OPM contracts with almost 400 health plans, including fee-for-service plans and health maintenance organizations, to operate the Federal Employees Health Benefits Program (FEHBP). The Blue Cross and Blue Shield Association's plan is the largest, covering almost 42 percent of about 4 million FEHBP enrollees in 1994. The Association's contract with PCS for retail prescription drug services began in 1993; its contract with Medco for mail order drug services began in 1987. In operating the retail drug program, PCS contracts with a network of pharmacies to provide the Association's federal employee health plan prescriptions at discounted prices. In 1996, this network included 44,751 pharmacies, about 60 percent of which were chain drug stores; the remaining 40 percent were independently owned. In operating the mail order program, Medco provides the plan prescriptions also at discounted prices. Medco receives and dispenses prescriptions from pharmacies in Florida, New Jersey, Ohio, and Texas. Under its FEHBP contract, the Association must submit to OPM any proposal to change its federal employee health plan benefits. OPM reviews such proposals to assess their cost-effectiveness to the program and potential effect on the delivery of benefits to federal enrollees. In addition, the Association oversees the activities of Medco and PCS and must report to OPM any significant problems that could affect the delivery of benefits to enrollees, such as those Medco initially experienced in implementing the benefit change. The Association submitted its benefit change proposal to OPM on May 31, 1995, citing the need to control the Blue Cross and Blue Shield Service Benefit Plan's rising prescription drug costs while maintaining quality service for enrollees. Between 1988 and 1995, the Association's payments for the plan's prescription drugs increased at an average annual rate of about 21 percent, compared with an average annual rate of about 12 percent for total benefit payments. Moreover, prescription drug payments have constituted an increasingly greater share of total benefit payments, rising from about 13 percent in 1988 to about 23 percent in 1995 (see fig. 1). These payment increases appear to result mainly from increases in the number of prescriptions per enrollee and the price of prescriptions. Before the benefit change, the approximately 800,000 people insured under the Association's Standard Option Plan who also had Medicare part B coverage did not pay anything for prescription drugs purchased at network retail pharmacies or through the mail order program. These people must now pay 20 percent of the price of prescriptions purchased at network retail pharmacies. Copayments for retail prescriptions were already required of other enrollees and are similar to those required in several other federal employee health plans. Without the benefit change, the Association contended that it would have had to increase monthly premiums for all of its federal enrollees with Standard Option coverage. To review Medco's strategy for managing the anticipated increase in prescriptions and calls about them, Association staff met with Medco representatives on August 24, 1995. According to Medco officials, they estimated the size and timing of the increase by relying primarily on their own claims experience in managing pharmacy benefits for about 50 million people as well as data from a comparable benefit change made by Massachusetts Blue Cross and Blue Shield. The resulting Medco forecast estimated a gradual 64-percent growth in 1996 mail order prescriptions. Using this data, Medco planned to gradually increase its capacity to handle prescriptions from about 110,000 a week during the last quarter of 1995 to 180,000 a week during the last quarter of 1996. Medco also planned to handle occasional surges in demand of up to 13 percent more than the forecasted number and increase its telephone capacity to respond to greater demand for customer service. More immediate growth in mail order prescriptions could have been expected from this cost-conscious group of enrollees, however, according to our actuarial consultant's review of this forecast. OPM notified the Association that the benefit change had been approved in September 1995. Both OPM and Association officials contended that the change would promote more cost-effective use of the prescription drug benefit by encouraging enrollees to use the less expensive mail order program. According to the Association's actuarial analysis, which included Medco savings estimates related to its contract, the benefit change would save the plan about $193 million in 1996. OPM's actuarial analysis supported this estimated level of savings. Although these analyses did not include an audit of Medco's estimates or related supporting documentation, our actuarial consultant's review of the Association and OPM analyses indicated that the overall savings estimates were reasonable, though possibly understated. The number of prescriptions received by Medco quickly surpassed Medco and Association expectations. During the first week of January 1996, the number of prescriptions rose to 157,000, and during the week ending January 27, 1996, they reached 233,000--an amount about 66 percent greater than expected. By the week ending March 9, 1996, and continuing through the week ending April 6, 1996, the number of weekly prescriptions received ranged between 175,000 and 187,000. Enrollees with Medicare part B benefits accounted for most of the increase in prescriptions. About 9 percent of these enrollees' prescriptions were purchased through the mail order program in 1995, a percentage that increased to about 38 percent by February 1996. Figure 2 shows the increase in mail order prescriptions