In operating a system of military health care delivery, the Department of Defense (DOD) has twin missions: care and treatment of military personnel where and when they need it, and cost-effective and accessible health care benefits for their families as well as retired military personnel and their families. Today, the military health care system provides coverage for about 8.2 million people; more than half of those covered are retirees and their dependents and survivors. Under the terms of its authority (10 U.S.C. 1074 and 1076), DOD may provide health care to the families of active duty military and retirees of any age in its medical facilities as long as space and resources are available. Beneficiaries receive such space-available care at little or no cost. The statute, however, does not entitle these beneficiaries to that care. Pharmacy programs represent about 9 percent of the $14.7 billion Defense Health Program budget—about $1.3 billion. Among the health care services, the pharmacy benefit is most in demand by military beneficiaries. DOD currently provides prescription drug benefits through three programs: military treatment facility (MTF) outpatient pharmacies, TRICARE contractors’ retail pharmacies, and a national contractor’s mail order service. The largest DOD pharmacy program is the outpatient pharmacies operated in the direct care system of 587 Air Force, Army, and Navy MTFs. The program spent an estimated $741 million for prescription drugs in fiscal year 1997. About 4,000 military and civilian pharmacists and technicians run the pharmacies, and in 1997 they dispensed about 55 million prescriptions. MTFs get most of their prescription drug supplies through the Defense Supply Center in Philadelphia (DSCP). DSCP provides over $3.4 billion in food, clothing, medicines, and medical supplies to military personnel worldwide and other federal customers. DSCP’s pharmaceuticals group, the single manager for DOD purchases and supplies, had fiscal year 1996 sales of over $700 million. DSCP uses its prime vendor program to deliver medicines and other pharmaceutical supplies to MTFs. A prime vendor is a distributor that has been awarded a contract to store and distribute pharmaceutical products to individual MTFs, reducing the need for DOD wholesale and retail systems. Under this concept, DSCP negotiates prices for pharmaceutical products directly with manufacturers. DSCP then contracts with the prime vendor to buy the products at these prices and distribute them directly to the MTF within 24 hours of receiving an order.DSCP negotiates discounted drug prices through distribution and pricing agreements (DAPA) with over 200 drug manufacturers. According to DSCP, DAPA prices have been between 24 and 70 percent less than average wholesale prices. The direct care system is supplemented by DOD’s TRICARE managed care support contracts, under which retail pharmacy benefits are provided to eligible military beneficiaries. TRICARE contractors offer both network and nonnetwork retail pharmacy services. A network pharmacy contracts to fill prescriptions at the same discounted retail price to anyone covered by TRICARE. If beneficiaries have no other health insurance, network pharmacies file claims on beneficiaries’ behalf for prescriptions filled. Beneficiaries using nonnetwork pharmacies pay full retail costs and submit claims to get reimbursed. DOD’s national mail-order pharmacy program contractor is another way DOD augments MTF pharmacy services. This program delivers 30- to 90-day supplies of medications taken for longer-term, chronic health problems to eligible beneficiaries’ homes. In the private sector, pharmacy benefit managers (PBM) administer prescription drug coverage on behalf of health plan sponsors. Their objective is to provide high-quality pharmaceutical care at the lowest possible cost. PBMs, a relatively new type of firm, became a major market force only during the late 1980s. Their precursors were firms that provided prescription claims processing or mail-order pharmacy service on behalf of insurers. While PBMs continue to provide these services, many provide additional services, such as formulary development and management, development of pharmacy networks to serve health plan enrollees, drug rebate negotiation with manufacturers, generic substitution, therapeutic interchange, and drug utilization review. Many PBMs are also developing products called “disease management” programs, which will attempt to provide the most cost-effective treatments for specific diseases. Like a growing number of health insurers who have experienced rapidly rising prescription drug costs, the military health care system has experienced prescription drug demand and cost increases. DOD pharmacy costs increased 13 percent between 1995 and 1997, compared with DOD’s overall health care cost increase of 2 percent for that period. While DOD pharmacy costs are estimated at less than 10 percent of health program spending, drug therapy can affect a larger share of the total $14.7 billion defense health care costs. That is, drug treatment can sometimes help avoid the use of more costly medical treatments involving hospitalizations and surgeries or reduce other outpatient medical costs associated with chronic diseases. Accordingly, DOD has taken steps to improve pharmacy program management. In 1993, for example, DOD Health Affairs established the DOD Pharmacoeconomic Center (at Fort Sam Houston, San Antonio) to improve the overall use of pharmaceuticals. In 1995, Health Affairs increased the Center’s responsibilities and created a Pharmacy Board of Directors to provide guidance to the Center. Since October 1997 the Board has been looking at ways to improve the formulation of DOD pharmacy policies. Before February 1998, no single DOD organization had overall responsibility for all MTF and contractor-supported pharmacy programs and operations (see fig. 1 for organization chart as of January 1998). However, since January, Health Affairs has undergone leadership changes and reorganized its TRICARE management group into the new TRICARE Management Activity (TMA). Whether and how overall pharmacy program responsibility will be consolidated in the reorganized activity remain to be seen. Growing increasingly concerned about the costs and quality of DOD’s pharmacy benefit, the Congress, in the Fiscal Year 1998 National Defense Authorization Act (P.L. 105-85), required us to review DOD’s pharmacy programs, focusing on (1) the adequacy of the information that DOD and its contractors have to manage the pharmacy benefit; (2) the merits and feasibility of DOD and its contractors applying commercial best practices, including a uniform formulary, in managing DOD’s pharmacy programs; (3) the merits and limitations of recent mail-order and retail pharmacy initiatives to secure discounted DOD drug prices; and (4) the potential effects MTF funding and formulary management decisions can have on beneficiaries’ access to pharmacies and TRICARE contractors’ costs. The act also requires the Secretary of Defense to report to the Congress no later than 90 days after our report is issued on the feasibility and advisability of implementing changes to DOD’s pharmacy programs, based on our findings and conclusions. To do our work, we reviewed laws, regulations, and policies applicable to DOD pharmacy programs and obtained cost and workload data from relevant DOD sources and databases. We interviewed and obtained documents from DOD officials at the Office of the Assistant Secretary of Defense (Health Affairs) and at TMA offices in Washington, D.C.; Aurora, Colorado; and San Antonio, Texas; the Deputy General Counsel (Personnel and Health Policy), Washington, D.C.; DSCP; and TRICARE lead agent offices in San Antonio; Fairfield, California; and Colorado Springs. We also interviewed and obtained documents from pharmacy consultants at the Army’s Surgeon General’s Office, the Navy’s Bureau of Medicine and Surgery, and the Air Force Surgeon General’s Office and from head pharmacists at 15 MTFs in California, Colorado, Florida, Kansas, Louisiana, Maryland, Missouri, Texas, and Washington, D.C. We interviewed and obtained documents from three TRICARE managed care support contractors: Foundation Health Federal Services, Inc. (Rancho Cordova, Calif.), Humana Military Healthcare Services (Louisville, Ky.), and TriWest Healthcare Alliance (Phoenix, Ariz.). We also interviewed and obtained documents from the national mail-order pharmacy program contractor (Merck-Medco Managed Care, L.L.C.) and its parent (Merck & Co.) in Washington, D.C. To obtain the perspectives of outside affected parties, we interviewed representatives of two military beneficiary groups and several pharmaceutical manufacturers. We also interviewed representatives of the Pharmaceutical Research and Manufacturers of America. DOD, three TRICARE contractors, and the national mail-order pharmacy contractor commented on a draft of this report. We address their comments in chapter 6; their comments are reprinted in appendixes IV through VII. We conducted our review between June 1997 and May 1998 in accordance with generally accepted government auditing standards. Timely, accurate, and complete data