Prescription Drugs: The Number, Role, and Ownership of Pharmacy Services Administrative Organizations
Released: 2013-02-28T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Independent pharmacies dispensed about 17 percent of all prescription drugs in the United States in 2010. To obtain, distribute, and collect payment for drugs dispensed, pharmacies interact with a network of entities, including drug wholesalers and third-party payers. With limited time and resources, independent pharmacies may need assistance in interacting with these entities, particularly with third-party payers that include large private and public health plans. Most use a PSAO to interact on their behalf. PSAOs develop networks of pharmacies by signing contractual agreements with each pharmacy that authorizes them to interact with third-party payers on the pharmacy's behalf by, for example, negotiating contracts. While specific services provided by PSAOs may vary, PSAOs can be identified and distinguished from other entities in the pharmaceutical distribution and payment system by their provision of intermediary or other services to assist pharmacies with third-party payers.

GAO was asked to review the role of PSAOs. In this report, GAO describes: (1) how many PSAOs are in operation and how many pharmacies contract with PSAOs for services; (2) the services PSAOs offer and how they are paid for these services; and (3) entities that own PSAOs and the types of relationships that exists between owners and the pharmacies they represent. GAO analyzed data on PSAOs in operation in 2011 and 2012, reviewed literature on PSAOs and model agreements from 8 PSAOs, and interviewed federal agencies and entities in the pharmaceutical industry.

section_title: What GAO Found
paragraphs: At least 22 pharmacy services administrative organizations (PSAO), which varied in the number and location of the pharmacies to which they provided services, were in operation in 2011 or 2012. In total, depending on different data sources, these PSAOs represented or provided other services to between 20,275 and 28,343 pharmacies in 2011 or 2012, most of which were independent pharmacies. While the number of pharmacies with which each PSAO contracted ranged from 24 to 5,000 pharmacies, most PSAOs represented or provided other services to fewer than 1,000 pharmacies. Additionally, some PSAOs contracted with pharmacies primarily located in a particular region rather than contracting with pharmacies located across the United States.

While PSAOs provide a broad range of services to independent pharmacies, and vary in how they offer these services, PSAOs consistently provide contract negotiation, communication, and help-desk services. All of the model agreements between PSAOs and independent pharmacies that GAO reviewed stated that the PSAO will negotiate and enter into contracts with third-party payers on behalf of member pharmacies. PSAOs may also contract with pharmacy benefit managers (PBM), which many third-party payers use to manage their prescription drug benefit. In addition to contracting, PSAOs also communicate information to members regarding contractual and regulatory requirements, and provide general and claims-specific assistance to members by means of a help-desk or a dedicated staff person. They may also provide other services to help member pharmacies interact with third-party payers or their PBMs, such as managing and analyzing payment and drug-dispensing data to identify claims unpaid or incorrectly paid by a third-party payer. PSAO services are intended to achieve administrative efficiencies, including contract and payment efficiencies for both independent pharmacies and third-party payers or their PBMs. Most PSAOs charge a monthly fee for a bundle of services and may charge additional fees for other services provided to its member pharmacies. Virtually all of the fees paid for PSAO services are paid by member pharmacies, with PSAOs receiving no administrative fees from other entities such as third-party payers or their PBMs.

The majority of PSAOs in operation in 2011 or 2012 were owned by drug wholesalers and independent pharmacy cooperatives. Of the 22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent pharmacy cooperatives, 4 were owned by group purchasing organizations, and 3 were stand-alone PSAOs owned by other private entities. These owners varied in their requirements for PSAO member pharmacies to also use services from their separate, non-PSAO line of business. Three PSAO owners GAO spoke with required PSAO members to also use their non-PSAO services. For example, one wholesaler-owned PSAO limited its offer of PSAO services to existing customers of its drug distribution line of business. All but one PSAO owner GAO spoke with reported that their PSAO line of business earned little to no profit. However, PSAO owners may operate PSAOs for a number of reasons, including helping pharmacies gain access to third-party payer contracts and to provide benefits to the owner's non-PSAO line of business.

section_title: Letter
paragraphs: Independent pharmacies dispensed almost 20 percent of all prescription  drugs in the United States in 2010, with chain pharmacies accounting for  the majority of the remaining 80 percent. To obtain, distribute, and collect  payment for the drugs they dispense, independent pharmacies interact  with a network of entities that offer a variety of services. These entities  include drug wholesalers that purchase and distribute drugs to  pharmacies, and third-party payers that pay for the dispensed drugs on  behalf of enrollees. With limited time and resources, independent  pharmacies may need assistance in interacting with these entities,  particularly with third-party payers that include large private and public  health plans such as those offered by large corporations and the federal  government through Medicare and the Federal Employees Health  Benefits Program (FEHBP).

To address independent pharmacies’ need for assistance with third-party  payer interactions, both existing entities—such as drug wholesalers—as  well as new entities began providing a variety of administrative services to  independent pharmacies. These administrative services included, for  example, managing pharmacies’ claims payments from third-party  payers. Entities that provide administrative services to independent  pharmacies to assist such pharmacies in interacting with third-party  payers are called pharmacy services administrative organizations  (PSAO). While specific services provided by PSAOs may vary, PSAOs  can be identified and distinguished from other entities in the  pharmaceutical distribution and payment system by their provision of  intermediary services to assist pharmacies with third-party payers.

