Prescription drug discount cards are a relatively new option for consumers. Most of the large PBM-administered programs have been operating for less than 5 years, although some cards, such as one administered by Express Scripts, have been available for about a decade. Pharmaceutical-manufacturer-sponsored discount cards are a more recent development; the first one began in fall 2001. Together Rx began operating in June 2002. PBM-administered drug discount card programs are generally offered to consumers through such organizations as retail stores, retail pharmacies, employee and other associations, nonprofit organizations, insurance companies, and PBMs. The sponsoring organization typically markets the program under its own name, but contracts with another organization— usually a PBM—to administer the program. Generally, the PBM creates a network of participating pharmacies that have contracts with the PBM specifying discount arrangements. The PBM processes orders for the cards and operates a mail order pharmacy that cardholders may use. Consumers can have as many different cards as they like. Each card can be used at any participating retail pharmacy or through the PBM’s mail order pharmacy. Retail pharmacies play an important role in drug discount card programs because they agree to offer a lower price to cardholders. The PBM administrators with whom we spoke estimated that retail pharmacies fill 75 to 95 percent of the prescriptions paid for using PBM-administered discount cards, with mail order filling the remaining prescriptions. A large majority of prescriptions paid for using pharmaceutical-manufacturer- sponsored cards are also filled by retail pharmacies, rather than through mail order. To the typical pharmacy, however, card users comprise a small share of their prescription business. Representatives of three retail pharmacy chains we contacted told us that from 2 to 10 percent of a pharmacy’s prescriptions are purchased using a card. Under the Administration’s proposed Medicare-Endorsed Prescription Drug Plan Assistance Initiative, established drug card sponsors could apply to CMS for a Medicare endorsement; if they get it, sponsors could advertise this endorsement. Before the injunction was issued, applications from card sponsors were due March 7, 2003, and a final decision on the initial cards that would be Medicare-endorsed was slated to be announced in May 2003. On this timetable, CMS said it expected that beneficiaries would be able to enroll in the card program of their choice beginning in September 2003. Cards receiving the endorsement would have to meet certain standards, which are described below. The CMS rule does not provide details on some of these standards and is silent on how the agency would ensure compliance with some of them. Beneficiary eligibility. A card program would have to be open to all Medicare beneficiaries. Each beneficiary could be enrolled in only one Medicare-endorsed card program at a time, but could withdraw from it at any time. (A database of all cardholders would be maintained to ensure that each beneficiary was enrolled in only one Medicare-endorsed card program.) After withdrawing from a card program, the beneficiary could enroll in another Medicare-endorsed card program, but that enrollment would not take effect until the first day of the following July or January, whichever came first. Fees. A card program could charge an enrollment fee of no more than $25 to each Medicare beneficiary. Coverage. Each card program would provide a discount for at least one brand name or generic prescription drug from each therapeutic class of drugs (specified in the final rule) commonly needed by Medicare beneficiaries. CMS said it anticipated periodically modifying the therapeutic classes to keep them up to date with Medicare beneficiaries’ use of drugs and with changes in the pharmaceutical marketplace, including newly approved drugs. Advertised discounts. The discount that a beneficiary would receive by purchasing drugs with a Medicare-endorsed prescription drug card must be advertised in dollars, not as a percentage. CMS said it anticipated working with beneficiaries and the pharmaceutical industry to create a means to compare prices for drugs among all Medicare-endorsed prescription drug cards. CMS stated that it would give a special designation to up to 10 percent of cards that offered the deepest discounts to beneficiaries. Negotiation of discounts. Medicare-endorsed cards would require card administrators to negotiate with pharmaceutical manufacturers to provide lower prices to retail pharmacies for drugs purchased by cardholders. Discount card administrators would have to ensure that a “substantial” share of the lower prices was passed on to beneficiaries, either indirectly, through retail pharmacies, or directly. Information for beneficiaries. Enrollment fees, the availability of patient management services, such as drug interaction warnings, and information about the generic equivalent of brand name drugs for each Medicare-endorsed card would be included on CMS’s Web site and in the documents that contain card price comparisons developed by CMS. PBM-administered drug discount cards differ from pharmaceutical- manufacturer-sponsored cards with respect to eligibility, the range of drugs they cover, the extent to which the retail pharmacy is paid for all or part of the difference between the price a person pays