on prescription drug use and costs are essential to effectively manage pharmacy benefits. But DOD and its contractors lack such data, largely because their computerized pharmacy patient databases are not integrated. Thus, their ability to manage the MTF, TRICARE retail, and national mail-order pharmacy programs is significantly impaired. In the private sector, where PBMs manage more than 2.4 billion prescriptions per year, computer databases connect thousands of retail and mail-order pharmacies electronically. Such on-line capabilities enable PBMs to achieve cost-efficiencies and enhance patient care. Currently, higher priority plans to upgrade DOD’s Composite Health Care System (CHCS)—with planned fiscal year 2003 implementation—have kept DOD from installing a readily available automated drug utilization review system known as the Universal Pharmacy Patient Profile (UP3). DOD cannot readily access information on basics such as MTFs’ and contractors’ drug costs and use, dispensing costs, MTF or civilian physicians who frequently prescribe high-cost drugs, or beneficiaries with large prescription drug expenses. MTF pharmacy cost and use data are generally unreliable, and the types of pharmacy data DOD requires TRICARE contractors to report are not useful for management purposes. To estimate DOD’s systemwide pharmacy program costs, we pieced together data from several DOD entities. In so doing, we found conflicting pharmacy cost reports differing by millions of dollars for the same activity. For example, while the TMA Resource Management Office reported to us that fiscal year 1996 Army pharmacy program costs were about $198 million, the Army Pharmacy Consultant (who is also a member of DOD’s Pharmacy Board of Directors) reported that such costs were about $249 million. Also, some sources were and others were not trying to account for MTFs’ drug-dispensing costs, including pharmacy personnel and other direct and indirect costs to provide pharmacy services. On the basis of fiscal year 1997 data provided by five separate DOD pharmacy and budget management entities, we estimated that MTF pharmacies spent between about $741 million and about $776 million for drugs alone, and about $305 million on drug-dispensing costs—for a fiscal year 1997 total of about $1 billion. We obtained contractor pharmacy costs from two other DOD organizations, which, when added to estimated MTF costs, amounted to a systemwide fiscal year cost estimate of about $1.3 billion. Cost data are not available on matters such as (1) over-the-counter drugs, (2) MTF prescriptions for Medicare retirees, and (3) the top 50 drugs, in terms of DOD expenditures or numbers of prescriptions dispensed. Such information could be used to make policy and managed care decisions needed to address cost savings and service quality. Table 2.1 contains our estimates of DOD’s pharmacy costs for fiscal years 1995 through 1997. While DOD requires the TRICARE contractors to report monthly prescription drug volume and claims costs for their retail pharmacy programs, DOD uses the reports primarily to oversee “cash disbursements” at the completion of the claims adjudication process. Contractor officials told us, however, they would not recommend such reports to their commercial clients for use in controlling pharmacy costs. For example, the reports do not include national drug codes, physician identification numbers, or patient-level drug use. Such information is needed to target high-cost drugs, in terms of DOD expenditures, that should be subject to utilization management restrictions; prepare doctor “report cards” used to educate or provide incentives to those who prescribe too many or nonformulary drugs; and identify patients who are getting too many or the wrong mix of medications. One contractor’s (Humana) officials told us they successfully worked with regional DOD pharmacy managers to expand the required reports’ scope and detail. But, they told us, those reports were of far less management value than reports they provide their commercial customers. Although most military beneficiaries regularly obtain prescription drugs from multiple dispensing outlets across DOD’s three programs, no centralized computer database exists with each patient’s complete medication history. The hundreds of MTF pharmacy databases are not linked, nor are the TRICARE contractors’ retail pharmacies’ and the national mail-order pharmacy patient medication records linked together or with the MTF databases. Contractor and DOD pharmacy officials told us that millions of dollars in unnecessary costs from overutilization and patient safety problems from adverse reactions to prescription drugs are likely occurring because DOD lacks the databases needed to support automated prospective drug utilization review (PRODUR) systems to review DOD prescriptions before they are dispensed. Such systems are widely used to reduce inappropriate prescription drug use that can cause adverse reactions leading to illness, hospitalization, and even death. In addition to promoting patient safety, PRODUR systems can be used to better identify patterns of fraud, abuse (including overuse), or other inappropriate or medically unnecessary care. Such systems, moreover, are now used in some Medicaid programs and the Federal Employees Health Benefits Program (FEHBP). For example, between 1994 and 1995, five state Medicaid programs saved $5 million by appropriately canceling early refill prescriptions. Also, three FEHBP plans, with about 4.5 million beneficiaries, estimated combined savings of about $19 million in 1995 by using automated PRODUR systems. Another PBM told us that, for the FEHBP plans it represents, 1997 savings from using PRODUR were $46 million. While those savings were significant, other major dollar savings may be achieved, in all likelihood, by avoiding hospitalizations resulting from inappropriate drug therapy. (App. I provides details on how PRODUR systems work.) DOD’s lack of integrated pharmacy patient databases, and thus its inability to use PRODUR systemwide, are the most significant cost-effectiveness and patient safety obstacles in its pharmacy system. Now, DOD’s ability to use a PRODUR system is limited to local systems at specific MTF pharmacies that do not have the patient’s complete history. PRODUR would enable DOD, as is done in FEHBP, the Medicaid program, and the private sector, to perform cost-saving and safety-enhancing drug reviews with consistency throughout the drug distribution system (MTFs, TRICARE retail, and national mail order). For example, each of these pharmacies, when presented with a new or refill prescription by a DOD beneficiary, could check the patient’s complete medication profile to ensure that the new drug will not adversely react with the patient’s other drugs. The review could also disclose whether the prescription is being refilled too soon. DOD pharmacy officials told us that integrated program databases would allow MTFs to convert from an inefficient manual third-party billing process to an electronic billing system, annually saving an estimated $25 million. Several DOD pharmacy officials told us that the lack of PRODUR has allowed beneficiary prescription drug stockpiling to become so pervasive among patients using MTF pharmacies that pharmacists commonly refer to the problem as “polypharmacy”—or the practice of visiting multiple pharmacies to accumulate more prescription drugs than needed. To illustrate, they provided the following examples: During a 10-week period, a sickle cell anemia patient being treated at an Army base for chronic pain obtained 14 prescriptions (a 1-year supply) of potentially addictive narcotics. Several civilian and two Army and Navy doctors wrote the prescriptions, which were filled at the Army medical center pharmacy, a Navy hospital pharmacy, and several of the TRICARE contractor’s regional retail pharmacies. The lack of a common, computerized patient drug profile and PRODUR prevented the Army, the Navy, and the TRICARE contractor’s PBM company from detecting the prescription abuse and drug stockpiling. By happenstance, an Army medical center pharmacist came upon the problem during an unrelated regional pharmacy cost review. At an Air Force base, a young patient’s mother obtained 260 prescriptions in 15 months from several on-base doctors. The prescriptions were filled at the base hospital and clinic pharmacies. In effect, she amassed a 5-year supply of inhalant asthma drugs (Proventil and Ventolin) and inhalation devices. When an investigation was conducted as a result of the mother’s aggressive behavior toward pharmacy staff, the base hospital pharmacy staff had to manually compile the patient’s medication profile from the hospital and clinic pharmacies to determine the extent of the mother’s drug stockpiling. At another Air Force base, the clinic pharmacy collected old and unused prescription drugs from beneficiaries’ houses as part of a poisonous waste cleanup project. The pharmacy recovered several unopened drug packages, which suggested that these MTF prescriptions were not needed. In three instances, for example, they recovered 12 packages of Proventil asthma inhalers; 7 tubes of Cyclocort anti-inflammatory ointment; and