PSAOs develop networks of member pharmacies by signing contractual  agreements with individual pharmacies. These agreements set forth the  duties and obligations of the PSAO to each pharmacy and vice versa, and  generally authorize PSAOs to interact with third-party payers on behalf of  the members in their network. Among the responsibilities established  between the PSAO and the pharmacy, the PSAO is frequently given the  responsibility to contract on behalf of the pharmacy with third-party  payers. Independent pharmacies may want the assistance of a PSAO  due to the complexity of the contract terms and financial interactions with  multiple third-party payers. As an intermediary, a PSAO may also provide  other services that assist pharmacies in working with third-party payers.  Because these other services may vary by PSAO, pharmacies may  belong to multiple PSAOs’ networks that provide complementary  services. For example, a pharmacy may belong to one PSAO network  that contracts with third-party payers on its behalf and belong to another  PSAO network that assists the pharmacy with reconciling claim payments  from third-party payers.

According to industry reports, 80 percent of  independent pharmacies obtain services from a PSAO. In addition,  nearly 80 percent of the independent pharmacies surveyed by the  Department of Health and Human Services, Office of Inspector General  (HHS OIG) for its 2008 study reported obtaining PSAO services.

Although PSAOs are focused on assisting independent pharmacies, their  services may also benefit third-party payers. In addition, PSAO services  may also benefit pharmacy benefit managers (PBMs), which many third- party payers use to help manage their prescription drug benefit, including  developing contracts that set forth the terms and conditions for  pharmacies to dispense prescriptions to health plan enrollees. According  to PBMs, PSAOs make it easier for third-party payers or their PBMs to  interact with multiple independent pharmacies by serving as a single point  of contact. In addition, by providing access to multiple independent  pharmacies, PSAOs enable third-party payers or their PBMs to expand  and maintain networks in certain geographic areas—such as rural and  underserved areas—where independent pharmacies are more likely to be  located. Thus, PSAOs help third-party payers or their PBMs build  networks of pharmacies to meet the needs of health plans and their  enrollees and, in some cases, to satisfy federal requirements.

You expressed interest in knowing more about the role of PSAOs in the  network of entities that interact to distribute and pay for prescription  drugs. In this report, we describe: (1) how many PSAOs are in operation  and how many independent pharmacies contract with PSAOs for  services; (2) the services PSAOs offer to independent pharmacies and  how they are paid for these services; and (3) the entities that own PSAOs  and the types of relationships that exist between PSAO owners and the  independent pharmacies with which they contract.

To determine how many PSAOs are in operation and how many  independent pharmacies with which they contract, we reviewed literature  on PSAOs, and conducted interviews with various entities including key  entities in the pharmaceutical industry and federal agencies that have  conducted work involving PSAOs. We also analyzed National Council for  Prescription Drug Programs (NCPDP) data from February 2011. NCPDP  collects and maintains a database of in-depth pharmacy information from  both pharmacies and PSAOs. Specifically, we conducted a  comprehensive literature review that included materials published through  October 2012. We also obtained and reviewed published and  unpublished reports we identified through Internet searches for  information related to PSAOs and an interview with a pharmaceutical  trade association. We conducted a total of 24 interviews with various  entities including federal agencies—HHS OIG and the Federal Trade  Commission (FTC)—trade associations, pharmaceutical industry experts,  three independent pharmacy owners, and a sample of PSAOs and  PBMs.

PSAO sample: Our sample of PSAOs to interview included the   5 largest PSAOs based on the number of pharmacies they contracted  with according to NCPDP data, as well as 5 additional PSAOs that  varied by the number of pharmacies they represented and by  ownership. According to NCPDP data, these 10 PSAOs represented  over 17,000 pharmacies.

PBM sample: Our sample of PBMs to interview included the three  largest PBMs as of March 2012, as defined by prescription volume,  according to Atlantic Information Services data. Combined, these  PBMs represented about 60 percent of total prescription volume in the  United States.

Finally, we analyzed NCPDP data and reviewed other available  information, such as industry reports. We analyzed NCPDP data to  determine the total number of PSAOs in operation in 2011 by first  identifying potential PSAOs in the NCPDP data and then verifying  whether the entity was a PSAO by reviewing its website and other  available information. We considered an entity to be a PSAO if it  contracted to provide intermediary or other services that assist  independent pharmacies in working with third-party payers or their PBMs.  We developed this criterion on the basis of information we gathered from  the literature review and interviews with key entities, including an industry  expert and a PSAO. Using our list of PSAOs, we then searched the  NCPDP database to determine the total number and types of pharmacies  that each of the PSAOs represented in 2011. We reviewed NCPDP data  for reasonableness and consistency, including screening for outliers. We  also reviewed documentation and spoke with NCPDP officials about  steps taken to ensure data reliability.

We determined that the data used in this report were sufficiently reliable  for our purposes. However, there are some limitations to the NCPDP  data, including that these data may not contain the complete universe of  PSAOs or independent pharmacies. For example, according to NCPDP  officials, smaller independent pharmacies that do not conduct electronic  transactions may not be included in the NCPDP data. Multiple entities we  interviewed reported that there is no one comprehensive data source for  information on PSAOs; however, several entities, including the HHS OIG,  reported using NCPDP to determine the number of independent  pharmacies in operation, the number of PSAOs in operation, or the  affiliations between pharmacies and PSAOs. Due to NCPDP data  limitations, we also reviewed industry reports and other sources of  information, such as PSAO websites, to supplement these data when  answering our research objectives. These supplemental data provided  the number of PSAOs in operation and the number of pharmacies they  contracted with in 2011 or 2012, which may vary from the data reported  by NCPDP. Consequently, we report a range in the number of  pharmacies represented by PSAOs in 2011 or 2012. Additionally, since  PSAOs can represent other types of pharmacies, such as small chains, in  addition to independent pharmacies and pharmacies can have  agreements with multiple PSAOs for different services, the number of  pharmacies that we report as being represented by PSAOs may be  greater than the total number of independent pharmacies operating in the  United States.

