President Bush's Proposed Medicare-Endorsed Drug Discount Card Initiative: Status and Issues
Released: 2003-02-07T00:00:00

Background

On July 12, 2001, President Bush announced a Medicare-endorsed prescription drug discount card program tohelp Medicare beneficiaries reduce theirout-of-pocket drug costs. The President stated that the discount card program was an interim measure that wouldprecede broader Medicare reform measures,including a prescription drug benefit for seniors. Medicare does not cover most outpatient prescription drugs. Mostseniors have some form of supplementaryhealth insurance to cover expenses not met by Medicare; however, many of these plans do not offer drug coverageor offer limited protection for drug expenses. (1)

The President's card program is controversial and immediately prompted criticism from the retail pharmacy industry, from some Members of Congress, and fromsome consumer groups. Critics of the plan have argued that the plan would not bring additional benefits for seniorsand that retail pharmacies would bear theburden of prescription drug cost reductions for seniors. Shortly after the card initiative was announced in 2001,pharmacy groups successfully filed a lawsuitagainst CMS, asking a federal court to issue an injunction that would halt the card program on the grounds that theAdministration had no statutory authority toestablish the program. The Administration proceeded with plans to modify the program and used a formalrulemaking process for a new proposal. On March 6,2002, CMS issued a proposed rule for the card program with a 60-day comment period. On August 30, 2002, CMSissued the final rule. Although pharmaciescontinued to assert that the Administration lacked the authority to implement the initiative, CMS proceeded withthe program. On January 8, 2003, CMS formallysolicited applications from parties interested in offering Medicare prescription drug discount cards. Applicationswere due on March 7, 2003.

On January 29, 2003, a federal district court judge ruled against the Medicare discount card initiative, stating that the Administration did not have the statutoryauthority to implement the program. CMS withdrew its solicitation for applications and issued a statement sayingthat CMS is evaluating the court decision andthe various options CMS has, including a likely appeal. (2) The BushAdministration has stated that it would include prescription drug coverage in its plan to reviseMedicare, but it is unclear whether the prescription drug discount card would be included in the Administration'sproposal. In the 108th Congress, legislation hasbeen introduced ( H.R. 513 ) to authorize the Secretary of Health and Human Services to endorse prescriptiondrug discount cards for use by Medicarebeneficiaries.

Currently, many private companies and membership organizations offer prescription discount cards for seniors. The Medicare discount card program would allowprivate companies to develop discount card plans for beneficiaries and apply for Medicare endorsement of theirplans. The President's proposed program would,in most respects, be similar to these other plans. The major difference is that the discount cards offered under thePresident's plan would be Medicare-endorsedand would provide consumers with comparative information on the formularies and prices offered within the cardprogram. Another key difference is thatbeneficiaries could have only one Medicare-endorsed card plan.

This report will discuss prescription drug coverage gaps for seniors, private sector discount card programs, the discount card program the President originallyproposed in July, and the key differences in the final regulation issued in August 2002. Implementation issues ofthe program, as well as asserted benefits andlimitations, will also be explored. This report will be updated as events warrant.

Gaps in Senior Prescription Drug Coverage

In 1998, an estimated 10 million elderly people, or 27% of Medicare beneficiaries, did not have any form ofprescription drug coverage. The remaining 28 millionMedicare beneficiaries had some form of drug coverage for at least part of the year. However, coverage is notalways stable and access to drug benefits for seniorsis declining. (3) Medicare beneficiaries are among the highest users ofprescription drugs. They represent 14% of the total U.S. population, and account for 43% ofthe nation's total drug expenditures. (4) With national spending on prescriptiondrugs rising, Medicare beneficiaries face increasing challenges in being able to payfor their prescription drug needs.

Although most Medicare beneficiaries have some form of prescription drug coverage, they still pay a portion of their total drug expenses out of pocket. In 1998,beneficiaries with coverage paid approximately 33% of their total drug expenses out of pocket. Averageout-of-pocket drug expenditures for beneficiaries withcoverage was $325 in 1998, while expenditures for those without coverage was $546. For those in poor health, theout-of-pocket expenditures for uncoveredbeneficiaries averaged $820. According to the 1998 Medicare Current Beneficiary Survey (MCBS), coveredbeneficiaries paid a larger percentage of their totaldrug costs out of pocket in 1998 than in 1997. Between 1997 and 1998, out-of-pocket expenditures for coveredbeneficiaries increased by almost 18 percent,while beneficiaries with no coverage had no change in expenses. (5)

Existing Commercial Prescription Discount Card Programs

Prescription drug discount cards are widely available through some private companies and membershiporganizations, such as AARP (formerly the AmericanAssociation of Retired Persons). These companies have set up buying clubs that offer savings on prescription drugsand other medical services to attractconsumers looking for a better price on these items. The companies vary from Internet mail order service companiesto pharmacy benefit managers (PBMs) thatoffer discount card services, such as Merck-Medco and the AARP Member Choice Program (provided through theUnited Health Group Incorporated, with mailorder prescriptions filled by Express Scripts). Card plans usually require an annual membership fee that can rangefrom $15 to $50 per year and offer discountcards that are accepted by a network of drugstores and/or doctors. (6) The plansoffer a discount to card holders on their prescription drug purchases at retailpharmacies. Since the announcement of President Bush's proposal, several pharmaceutical companies formed theirown senior discount card plans in early 2002. (Some of these plans are described in the section below titled Senior Discount Card Plans).