contrasted with the number of forecasted prescriptions. Medco's processing capacity could not absorb this rapid increase. The number of pharmacists was insufficient to handle prescription orders, and many enrollees did not get their prescriptions filled promptly. For example, although Medco's contract requires that it dispense or return 99 percent of the prescriptions it receives daily within 5 business days, Medco reported that this performance measure was met about 87 percent of the time in January 1996 and about 94 percent of the time in February 1996. In addition, many customer calls were delayed or went unanswered during January and February 1996. Medco's contract specifies that no more than 2 percent of customer calls a week receive a busy signal, known as call blockage. Although the call blockage rate averaged 1.8 percent a week for the 2-month period, about 8 percent, or 11,000 calls, received a busy signal during the week ending January 20, 1996. During the last week of January 1996, OPM informed Association officials of its disappointment with the customer service being provided to enrollees using the mail order program and indicated that corrective measures should be taken. Medco responded to the unanticipated demand and associated service problems by moving quickly to increase processing capacity. For example, during the week ending January 20, 1996, Medco officials expanded operations at the company's Florida and New Jersey pharmacies from a 5-1/2-day schedule to 7 days a week, with operating hours expanded from 15 hours to 19 hours daily. Medco also reassigned pharmacists who normally performed other Medco jobs to confirm phone and fax prescription orders. Medco officials also brought pharmacists and support personnel from pharmacies across the country to one Tampa pharmacy to increase processing capacity. OPM and the Association agreed that Medco would send medications by overnight mail to customers who would not otherwise receive their prescriptions within 5 business days. Between the weeks ending January 6, 1996, and April 27, 1996, Medco sent approximately 160,000 prescription packages by overnight mail at a cost of almost $1 million. In February 1996, OPM also indicated that the Association should arrange for mail order customers who needed delayed medications to get up to a 21-day supply from PCS network retail pharmacies without paying the 20-percent copayment. This ad hoc arrangement required PCS to respond quickly to the needs of the Association and over 5,000 enrollees who used this service. The copayments for over 10,000 retail prescriptions dispensed to these enrollees cost the plan approximately $291,000. Although Medco continued to use extra means to deliver prescriptions to enrollees through the last week of April 1996, Association data show that the mail order program began to meet performance expectations for turning around prescriptions within 5 days the week ending March 16, 1996. Medco had already begun to consistently meet performance expectations for customer service calls the week ending February 10, 1996. The difficulties enrollees had with the mail order program during early 1996 were reflected in an Association's customer satisfaction survey of mail order customers. During the first quarter of 1996, about 81 percent of those surveyed indicated that they were satisfied with services. Enrollee responses indicated that they were most concerned about the time it took to fill prescriptions. About 75 percent responded that their prescriptions were filled promptly, down from quarterly averages of 94 percent in 1994 and 92 percent in 1995. NACDS and many chain and independent pharmacies foresee the benefit change shifting millions of dollars in prescription drug sales to the mail order program. Because the benefit change is recent, we could not determine how many federal enrollees affected by the change will continue to shift prescriptions to the mail order program. Therefore, determining the benefit change's effect on retail pharmacies' sales is difficult. Nevertheless, payments to retail pharmacies for prescriptions dispensed to enrollees affected by the benefit change decreased substantially from 1995 to 1996, according to our analysis of PCS payments to retail pharmacies. (See fig. 3.) Figure 3 shows that between January and May 1995, total prescription payments to retail pharmacies for prescriptions dispensed to enrollees affected by the benefit change were about $259.6 million, compared with about $164.9 million between January and May 1996--a decrease of about 36 percent. Retail pharmacies serving the largest percentages of the federal enrollees affected by the benefit change experienced similar percentage decreases in prescription payments, according to PCS data. Between 1995 and 1996, Walgreens, Rite Aid, CVS, Revco, and Wal-Mart had, on average, a 41-percent decrease in total retail payments for prescriptions dispensed to the enrollees with Medicare part B coverage and a 14-percent decrease in total payments for prescriptions dispensed to all plan enrollees. Total payments to all retail pharmacies for prescriptions dispensed to enrollees in the Association's federal employee health plan also decreased between 1995 and 1996. This total includes payments to enrollees affected by the benefit change. PCS data indicate that between January and May 1995, total payments were about $473.3 million, compared with about $439.8 million between January and May 1996--a decrease of about 7 percent. The Blue Cross and Blue Shield Association contracts with Medco and PCS include annual performance measures that focus on savings and customer service. The contracts provide financial incentives for exceeding certain performance measures and penalties for