To describe the services provided by PSAOs and how PSAOs are paid  for these services, we interviewed officials from the various entities noted  above and reviewed agreements between PSAOs and independent  pharmacies. In conducting our interviews with PSAOs and independent  pharmacies, we asked about how payment for PSAO services were made  and received, including the frequency and amount of payments. We also  obtained model agreements from eight of the ten PSAOs we interviewed.  We reviewed these agreements to determine the duties and obligations of  each PSAO to its member pharmacies. In addition, we reviewed the  duties and obligations of member pharmacies joining the PSAO network  as well as the payment and termination provisions included in each  agreement. The information obtained from these interviews and  agreements may not be generalizeable due, in part, to variation in the  types of services offered by different PSAOs.

To determine the entities that own PSAOs and the types of relationships  that exist between PSAO owners and the independent pharmacies they  represent, we analyzed NCPDP data, reviewed industry reports and  PSAO websites, and interviewed the various entities noted above.  Specifically, using NCPDP data, we obtained the contact information for  each PSAO, which in some cases indicated the owner of the PSAO.  Where it did not indicate the owner, we reviewed industry reports that  included ownership information for some PSAOs, reviewed the PSAO’s  website, or contacted the PSAO directly. We reviewed NCPDP data for  reasonableness and consistency, including screening for outliers. We  also reviewed documentation and spoke with NCPDP officials about  steps taken to ensure data reliability. We determined that the data used in  this report were sufficiently reliable for our purposes. In addition, we  spoke with PSAOs, independent pharmacies, and other industry  stakeholders as noted above about the relationships existing between  PSAOs and the pharmacies that they represent.

We conducted this performance audit from June 2012 through January  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. Because we did not  evaluate the policies or operations of any federal agency to develop the  information presented in this report, we did not seek comments from any  agency.
subsections: section_title: Background
paragraphs: The distribution of and payment for prescription drugs involves  interactions among multiple entities. These entities include drug  wholesalers, independent pharmacies, PSAOs, and third-party payers  and their PBMs. Interactions among these entities facilitate the flow of  and payment for drugs from manufacturers to consumers.
subsections: section_title: Drug Wholesalers
paragraphs: Drug wholesalers (hereafter referred to as wholesalers) purchase bulk  quantities of drugs from pharmaceutical manufacturers and then distribute  them to pharmacies, including independent pharmacies. For example, a  wholesaler may fill an order from an independent pharmacy for a  specified quantity of drugs produced by manufacturers and deliver the  order to the pharmacy. In addition to supplying drugs, some wholesalers  offer ancillary services to independent pharmacies such as helping them  manage their inventory. Three wholesalers—AmerisourceBergen  Corporation, McKesson Corporation, and Cardinal Health Inc.— accounted for over 80 percent of all drug distribution revenue in the  United States in 2011.

section_title: Independent Pharmacies and PSAOs
paragraphs: Independent pharmacies are a type of retail pharmacy with a store-based  location—often in rural and underserved areas—that dispense  medications to consumers, including both prescription and over-the- counter drugs. In this report, we define independent pharmacies as one  to three pharmacies under common ownership. Approximately 21,000  independent pharmacies constituted almost 34 percent of the retail  pharmacies operating in the United States in 2010. Although  independent pharmacies offer other products such as greeting cards and  cosmetics, prescription drugs account for the majority of independent  pharmacy sales. These sales accounted for almost 17 percent of the  $266 billion in prescription drug sales in the United States in 2010. In  addition to products, independent pharmacies provide patient-care  services such as patient education to encourage patients’ appropriate use  of medications. According to a 2009 survey of pharmacists, independent  pharmacies spend the majority of their time dispensing prescription drugs  and providing patient-care services.

Independent pharmacies primarily purchase drugs from wholesalers  (although they may also purchase them directly from manufacturers) and  represented slightly over 15 percent of wholesalers’ total sales to retail  pharmacies in 2010. Independent pharmacies are an important part of a wholesaler’s customer portfolio because, in addition to purchasing drugs,  independent pharmacies may also pay the wholesaler to provide logistical  functions and ancillary services such as direct delivery of drugs to  individual stores and inventory management. Thus, a wholesaler’s  relationship with an independent pharmacy may result in multiple  business opportunities for the wholesaler and administrative efficiencies  for the pharmacy. After receipt of drugs from a wholesaler or  manufacturer, pharmacies then fill and dispense prescriptions to  consumers, such as health plan enrollees. These latter prescriptions are  dispensed according to contractual terms agreed upon with each  enrollee’s health plan, that is, with each third-party payer or its PBM.