How Prescription Drug Discount Card Programs Work

Card sponsors arrange a network of retail pharmacies that will participate in the program and offer discounts to card holders. The retail pharmacies in the networkagree to accept the card sponsor's reimbursement rate. This reimbursement rate is often lower than what retailpharmacies charge cash-paying customers whohave no healthcare coverage. Pharmacies generally accept the lower price agreed to in the program becausebelonging to the program network results in a largervolume of business. However, the lower prices accepted by the pharmacies may result in lower prescription drugrevenues for the store.

The operators of card programs typically control the costs of a prescription drug benefit by developing formularies. (7) A formulary is a list of drugs that the cardsponsor generates to provide the higher benefits to participating members at a reduced cost. In deciding which drugsto include in the formulary, the card sponsordetermines which drugs are most cost-effective to include in the list. Discount card programs generally userestricted formularies. Patients may obtain discountsonly on the drugs included in the formulary offered by the card program and must pay full price for the drugs notincluded in the card's formulary.

Private discount card programs are similar to other drug benefit programs, such as those offered by private health insurance plans, in that they generally developformularies by consulting with an independent pharmacy and therapeutics (P&T) committee. A number ofdrugs may be used to treat a certain condition ordisease. Such drugs are said to be therapeutically equivalent or belonging to the same therapeutic category. Aformulary does not always include every drug in agiven therapeutic category, but usually includes at least one brand-name drug per category. The P&Tcommittee evaluates the safety, efficacy, substitutability andcost of therapeutically equivalent drugs. The members of the committees and the decision-making process vary byhealthcare plan, but most often includephysicians, pharmacists, medical directors, and/or health plan staff members. Some larger drug benefit sponsors,however, do not allow their staff to participate inP&T committees because of potential conflict of interest. Some health plans say that they emphasize outcomesin choosing formulary drugs, while others lookmore at clinical comparability, bioequivalency and cost. (8)

Formularies allow card providers to contain the cost of prescription drugs primarily through manufacturer rebates and retail pharmacy discounts. Drugmanufacturers give rebates to the card providers to increase market share and/or utilization. If a manufacturer'sproducts are included in the formulary, themanufacturer expects the use of its drugs to increase. The amount of the rebate offered by a manufacturer to asponsor varies by plan. These rebates varysignificantly across the industry, and there is no reliable data to suggest the size of such rebates. The rebateseffectively lower the net prices that the benefitsponsor must pay for the prescription drugs its members use. Retail pharmacies provide discounts in order to gainaccess to card plan members.

In addition to retail pharmacy discounts, many card programs offer mail order services to their members. Mail order pharmacies operate at lower costs thantraditional retail pharmacies and tend to be less expensive for the card sponsor. Some card sponsors encourage theirmembers to use the mail order pharmacy byoffering lower prices through the mail order service than are available at retail pharmacies.

Some card sponsors perform drug utilization review (DUR) to evaluate whether a patient was prescribed the proper dosage, whether the patient is getting theappropriate dosage, or if prescriptions are being refilled too frequently. DUR also screens prescriptions for drugsthat may be inappropriate for the patient, fordangerous drug interactions, for duplicate prescriptions, for the overuse of controlled substances, and for fraud andabuse. Actions resulting from incidentsuncovered through DUR may result in the card sponsor sending educational material to the physician or pharmacist,or in dropping coverage for the patient.

Discount Card Plans for Low-Income Seniors

In 2002, a number of pharmaceutical companies started offering discount card plans for low-income seniors. GlaxoSmithKline (GSK), Novartis, Pfizer, Eli Lilly,and a coalition of seven pharmaceutical companies each formed senior discount card plans for medications theyproduce. The programs are intended forlow-income seniors and are limited to those Medicare beneficiaries who meet the eligibility requirements definedby each company. In addition, a pharmacygroup announced their own card program which is also intended to benefit the nation's elderly low-incomepopulation. Details of the plans include the following:

GSK Orange Card : The card is available to Medicare beneficiaries who have annual incomes below 300% the federal poverty level, or$26,000 for a single person and $35,000 for a couple. The card, in effect since January 2002, offers discounts of25% on the GSK list price for wholesalers, whichis the Average Wholesale Price (AWP) reported by First Data Bank, for all GSK outpatient prescription products. The card does not have an enrollment fee. Acardholder would present the discount card at participating pharmacies and realize the savings at the point of sale. (9)

Novartis Care Card . The card is available for Medicare beneficiaries who lack prescription drug coverage and whose annual income isbelow 300% the Federal Poverty Level (approximately $26,000/single or $35,000/couple). Eligible participantsmust be U.S. citizens. The card is free of chargeand offers discounts of 25% off the AWP price for select Novartis outpatient prescription products at participatingpharmacies. Seniors would realize theirsavings at the point of sale. (10)

Pfizer Share Card . The card is available for low-income Medicare beneficiaries ($18,000/single or $24,000/couple annual income) whohave no other prescription drug coverage. Plan participants would pay a $15 fee for each 30-day Pfizer prescriptiondrug supply and have no limits on the numberof prescriptions. The plan also includes two co-promoted drugs. The program was in effect as of March 1, 2002. (11)

Eli Lilly Lilly Answers. The card is available for Medicare-eligible seniors and the disabled with yearly individual incomes under $18,000 ofannual household incomes under $24,000. The card is free for qualifying individuals. Card holders would be ableto buy a 30-day supply of any Lilly prescriptiondrug for $12. The company estimates that card users could save up to $850 per drug per year. (12)

Together Rx Card from Abbott Laboratories, AstraZeneca, Aventis, Bristol-Myers Squibb Company, GlaxoSmithKline, Johnson & Johnson,and Novartis.. (13) The card is available for Medicare beneficiaries with yearlyincomes up to $28,000 for individuals and $38,000 for couples. The companiesannounced that card holders would save 20-40% on retail prices on over 150 widely prescribed medicines througha variety of savings options.