a 6-month supply of Norvasc (a drug used to treat high blood pressure). All the drug packages were past their printed expiration dates. Upon her husband’s death from chronic lung disease, a widow returned several boxes of inhalant drugs and supplies to an Army base’s pharmacy. Obtained from several MTF pharmacies over a 2-year period, the drugs were valued at about $5,000. In responding to why she and her husband obtained drugs that were not used, the widow pointed out that her husband was entitled to them, he feared his benefits might be curtailed, and so they stocked up. On a Monday afternoon, a patient and his wife tried to fill prescriptions worth $400 at an Air Force base pharmacy. Somewhat suspicious, the pharmacist called the out-of-state base that wrote the prescriptions. He found that the couple had gotten a 90-day supply of each drug from that out-of-state base pharmacy the previous Friday, and, checking further, that they had gotten 90-day supplies of the drugs at another base pharmacy that same Monday morning. The pharmacist refused to fill the prescriptions and alerted the other pharmacies. The couple left, threatening to formally complain that the Air Force had denied them their duly prescribed and needed medications. The dollar and safety consequences of DOD’s pharmacy programs’ lack of integrated computer databases and PRODUR are likely significant. DOD and contractor officials told us they believe that systemwide drug use costs alone are a likely 10 to 20 percent higher than they should be because of inappropriate drug therapy and stockpiling. Applying similar percentages to the estimated 1997 total DOD drug costs would mean that some $99 million to $197 million may be unnecessary. The officials also told us that inappropriate drug therapy causes about 10 percent of hospitalization, emergency room, and doctor visit costs. According to a May 1998 Pharmacoeconomic Center analysis, 55,000 MTF hospitalizations per year may be caused by inappropriate drug therapy. This means that at a $1,500 average daily cost, about $83 million in MTF hospitalization expenses may be preventable. More importantly, patient safety is in jeopardy without PRODUR. Other studies likewise estimated that hospitalizations caused by inappropriate drug therapy range from 3 percent of the general population to as high as 28 percent for the elderly. In November 1995, some DOD pharmacy officials proposed networking all MTF pharmacies to create a centralized patient medication record database so PRODUR could be applied. This system was estimated within DOD to save more than $100 million over a 10-year period—more than offsetting the system’s estimated $21 million cost—and to markedly improve patient health care and safety. The proposed UP3 system would create for every patient a single electronic record of all inpatient and outpatient drugs that would be accessible by all pharmacies through a centralized database. The UP3 system would support automated functions such as prospective drug utilization reviews, drug recalls, third-party claims adjudication, and inventory control. The DOD pharmacy officials’ 1995 proposal focuses on first integrating MTF pharmacies, but suggests eventual integration with contractor-supported retail and mail-order pharmacy databases. In May 1998, Pharmacoeconomic Center staff incorporated new information that substantially changes these earlier estimates: $424 million in savings over 10 years, about 10 times greater than the revised $43 million estimate of the system’s cost over the same period. The headquarters office responsible for finally approving all DOD health information technology investments, however, has declined to further fund the project. TMA Office of Information, Technology, and Reengineering officials told us that their aim is to avoid investing in redundant and “stovepipe” technologies. These officials told us that the planned acquisition of the CHCS II system in fiscal year 2003 and alternative improvements to the current CHCS system before 2003 will meet the same needs identified in the UP3 proposal. But DOD pharmacy officials disagreed and told us that UP3 would amount to a low-cost, high-return investment in readily available commercial software. They further asserted that such software will be compatible with and required in capturing the pharmacy data component of the future CHCS II computer-based patient record. We agree with the pharmacy officials’ assessment and believe the software application could also be immediately interfaced with existing DOD health information systems used to purchase and distribute pharmaceutical supplies—further ensuring future compatibility with the planned CHCS II upgrade. TRICARE retail pharmacy contractors told us that they were eager to integrate their databases with MTF pharmacy databases. Although they routinely use PRODUR to manage their commercial health plan pharmacy benefits, they are unable to do so with TRICARE or the national mail-order programs because of the lack of automated linkage to MTF pharmacy patient databases. They told us that they supported the DOD pharmacists’ proposal to use PRODUR and would welcome collaborating with DOD as they have done on other TRICARE matters. Humana’s TRICARE program President and Chief Operating Officer told us that Humana would like to negotiate a contract with DOD whereby Humana would pay for setting up such interactive computer systems within its regions’ MTFs and share with DOD the consequent savings—so sure is Humana of the cost-avoidance and patient safety advantages for all parties. In April 1998, we informed DOD officials of Humana’s proposal. TMA’s Acting Executive Director told us that TMA would pursue the matter with Humana. Private sector fee-for-service and managed health care plans work with PBMs to provide well-defined prescription drug benefits to beneficiaries based on the coverage beneficiaries choose to purchase. The PBMs and the plans then work to ensure that the beneficiaries have easy access to their benefits, regardless of where they live. DOD’s goal likewise is to provide a uniform, consistent drug benefit to the 8 million active duty personnel, retirees, and their families, regardless of residence. Despite DOD’s intentions, however, this is not taking place. DOD’s pharmacy policies and practices cause beneficiaries nationwide to encounter different and changing rules affecting their coverage and access to benefits. Also, DOD and its contractors are unable to fully apply widely used commercial best practices, such as retrospective drug utilization reviews, to reduce pharmacy costs, improve patient safety, and control other health care costs caused by drug mishaps. Standard business practice in private sector and federal civilian employee health plans is to devote considerable attention to designing the pharmacy benefit’s many details. Details such as copayments and nonformulary drug costs can create the incentives or disincentives crucial to balancing the health plan’s financial soundness with beneficiaries’ freedom to choose pharmacies and drugs. In contrast, DOD has not adopted such a systems view of its pharmacy operations. Rather, DOD’s pharmacy programs are structured in a way that creates benefit inconsistencies among the programs and the various categories of military beneficiaries. Lessons can be learned by contrasting DOD’s requirements with those provided under the world’s largest employer-sponsored health insurance program—FEHBP. FEHBP provided voluntary health insurance coverage for about 9 million federal civilian employees, retirees, and dependents in 1997. During that year, it spent about $16.3 billion to cover its members.To differing degrees, all FEHBP plans cover prescription drugs. In 1995, pharmacy benefit payments for five of the largest FEHBP plans were about $2 billion. The standard FEHBP plan brochure includes a prescription drug benefit section reflecting various benefit design decisions that balance the plan’s need for cost control with employees’ need for the widest drug service selection. Since the brochure’s drug benefit section is highly detailed, enrollees have a full explanation of benefits and what to expect in gaining access to pharmacy care and in filing a claim—no matter where they live. In contrast, DOD’s pharmacy programs operate under a complicated and confusing array of policies, regulations, and contractual requirements governing key benefit design elements such as eligibility, drug coverage, and cost-sharing. Understanding the full DOD pharmacy benefit requires a complex matrix displaying the eight beneficiary eligibility categories across the three pharmacy programs, as shown in table 3.1. One special population—the 1.2 million Medicare-eligible retirees—is about to be redivided into three eligibility categories—space available, Medicare BRACs, and TRICARE Seniors. With the rollout of the Medicare subvention demonstration program later this year, an eighth category for TRICARE Seniors will be added to the DOD matrix. The Medicare program does not provide coverage for prescription drugs, a major expense for older people, who tend to use more prescriptions as they age. Thus, the lack of a DOD systemwide prescription