According to the National Community Pharmacists Association (NCPA),  payments based on the contractual terms of third-party payers or their  PBMs significantly affect the financial viability of independent pharmacies.  Consequently, these pharmacies must carefully choose which contracts  to accept or reject. Accordingly, most independent pharmacies rely on  PSAOs to negotiate directly, or to make recommendations for negotiating  contracts on their behalf with third-party payers or their PBMs. When a  PSAO enters into a contract with a third-party payer or its PBM, the  pharmacies in its network gain access to the third-party payer or PBM  contract—and the individuals it covers—by virtue of belonging to the  PSAO’s network.

section_title: Third-Party Payers and PBMs
paragraphs: Third-party payers accounted for almost 80 percent of drug expenditures  in 2010, which represents a significant shift from 30 years ago when  payment from individual consumers accounted for the largest portion of  expenditures. Third-party payers include private and public health plans  such as those offered by large corporations and the federal government  through Medicare and the FEHBP, many of which use PBMs to help them  manage their prescription drug benefits. As part of the management of  these benefits, PBMs assemble networks of retail pharmacies, including  independent pharmacies, where the health plan’s enrollees can fill  prescriptions.or its PBM’s network by entering into an agreement with the third-party  payer or its PBM. It does so either directly or through a PSAO that has  negotiated with that third-party payer or its PBM on the pharmacy’s  behalf. Contract terms and conditions may include specifics about   A pharmacy becomes a member of a third-party payer’s  reimbursement rates (how much the pharmacy will be paid for dispensed  drugs), payment terms (e.g., the frequency with which the third-party  payer or its PBM will reimburse the pharmacy for dispensed drugs), and  audit provisions (e.g., the frequency and parameters of audits conducted  by the third-party payer, its PBM, or designee), among other things.

The reimbursement rate that third-party payers or their PBMs pay  pharmacies significantly affects pharmacy revenues. Retail pharmacies  participating in a PBM’s network are reimbursed for prescriptions below  the level paid by cash-paying customers (those whose prescriptions are  not covered by a third-party payer). In addition, pharmacies must  undertake additional administrative tasks related to transactions for  customers who are covered by third-party payers that are not required for  cash-paying customer transactions. For example, for customers covered  by third-party payers, pharmacy staff must file claims electronically and  may be required to counsel them on their health plan’s benefits. However,  most retail pharmacies participate in PBM networks because of the large  market share PBMs command, which represents potential pharmacy  customers. The five largest PBMs operating in the first quarter of 2012  represented over 330 million individuals.benefit from the prescription and nonprescription sales generated by  customers that PBMs help bring into their stores. (See fig. 1 for a diagram  of the network of entities in the distribution of and payment for  pharmaceuticals.)

section_title: At Least 22 PSAOs Contracted with over 20,000 Pharmacies in 2011 or 2012, the Majority of Which Were Independent Pharmacies
paragraphs: At least 22 PSAOs, which varied in the number and location of  pharmacies to which they provided services, were in operation in 2011 or  2012. In total, depending on different data sources, these 22 PSAOs  represented or provided other services to between 20,275 and 28,343  pharmacies in 2011 or 2012. (See table 1.) The number of pharmacies  contracted with each PSAO across these sources ranged from 24 to  5,000 pharmacies; however, according to NCPDP data most contracted  with fewer than 1,000 pharmacies. The largest 5 PSAOs combined  contracted with more than half of all pharmacies that were represented by  a PSAO in 2011 or 2012. Because pharmacies may change their PSAO,  the number of pharmacies contracting with each PSAO fluctuates as   For example, according to one  PSAOs enroll and disenroll pharmacies.PSAO, member pharmacies will change PSAOs whenever they think that  another PSAO can negotiate better contract terms with third-party payers  or their PBMs. Some PSAOs contracted primarily with pharmacies  located in a particular region. These PSAOs generally represented fewer  pharmacies than PSAOs representing pharmacies across the United  States. For example, the Northeast Pharmacy Service Corporation  represented 250 independent pharmacies while the RxSelect Pharmacy  Network represented from 451 to 569 independent pharmacies.

According to NCPDP data, PSAOs provide services primarily to  independent pharmacies. Of the 21,511 pharmacies associated with  PSAOs in the 2011 NCPDP database, 18,103 were identified as  independent pharmacies. These independent pharmacies represent  nearly 75 percent of the total number of independent pharmacies in the  2011 NCPDP database. This is close to an estimate reported by NCPA  and the HHS OIG, both of which conducted surveys in which  approximately 80 percent of responding independent pharmacies were  represented by PSAOs. In addition to independent pharmacies, some  PSAOs also contracted with small chains and franchise pharmacy  members.small chain pharmacies ranging in size from 25 to 150 pharmacies under   For example, Managed Care Connection provides services to  common ownership, and the Medicine Shoppe only offers its PSAO  services to its franchise pharmacies.

section_title: PSAOs Provide Independent Pharmacies with a Range of Services Intended to Achieve Administrative Efficiencies, and Most PSAOs Are Paid a Monthly Fee for These Services
paragraphs: PSAOs provide a broad range of services to independent pharmacies  including negotiating contractual agreements and providing  communication and help-desk services. These and other services are  intended to achieve administrative efficiencies for both independent  pharmacies and third-party payers or their PBMs. Most PSAOs charge a  monthly fee for a bundled set of services and separate fees for additional  services.
subsections: section_title: PSAOs Provide a Range of Services to Independent Pharmacies Including Contract Negotiation, Communication, and Help- Desk Services
paragraphs: While PSAOs provide a broad range of services to independent  pharmacies and vary in how they offer these services, we found that  PSAOs consistently offer contract negotiation, communication, and help- desk services. Several entities, including industry experts, trade  associations, and PSAOs we spoke with, referred to one or all of these  services as a PSAO’s “key service(s)”—meaning that a PSAO can be  distinguished from other entities in the pharmaceutical industry by its  provision of these services. In addition, PSAOs may provide many other  services that assist their member pharmacies—the majority of which are  independent pharmacies—in interacting with third-party payers or their  PBMs, although those PSAOs we spoke with did not provide these other  services as consistently as their key services.