Pharmacy Care Alliance Pharmacy Care One Card . The Pharmacy Care Alliance wascreated by the National Association of Chain DrugStores and created the card program to offer low-income seniors access to drug manufacturer programs through onecard. The pharmacies announced that the cardwill allow seniors to access multiple manufacturer discount and subsidy programs using only one card at thepharmacy of their choice. (14) This card program isdifferent from the others in that it is open to all drug manufacturers and community pharmacies for participation.

The pharmaceutical companies issuing the cards stated that they developed the cards to assist seniors who do not have prescription drug coverage while aprescription drug benefit is added to Medicare. Critics of these card discount programs argue that thepharmaceutical companies are trying to deflect publicpressure away from the rising costs of prescription drugs and attempting to switch consumers to productsmanufactured by these companies. They claim thecompanies' efforts are only a marketing tool and would not lower prices. (15) Retail pharmacies have been critical of discount card programs offered by drugmanufacturers, arguing that discounts come entirely from reductions in the prices charged by pharmacies and notfrom the manufacturers. (16)

Description of the Medicare-Endorsed Drug Card Initiative

The final regulation for the Medicare-endorsed prescription drug initiative was announced by the Centers forMedicare and Medicaid Services (CMS) on August30, 2002 and published in the Federal Register on September 4, 2002. (17) It is not known when or if the program will be implemented because a federal districtcourt ruled on January 29, 2003 that the Administration did not have the authority to implement the card initiative. The Administration has said it is likely toappeal the court's decision. If the Administration decides to appeal the case, the outcome of the appeal woulddetermine whether or not the initiative will beimplemented. The Administration may also move forward with the initiative if Congress grants legal authority toHHS to implement the program. On January 31,2003, Representative Mark Foley introduced a bill ( H.R. 513 ) in the House to authorize HHS to endorseprescription drug discount cards for use byMedicare beneficiaries. This section describes general features of the drug card initiative, a description of how theprogram would be administered, details of thefinal rule establishing the initiative, and pharmacy participation in the card programs.

General Features of Drug Card Initiative

The Medicare-endorsed card initiative would be a voluntary program that is, in many respects, modeled on existing plans offered by private companies,membership associations, and pharmacy benefit managers. The primary objective of the proposal is to provideMedicare beneficiaries immediate prescriptiondrug benefits at discounted prices. In his original proposal, President Bush emphasized that the initiative would bean interim measure and that it was not intendedto be a substitute for a broader Medicare prescription drug benefit.

The drug card initiative would authorize Medicare to endorse a number of qualified privately-administered prescription drug discount cards for Medicarebeneficiaries. Each card would offer discounts from the retail prices of certain prescription drugs. The card programwould be different from existing plans inthat a consortium of card sponsors would be required to provide participants with comparative information on pricesand formularies. This would provideMedicare beneficiaries with one central source of information to compare features of all Medicare-endorsed cards,including drug-specific discounted prices,pharmacy networks, enrollment fees, and other drug services. In addition, the card sponsors would be required tofollow certain guidelines provided by theCenters for Medicare and Medicaid Services (CMS), the office responsible for administering the program.

Medicare beneficiaries would be allowed to participate in only one Medicare-endorsed card program at a time,but could change plans on a semi-annual basis. CMS stated that multiple enrollments could weaken the negotiating leverage of each company offering card plans,which could lead to lower rebates from drugmanufacturers, and, therefore, lower discounts to card holders. Medicare beneficiaries could enroll in other discountcard plans that are not Medicare endorsed.

CMS expects to endorse 15 card sponsors if the drug card initiative is implemented. It is unknown whether the program would use existing discount cards orcreate new card programs that qualify for endorsement by Medicare. (18)

Program Administration

As outlined, President Bush's drug discount card initiative would be managed by CMS, but, in general, would entail limited government involvement. Thegovernment's role would mainly consist of providing Medicare beneficiaries with information on the card programand facilitating access to the private companiesthat offer Medicare-endorsed discount cards. CMS oversight would consist of certification of card providers basedon criteria that would include membershipthresholds, pharmacy network thresholds, and inclusion of all drug classes in the discount program. CMS has statedthat it expects most of the funding for theprogram to come from the consortium of card providers, and that the federal administrative costs would be small. The federal administrative costs for the programwould be funded through the CMS budget.

Upon implementation of the program, CMS would provide detailed information on each endorsed discount card program to Medicare beneficiaries. Theinformation provided by CMS would include descriptive information on the endorsed discount cards through theMedicare website, and general information bytelephone on the Medicare toll-free line. CMS would promote the cards to beneficiary and consumer groups, healthcare providers, states, and other interestedgroups.

Final Rule for Medicare Drug Card Initiative

The final rule for the Medicare-Endorsed Prescription Drug Card Assistance Initiative appeared in the Federal Register on September 4, 2002. The revisedinitiative was similar to President Bush's original proposal, but with more detail on how the program would operateand with changes to some key aspects of theprogram. The final regulations specify general rules for the Medicare-endorsed prescription drug card program.Card sponsors applying for endorsement would berequired to submit an application and meet all the requirements outlined in the final regulations. (19)

The final federal proposal includes an effort to coordinate with state programs by proposing that states could partner with private drug card program sponsors byselecting a Medicare-endorsed card program, offering its own endorsement and having a distinct card. In a separateNotice issued on March 6, 2002, CMSoutlined additional steps it was considering to support state efforts to make affordable drugs more readily availableand invited public comments on theseefforts. (20)

General Rules for Endorsement. The regulations provided a number of requirements for entities seekingMedicare endorsement of their card programs. All candidates would be required to submit applications announcedin the solicitations by CMS and meet allrequirements for endorsement. Applicants may sponsor up to a maximum of two card programs, but may haveoperational responsibilities in multiple cardprograms. Endorsements would be effective for a period of 12 to 24 months in year one of the initiative, and 12 to15 months in year two of the initiative. CMScould terminate endorsement of a card program at any time, while card sponsors could choose not to continueparticipation in the card initiative at any time. In theevent of the termination of an endorsed card program, the card sponsor would be responsible for giving 90-daynotice to beneficiaries that the card program will beending.

