federal agency that administers the FEHBP, predicted that prescription  drugs would continue to be a primary driver of program costs in 2009.
Because of the importance of controlling prescription drug spending by  the federal government, you asked us to describe prescription drug  spending control approaches used by the FEHBP and summarize the  approaches used by other federal programs. Accordingly, my testimony  today will describe the approach used by FEHBP to control prescription  drug spending and summarize approaches used under Medicare, the  Department of Veterans Affairs (VA), the Department of Defense (DOD),  and Medicaid. My remarks are based on prior work performed from 2003  to 2009 on federal programs that purchase or cover prescription drugs,  with selected updates from relevant literature on drug spending controls  prepared by other congressional and federal agencies. We used various  methodologies to complete our work; please see the individual products  for the details. Our work was performed 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: The FEHBP is the largest employer-sponsored health insurance program  in the country. Through it, about 8 million federal employees, retirees, and  their dependents received health coverage—including for prescription  drugs—in 2008. Coverage is provided under competing plans offered by  multiple private health insurers under contract with OPM, which  administers the program, subject to applicable requirements. In 2009, 269  health plan options were offered by participating insurers, 10 of which  were offered nationally while the remaining health plan options were  offered in certain geographic regions. According to OPM, plans must cover  all medically necessary prescription drugs approved by the Food and Drug  Administration (FDA), but plans may maintain formularies that encourage  the use of certain drugs over others. Enrollees may obtain prescriptions  from retail pharmacies that contract with the plans or from mail-order  pharmacies offered by the plans. In 2005, FEHBP prescription drug  spending was an estimated $8.3 billion.
Medicare—the federal health insurance program that serves about   45 million elderly and disabled individuals—offers an outpatient  prescription drug benefit known as Medicare Part D. This benefit was  established by the Medicare Prescription Drug, Improvement, and  Modernization Act of 2003 (MMA) beginning January 1, 2006. As of  February 2009, Part D provided federally subsidized prescription drug  coverage for nearly 27 million beneficiaries. The Centers for Medicare &  Medicaid Services (CMS), part of the Department of Health and Human  Services (HHS), manages and oversees Part D. Medicare beneficiaries may  choose a Part D plan from multiple competing plans offered nationally or  in certain geographic areas by private sponsors, largely commercial  insurers, under contract with CMS. Part D plan sponsors offer drug  coverage either through stand-alone prescription drug plans for  beneficiaries in traditional fee-for-service Medicare or through Medicare  managed care plans, known as Medicare Advantage. In 2009, there were  over 3,700 prescription drug plans offered. Under Medicare Part D, plans  can design their own formularies, but each formulary must include drugs  within each therapeutic category and class of covered Part D drugs.  Enrollees may obtain prescriptions from retail pharmacies that contract  with the plans or from mail-order pharmacies offered by the plans.  Medicare Part D spending is estimated to be about $51 billion in 2009.
The VA pharmacy benefit is provided to eligible veterans and certain  others. As of 2006, about 8 million veterans were enrolled in the VA  system. In general, medications must be prescribed by a VA provider,  filled at a VA pharmacy, and listed on the VA national drug formulary,  which comprises 570 categories of drugs. In addition to the VA national  formulary, VA facilities can establish local formularies to cover additional  drugs. VA may provide nonformulary drugs in cases of medical necessity.  In 2006, VA spent an estimated $3.4 billion on prescription drugs.
The DOD pharmacy benefit is provided to TRICARE beneficiaries,  including active duty personnel, certain reservists, retired uniformed  service members, and dependents. As of 2009, there were about   9.4 million eligible TRICARE beneficiaries. In addition to maintaining a  formulary, DOD provides options for obtaining nonformulary drugs.  Beneficiaries can obtain prescription drugs through a network of retail  pharmacies, nonnetwork retail pharmacies, DOD military treatment  facilities, and DOD’s TRICARE Mail-Order Pharmacy. In 2006, DOD spent  $6.2 billion on prescription drugs.