On behalf of pharmacies, PSAOs may negotiate and enter into contracts  with third-party payers or their PBMs. Both the HHS OIG and an industry  study reported that small businesses such as independent pharmacies  generally lack the legal expertise and time to adequately review and  negotiate third-party payer or PBM contracts, which can be lengthy and  complex.independent pharmacies that we reviewed indicated, and all of the  PSAOs we spoke with stated, that the PSAO was explicitly authorized to  negotiate and enter into contracts with third-party payers on behalf of  member pharmacies. By signing the agreement with the PSAO, a  member pharmacy acknowledges and agrees that the PSAO has the right  to negotiate contracts with third-party payers or their PBMs on its behalf.

All of the model agreements between PSAOs and  PSAOs we spoke with had different processes for negotiating and  entering into contracts with third-party payers or their PBMs. These  processes included following guidance or parameters established by a  governing body such as a board of directors composed partially or  entirely of representatives from the PSAO’s member pharmacies. In  addition, some PSAOs’ decisions about entering into contracts are made  by their contracting department or executive staff that base the decision  on factors such as analyses of the contract’s proposed reimbursement  rate and the efficiencies and value that the PSAO’s member pharmacies  would provide to the particular market in which the contracts are offered.  Decisions about entering into contracts may also include consultation with  a PSAO’s advisory board composed of representatives from the PSAO’s  member pharmacies.

While PSAOs may review and negotiate a wide range of contract  provisions, PSAOs we spoke with reported negotiating a variety of  provisions including reimbursement rates, payment terms, audits of  pharmacies by third-party payers or their PBMs, price updates and  appeals, and administrative requirements.areas, PBMs and PSAOs we spoke with reported that audits and  reimbursement rates were of particular concern to pharmacies. One   Regarding these contract  PSAO reported that its negotiations about a contract’s audit provisions  were intended to minimize member pharmacies’ risks and burdens as  audit provisions can include withholding reimbursement on the basis of  audit findings. In addition, according to some PSAOs that we spoke with,  reimbursement rates to pharmacies have decreased over time, and  PSAOs and other sources we spoke with reported that PSAOs’ ability to  negotiate reimbursement rates has also decreased over time.

Over half of the PSAOs we spoke with reported having little success in  modifying certain contract terms as a result of negotiations. This may be  due to PBMs’ use of standard contract terms and the dominant market  share of the largest PBMs. Many PBM contracts contain standard terms  and conditions that are largely nonnegotiable. According to one PSAO,  this may be particularly true for national contracts, in which third-party  payers or their PBMs have set contract terms for all pharmacies across  the country that opt into the third-party payer’s, or its PBM’s network. For  example, a national contract exists for some federal government  programs, such as TRICARE. In addition, several sources told us that  the increasing consolidation of entities in the PBM market has resulted in  a few PBMs having large market shares, which has diminished the ability  of PSAOs to negotiate with them, particularly over reimbursement rates.

In contrast, PBMs we spoke with reported that PSAOs can and do  negotiate effectively. PBMs and PSAOs reported that several factors may  affect negotiations in favor of PSAOs and their members, including the  number and location of pharmacies represented and the services  provided by those pharmacies in relation to the size and needs of the  third-party payer or its PBM. For example, a third-party payer or its PBM  may be more willing to modify its contract terms in order to sign a contract  with a PSAO that represents pharmacies in a rural area in order to  expand the PBM’s network in that area. In addition, a third-party payer or  its PBM may be more willing to negotiate in order to add pharmacies in a  PSAO’s network that offer a specialized service such as diabetes care  needed by a health plan’s enrollees. One PSAO also reported that small  PBMs wishing to increase their network’s size may be more willing to  negotiate contract terms.

We found that PSAOs vary in their requirements for their member  pharmacies. Two PSAO-pharmacy model agreements that we reviewed  stated that member pharmacies must participate in all contracts in which  the PSAO entered on behalf of members. These PSAOs and six  additional PSAOs we spoke with reported that their member pharmacies  must participate in all contracts between the PSAO and third-party payers  or their PBMs. The remaining two PSAOs we spoke with reported that  they build a portfolio of contracts from which member pharmacies can  choose. These PSAOs negotiate contracts with various third-party payers  or their PBMs and member pharmacies review the terms and conditions  of each contract and select specific contracts to enter into. Most of the  PSAO-pharmacy model agreements we reviewed contained provisions  expressly authorizing member pharmacies to contract with a third-party  payer independent of the PSAO. Two additional PSAOs we spoke with  confirmed that they do not restrict member pharmacies from entering into  contracts independent of the PSAO. All three PBMs we spoke with  confirmed that pharmacies may contract with them if their PSAO did not  sign a contract with them on the pharmacies’ behalf.

PSAOs serve as a communication link between member pharmacies and  third-party payers or their PBMs. Such communication may include  information regarding contractual and regulatory requirements as well as  general news and information of interest to pharmacy owners. All of the  PSAOs we spoke with provided communication services to pharmacies  such as reviewing PBMs’ provider manuals to make member pharmacies   Communication with pharmacies was provided  aware of their contents.by means of newsletters and the PSAOs’ Internet sites. In addition to  communicating contractual requirements, PSAOs may also communicate  applicable federal and state regulatory updates. For example, one PSAO  we spoke with told us that it provides its member pharmacies with  regulatory updates from the Centers for Medicare & Medicaid Services by  publishing this information in its newsletter. Another PSAO we spoke with  provided regulatory analyses that included examining and briefing its  member pharmacies on durable medical equipment accreditation  requirements, and fraud, waste, and abuse training requirements.  According to the PSAO, this was to ensure that its member pharmacies  were taking the right steps to comply with applicable regulations.