Eligibility Requirements for Endorsement. The regulations list a set of requirements that applicants must meetin order to have their card programs endorsed by Medicare. Applicants must meet specific criteria related toexperience, structure of their proposed cardprogram(s), ability to manage a consortium and provide customer service. The following sections summarize therequirements listed in the final rule.

Experience, structure, and participation in administrative consortium. Applicants must demonstrate three yearsexperience in pharmacy benefit management, in administering a prescription drug discount program, or inadministering a low income drug assistance program. They must demonstrate experience in managing at least one million covered lives in an insured pharmacy benefit,prescription drug discount program, or a lowincome drug assistance program.

Applicants must demonstrate they have formed a pharmacy network serving all fifty states and the District of Columbia, or have a regional pharmacy networkserving at least two contiguous states, with the exception of Hawaii and Alaska which can partner with two or morecontiguous states.

Applicants must be financially solvent and have a satisfactory record of integrity and business ethics. They must agree to jointly administer, abide by theguidelines of, and fund a private administrative consortium with other Medicare-endorsed prescription drug cardprogram sponsors in accordance with CMSrequirements. They must also demonstrate the ability to manage such a consortium. Applicants must comply withall applicable federal and state laws.

Customer Service. Applicants' proposed card programs must follow certain guidelines in offering customer service. They must limit their one-time enrollment fee to $25 during first year of the program initiative. CMS may adjustthe amount of the one-time fee after first year ofthe initiative. The proposed card programs are required to enroll only Medicare beneficiaries, and enroll allMedicare beneficiaries who apply for enrollment.Applicants must agree to provide information on their card program and outreach materials to all enrolledbeneficiaries. They also must maintain a toll-freecustomer call center that is open during usual business hours and that provides customer telephone service, includingto pharmacists, in accordance with standardbusiness practices.

Discounts, Rebates, and Access. Applicants must offer a discount on at least one brand name or genericprescription drug in each therapeutic category of the prescription drugs most commonly needed by Medicarebeneficiaries. They must obtain pharmaceuticalmanufacturer drug rebates or discounts on brand name and/or generic drugs and ensure that a substantial share isprovided to beneficiaries either directly orindirectly through pharmacies. They must ensure that no changes would occur to drug formularies for periods ofat least 60 days, and notify CMS, the consortium,and network pharmacies of any changes to the formulary 30 days before the change becomes effective. They mustguarantee that Medicare beneficiaries wouldreceive the lower of either the price offered by the discount card program or the price a pharmacy would charge acash paying customer. Endorsed card sponsorswould be required to provide the administrative consortium with information on drugs included in the applicant'sformulary and the prices.

Applicants must have a proposed national or regional contracted pharmacy network sufficient to ensure that pharmacies are locally accessible to all beneficiaries. At least 90 percent of beneficiaries, on average, must live within five miles of a contracted pharmacy in allMetropolitan Statistical Areas (MSAs) served by theprogram and within ten miles of a contracted pharmacy in all non-MSAs (rural areas).

Administrative Consortium. Sponsors of Medicare-endorsed card plans would be responsible for forming andfinancing a joint consortium to handle all enrollment and eligibility functions and avoid duplicate card issuance. The consortium would be responsible forensuring that beneficiaries are not enrolled in more than one Medicare-endorsed card program at the same time. It would facilitate the publication of comparativeprice information on discounted drugs available through the endorsed card programs, to assist beneficiaries selectthe most appropriate program for their needs. The consortium would be required to ensure the integrity of the information provided by card sponsors; develop andimplement a written data security plan forprotected health information; and abide by applicable federal and state laws including the Health InsurancePortability and Accountability Act of 1996 (HIPPA). CMS may assist in the start-up of the administrative consortium and perform some of these functions for atransitional period of time.

Beneficiary Enrollment. Medicare beneficiariesenrolling in a Medicare-endorsed prescription drug cardprogram for the first time may enroll at any time. Beneficiaries may enroll in only one Medicare-endorsed cardprogram at a time, but may change enrollment to adifferent program on the first day of the following January or July from after the request for the change is made. In the event the card program is terminated byeither the sponsor or CMS, enrolled beneficiaries may enroll in a different endorsed card program effectiveimmediately.

Public Comments. CMS solicited comments on a number of issues in the proposed regulation which wasissued in March 2002. According to press reports, CMS received 26 comments, including those from thePharmaceutical Research and Manufacturers of America(PhRMA) and AARP. Both PhRMA and AARP expressed support for the initiative, but sought numerous changesbefore the final rule was issued. The SmallBusiness Administration submitted a comment that stated that the proposed rule for the card could significantlyreduce profit margins of many pharmacies, notingthat the financial impact analysis conducted by CMS was "incomplete". (21) Pharmacy groups issued a comment saying CMS should withdraw the proposed rule. Pharmacies asserted that the discount card program would hurt pharmacy profits and that CMS lacked the statutoryauthority to implement the plan.

Key Differences between Proposed and Final Rule. CMS announced that, in response to comments receivedduring the public comment period, the final regulation differs from the proposed regulation published on March 6,2002 in several respects. Some key differencesinclude the following: (22)

Enhanced information on drug prices, including information about generic alternatives, and other endorsed card program features that wouldbe available through the consortium website and by telephone.