drug benefit for most Medicare-eligible retirees opens a major gap in their health care coverage between Medicare and DOD. As shown in table 3.1, all beneficiaries are eligible for the no-cost MTF pharmacy program at any MTF, regardless of where they live. Since 1994, however, DOD Health Affairs has issued several policies governing MTF pharmacy services. These policy changes affected how each MTF determined its priorities in providing space-available prescription drug services to families of military personnel as well as to retired military beneficiaries. For example, a June 1994 DOD policy permitted MTF commanders, if necessary on the basis of available resources, to limit pharmaceuticals to non-active duty beneficiary classes in accordance with their priority for care (first, active duty family members, followed by retirees and their family members). In July 1995, the Assistant Secretary of Defense (Health Affairs) changed the MTF pharmacy support policy and required MTFs to honor all prescriptions for formulary drugs regardless of beneficiary category. In April 1997, the Acting Assistant Secretary of Defense (Health Affairs) issued a more explicit directive that MTF pharmacies not give preference to active duty and TRICARE prime beneficiaries over all other categories. Instead, the still current April 1997 policy requires that whatever prescription drugs are on the MTFs’ formularies must be made available to all beneficiaries. Today, the only basis for turning beneficiaries away from the MTF pharmacy is when the medication is not on its formulary. A key strategy private health plans and PBMs use to provide quality pharmacy care and control costs is consistent, coordinated formulary development. A formulary is a list of prescription drugs, grouped by therapeutic class, that the health plan prefers its physicians to prescribe for its beneficiaries. Drugs are chosen for a formulary on the basis of medical value and price. Formularies are used to help control prescription drug costs by (1) limiting the number of drugs a plan will cover; (2) encouraging the use of preferred drugs when coupled, for example, with programs to inform doctors and beneficiaries about the formulary drugs; or (3) developing financial incentives to encourage formulary drug use. Formularies can be categorized in three ways: open, incentive-based, or closed. Open formularies are most used by fee-for-service health plans and are often referred to as “voluntary” because neither beneficiaries nor doctors are penalized if nonformulary drugs are prescribed.Incentive-based (also referred to as managed) formularies are becoming increasingly popular because they combine flexibility and greater cost-control features than open formularies. Generally, incentive-based formularies offer beneficiaries lower copayments (if any) when their doctors prescribe the preferred formulary or generic drugs. A closed formulary limits coverage to formulary drugs only. In private health plans and FEHBP, closed formularies are uncommon. Recent studies have shown that such formularies, which are thought by some health plans to provide greater prescription drug cost control, may actually drive up other health care costs. For example, denying needed drugs could lead to illness and cause higher dissatisfaction levels among patients and doctors. DOD’s formularies vary depending on where the beneficiary gets his or her prescription drugs. This situation occurs because DOD’s many policies and requirements create different formularies for its programs: closed formularies for MTF pharmacies and the national mail-order pharmacies, and open formularies for TRICARE retail. As a result, beneficiaries experience drug coverage and availability uncertainties and they, DOD, and the TRICARE contractors experience unnecessary costs. Each of DOD’s 587 MTF pharmacies devises and maintains its own closed formulary. Since 1993, in an effort to improve pharmacy benefit uniformity across MTFs, DOD has required all MTFs to include on their formularies at least those 120 products on the Tri-Service Formulary (TSF). However, there are no restrictions or incentives for physicians, pharmacists, or beneficiaries to prescribe, dispense, or use TSF products. Since 1997, DOD has considered more restrictive policies and centralized control over formulary decisions in response to congressional and beneficiary complaints about the lack of a consistent systemwide pharmacy benefit and nonstandardized MTF formulary management. However, DOD has not taken a systemwide approach to proposed policy changes. Instead, it has focused only on policies governing the MTF and national mail-order programs, not the TRICARE contractors’ programs.In July 1998, DOD will replace the TSF policy with a more restrictive basic core formulary (BCF) policy (see app. II for the products included on the BCF). Like the TSF policy, the BCF would become the minimum list of products on each MTF outpatient pharmacy formulary. The policy calls for a DOD national P&T committee to decide which drug products to add to or drop from the BCF. The BCF policy calls for potentially reducing the number of drugs available in certain high-cost therapeutic classes. These therapeutic classes will be designated on the BCF as “closed” (see app. III for a list of prescription drugs currently available in therapeutic classes thus far targeted for closure). Under the policy, MTFs would not be allowed to dispense nonformulary products in those BCF therapeutic classes, although case-by-case exceptions would be allowed for medical necessity. In this way, DOD seeks to ensure that more doctors, pharmacists, and beneficiaries actually use these formulary items. The lack of a uniform formulary across MTF, TRICARE retail, and national mail-order pharmacy programs has unintended consequences for beneficiary costs and access as well as DOD and contractor costs. Effects include the following: Different closed formularies in the MTF pharmacies cause unpredictable cost-shifting among MTFs and allegedly may be causing cost-shifting from MTF pharmacies to TRICARE contractors’ retail pharmacy programs. Both situations can create uncertain financial effects within the pharmacy programs and for beneficiaries, as well as cause overall program cost increases. TRICARE contractors’ bid prices are unnecessarily inflated because, under their contract, they must use open formularies and thus have only limited influence over beneficiary prescription drug use. As a result, the TRICARE contractors told us, they are less able to negotiate deeper price discounts from drug companies without the ability to provide preferred or favorable status on a closed or incentive-based drug formulary. If they could, one contractor estimated, their retail pharmacy drug costs could be reduced between 10 percent and 20 percent ($23 million to $47 million on the basis of 1997 retail drug costs of $233 million). Overall costs are higher than necessary for DOD because of its inability to share the TRICARE contractors’ formulary savings through the applicable bid-price adjustment provisions of the contracts. Despite the flexibility and cost-control advantages of incentive-based formularies, such an approach faces various policy, statutory, regulatory, and contractual barriers. For example, DOD believes it lacks authority to charge non-active duty beneficiaries copayments for MTF outpatient prescription drugs. Copayments at MTFs would create incentives for physicians to prescribe and beneficiaries to accept the formulary drugs. At the same time, beneficiaries could elect to make a copayment to obtain the nonformulary drugs at an MTF rather than shop at the contractor’s outlets or the mail-order pharmacy with their copayments. An example of a contractual barrier is DOD’s position on the formulary types to be used in the TRICARE retail and mail-order pharmacy programs. While DOD required that the new national mail-order pharmacy program contractor use a closed formulary, DOD’s contracts with TRICARE contractors prohibit the use of closed formularies, although they are apparently permitted under TRICARE regulations. DOD and contractor officials told us that a uniform, incentive-based formulary for all pharmacy programs would be a significant “demand management” and cost-control improvement over the current approaches. The added revenue from MTF copayments, if retained by the affected MTF, could be used to pay for more prescription drug services. Copayments could be designed to create incentives for physicians to prescribe and beneficiaries to use more cost-effective formulary drugs. Pharmacoeconomic Center officials told us that MTFs could save an estimated $60 million each year in prescription drug costs using, for example, a $15 MTF copayment for nonformulary products. One of Foundation’s TRICARE program officials estimated that MTF prescription drug costs could drop about 5 percent under an incentive-based formulary—a savings of $37 million based on 1997 MTF drug costs of $741 million. Including potential TRICARE retail pharmacy program formulary savings, systemwide savings could amount to between $61 and $107 million per year. In addition to formulary management and automated PRODUR