not meeting them. According to information from Association officials, in 1995, Medco and PCS met most of their savings and customer service measures for the Blue Cross and Blue Shield Service Benefit Plan. The Blue Cross and Blue Shield Association estimated that its two PBMs saved the plan about $505 million in 1995. Association officials indicated that these savings are used to support the pharmacy benefit program, as well as to contain enrollee premiums, deductibles, and copayments. Savings in 1995 resulted from seven categories of PBM services, according to Association estimates. These estimated savings were based on what the Association projected it would have paid for prescription drugs and related services had it not contracted with the PBMs. The Association developed this methodology, which represents one way to determine potential savings from PBM services. We plan to evaluate the soundness of this methodology and compare it with those developed by other federal health plans for our final report. Figure 4 shows the percentage of total savings each of seven service categories represents. Retail and mail order pharmacy discounts accounted for about $264 million in savings. For retail, the savings represent the discounts PCS achieved from negotiating with individual pharmacies the amount PCS would reimburse them for prescriptions. Mail order savings were derived from discounts that the Association negotiated with Medco. Maximum allowable cost (MAC) savings accounted for approximately $72 million in savings. MAC refers to the maximum price that retail pharmacies in PCS' network may be paid for certain generic drugs. Savings resulted from the difference between drugs' MAC prices and their usual and customary prices. Manufacturer rebates accounted for about $107 million in savings and represent the guaranteed discounts that PCS and Medco negotiated with drug manufacturers. The plan received 90 percent of the total rebates, and the PBMs retained 10 percent as an administrative fee and incentive to increase the amount of discounts. PCS did not meet its rebate guarantee in 1995 and as a result incurred a penalty. Concurrent and retrospective drug utilization review (DUR) accounted for about $10 million in savings that resulted from clinical activities the PBMs performed. Concurrent DUR is performed before dispensing a drug to prevent problems such as drug interactions and therapeutic duplications. Retrospective DUR is a program PCS conducts to encourage physicians and enrollees to use the most cost-effective drugs and regimens to optimize drug therapies. Medco's intervention program accounted for about $13.5 million in savings. The program encourages patients to use, and physicians to prescribe, less expensive brand-name drugs considered as safe and effective as other, more expensive brand-name drugs. The prior approval program accounted for about $36.5 million in savings. This program covers 13 drugs that require Association approval before dispensing and derived savings from prescriptions denied reimbursement or never filled. The coordination of benefits (COB) program accounted for about $2 million in savings. COB is an industrywide method used to avoid paying duplicate benefits to an individual covered by another insurer. The Association's contracts with its PBMs also specify performance measures for the quality of customer service provided to the federal plan and its enrollees. For example, as previously discussed, Medco's contract requires dispensing prescriptions and answering customer calls within specific time frames. Medco's contract also requires that its pharmacy dispense all of its prescriptions annually with less than a .005-percent error rate. In addition, PCS' contract has several guarantees for the accuracy and timeliness of prescription claims submitted by enrollees for reimbursement. In two instances, PCS did not meet claims timeliness guarantees and therefore paid the Association minor penalties. PCS' contract also guarantees that it provide plan enrollees convenient access to its network pharmacies. The guarantee states that a network pharmacy be located within 5 miles of 98 percent of the enrollees. PCS data indicate that this guarantee was met in 1995 and as of April 1996. Mr. Chairman, this concludes my prepared statement. I will be pleased to answer any questions. For more information on this testimony, please call John Hansen, Assistant Director, at (202) 512-7105. Other major contributors included Joel Hamilton, Jennifer Arns, and Mary Freeman. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Summary:
GAO discussed the Blue Cross and Blue Shield Association's change in prescription drug benefits covered under its federal employee health plan. GAO noted that: (1) the Association's payments for prescription drugs increased about 21 percent between 1988 and 1995; (2) to manage costs, the Association contracted with two pharmacy benefit managers (PBM) to provide retail prescription and mail order drug services; (3) to offset high prescription costs, the Association began requiring enrollees insured under the Standard Option Plan and covered by Medicare part B to pay 20 percent of their prescription costs at retail pharmacies; (4) the Association also encouraged enrollees to utilize the least expensive mail order option by offering prescriptions free of charge; (5) the demand for mail-order prescriptions surpassed contractor and Association expectations, causing delays in prescription orders and customer calls; (6) critics of the benefit change believe that millions of dollars in prescription drug sales will be shifted away from retail drug stores to the mail order program; and (7) the Association estimated that its two PBM saved $505 million in 1995.