Endorsed card sponsors would be required to secure manufacturer rebates or discounts on brand nameand/or genericdrugs.

The experience requirements changed from five years to three years, and from managing two millionlives in a national pharmacy benefit ordrug discount card program to managing one million lives. Changes to the qualifying criteria would provideincreased opportunities for pharmacy and otherorganizations to offer Medicare-endorsed card programs.

Endorsed card sponsors would be allowed to offer two program designs, providing beneficiaries morechoice.

Endorsed card sponsors would have to ensure stable drug formularies and prices. They would not beable to increase drug prices or changedrugs from their formulary for periods of at least 60 days, beginning on the first day of the program'soperation.

New privacy requirements for Medicare card sponsors would improve privacy protection forbeneficiaries. Endorsed card sponsors would berequired to align their privacy protections with privacy standards under HIPAA, including the final changes in therecently announced update of those privacystandards.

Pharmacy Participation

Retail pharmacies participating in Medicare-endorsed card programs would agree to belong to a network of pharmacies arranged by the card sponsor on avolunteer basis. Most pharmacies already belong to one or more networks organized by PBMs. As part of theagreement with the card sponsor, retail pharmacieswould accept a negotiated reimbursement rate from the card sponsor. The reimbursement rate could be lower thanthe usual price the pharmacy charges for a drug,and, possibly, result in lower profit margins for the pharmacy. However, the proposal's promoters have noted thatpharmacies typically agree to join cardnetworks because they gain access to the large number of members belonging to the card plan, which would beexpected to increase their customer base and salesvolume. Pharmacies not electing to join a network arranged by card sponsors risk losing customers. (23)

Expected Discounts from Card Initiative: Diverse Estimates

The potential savings provided by the program are expected to come from the market leverage that card sponsorsobtain from the formulary and pharmacynetwork, and also from the "education attributes" of the program. (24) Theeducational aspect, consisting of the informational material on drug prices, formularycontent, and the pharmacy network offered by the card program, is intended to improve the ability of consumers tocomparison shop and choose the plan thatmeets their needs at the lowest cost.

CMS has estimated that seniors would be able to obtain a 10% to 13%, and possibly up to a 15%, discount on prescription drug retail purchases through theMedicare-endorsed card program. A fact sheet issued by CMS states that it projects that the first year of the programwould provide Medicare beneficiariesbetween $1.2 and $1.6 billion savings on their prescription drug purchases.

Some observers have commented that the Administration's proposed discount program would probably provide seniors with at least some savings on their overallprescription drug bill. Questions have been raised about the actual size of the discounts that would be available. Specific information is not available on thediscount amounts and formularies the potential card sponsors would offer. The actual size of retail discounts maynot be known until after the first year ofprogram operation. While it is possible to compare prices available through existing discount card programs tothose at individual retail pharmacies or Internetpharmacies, one of the constraining factors in conducting this kind of analysis is the lack of widely available dataon retail drug prices.

The U.S. General Accounting Office (GAO) completed a study in 2002 on prescription drug prices for seniors offered by drug discount card programs, localpharmacies, or over the Internet. (25) The study included surveys on pricesavailable from five companies that administer large drug discount card programs, fiveInternet pharmacies, and several retail pharmacies in four different geographic areas (Washington, D.C., Chicago,Seattle, and rural Georgia). Prices listed in thestudy show that the discounts on brand name drugs offered by the card programs ranged from 6% to 32% on theaverage retail pharmacy prices. The average sizeof the discount on all drugs was about 12%. The Internet pharmacy prices on the GAO survey varied. In some casesthe Internet prices were up to 19% higherthan those available by discount card programs, while for other drugs, the prices were up to 12% lower. The Internetpharmacy prices were consistently lowerthan retail pharmacy prices. The retail pharmacy prices obtained by GAO demonstrated that prices may varyconsiderably in different geographic regions. Forexample, the average price for a 30-day supply of 10-mg tablets of Lipitor was 13% higher in rural Georgia thanin Seattle, Washington. (26)

Critics of President Bush's program have disputed past statements made by the Administration of potential discounts of up to 25%. More recent announcementsby CMS have stated that discounts would probably be within the range of 10% to13%, and possibly up to 15%. (27) Retail pharmacy groups, consumer groups, andsome Members of Congress believe that the program is not likely to produce significant savings for seniors. SomeMembers of Congress argue that, based ontheir interpretation of data collected by GAO, existing discount card programs do not work and provide no morethan 10% savings on retail prices. (28) They havestated that the Bush proposal would not offer greater discounts for seniors than those already available in the market. In a letter to the U.S. Department of Healthand Human Services (HHS), six Members of Congress state that a Medicare discount card program is unlikely toprovide significant discounts on brand namedrugs for seniors. They cite the price study by GAO and say that the study indicates that seniors already have accessto drug discount cards and that theseprograms offer little savings for seniors for commonly used brand name drugs. They believe that the findings ofthe GAO price study indicate that unless theproposed Medicare discount card program requires a significant discount from the drug manufacturers that is passedon to seniors, the program would not provideadditional benefits for seniors. (29)

Administration Arguments in Support of Discount Card Program

President Bush has emphasized that the discount card program would not be a substitute for a new prescriptiondrug benefit provision under Medicare. Thediscount program was intended to be an interim solution that would provide some immediate cost relief for seniorswhile other options were under consideration.