PSAOs provide general assistance to pharmacies and assistance with  issues related to third-party payers and their PBMs such as questions  about claims, contracting, reimbursement, and audits. PSAOs may  provide such assistance by means of a help-desk (or customer service  department) or a dedicated staff person. For example, one PSAO we  spoke with reported that it provides general pharmacy support services to  help pharmacies with any needs they may have in the course of operating  their businesses. This PSAO also had a staff person responsible for  providing support services to member pharmacies including answering  their questions about claims and each contract’s reimbursement rate or  payment methodology. A PSAO may also help a pharmacy identify why a  certain claim was rejected.

PSAOs provide many other services that assist member pharmacies in  interacting with third-party payers or their PBMs. For example, PSAOs  may provide services that help the pharmacy with payment from a third- party payer or its PBM, comply with third-party payer requirements, or  develop services that make the pharmacy more appealing to third-party  payers or their PBMs. (See table 2 for a list and description of these  services.)

The PSAOs we spoke with varied in their provision of these other  services although 9 of the 10 PSAOs we spoke with provided central  payment and reconciliation services or access to reconciliation vendors  that provided the service. However, other services were not provided as  consistently across PSAOs. For example, only 1 PSAO reported that it  provided inventory management or front store layout assistance.

PSAO services have changed over time to meet member pharmacies’  interests. In some cases, this has meant adding new services, while in  other cases PSAOs have expanded existing services. Several PSAOs we  spoke with reported adding services intended to increase cost efficiencies  and member pharmacies’ revenues. For example, three PSAOs we spoke  with reported that they began offering central pay services and two of  these PSAOs and an additional PSAO reported that they began offering  reconciliation services. PSAOs we spoke with also reported expanding  existing services. For example, one PSAO reported adding electronic  funds transfers, while two other PSAOs reported that although they were  already providing electronic funds transfers, they increased the frequency  of transfers to five days per week. This increase was made to improve  pharmacies’ cash flow by giving them quicker access to funds owed them  by third-party payers or their PBMs. Two PSAOs we spoke with reported  adding certification programs, particularly vaccination/immunization  certification programs, because of the needs of third-party payers or their PBMs for this service to be provided through their network pharmacies.

section_title: PSAOs Provide Services Intended to Achieve Administrative Efficiencies for Independent Pharmacies and Third- Party Payers or Their PBMs
paragraphs: PSAOs provide services intended to achieve administrative efficiencies  for both independent pharmacies and third-party payers or their PBMs.  PSAO services enable pharmacy staff, including pharmacists, to focus on  patient-care services rather than administrative issues that pharmacists  may not have the time to address. PSAO services also reduce the  number of resources that PBMs must direct toward developing and  maintaining relationships with multiple independent pharmacies.

PSAO services are intended to help independent pharmacies achieve  efficiencies particularly in contract negotiation. For example, independent  pharmacies and PBMs we spoke with told us that PSAO contract  negotiation services eased their contracting burden and allowed them to  expand the number of entities with which they contracted. As a member  of a PSAO, pharmacies may no longer have to negotiate contracts with  multiple third-party payers or their PBMs operating in any given market.  Independent pharmacies also told us that PSAOs provide other services  that create both administrative and cost efficiencies for them. For  example, one pharmacist told us that the marketing services provided by  his PSAO relieved him of advertising costs because the PSAO provided  advertising circulars to its PSAO-franchise members. Another  independent pharmacy reported that its PSAO provides services such as  claims reconciliation less expensively than the pharmacy could perform  on its own.

Similar to independent pharmacies, PBMs we spoke with reported that  PSAO services create administrative efficiencies for them, including  efficiencies in contracting, payment, and their call centers. PSAO services  create contracting efficiencies because they provide PBMs with a single  point through which they can reach multiple independent pharmacies. For  example, the PBMs we spoke with each had over 20,000 independent  pharmacies in their networks, however, each PBM only negotiated  contracts with 15 to 19 PSAOs, representing a majority of the pharmacies  in its network. PBMs also reported that PSAO services create payment  efficiencies when PSAOs provide central payment services. One PBM  reported that instead of mailing checks to hundreds of individual  pharmacies, the PBM made one electronic funds transfer to the PSAO,  which then distributed the payments to its members. Finally, PBMs  benefit from reduced call center volume because PSAOs often provide  similar support directly to member pharmacies. For example, a call that  may have gone to the PBM about a claim that was not paid may instead  go to the pharmacy’s PSAO, which will help the pharmacy understand  any issues with the claim. PSAOs may also aggregate member  pharmacies’ issues and contact the PBM to discuss issues on behalf of  multiple pharmacies and relay pertinent information back to those  pharmacies.

While creating efficiencies by acting on behalf of multiple pharmacies,  PSAOs must ensure that their arrangements do not unreasonably restrain  trade, thereby raising antitrust concerns. The FTC and the Antitrust  Division of the Department of Justice (DOJ) are the federal agencies  responsible for determining whether a particular collaborative  arrangement may be unlawful and for enforcing applicable prohibitions.