systems, private health plans use other PBM strategies to further control prescription drug costs, curb inappropriate prescription drug therapy, and identify physicians who prescribe too many or nonformulary drugs so they can be educated about more appropriate, cost-effective treatments for their patients. Such strategies, referred to as physician and pharmacist interventions, cannot be fully and systematically applied in MTF, TRICARE retail, and national mail-order pharmacy programs (see table 3.2 for a description). DOD and contractor officials cited barriers such as a lack of policies or contract provisions permitting therapeutic interchange, along with the need to integrate each program’s pharmacy patient records into a shared database to make managed pharmacy care decisions. Along with improving the quality of drug therapy, these strategies are routinely used in private health plans to control costs and achieve large direct and indirect cost-savings. For example, three FEHBP plans, covering 4.5 million beneficiaries, estimated saving about $60 million in 1995 using such strategies. Another PBM told us that, in the FEHBP plans it represents, 1997 savings resulting from prior authorization alone were $66 million. The consequences of not using these commercial best practices more extensively in DOD pharmacy programs are likely significant. For example, higher costs are caused by using more expensive drug therapies instead of less costly generic or therapeutic alternatives and by not having doctor “report cards” that could be used to encourage physicians to prescribe less costly prescription drugs. According to DOD and contractor officials, systemwide costs likely are 10 to 20 percent higher than necessary. Applying such percentages would mean that the total DOD 1997 pharmacy drug costs of $987 million may include $99 million to $197 million in unnecessary spending. Private sector pharmacy benefit managers use mail-order and network retail pharmacy programs to control costs and optimize beneficiaries’ access and service. Until recently, DOD procured mail-order and retail pharmacy services as part of the TRICARE managed care support contracts. To secure DAPA drug prices and thus help control TRICARE contractors’ pharmacy cost increases, DOD replaced the contractors’ mail-order pharmacy programs with a separate national mail-order contract service. DOD is now considering a proposal to provide retail pharmacy services under one new contract once the new TRICARE managed care support contracts are phased in across the country. Such initiatives separate pharmacy care from health care management, will likely increase systemwide costs, pose additional patient safety risks, and complicate TRICARE contract management. During the past several years, DOD has used contractor-supported mail-order pharmacy programs as a less costly way to dispense medications to beneficiaries with chronic health conditions, such as asthma and diabetes. Mail order is easy and convenient for beneficiaries to use and can control DOD’s costs because prescription drugs are purchased at DAPA prices previously available only to MTF pharmacies. In 1994, DOD contracted for two mail-order pharmacy demonstration programs and required TRICARE contractors to provide mail-order pharmacy services starting in March 1995. Also, after consulting with VA, the federal agency responsible for implementing the Veterans Health Care Act of 1992, DOD decided to forgo seeking authority under the act for TRICARE contractors to directly receive DAPA prices for their mail-order and retail pharmacy services. Instead, DSCP officials proposed and DOD Health Affairs agreed, upon consulting with VA, that DSCP should issue a contract solicitation for a separate national mail-order pharmacy program. Under the national mail-order pharmacy program, which became operational in October 1997, the new contractor—Merck-Medco— dispenses prescription drugs purchased by a DSCP prime vendor contractor. DOD receives the DAPA prices for these drugs (see fig. 4.1). To fully implement the new program, DOD modified the TRICARE contractsso that in April 1998 the TRICARE contractors ended their mail-order pharmacy services and began paying Merck-Medco to deliver the services. According to several DOD and TRICARE contractor officials, separating mail-order pharmacy from TRICARE health care delivery increases systemwide costs and creates contract administration and health care management problems. Some examples follow: While the TRICARE contractors continue providing retail pharmacy services, neither they nor the mail-order pharmacy contractor will have a complete computerized history of each patient’s retail and mail-order medications. This presents potential health risks for patients. Merck-Medco is not linked to the TRICARE contractors’ claims adjudication databases, which are used to track the amount each single beneficiary or family group spends on drugs to determine when the annual deductibles and out-of-pocket cost limits have been reached. Thus, delays in paying claims and errors can be expected. While Merck-Medco is to provide an accounting of beneficiary mail-order expenditures to each contractor, such data sharing is cumbersome and will be delayed by intermediary routing through several DOD offices. For the TRICARE contractors to pay for national mail-order pharmacy services, DOD has set up a new billing and payment system that may take months to reconcile. Rather than having Merck-Medco directly bill the TRICARE contractors for the mail-order services, DOD plans to pay Merck-Medco for its mail-order services and, in its monthly TRICARE contractor payments, to subtract an amount to cover the contractor’s share of the costs. Each year, DOD and the TRICARE contractors will negotiate the monthly offset amount based on projected mail-order demand. A DOD official told us this roundabout process will lead to unnecessary errors and disputes and further complicate and delay the contract bid price adjustment process. DOD is also requiring the MTFs to pay for Merck-Medco’s mail-order pharmacy services provided to enrolled prime beneficiaries. This will add financial pressure to MTF pharmacy budgets and could lead to further MTF formulary restrictions and consequent access problems for beneficiaries. A significant problem related to the new mail-order program’s formulary was avoided shortly before the April 1998 changeover. During the TRICARE contract modification negotiations, the contractors objected to the new mail-order program’s restrictiveness compared with their retail pharmacies’ formularies. The contractors pointed out to DOD that many of the drugs beneficiaries were used to getting by mail order were excluded from the new program, arguing that beneficiaries would flock to their pharmacies and their costs would increase. In February 1998, we also had alerted DOD to this potential outcome. In March 1998, shortly before the mail-order contract changeover, DOD relaxed the new program’s closed formulary to allow nonformulary prescriptions on a case-by-case basis. Since February 1998, DOD has been developing a proposal that would award a contract for a national retail pharmacy program. As currently proposed, the new program would replace retail pharmacy services provided under the TRICARE contracts and would be phased in nationwide as current TRICARE contracts expire and new contractors begin delivering health care services. Unlike the national mail-order pharmacy program, the current TRICARE contracts would not be affected. It is unclear, however, whether future TRICARE contractors would pay for such services from a separate contractor. Like the mail-order pharmacy program, the proposed retail pharmacy program would keep the national retail pharmacy network contractor out of the DAPA price transaction between DOD and the drug companies. DSCP is planning for a May 1999 contract award, but TMA officials told us in April 1998 that no final decisions have been made to proceed with a contract solicitation. DSCP officials estimate, on the basis of limited data, that retail pharmacy drug costs would be reduced 50 to 60 percent under such a DAPA-priced retail pharmacy program. A key issue with respect to eligibility for DAPA prices from drug companies to DOD is the respective roles of DOD and the national retail pharmacy benefit manager under the proposed program. Under the Veterans Health Care Act, DAPA prices are available for brand-name prescription drugs that DOD purchases under a “depot contracting system.” DSCP’s pharmaceuticals group director told us he believes DOD would be eligible for the DAPA prices. However, a VA national acquisition center senior contract attorney told us in February 1998 that DOD had not yet consulted with VA on that proposal. TMA’s Director of Health Services and Operations Support told us in April 1998 that DOD plans to consult with VA as part of its ongoing decision-making process. Even if permissible, the retail pharmacy network proposal raises several issues: Having two separate national contractors for mail-order and retail pharmacy services would further fragment DOD health care services and divorce TRICARE contractors’ medical care management from