CMS highlighted several key elements that the Administration believes would make the Medicare-endorsed cards better than the current discount cards currentlyavailable in the market. (30) The first is that the exclusive enrollment feature,combined with the formulary, pharmacy network, and informational attributes of theprograms, would provide the card sponsors and their members with the necessary "market clout" to obtain largerrebates from pharmaceutical manufacturers andpass the rebate to the consumer. (31)

CMS has said that the market has shown that discount cards can obtain manufacturer rebates, but that these programs do not always pass the rebate back to theconsumer. The Administration believes that because the Medicare-endorsed card initiative would require that cardsponsors pass the rebate to the pharmacy andthe consumer, Medicare beneficiaries could obtain larger discounts than those in currently available card programs. Because the membership in theMedicare-endorsed programs would consist entirely of seniors and some disabled persons, it seems likely that theMedicare card program could provide cardsponsors with some market leverage in negotiating discounts with the drug manufacturers on the most commonlyprescribed senior drugs. However, noinformation is publicly available on the amount of the proposed discounts or rebates, nor on the amount of therebates that would be passed on to Medicarebeneficiaries.

Second, the Administration believes that the comparative price information feature of the Medicare-endorsed card proposal would benefit seniors in that theywould have access to comparative price, formulary, and pharmacy network information on the various cardprograms and choose the best plan for their needs. Discount program participants would be able to switch from one card program to another at 6-month intervals,although this could result in additional one-timeper plan enrollment fees of up to $25.

The informational feature is potentially one of the most valuable features of the President's discount program, because it would provide a single source ofinformation on drug prices, formularies, and pharmacy networks of all Medicare-endorsed discount card programs. Some existing card programs individuallyprovide information on prices and formularies, but information on competing programs is not available in one easilyaccessible location. For the many seniorswho do not have access to a computer or the Internet, however, published information would continue to be the mostimportant vehicle for ensuring that programparticipants realize the informational benefits of the program. The success of this aspect of the program woulddepend on the final details of the individual cardprograms and how well the companies manage the consortium and provide customer service for easy access to priceand pharmacy network information.

The publication of drug price information could eventually put pressure on pharmaceutical manufacturers, pharmacies and/or card sponsors to match lower pricesoffered by competitors. Although this could result in additional savings for seniors, the retail pharmacy industrybelieves that pharmacies would face reducedprofit margins if they were pressured to reduce prices without a change in what they pay the wholesalers or drugmanufacturers for the drugs, while the latter twogroups would benefit at the pharmacists' expense. Although the final rule requires that a portion of thepharmaceutical rebates or discounts be provided tobeneficiaries either directly or indirectly through pharmacies, the pharmacies argue that the rule does not specifythe amount of the discount that should go topharmacies.

Another factor to consider is whether the card sponsor plans under the proposed Medicare program include drug utilization review (DUR) to determine whetherpatients are using therapeutically equivalent drugs. Patients sometimes use drugs prescribed by different doctorsto treat the same condition and are not aware ofit. DUR may prevent the duplicative use of drugs that fall within the same therapeutic category, thereby enhancingpatient safety while lowering prescription drugcosts. DUR can also identify harmful drug interactions that may occur when a patient with more than one medicalcondition treats those conditions with drugsthat, when taken together, are harmful.

The third item mentioned by CMS is that the Medicare drug card initiative would require card sponsors to offer broad access to retail pharmacies, and only offermail-order services as an option. Some existing drug card programs offer only mail-order services, and do notinclude a retail pharmacy network in their plan. The Medicare initiative would not endorse these types of plans. Pharmacy associations assert that, while mail-ordercard programs may provide lower prescriptiondrugs prices, these programs do not provide seniors with the personal help they may need from communitypharmacists. Pharmacy associations have also arguedthat the Medicare drug card initiative could be an incentive for Medicare beneficiaries to shift their prescription drugpurchases from retail pharmacies tomail-order services, and that this would come at a cost to retail pharmacies. CMS has stated that the networkpharmacy requirement in the Medicare drug cardproposal would ensure that Medicare beneficiaries continue to purchase their drugs from retail pharmacies.

The final point mentioned by CMS is that Medicare-endorsed card sponsors would be expected to provide clearand reliable educational information services toMedicare beneficiaries such as pharmacy counseling, generic substitution, and DUR programs to monitor andprevent drug-drug interactions. CMS believes thatthis feature would assist seniors and people with disabilities select a quality discount card program. (32) As mentioned earlier, the informational aspects of theMedicare initiative could be valuable in helping seniors lower their drug costs by choosing the card program mostappropriate for their needs. Much, however,would depend on the quality of service that card sponsors provide. Because the drug discount card initiative isintended only for Medicare beneficiaries, featuresof the program such as customer service, marketing material, and included drugs would be geared toward Medicarebeneficiaries. The card program, it is argued,could result in more coordination among companies offering card discount programs and CMS, which couldimprove the service and information seniors receivewhen shopping for their prescription drugs. A consortium of card sponsors could lead to an improvement ofmarketing materials and drug price information forseniors. However, because details of the card programs that would be proposed are not known at this time, it isdifficult to assess how much of an improvementthere would be over existing drug card programs.

Pharmacists' Challenge to Medicare Discount Card Program

Procedural Objections

On July 17, 2001, the National Association of Chain Drug Stores (NACDS) and the NCPA, as plaintiffs, filed a suit in the Federal District Court for the District ofColumbia against Department of Health and Human Services (HHS) Secretary Tommy Thompson and the CMSAdministrator Tom Scully to block theAdministration's original prescription discount card initiative. On July 26, 2001, the NACDS/NCPA asked the courtto issue an injunction preventing the BushAdministration from proceeding with the discount card initiative on the grounds that, among other arguments, theAdministration exceeded the statutory authoritygranted to it by the Social Security Act and that the Administration failed to comply with the proceduralrequirements of the Administrative Procedure Act.