According to FTC officials, such a determination is dependent on multiple  factors including the geographic region that a PSAO is operating in and  the health care program (e.g., Medicare Part D) with which a PSAO is  contracting. These factors affect the PSAO’s ability (and the abilities of  the pharmacies the PSAO represents) to affect the terms of a contract or  the pricing of a good. For example, a group of rural pharmacies may more  effectively influence contract negotiations than a single pharmacy  operating in an urban area with many competitors. PSAOs we spoke with  were aware of potential antitrust issues and reported taking measures to  minimize them. For example, two of the PSAOs we spoke with reported  developing their PSAO’s organizational structure to ensure compliance  with antitrust laws.

section_title: Most PSAOs Charge a Monthly Fee for Bundled Services and Additional Fees for Other Services
paragraphs: Although PSAOs’ charges to member pharmacies for their services may  vary depending on how the services are provided, 8 of the 10 PSAOs we  spoke with charged a monthly fee for a bundled set of services. For  example, 1 PSAO charged $40 to $80 per month for a bundle of services  that included contract negotiation, communication with member  pharmacies, help-desk services, business advice, and limited audit  support. In comparison, another PSAO’s monthly fee ranged from $59 to  $149 per month depending on the combination of services that the  pharmacy requested. One of the remaining PSAOs we spoke with  charged an annual fee rather than a monthly fee, while the other PSAO  did not charge any fees for its PSAO services. The latter PSAO provided  PSAO services as a value-added service to members of its group  purchasing organization, for which it charged a monthly fee. Other  services that are offered by most, but not all, PSAOs we spoke with are  either provided within the bundle or as separate add-on services. PSAOs  may also charge fees for individual services that are based on the type or  value of that service.

Virtually all of the fees for PSAO services are paid for by member  pharmacies. All of the PSAOs we spoke with reported that they did not  receive any type of fees from other entities such as an administrative fee  from a third-party payer or its PBM. Similarly, all of the PBMs we spoke  with told us that they did not pay PSAOs for their services. However 1 of  the 3 PBMs we spoke with reported that it paid part of a pharmacy’s  dispensing fee to 1 of the 16 PSAOs with which it contracted rather than  to the pharmacy.

section_title: Wholesalers and Independent Pharmacy Cooperatives Owned the Majority of PSAOs; Requirements to Use Non-PSAO Services Varied by Owner
paragraphs: The majority of PSAOs in operation in 2011 or 2012 were owned by  wholesalers and independent pharmacy cooperatives.PSAO owners varied as to whether they require member pharmacies to  also use the non-PSAO services they offer.
subsections: section_title: Wholesalers and Independent Pharmacy Cooperatives Owned the Majority of PSAOs
paragraphs: Wholesalers and independent pharmacy cooperatives owned the majority  of the PSAOs in operation in 2011 or 2012. Specifically, of the   22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were  owned by independent pharmacy cooperatives (“member-owned”),   4 were owned by group purchasing organizations, and 3 were stand- alone PSAOs owned by other private entities. (See table 3.) Three of the  5 largest PSAOs were owned by the 3 largest wholesalers in the U.S.:  AmerisourceBergen Corporation, Cardinal Health Inc., and McKesson  Corporation. Across all sources included in our review, the PSAOs owned  by these wholesalers represented 9,575 to 12,080 pharmacies, and  PSAOs owned by independent pharmacies represented 4,883 to 8,882  pharmacies. According to one industry report, the services provided by  member-owned PSAOs are similar to those offered by wholesaler-owned  PSAOs. One PBM we spoke with noted that because of the financial  backing of wholesaler-owned PSAOs, their PSAOs generally offer central  payment services more often than PSAOs owned by other types of  entities. This strong financial backing is necessary to offer these services  because there is a considerable liability and risk in providing a central  payment service.

PSAO owners may operate PSAOs for a number of reasons, including to  benefit another, non-PSAO line of their business. The wholesalers we  spoke with provided various reasons for offering PSAO services, such as  wanting to assist independent pharmacies in gaining access to third-party  payer or PBM contracts, or to help pharmacies operate more efficiently.  Additionally, one wholesaler noted that it created its PSAO because third- party payers and independent pharmacies indicated there was a need for  PSAO services in the market. These third-party payers wanted a sole  source for reaching multiple pharmacies, while independent pharmacies  wanted a facilitator to assist them with reviewing third-party payer  contracts. Other pharmaceutical entities noted that wholesalers may have  an interest in developing relationships with independent pharmacies,  which are potential customers of the wholesaler’s drug distribution line of  business. By obtaining multiple services from a wholesaler, an  independent pharmacy may be less likely to switch wholesalers.  Additionally, by having their PSAOs assist independent pharmacies with  entering multiple third-party payer or PBM contracts, wholesalers may  benefit from the increased drug volume needed by independent  pharmacies to serve the third-party payer’s or PBM’s enrollees. Other  types of PSAO owners also provided a number of reasons for providing  PSAO services, for instance, a number of these owners stated that they  began offering PSAO services as a market-driven response to the growth  of third-party payers and PBMs. In fact, one PSAO owner we spoke with  stated that it reluctantly began offering these services at the request of  customers of its group purchasing services, who wanted help navigating  the issues and complexities of third-party payer and PBM contracting.

section_title: PSAO Owners Vary As to Whether They Require Member Pharmacies to Use Their Non-PSAO Services
paragraphs: The owners of PSAOs we spoke with varied as to whether they require  PSAO member pharmacies to also use services from a separate non- PSAO line of their business. Of the nine PSAO owners we spoke with that  had a separate non-PSAO line of business (e.g., drug distribution or  group purchasing), six did not require their PSAO member pharmacies to  use services from that non-PSAO line of business. Of the remaining  three, one wholesaler-owned PSAO limited its offer of services to  pharmacies that were existing customers of its drug distribution line of  business, while two member-owned PSAOs reported requiring their  PSAO member pharmacies to join their group purchasing organizations.  Officials from the wholesaler-owned PSAO stated that their limiting the  availability of PSAO services to existing customers ensures that their  PSAO already has basic information about their member pharmacies and  a salesperson who serves as each member pharmacy’s point of contact.