Medicaid, a joint federal-state program, finances medical services for  certain low-income adults and children. In fiscal year 2008, approximately  63 million beneficiaries were enrolled in Medicaid. While some benefits  are federally required, outpatient prescription drug coverage is an optional  benefit that all states have elected to offer. Drug coverage depends on the  manufacturer’s participation in the federal Medicaid drug rebate program,  through which manufacturers pay rebates to state Medicaid programs for  covered drugs used by Medicaid beneficiaries. Retail pharmacies  distribute drugs to Medicaid beneficiaries and then receive  reimbursements from states for the acquisition cost of the drug and a  dispensing fee. Medicaid outpatient drug spending has decreased since  2006 because Medicare Part D replaced Medicaid as the primary source of  drug coverage for low-income beneficiaries with coverage under both  programs—referred to as dual eligible beneficiaries. In fiscal year 2008,  Medicaid outpatient drug spending was $9.3 billion—including $5.5 billion  as the federal share—which was calculated after adjusting for  manufacturer rebates to states under the Medicaid drug rebate program.
section_title: FEHBP Uses Competition between Health Plans to Control Prescription Drug Costs
paragraphs: FEHBP uses competition among health plans as the primary measure to  control prescription drug spending and other program costs. Under an  annual “open season,” enrollees may remain enrolled in the same plan or  select another competing plan based on benefits, services, premiums, and  other such factors. Thus, plans have the incentive to try to retain or  increase their market share by providing the benefits sought by enrollees  along with competitive premiums. In turn, the larger a plan’s market share,  the more leverage it has for obtaining favorable drug prices on behalf of its  enrollees and controlling prescription drug spending.
Similar to most private employer-sponsored or individually purchased  health plans, most FEHBP plans contract with pharmacy benefit managers  (PBMs) to help them administer the prescription drug benefit and control  drug spending. In a 2003 report reviewing the use of PBMs by three plans  representing about 55 percent of total FEHBP enrollment, we found that  the PBMs used three key approaches to achieve savings for the health  plans:    negotiating rebates with drug manufacturers and passing some of the  savings to the plans;    obtaining drug price discounts from retail pharmacies and dispensing  drugs at lower costs through mail-order pharmacies operated by the  PBMs; and   using other intervention techniques that reduce utilization of certain drugs  or substitute other, less costly drugs. For example, under generic  substitution PBMs substituted less expensive, chemically equivalent  generic drugs for brand-name drugs; under therapeutic interchange PBMs  encouraged the substitution of less expensive formulary brand-name drugs  for more expensive nonformulary drugs within the same drug class; under  prior authorization PBMs required enrollees to receive approval from the  plan or PBM before dispensing certain drugs that are high cost or meet  other criteria; and under drug utilization review PBMs examined  prescriptions at the time of purchase or retrospectively to assess safety  considerations and compliance with clinical guidelines, including  appropriate quantity and dosage.
The PBMs were compensated by retaining some of the negotiated savings.  The PBMs also collected fees from the plans for administrative and clinical  services, kept a portion of the payments from FEHBP plans for mail-order  drugs in excess of the prices they paid manufacturers to acquire the drugs,  and in some cases retained a share of the rebates that PBMs negotiated  with drug manufacturers.
While OPM does not play a role in negotiating prescription drug prices or  discounts, it does attempt to limit prescription drug spending through its  leverage with participating health plans in annual premium and benefit  negotiations. Each year, OPM negotiates benefit and rate proposals with  participating plans and announces key policy goals for the program,  including those relating to spending control. For example, in preparation  for benefit and rate negotiations for the 2007 plan year, OPM encouraged  proposals from plans to continue to explore the appropriate substitution  for higher cost drugs with lower cost therapeutic alternatives, such as  generic drugs, and the use of tiered formularies or prescription drug lists.  OPM also sought proposals from plans to pursue the advantages of  specialty pharmacy programs aimed at reducing the high costs of infused  and intravenously administered drugs. In preparation for 2010 benefit  and rate negotiations, OPM reiterated its desire for proposals from plansto substitute lower cost for higher cost therapeutically equivalent drug s,    adding emphasis to using evidence-based health outcome measures.
section_title: Other Federal Programs Use a Range of Approaches to Control Prescription Drug Spending
paragraphs: Medicare Part D uses a competitive model similar to FEHBP, while other  federal programs use other methods, such as statutorily mandated prices  or direct negotiations with drug suppliers.
subsections: section_title: Medicare Part D Uses Competing Prescription Drug Plans
paragraphs: Medicare Part D follows a model similar to the FEHBP by relying on  competing prescription drug plans to control prescription drug spending.  As with the FEHBP, during an annual open season Part D enrollees may  remain enrolled in the same plan or select from among other competing  plans based on benefit design, premiums, and other plan features. To  attract enrollees, plans have the incentive to offer benefits that will meet  beneficiaries’ prescription drug needs at competitive premiums. The larger  a plan’s market share, the more leverage it has for obtaining favorable  drug prices on behalf of its enrollees and controlling prescription drug  spending. As a result, Part D plans vary in their monthly premiums, the  annual deductibles, and cost sharing for drugs. Plans also differ in the  drugs they cover on their formulary and the pharmacies they use.