without a discount card and the discount card price for a particular drug, and the prices available with a card. The discount card programs administered by PBMs are available to any adult, while the pharmaceutical manufacturers’ cards are available only to Medicare-eligible individuals and couples with incomes below a certain level who do not have prescription drug coverage. Each PBM-administered card covers most outpatient prescription drugs, while the cards sponsored by pharmaceutical manufacturers generally provide discounts only on the outpatient prescription drugs that company produces. PBM-administered discount cards specify that the cardholder’s price will be the lower of a percentage below a commonly used reference price or the pharmacy’s usual price (generally referred to as the usual and customary price). The typical card sponsored by a pharmaceutical manufacturer offers cardholders either a price that is a specified percentage off a list price or a fixed price for a specified quantity of each covered drug. (See appendix I for selected characteristics of the drug card programs that we examined.) The eligibility requirements for a card generally depend on whether it is administered by a PBM or sponsored by a pharmaceutical manufacturer. Unlike the PBM-administered cards, which are available to any individual, the drug company-sponsored cards are available only to Medicare-eligible individuals and couples with no prescription drug coverage who earn less than a certain amount. Income eligibility limits for these cards range from $18,000 to $30,000 for an individual and from $24,000 to $40,000 for a couple. PBM-administered discount cards usually cover most brand name and generic drugs. PBM officials said exceptions could include high-cost drugs in limited supply, those needing special administration, and the relatively few outpatient prescription drugs covered by Medicare. Each of the cards sponsored by a pharmaceutical manufacturer typically covers all the outpatient prescription drugs that the manufacturer produces. The number of drugs covered by the four manufacturer-sponsored cards we reviewed ranges from 14 to 46. The Together Rx card offers discounts on about 150 brand name drugs manufactured by its participating pharmaceutical manufacturers. Under all drug discount card programs, retail pharmacies agree to accept a lower price from a cardholder than the usual price they would charge a noncardholder. The card programs vary, however, in whether and to what extent the pharmacies are paid for the difference between these two prices. For purchases with the Medco Health Solutions and WellPoint Health PBM-administered cards, there is no such payment. For some of the purchases made with the other three PBM-administered cards, the retail pharmacy is either paid a portion of the difference between the pharmacy’s usual price and the price the cardholder pays. For other purchases made with any of these three cards, the pharmacy is not paid for any of the difference between the usual price and the price the cardholder pays. Under the typical pharmaceutical manufacturer-sponsored card, the manufacturer pays retail pharmacies for a portion of the difference between the usual price it charges for a drug and the lower price the pharmacy agrees to charge a cardholder. Some manufacturers set limits on the usual price that will be used to determine this portion. While PBM-administered drug discount cards typically express their savings to cardholders as a percentage off what a cardholder would otherwise pay, the cards differ in how they calculate the price that cardholders pay at a retail pharmacy. For example, all the PBM- administered cards other than Citizens Health express the cardholder’s price as the lower of the average wholesale price minus 10 to 15 percent or the retail pharmacy’s usual price. Citizens Health and the AARP card administered by Express Scripts use similar formulas, but further stipulate that the cardholder’s price must be at least one dollar below the retail pharmacy’s usual price. Drug prices available with pharmaceutical manufacturer-sponsored cards are typically lower than the prices available with PBM-administered cards because a manufacturer-sponsored card’s price is either a percentage off the manufacturer’s list price to wholesalers, which is generally lower than average wholesale price, or a dollar amount for a specified amount of a drug. For example, Aventis cardholders pay no more than 15 percent below its list price to wholesalers for a covered drug, and a Pfizer Share Card enrollee pays $15 for each 30-day supply of any covered drug. With GlaxoSmithKline’s Orange card a cardholder pays a price that is the pharmacy’s usual price, subject to a limit determined by the manufacturer, minus 25 percent off the company’s list price to wholesalers. Each manufacturer participating in Together Rx sets the price for each of its drugs independently, while guaranteeing that the price will be at least 15 percent off the manufacturer’s list price to wholesalers. PBM-administered drug discount cards used at retail pharmacies or the PBMs’ mail order pharmacies generally offer savings to consumers because card prices are typically lower than the prices retail pharmacies would otherwise charge. Card savings—the difference between the pharmacy’s usual price and the cardholder’s price—vary, primarily because the usual price varied across the 