On September 6, 2001, U.S. District Court Judge Paul Friedman issued an injunction, stating that the pharmacy groups "had a substantial likelihood of success" inwinning their case on two grounds: that the Administration did not have the legal authority to establish the programand that it had not followed the properrulemaking process. (33) On October 9, 2001, the Administration asked thecourt for a stay of the proceedings to allow it to use the formal rulemaking process for anew Medicare discount card proposal that could be different from the original one announced in July. On November5, 2001, Judge Friedman issued a stay of theproceedings to allow HHS to submit "its proposed policy for notice and comment pursuant to the AdministrativeProcedure Act." (34) At a later date the judgestated that the stay of proceedings would continue only while HHS submitted its proposed policy for notice andcomment. The plaintiffs, he stated, could return tocourt at any time after such a policy has been published.

CMS proceeded with the rulemaking process in late 2001 although CMS Administrator Thomas Scully acknowledged that the new prescription drug plan wouldneed approval from a federal judge or be approved by Congress. On March 6, 2002, CMS issued a proposed rulefor a Medicare-Endorsed Prescription Drug Cardand Drug Discount Card Assistance Initiative (42 CFR Part 403) with a 60-day comment period. CMS issued thefinal regulation on September 4, 2002.

On September 13, 2002, the Department of Justice (DOJ) filed a motion with the U.S. District Court for the District of Columbia to require pharmacy groups totell the court by September 20 whether they plan to proceed with the case against CMS and the Department ofHealth and Human Services to halt the program. DOJ asked that all motions in the case be filed by October 28, 2002. (35) OnSeptember 27, 2002, pharmacies responded to this motion by rejecting the federalgovernment's schedule for filing motions in the case, and suggested their own schedule in which they would file amotion to enforce the existing injunction in thecase.

On January 29, 2003, Judge Paul Friedman held that the NACD demonstrated it had standing to show pharmacies would suffer economic harm from the Medicarediscount card initiative. Judge Friedman rejected the argument by HHS Secretary Thompson that the federalgovernment had the authority to implement the cardprogram under the Medicare Beneficiary Assistance Act of 1990. (36) On theday of the ruling, CMS Administrator Tom Scully announced that CMS would beevaluating its options and continue to work with Congress to help strengthen Medicare and push for acomprehensive prescription drug benefit. He also stated thatthe court's decision hastened the "course of a likely appeal." (37)

Economic Objections

In addition to the procedural issues that the pharmacy associations successfully raised, they also criticized President Bush's Medicare discount card program oneconomic grounds. The coalition of pharmacy organizations, which represents all segments of pharmacy practice,issued a letter on July 11, 2001 to PresidentBush opposing any form of prescription discount cards. (38) The pharmacyassociations argue that discount card programs put the burden of cost reductions forseniors on the retail pharmacies. They say that the card programs do not reduce the prices that pharmacies pay formedications and claim that providing discountswill disproportionately reduce net profits of pharmacies vis a vis card sponsors and drug manufactures.

The final regulation of the Medicare drug card initiative is different from the original proposal in that card sponsors would be required to have contractualarrangements with drug manufacturers for rebates or discounts and a contractual mechanism for passing on the bulkof the rebates or discounts that are notrequired to fund operating costs to beneficiaries or pharmacies either through lower prices or enhanced pharmacyservices. However, pharmacies remainconcerned that the revised initiative would harm their profits because, although the card initiative requires cardsponsors to pass discounts to beneficiaries, it doesnot stipulate how much of those savings should be given to seniors. (39)

The associations estimate that the price a pharmacy pays for the medications represents about 78 percent of the average prescription price. The remaining 22percent represents gross margins, and after accounting for operating expenses, results in a net profit of only 2percent. The pharmacies also claim that the proposalcould limit seniors' access to the pharmacy of their choice and that price incentives would encourage the use of mailorder pharmacies, resulting in anunderutilization of lower-cost generic drugs. (40) They argue that theformularies used by the card plans would not always include generic equivalents of brandname drugs, and, therefore, promote the use of brand name drugs. It is difficult to assess the statements made bythe pharmacy associations, because the effect onpharmacies would depend on specific formularies and prices offered by the proposed card programs, which isinformation that is not publicly available

The National Community Pharmacists Association (NCPA) and the National Association of Chain Drug Stores filed a declaration with the Washington, D.C.federal court on July 25, 2001 in support of the lawsuit filed against the federal government. The declaration byStephen Schondelmeyer, Ph.D., Director of theUniversity of Minnesota's PRIME Institute states that pharmacies will lose almost $2 billion in revenues as a resultof the discount card program and that 2,500 to10,000 community pharmacies will cease to operate within three years if the card program is implemented. According to Schondelmeyer's declaration, the cardprogram would encourage the use of mail order pharmacies which would steer card users away from retailpharmacies. Schondelmeyer also states that the carddiscounts would reduce profit margins for pharmacies. (41)

Although drugstores' profit margins on prescription drug sales may decrease as a result of discount cards, some analysts believe that overall net profits mayincrease due to larger volumes of prescription drugs sold and higher sales in non-pharmaceutical items. While theprofit margins of drug stores have fallenconsiderably since the 1970s, recent data suggests that this trend may change in coming years as prescription drugsales increase. A recent Standard and Poor's(S&P) Industry Survey (42) reported that drugstores' grossprofit margins were expected to fall again in 2001, as they had in 2000 and 1999, due to increases inprescription drug sales to third-party plans. (43) For the drugstore industryas a whole, however, total sales increased 7.7%. The number of prescriptions dispensedby traditional drugstore chains increased 7.1% in 2000, while that of independent drugstores increased by 0.3%. TheS&P report indicated that rising prescriptionvolumes helps increase the sales of over-the-counter drugs and front-end merchandise (nonpharmacy-related goods)which accounts for the overall net profitincrease of 6% for the drugstore industry in 2000. (44) In the larger chains,such as CVS and Walgreens, net income increased an average of 19.5%. Although grossmargins have been falling in recent years, the S&P report indicated that these are expected to improve in thelong term as drugstore chains negotiate betteragreements with third-party payers, and decline to renew plans that are marginally profitable. (45) The S&P report did not evaluate the potential impact of theAdministration proposal.