pharmaceutical care. One contractor official told us that utilization management would have to be extensively reengineered and that it would not be possible to adequately manage patients’ medical care. Another contractor told us that the prescription drugs are important in maintaining the beneficiary population’s good health and that it is difficult to isolate the pharmacy benefit from the remaining medical benefit. All contractors would object to being financially responsible for retail and mail-order pharmacy contractors’ costs since they would have no control over their formularies or operations. The proposal would involve a complicated and protracted series of financial transactions to distribute and reimburse millions of prescriptions among multiple organizations. The added companies and DOD agencies that would need to share data systems just for payment purposes could further delay needed pharmacy database integration. Also, the accounting and payment reconciliation complexities expected with the national mail-order program may be exacerbated for the proposed retail program. According to TRICARE contractor officials, savings from DAPA prices could be short-term. These officials predicted that drug companies may be motivated to raise DAPA prices to avoid losses from an expanded DOD discounted market. Although these marketplace adjustments are difficult to project because of the many factors that influence drug prices, expanding the size of the market that could have access to DAPA prices could put upward pressure on DAPA prices.It is unclear how the proposal would affect beneficiary cost-sharing under TRICARE Extra. Currently, cost shares range from 15 to 20 percent of negotiated retail drug prices (see table 3.1). Like DOD, beneficiaries could potentially experience 50 to 60 percent savings if their cost shares were based on DAPA prices rather than on higher commercial prices. However, DOD’s proposal does not address that aspect. It is also unclear whether the proposal would end beneficiary access to nonnetwork retail pharmacies, which is currently allowed under TRICARE contracts, or lead to a more fragmented subsystem managed by separate contractors. Under TRICARE Standard, beneficiaries who choose to use nonnetwork retail pharmacies must pay higher out-of-pocket costs and submit paper claims to TRICARE contractors for reimbursement of covered benefits. DOD’s proposal does not address which contractors, if any, would be required to accommodate claims for nonnetwork retail pharmacy services. We asked DOD officials why they had not considered allowing TRICARE contractors to provide the information needed for DAPA prices paid directly to DOD. In April 1997, Foundation’s Senior Vice President for TRICARE Program Management proposed a method for TRICARE contractors to provide DOD with the data it needs to obtain DAPA prices from drug companies. Foundation estimated that the proposal would save $250 million throughout the lives of its three TRICARE contracts. Such an approach, if permissible under the Veterans Health Care Act, would avoid the various issues that would be created if a separate national PBM retail pharmacy contractor took over and might offer savings in addition to those that could be achieved from integrating patient databases and implementing other commercial best practices in existing programs, including TRICARE retail. TMA headquarters officials told us this approach was not considered because in 1997 they believed the only way to extend DAPA pricing to a retail pharmacy program was through a separate contract. Another official told us that under the TRICARE contractor approach, other conflicts likely would arise, such as that between TMA’s Office of Acquisition Management and Support overseeing TRICARE contracts and DSCP, which administers DAPA prices. DSCP, which developed the subject proposal and is its chief sponsor, has a somewhat competing mission with TMA. DSCP would gain financially for example, if its DOD drug market share expanded by replacing existing services with its own retail and mail-order pharmacy contracts. On the other hand, DSCP views the new retail pharmacy contract as a natural extension of its current DOD market to supply MTFs with pharmaceuticals. In the 1990s, as military beneficiaries’ demand for prescription drugs increased, the number of MTF pharmacies decreased and funding was tightened. To balance service demand with decreasing resources, MTF pharmacies began regularly adjusting their formularies without considering the systemwide effects on beneficiaries’ access and overall DOD pharmacy program costs. Such actions, particularly at smaller MTF pharmacies, have resulted in certain drugs becoming unavailable at some MTFs. The consequent shifting of affected beneficiaries to larger MTF pharmacies has caused inconvenience and driven up systemwide costs. Recognizing these outcomes, in July 1998 DOD will impose a standardized BCF for all MTFs to control such ad hoc formulary adjustments. Since late 1996, both DOD and the TRICARE contractors have been examining why the contractors’ drug costs have increased at higher-than-expected rates, allegedly causing significant losses for the contractors. The contractors cited MTF formulary restrictions as the cause and told us they plan to seek additional compensation from DOD. DOD disagrees, and the matter is currently being studied. According to DOD pharmacy officials, the closing of one-third of MTFs since 1988 has significantly increased pharmacy workload and costs at the remaining 587 MTFs. Meanwhile, according to DOD pharmacy officials, pharmacy costs are the largest discretionary cost in the MTF budget. As such, MTFs closely monitor and frequently change—usually monthly—their formularies to balance prescription drug demand and volume against costs and funds available. The MTFs define space-available care, for pharmacy purposes, by the drugs carried on the formulary. If a patient’s drug is carried there, in effect, space for the patient is deemed to be available. Also, formulary drugs must be equally available to all beneficiary categories. As a result of the budget limitations, MTF commanders have to manage their formularies in a way that limits access to some beneficial medications. However, neither DOD Health Affairs nor the service medical commands centrally oversee MTF formulary decisions. Our discussions with pharmacy officials and review of 15 MTFs’ frequent formulary management decisions between 1995 and 1998 indicated that cost was the prevailing reason for adding or dropping drugs. The following are some examples: In 1995, the MacDill Air Force hospital near Tampa, Florida, decided to add to its formulary the newly available pill form of Imitrex, which is used to treat migraine headaches. However, to limit utilization and thus beneficiaries’ access to this high-cost drug in pill form, the pharmacy would accept prescriptions only for patients who had previously responded well to Imitrex injections. Although the pharmacy no longer applies this particular restriction, it applies an Imitrex dispensing restriction to control utilization and costs. Under this restriction, MacDill will dispense only one package per prescription containing nine Imitrex tablets. In the past, physicians would prescribe, and MacDill would dispense, 30 to 60 tablets per prescription. In 1997, at $12 to $15 a pill, Imitrex cost the MacDill pharmacy $103,000. In 1996, the Pensacola, Florida, Navy hospital decided not to add Zyrtec (a new allergy drug for upper respiratory symptoms) to the formulary. While recognizing Zyrtec’s therapeutic edge over other formulary drugs in the same therapeutic class, MTF officials decided that the high demand for Zyrtec at other Navy MTFs made it cost-prohibitive. In 1997, to include Allegra, a widely advertised, nonsedating antihistamine, on their formularies, the McConnell Air Force clinic (Wichita, Kans.) and Eglin Air Force hospital (Fort Walton Beach, Fla.) imposed dispensing restrictions. Both facilities cut the amount in half by dispensing 30 tablets instead of the full 60 tablets for a 1-month supply. Eglin’s pharmacy chief told us this should save about $60,000 each year. Both facilities justified restricting Allegra, estimated by MTF officials to cost 25 to 50 times more than other antihistamines with major sedative side effects, on the basis that it was unwarranted for overnight use. In 1997, the Lackland Air Force medical center in San Antonio, Texas, dropped Allegra from its formulary because too much of its $28 million pharmacy budget was spent to make Allegra available for all beneficiaries. Instead, the MTF pharmacy carries Allegra as a nonformulary drug obtainable only under special order, primarily for military pilots. In 1997, to save $98,000 annually, the Sheppard Air Force hospital in Wichita Falls, Texas, dropped Zocor, a cholesterol-lowering drug, from its formulary. Sheppard patients on Zocor at that time were switched to the cheaper formulary brand, Pravachol. The Fort Carson Army hospital in Colorado Springs, Colorado, regularly reviews for reduction the 50 formulary drugs on which it expends the most money. In 1997, the pharmacy spent more than $350,000 dispensing