Part D uses competing sponsors to generate prescription drug savings for  beneficiaries, in part through their ability to negotiate prices with drug  manufacturers and pharmacies. To generate these savings, sponsors often  contract with PBMs to negotiate rebates with drug manufacturers,  discounts with retail pharmacies, and other price concessions on behalf of  the sponsor. MMA specifically states that the Secretary of HHS may not  interfere with negotiations between sponsors and drug manufacturers and  pharmacies. Even though CMS is not involved in price negotiations, it  attempts to determine whether beneficiaries are receiving the benefit of  negotiated drug prices and price concessions when it calculates the final  plan payments. Sponsors must report the price concession amounts to  CMS and pass price concessions onto beneficiaries and the program  through lower cost sharing, lower drug prices, or lower premiums. Similar  to OPM, CMS also negotiates plan design with participating plans and  announces key policy goals for the program, including those relating to  spending control. For example, in preparation for 2010 benefit and rate  negotiations, CMS noted that one of its goals is to establish a more  transparent process so that beneficiaries will be able to better predict their  out-of-pocket costs.
Part D sponsors or their PBMs also use other methods to help contain  drug spending similar to FEHBP plans. For example, most plans assign  covered drugs to distinct tiers, each of which carries a different level of  cost sharing. A plan may establish separate tiers for generic drugs and  brand-name drugs—with the generic drug tier requiring a lower level of  cost sharing than the brand-name drug tier. Plans may also require  utilization management for certain drugs on their formulary. Common  utilization management practices include requiring physicians to obtain  authorization from the plan prior to prescribing a drug; step therapy,  which requires beneficiaries to first try a less costly drug to treat their  condition; and imposing quantity limits for dispensed drugs. Additionally,  all Part D plans must meet requirements with respect to the extent of their  pharmacy networks and the categories of drugs they must cover. Plan  formularies generally must cover at least two Part D drugs in each  therapeutic category and class, except when there is only one drug in the  category or class or when CMS has allowed the plan to cover only one  drug. CMS has also designated six categories of drugs of clinical concern  for which plans must cover all or substantially all of the drugs.
section_title: VA and DOD Use Statutorily Mandated Prices and Negotiate Directly with Drug Suppliers
paragraphs: While FEHBP and Medicare Part D use competition between health plans  to control prescription drug spending, VA and DOD rely on statutorily  mandated prices and discounts and further negotiations with drug  suppliers to obtain lower prices for drugs covered on their formularies.
VA and DOD have access to a number of prices to consider when  purchasing drugs, paying the lowest available.
Federal Supply Schedule (FSS) prices. VA’s National Acquisition Center  negotiates FSS prices with drug manufacturers, and these prices are  available to all direct federal purchasers. FSS prices are intended to be  no more than the prices manufacturers charge their most-favored  nonfederal customers under comparable terms and conditions. Under  federal law, drug manufacturers must list their brand-name drugs on the  FSS to receive reimbursement for drugs covered by Medicaid. All FSS  prices include a fee of 0.5 percent of the price to fund VA’s National  Acquisition Center.
Blanket purchase agreements and other national contracts. B purchase agreements and other national contracts with drug  manufacturers allow VA and DOD—either separately or jointly—to  negotiate prices below FSS prices. The lower prices may depend on the  volume of specific drugs being purchased by particular facilities, such as  VA or military hospitals, or on being ass OD’s respective national formularies.  D igned preferred status on VA’s and  In a few cases, individual VA and DOD medical centers have obtained  lower prices through local agreements with suppliers than they could through the national contracts, FSS prices, or federal ceiling prices.
In addition, VA’s and DOD’s use of formularies, pharmacies, and prime  vendors can further affect drug prices and help control drug spending.  Both VA and DOD use their own national, standard formulary to obtain  more competitive prices from manufacturers that have their drugs listed  on the formulary. VA and DOD formularies also encourage the substitution  of lower cost drugs determined to be as or more effective than hig drugs. VA and DOD use prime vendors, which are preferred drug  distributors, to purchase drugs from manufacturers and deliver the drugs to VA or DOD facilities. VA and DOD receive discounts from their prime  vendors that also reduce the prices that they pay for drugs. For DOD, the discounts vary among prime vendors and the areas they serve. As of June 2004, VA’s prime vendor discount was 5 percent, while DOD’s discounts  averaged about 2.9 percent within the United States. Additionally, si to FEHBP and Medicare Part D, DOD uses utilization management  methods to limit drug spending including prior authorization, dispensin limitations, and higher cost sharing for nonformulary drugs and drugs  dispensed at retail pharmacies.