The lack of available information on the details of the President's discount card proposal for seniors makes it difficult to assess the potential economic impact onretail pharmacies. The Administration has issued general statements about the expected size of the discounts andhas stated that the administrative cost of theprogram would primarily be borne by the card sponsors. However, very little information has been issued onpotential card sponsors and their individualprograms. Until the details on individual card programs are available, an analysis on the economic impact onpharmacies would be based on speculation of howthe Administration plans to modify its original proposal and how card sponsors would determine their discounts.

Observations

The proposal for a Medicare discount card program was presented as an interim attempt to meet an immediateneed. On several occasions, the Congress hasconsidered providing coverage for at least a portion of beneficiaries' drug costs. The issue received renewedattention in the 106th and 107th Congress. However,there was no consensus on how the coverage should be structured. In the 108th Congress,Representative Mark Foley introduced a bill ( H.R. 513 ) inthe House on January 31, 2003 to authorize the Secretary of HHS to endorse prescription drug discount cards foruse by medicare beneficiaries. The bill wouldgive the Administration legal authority to implement the Medicare drug discount card initiative.

While it may not be essential that a senior drug benefit be administered through a pharmacy benefit manager (PBM), it seems clear that PBMs now play a majorrole in U.S. healthcare delivery. According to a report prepared by PriceWaterhouseCoopers LLP for the Health CareFinancing Administration, "PBMs managethe drug benefits of approximately 70% of the United States, including approximately 65% of our country'sseniors." (46) In the debate over the Administration'sdrug discount card plan, the central role of PBMs has clearly emerged as an issue, especially for the retail pharmacysector. The issues that retail pharmacies haveraised with PBMs go well beyond President Bush's Medicare discount card proposal. In fact, the 2001 Drug Topics'Redbook characterized the relationship asfollows:

(47)

For Congressional critics, discount cards are not seen as a solution to high costs of prescription drugs foruninsured or partially insured seniors. They point to theexistence of numerous discount programs and argue that even with plans that possibly deliver a 10% to 25%discount, the problem of high drug prices remains aserious one. The prices of pharmaceutical products charged by pharmaceutical manufacturers have been identifiedby some Members of Congress as a specialproblem requiring congressional action. The complexity of drug pricing procedures makes it difficult to understandhow the system operates, let alone devisepolicies that make it possible to deliver prescription drugs to seniors at prices comparable to those paid by clientsof third-party purchasers (PBMs) and theirsponsors (employers, insurers, HMOs, and drug discount card sponsors). If the President's revised discount programproposal manages to resolve the issues raisedby the pharmacy industry, Members of Congress may still raise concerns about whether seniors will get prescriptionmedications at affordable prices.

Discount drug programs may provide additional discounts to seniors, although it is possible that many of the covered drugs would still remain expensive for low-and middle-income seniors who do not have health insurance that covers prescription drugs. Nevertheless, thereis anecdotal evidence that suggests thatconsumers who are willing to comparison shop on the Internet for prescription drugs can, in some cases, match orbeat discount card prices. The difficulty that theAdministration and Congress face in developing a senior drug benefit will be to develop a policy that deliversnecessary medications to seniors, while providingpharmaceutical manufacturers, wholesalers, PBMs, and pharmacists with incentives to continue to participate inthe marketplace.

In summary, a Medicare-endorsed discount card program might provide some savings on prescription drugs for seniors, although the net overall effects are notclear because of the lack of details on the individual card programs. The broad effect on the senior population woulddepend on the size of the discounts and theformularies that the plans offer. The size of the discounts would depend on whether the card program would providesufficient market leverage for card sponsorsto negotiate higher manufacturer rebates from drug manufacturers. Seniors could benefit from certain features ofthe discount card program, such as more accessto information on drug prices and formularies offered by the different plans. This information could enhanceseniors' abilities to comparison shop and savemoney by choosing the plan that would best fit their needs. President Bush's revised proposal could offer seniorssome savings on medications, depending on thefinal details of the various card plans. As noted earlier in this report, critics of the Bush plan believe that theMedicare-endorsed discount cards would not bringadditional benefits for seniors. They have argued that the benefit is very minimal and duplicates a service (discountcards) that the marketplace alreadyprovides. (48)

The two most important concerns for pharmacists are related to (1) who bears the burden of the cost for the Medicare-endorsed discount card proposal and (2) thefear that card sponsors would structure their programs in such a way that seniors are induced to switch from theirlocal pharmacies to mail order pharmacies fortheir prescription drug purchases. The overall effect on pharmacies would likely depend on the potential agreementsthey reach with the card sponsors andwhether the card sponsors pass a portion of the drug manufacturer rebates to the pharmacies.

Seniors are equally concerned that discounts are passed all the way through the system to the ultimate intended beneficiaries. The effect on pharmacies would alsodepend on the response of seniors to the card program and whether they would continue shopping at retailpharmacies for their prescription drug purchases or usemore mail-order options to save money. While seniors and others who must get a prescription filled quickly willcontinue to patronize their local pharmacies,deeper discounting by PBM-owned or operated mail order pharmacies could lead to behavioral changes among thoseseniors who have an ongoing need forprescription drugs to treat chronic conditions.