Prilosec (a widely prescribed ulcer drug). To cut costs, the pharmacy now (1) urges use of the less costly formulary drug Prevacid, (2) requires that physicians justify Prilosec prescriptions in writing (saving about 5 percent), and (3) is developing physician guidance on the best use of Prilosec and Prevacid. These unilateral formulary decisions represent MTF commanders’ attempts to exercise prudent fiscal management and control their rising pharmacy costs. Such actions, particularly at smaller MTF pharmacies, have resulted in certain drugs becoming unavailable at some MTFs and the consequent shifting of affected beneficiaries to larger MTF pharmacies—causing inconvenience and driving up costs elsewhere in the system. DOD pharmacy officials told us that reduced MTF pharmacy funding and downsizing, coupled with increased demand spurred by the availability of free drugs to the beneficiary whether enrolled in the MTF or not, have created a nearly unmanageable situation for MTF pharmacy personnel. These officials told us that current policy should be changed to limit space-available care to active duty and MTF prime enrollees (that is, the beneficiaries who have selected an MTF military doctor as their primary care physician under the TRICARE Prime option). They acknowledged that this “lock out” may shift many unenrolled beneficiaries to the contractors’ retail and mail-order programs, or shift Medicare-eligible retirees out of DOD’s system altogether. DOD officials agreed that under the current nonintegrated program structure, such a policy would enable MTF pharmacy costs to stabilize and potentially decline, but it would drive up contractors’ and beneficiaries’ costs. In our view, MTF formulary decisions under the existing space-available policy may be having the same consequences. These include decreased beneficiary access, and hence greater inconvenience, and the potential shifting of beneficiaries to other system sources such that costs can be driven up systemwide. These conditions prompted DOD to approve the BCF policy’s more centralized and restrictive approaches to standardize MTF formularies, which will be implemented in July 1998. In September 1996, Foundation informally asked DOD for additional compensation from unanticipated pharmacy cost increases in its three contract service areas. Foundation initially began delivering TRICARE services in March 1995 in region 11. According to Foundation, the rate of retail prescriptions per 1,000 enrollees in region 11 more than doubled between May 1995 and May 1996. In Foundation’s view, this increase was caused by MTF physicians prescribing drugs no longer carried in the local MTF formularies. Also, in 1997, Humana began complaining to DOD of similar pharmacy cost increases in regions 3 and 4, likewise caused by MTF formulary restrictions shifting beneficiary costs to Humana’s retail pharmacies. As alleged by the TRICARE contractors, many beneficiaries are responding to MTF formulary management by buying their prescription drugs at contractor pharmacies, thereby increasing the volume of prescription drug purchases beyond what the contractors projected in their original bids. Responding to these current, escalating contract issues, DOD is studying the potential causes of the pharmacy cost increases and whether, as the contractors have alleged, MTF formulary management is at fault and equitable financial settlements with the contractors may be in order. DOD’s studies, moreover, are focusing on trends in pharmacy costs and use in Foundation’s and Humana’s service areas, compared with general MTF pharmacy use trends. Also, DOD is studying pharmacy cost and use trends in retail pharmacies versus MTF pharmacy use in areas in which TRICARE had not yet been implemented. DOD’s study has shown that, in the 3-year period ending in fiscal year 1997, the contractors’ retail pharmacy use surged by 43 percent, while MTF pharmacy use declined 5 percent. Moreover, DOD found these differences most pronounced in TRICARE areas. Notwithstanding these preliminary findings, DOD, Foundation, and Humana disagree on cause. Preliminarily, DOD is asserting that TRICARE retail pharmacy services’ ease of access and low cost may have attracted beneficiaries away from MTF pharmacies and to contractors’ programs, and thus the consequent cost-shifting may not be due to restrictive MTF formulary management. Of course, if DOD and the contractors had used interactive pharmacy databases during the periods in question, establishing cause and effect for the contractors’ allegations could have been greatly facilitated. In March 1998, moreover, contractor officials told us they disagree with DOD’s assertions and are considering submitting formal requests for millions of dollars in additional compensation. DOD’s contract administrators told us they know that Humana and Foundation are contemplating formal actions, but until such actions are taken, they are not able to comment further on the matter. As pharmaceuticals play a larger role in DOD’s health care system, both the demand for prescription drugs and their costs are growing. In response, DOD has sought ways to contain costs and improve how it manages the $1.3 billion pharmacy programs. Nonetheless, DOD and its contractors lack adequate prescription drug cost and use information as well as integrated pharmacy patient databases needed to effectively manage beneficiaries’ pharmaceutical benefits. Because of such problems as well as formularies that differ among its pharmacy programs, DOD is unable to fully apply proven PBM practices that could save hundreds of millions of dollars each year. The recent DOD mail-order program and retail pharmacy initiative, aimed at achieving savings by using DAPA prices, could cause financial and other problems for TRICARE contractors because pharmacy care would be separated from the contractors’ management of medical care. Also, efforts to cut MTF costs by dropping some prescription drugs from formularies could reduce beneficiaries’ MTF pharmacy access and increase other MTFs’ and potentially the TRICARE contractors’ pharmacy costs. Such efforts can be particularly hard financially on retirees aged 65 and older who have no outpatient prescription drug coverage under Medicare or any plan. In our view, the problems DOD is experiencing delivering its pharmacy benefit stem largely from the way it manages its $1.3 billion pharmacy programs. Although the MTF and contractor retail and mail-order pharmacy programs share patient populations and are otherwise highly interrelated, DOD has adopted a program-by-program focus rather than a systemwide view of these operations. As a result, changes made to one program inevitably affect the others, and cross-program problems such as nonintegrated databases and different formularies, eligibility, and copayment requirements are having substantial, unintended cost and beneficiary consequences. Although DOD has taken steps to create a Pharmacy Board of Directors and Pharmacoeconomic Center to help improve pharmacy management, a more fundamental overhaul is needed. We believe DOD needs a top-to-bottom redesign of its pharmacy programs that effectively involves the programs’ major stakeholders. Also, DOD must commit itself to managing pharmacy programs as a system and bringing needed reforms to the system. Otherwise, DOD’s pharmacy problems will continue and likely worsen in the future. To help DOD establish a more systemwide approach to managing its pharmacy benefit, the Congress may wish to consider directing DOD to establish a uniform, incentive-based formulary across its pharmacy programs and, as appropriate, to use non-active duty beneficiary copayments at MTFs to create incentives for physicians to prescribe and beneficiaries to use formulary drugs. Also, the Congress may wish to provide systemwide eligibility for Medicare-eligible retirees not now eligible for such benefits. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to undertake a top-to-bottom redesign of the prescription drug benefit across the MTF, contractor retail, and national mail-order pharmacies’ programs. This effort should identify and act on policy, oversight, managed care support, regulatory, and contractual changes needed to make the programs as uniform, integrated, and cost-effective as possible. Some changes may require additional legislative authorities and, as appropriate, the Secretary should seek those authorities from the Congress. Actions should include the following: Develop an approach for effectively involving affected stakeholders such as the DOD Pharmacy Board of Directors and Pharmacoeconomic Center, TMA Office of Acquisition Management and Support, DSCP, and TRICARE and national mail-order contractors in decisions bearing on the system. A starting point may be allowing the TRICARE and national mail-order contractors to be represented on the national DOD P&T committee. Expeditiously integrate the existing MTF, TRICARE retail, and national mail-order pharmacy patient databases and provide for automated PRODUR system use, rather than waiting for CHCS II implementation in 2003. Establish a uniform, incentive-based formulary for MTF, TRICARE retail, and national mail-order pharmacies’ programs. This should include using non-active duty beneficiary copayments at MTFs to encourage the use of formulary drugs at MTF, contractor retail, and mail-order pharmacies. Extend systemwide prescription drug eligibility to Medicare-eligible retirees not entitled to prescription benefits under the Medicare subvention demonstration and pharmacy base closure programs. Review national FEHBP and other private sector prescription drug benefits for lessons learned in establishing new DOD program criteria and revising prescription drug benefits. A guiding principle should be to provide DOD beneficiaries with uniform and geographically convenient access to DOD prescription drug services no matter where they reside. Upon integrating the existing pharmacy patient databases, institute electronic billing and claims reimbursement among MTFs and TRICARE contractors. Upon integrating the MTF pharmacy patient databases, institute mandatory third-party insurer billing for MTF prescription drugs provided to beneficiaries who have other health insurance for prescription drugs. Direct and ensure that MTF pharmacies and TRICARE contractors routinely apply accepted PBM practices such as prior authorization, early refill edits, duplicate therapy edits, and physician-approved therapeutic interchange—consistent with DOD pharmacy benefit policies. Postpone awarding a separate national retail pharmacy PBM contract until the subject reforms have been implemented for current TRICARE retail pharmacy programs and until cost-savings from those reforms can be compared with potential cost-savings under a separate retail pharmacy contract. In commenting on a draft of this report, DOD agreed with the report and each of its recommendations and described various actions planned or under way to address the recommendations. DOD also stated that, although valid and effective, such practices as MTF pharmacy copayments will incur beneficiary resistance and the perception of benefit erosion. We believe, on the other hand, that the pharmacy benefit, particularly for Medicare-eligible retirees, has already eroded and continues to do so because of MTF funding pressures and ad hoc formulary management. Moreover, we believe that our recommendations taken together will significantly help to reverse this troublesome course. Also, representatives of military retiree advocacy groups told us that beneficiaries would not oppose reasonable MTF copayments if assured they could reliably satisfy their prescription drug needs through DOD’s programs. Furthermore, beneficiaries’ general acceptance of MTF pharmacy copayments will critically depend, in our view, on DOD’s bringing about and promoting marked improvements in its overall pharmacy service efficiency, cost-effectiveness, and quality. DOD also stated, with respect to extending systemwide drug eligibility to Medicare-eligible retirees, that legislation will be required to fund such services above this population’s current MTF space-available services. We believe that if our recommendations are implemented promptly and strategically, the resulting savings would help to defray such added costs. As our report points out, implementing automated PRODUR systems; a uniform, incentive-based formulary; and other PBM best practices could save DOD and its contractors hundreds of millions of dollars annually by substantially lowering prescription drug costs. Also, collecting copayments for nonformulary drugs from all non-active duty beneficiaries would yield millions more, as would applying safer drug therapies to reduce general health care costs. Likewise, extending the systemwide drug benefit to Medicare-eligible retirees will result in better management of their care and in controls to help avoid excessive use and adverse drug reactions that can cause illness, hospitalization, and even death. In short, the financial and other health benefits to be derived from overhauling the system can be applied against the costs of a military retirees’ systemwide drug benefit. DOD’s comments in their entirety are included in appendix IV. We also obtained comments on a draft of the report from the TRICARE contractors—Foundation, TriWest, and Humana. Each agreed with the report and its recommendations. Foundation also stated that the DOD pharmacy system should not be fragmented further by carving out the contractors’ retail pharmacy services because pharmacy is an integral part of a patient’s total care. TriWest stated that the recommended top-to-bottom redesign of the prescription drug benefit should focus on improving patient access to appropriate pharmaceutical care and containing and better managing DOD and the TRICARE contractors’ costs. TriWest affirmed our report’s position that unless immediate, collaborative action is taken to fix the problems we identified, DOD’s pharmacy programs will likely worsen and costs will continue to hemorrhage. Foundation’s and TriWest’s comments appear in appendixes V and VI, respectively. Finally, Merck-Medco, the national mail-order pharmacy contractor, stated that DOD should contract with such PBMs as Merck-Medco rather than seeking to develop its proficiency at MTFs in applying best pharmacy practices. We disagree. The TRICARE contractors and Merck-Medco already provide commercial PBM services that supplement DOD’s direct care system’s capacity. Moreover, we do not have enough evidence that PBMs would cost less than the MTFs. Thus, we believe DOD needs a system-oriented pharmacy management structure in place and operational experience with best practices before further “make or buy” decisions can prudently be made. Furthermore, Merck-Medco, citing the legislative provision requiring us to study DOD’s pharmacy programs, stated that the report does not review the cost impacts of TRICARE contractors’ using PBM best practices to provide pharmacy benefits. We disagree. The report identifies barriers preventing TRICARE contractors from fully applying PBM best practices, and provides estimates of the cost and service quality effects on TRICARE contractors, DOD, and beneficiaries. The report also discusses systemwide problems with using PBMs to carve out TRICARE mail-order and retail pharmacy services to extend DAPA pricing to these programs. As a result, the report recommends that DOD postpone action on the retail pharmacy DAPA-pricing proposal and makes several other recommendations aimed at removing barriers to the contractors’ fully applying best PBM practices. Merck-Medco’s comments appear in appendix VII. DOD and the contractors also provided technical comments, which we incorporated as appropriate.

Summary: Pursuant to a legislative requirement, GAO reviewed the Department of Defense's (DOD) pharmacy programs, focusing on the: (1) adequacy of the information that DOD and its contractors have to manage the pharmacy benefit; (2) merits and feasibility of DOD and its contractors applying commercial best practices, including a uniform formulary, in managing its pharmacy programs; (3) merits and limitations of recent mail-order and retail pharmacy initiatives to secure discounted DOD drug prices; and (4) potential effects the military treatment facilities' (MTF) funding and formulary management decisions can have on beneficiaries' access to pharmacies and TRICARE contractors' costs. GAO noted that: (1) despite ongoing efforts to improve its pharmacy benefit programs, DOD and its contractors lack basic prescription drug cost and beneficiary use information as well as integrated pharmacy patient databases needed to effectively manage military beneficiaries' pharmaceutical care; (2) because of these problems, as well as formularies that differ among its pharmacy programs, DOD is unable to fully apply proven pharmacy benefit manager commercial best practices that could save millions of dollars each year; (3) recent DOD mail-order and retail pharmacy initiatives aimed at achieving savings by using distribution and pricing agreement drug prices could cause financial and other problems for TRICARE contractors because pharmacy care would be separated from the contractors' management of medical care; (4) moreover, MTFs' efforts to hold down costs by restricting the prescription drugs available on formularies could reduce beneficiaries' access to certain prescription drugs at MTF pharmacies and allegedly has increased TRICARE contractors' pharmacy costs; (5) such efforts can be particularly hard financially on retirees over age 64 with no prescription drug coverage under Medicare or any plan; (6) the significant problems DOD is experiencing in delivering its pharmacy benefit result largely from the way DOD manages its three pharmacy programs; (7) rather than viewing the programs as integral parts of a single pharmacy system, DOD manages the programs as separate entities, not taking into account, for example, the merits of establishing a uniform DOD formulary and integrated databases, or the effects that new initiatives, such as implementing a separate mail service pharmacy program, will have on the other programs; and (8) unless DOD begins to manage the various components of the pharmacy programs as a single system, the problems identified will continue and potentially worsen in the future.