While most PSAO owners do not require their member pharmacies to use  services from their primary line of business, member pharmacies may  choose to do so. In this case, a pharmacy must contract and pay for  PSAO and other services separately. In fact, according to one wholesaler  we spoke with, approximately 36 percent of its drug distribution  customers were also members of its PSAOs. required to submit an application to join a PSAO network. PSAO  applications we reviewed requested information about the pharmacy’s  licensing, services provided, and insurance. Additionally, applications  asked pharmacies to indicate whether they had been investigated by the  HHS OIG, had filed for bankruptcy, or had their pharmacy’s state license  limited, suspended, or revoked. PSAOs stated they used the information  provided in applications to verify that the pharmacies applying for  membership in their network are licensed by their state and in good  standing.

Pharmacies may choose to obtain PSAO services from their wholesaler, but not all do  so. Instead, some pharmacies may choose to join another PSAO.

Most PSAOs we spoke with operated their PSAO separately from any  separate non-PSAO line of business. For example, most wholesalers we  spoke with stated their PSAO staff and drug distribution staff are distinct  and do not interact. One of these wholesalers reported its PSAO has a  distinct corporate structure, management team, sales organization and  financial component from its drug distribution line of business. However,  nearly all of the PSAO owners we spoke with operate their PSAO as a  subsidiary of their non-PSAO line of business. For example, two PSAOs  were organized as subsidiaries of a member-owned buying group, while  another PSAO operated as a branded service under the owner’s non- PSAO line of business.

Most PSAO owners reported that PSAO services are not a profitable line  of business. Only 1 of the 10 PSAO owners we spoke with stated that its  PSAO service was profitable. Other PSAO owners reported little to no  profit earned from the PSAO services they provided. For those PSAOs  that are not profitable, the cost of operating them may be subsidized by  the owner’s non-PSAO lines of business. As previously noted, it may be  the case that offering PSAO services may benefit the owner’s non-PSAO  line of business even if the PSAO service itself is not profitable. For  example, one member-owned PSAO we spoke with also owned a group  purchasing organization to which its members must belong in order to  obtain PSAO services. The group purchasing organization may benefit  from increased membership driven by pharmacies that want to obtain its  PSAO services.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Health  and Human Services, the Chairman of the Federal Trade Commission,  and interested congressional committees. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have questions about this report, please contact   John E. Dicken at (202) 512-7114 or DickenJ@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff members who made key  contributions to this report are listed in appendix I.

section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Rashmi Agarwal and Robert  Copeland, Assistant Directors; George Bogart; Zhi Boon; Jennel Lockley;  Laurie Pachter; and Brienne Tierney made key contributions to this  report.


Question-summary annotations: questions: question: To what extent did PSAOs have contracts with pharmacies in 2011/2012?
answer: At least 22 pharmacy services administrative organizations (PSAO), which varied in the number and location of the pharmacies to which they provided services, were in operation in 2011 or 2012. In total, depending on different data sources, these PSAOs represented or provided other services to between 20,275 and 28,343 pharmacies in 2011 or 2012, most of which were independent pharmacies.
child_questions: question: What was the range of contracts?
answer: While the number of pharmacies with which each PSAO contracted ranged from 24 to 5,000 pharmacies, most PSAOs represented or provided other services to fewer than 1,000 pharmacies.

question: What was the geographical reach of the contracts?
answer: Additionally, some PSAOs contracted with pharmacies primarily located in a particular region rather than contracting with pharmacies located across the United States.

questions: question: What kind of groups owned PSAOs in 2011/2012?
answer: The majority of PSAOs in operation in 2011 or 2012 were owned by drug wholesalers and independent pharmacy cooperatives. Of the 22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent pharmacy cooperatives, 4 were owned by group purchasing organizations, and 3 were stand-alone PSAOs owned by other private entities.
child_questions: question: How did these owners vary?
answer: These owners varied in their requirements for PSAO member pharmacies to also use services from their separate, non-PSAO line of business. Three PSAO owners GAO spoke with required PSAO members to also use their non-PSAO services. For example, one wholesaler-owned PSAO limited its offer of PSAO services to existing customers of its drug distribution line of business.

question: What are the benefits of PSAO ownership?
answer: All but one PSAO owner GAO spoke with reported that their PSAO line of business earned little to no profit. However, PSAO owners may operate PSAOs for a number of reasons, including helping pharmacies gain access to third-party payer contracts and to provide benefits to the owner's non-PSAO line of business.

questions: question: What does GAO describe in their report?
answer: GAO was asked to review the role of PSAOs. In this report, GAO describes: (1) how many PSAOs are in operation and how many pharmacies contract with PSAOs for services; (2) the services PSAOs offer and how they are paid for these services; and (3) entities that own PSAOs and the types of relationships that exists between owners and the pharmacies they represent.
child_questions: question: How did GAO conduct their review?
answer: GAO analyzed data on PSAOs in operation in 2011 and 2012, reviewed literature on PSAOs and model agreements from 8 PSAOs, and interviewed federal agencies and entities in the pharmaceutical industry.