section_title: Medicaid Uses Aggrega Payment Limits, Drug Pricing Guidelines Required Rebates
paragraphs: Unlike VA and DOD, Medicaid programs do not negotiate drug prices with  il  manufacturers to control prescription drug spending, but reimburse reta pharmacies for drugs dispensed to beneficiaries at set prices. CMS sets  aggregate payment limits—known as the federal upper limit (FUL)—for  certain outpatient multiple-source prescription drugs. CMS also provides  guidelines regarding drug payment. States are to pay pharmacies the lower  of the state’s estimate of the drug’s acquisition cost to the pharmacy, pl a dispensing fee, or the pharmacy’s usual and customary charge to the  general public; for certain d costs may apply if lower.  rugs the FUL or the state maximum allowable  In addition to these retail pharmacy reimbursements, Medicaid programs  also control prescription drug spending through the Medicaid drug rebate  program. Under the drug rebate program, drug manufacturers are  required to provide quarterly rebates for covered outpatient prescription  drugs purchased by state Medicaid programs. Under the rebate program,  states take advantage of the prices manufacturers receive for drugs in the  commercial market that reflect the results of negotiations by private  payers such as discounts and rebates. For brand-name drugs, the rebates  are based on two price benchmarks per drug that manufacturers report to  CMS: best price and average manufacturer price (AMP). The  relationship between best price and AMP determines the unit rebate  amount and thus the overall size of the rebate that states receive. The  basic unit rebate amount is the greater of two values: the difference  between best price and AMP or 15.1 percent of AMP. If the brand-name  drug’s AMP rises faster than inflation as measured by the change in the  consumer price index, the manufacturer is required to provide an  additional rebate to the state Medicaid program. In addition to brand-name  drugs, states also receive rebates for generic drugs. For generic drugs, the  basic unit rebate amount is 11 percent of the AMP. A state’s rebate for a  drug is the product of the unit rebate amount plus any applicable  additional rebate amount and the number of units of the drug paid for by  the state’s Medicaid program. In addition to the rebates mandated under  the drug rebate program, states can also negotiate additional rebates with  manufacturers.
Like FEHBP and Medicare Part D participating plans, Medicaid programs  also use other utilization management methods to control prescription  drug spending including prior authorization and utilization review  programs, dispensing limitations, and cost-sharing requirements.
Mr. Chairman, this concludes my prepared remarks. I would be happy to  answer any questions that you or other members of the Subcommittee  may have.
section_title: Contacts and Acknowledgments
paragraphs: For future contacts regarding this testimony, please contact John E.  Dicken at (202) 512-7114 or at dickenj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony. Randy DiRosa, Assistant Director; Rashmi  Agarwal; William A. Crafton; Martha Kelly; and Timothy Walker made key  contributions to this statement.
section_title: Related GAO Products
paragraphs: Federal Employees Health Benefits Program: Enrollee Cost Sharing for  Selected Specialty Prescription Drugs. GAO-09-517R. Washington, D.C.:  April 30, 2009.
Medicare Part D Prescription Drug Coverage: Federal Oversight of  Reported Price Concessions Data. GAO-08-1074R. Washington, D.C.:  September 30, 2008.
DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth  in Spending at Retail Pharmacies. GAO-08-327. Washington, D.C.: April 4,  2008.
DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting  from the Uniform Formulary and Manufacturer Rebates. GAO-08-172R.  Washington, D.C.: October 31, 2007.
Military Health Care: TRICARE Cost-Sharing Proposals Would Help  Offset Increasing Health Care Spending, but Projected Savings Are  Likely Overestimated. GAO-07-647. Washington, D.C.: May 31, 2007.
Federal Employees Health Benefits Program: Premiums Continue to  Rise, but Rate of Growth Has Recently Slowed. GAO-07-873T. Washington,  D.C.: May 18, 2007.
Prescription Drugs: Oversight of Drug Pricing in Federal Programs.  GAO-07-481T. Washington, D.C.: February 9, 2007.
Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices  Used by Other Countries and U.S. Private Payers and Federal Programs.  GAO-07-358T. Washington, D.C.: January 11, 2007.
Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper  Limits for Reimbursement Compared with Retail Pharmacy Acquisition  Costs. GAO-07-239R. Washington, D.C.: December 22, 2006.
Federal Employees Health Benefits Program: Premium Growth Has  Recently Slowed, and Varies among Participating Plans. GAO-07-141.  Washington, D.C.: December 22, 2006.
Medicaid: States’ Payments for Outpatient Prescription Drugs.   GAO-06-69R. Washington, D.C.: October 31, 2005.