40 pharmacies we surveyed. For certain drugs at certain pharmacies, however, no savings were achieved through the use of the card because the retail pharmacy’s usual price was lower than the median card price. Savings achieved through a PBM- administered card would be reduced by the annual or one-time fee that the card charges. The range of savings achieved using a PBM-administered drug discount card at a retail pharmacy for a 30-day supply of the nine drugs we examined varied within and across geographic areas, primarily because of differences in the usual prices charged by the pharmacies. Choice of pharmacy rather than choice of card had more effect on how much a person saved with a discount card. (See appendix II for more information on the median retail drug card prices and the median retail pharmacy prices in the three areas we examined.) Median savings available with a PBM-administered card in the Washington, D.C. pharmacies ranged from $2.09 to $20.95 for the nine drugs. All 14 of the surveyed pharmacies offered a 10 percent senior discount. Card savings amounted to an additional 1.7 percent to 43.9 percent off the median pharmacy price. The highest percentage discount was for the two generic drugs in our sample (atenolol and furosemide), although because these were the lowest priced drugs, the dollar savings were among the lowest in the sample. The substantial price differences across pharmacies affected the card savings for a given drug. For example, the noncard price for a 30-day supply of 200 milligrams of Celebrex at the surveyed Washington, D.C. pharmacies ranged from $74.33 to $95.59. Median savings in North Dakota ranged from $0.54 to $7.72 for the nine drugs or from 1.3 percent to 42.3 percent off the median pharmacy price. Only 3 of 13 pharmacies offered a senior discount (two offered 10 percent and one offered 5 percent). At one of the pharmacies offering a senior discount, some card prices for eight of the nine drugs were higher than the pharmacy’s usual price for those drugs. In California, Medi-Cal, the state’s Medicaid program, requires retail pharmacies that participate in the program to offer the Medi-Cal price to Medicare beneficiaries who do not have prescription drug coverage. At the 10 Medi-Cal-participating pharmacies, savings for seven of the nine drugs ranged from $0.44 to $13.06 or from 0.7 percent to 11.1 percent off the median pharmacy price. The Medi-Cal prices for the other two drugs at these pharmacies were lower than the median drug card prices for these drugs so the use of the card offered no savings. At the two pharmacies that did not participate in Medi-Cal, but offered a 10 percent senior discount, the savings were similar to those at the Medi-Cal participating pharmacies, although one pharmacy’s prices for four drugs were lower than the median card prices. Savings at the other pharmacy, which did not offer a senior discount or participate in Medi-Cal, were considerably higher. Mail order prices for a 30-day supply of a drug with a PBM-administered discount card were typically lower than the retail pharmacies’ usual price without a discount card, resulting in greater card-related savings. The mail order prices with a discount card resulted in savings ranging from $6.30 to $27.56 for eight of the nine drugs we examined at the Washington, D.C. pharmacies we surveyed. The average retail pharmacy usual price without a discount card for the other drug was lower than the mail order price with a card. In North Dakota, the savings realized by using a PBM- administered drug card to purchase the nine drugs from a mail order pharmacy ranged from $0.63 to $17.58. In California, mail order prices using a PBM-administered drug card were lower than the Medi-Cal price for eight of the nine drugs we examined, resulting in savings ranging from $1.03 to $19.67; the Medi-Cal price was lower than the mail order drug card prices for the other drug. Mail order savings at the three California pharmacies that were not participating in Medi-Cal ranged from $3.12 to $104.32, except at one of the pharmacies offering a 10 percent senior discount where the retail price for two drugs was lower than the mail order price. Because it generally offers lower prices than retail pharmacies, mail order can be an attractive option for purchasing drugs for the chronic conditions common among the elderly, such as diabetes, arthritis, and high blood pressure. Two PBM administrators noted, however, that many elderly people cannot afford to buy at one time the 90-day supply of a drug that mail order pharmacies typically dispense. Consumers who use a mail order option can purchase drugs at Internet pharmacies without a discount card. Our comparison of prices using data from November 2001 found that the median mail order price using a PBM- administered discount card was generally lower than Internet pharmacy prices for a drug. But we also found at least one Internet pharmacy at that time that offered a price lower than the median discount card mail order price for 8 of 17 drugs that we examined. The savings from using a card are reduced if the card charges a fee. None of the pharmaceutical manufacturers’ cards charges a fee. The PBMs whose cards we examined generally charged a one-time fee or an annual fee. For example, the discount card we examined from Wellpoint Health charges a one-time fee of $25 for an individual and about $50 for a family. The Citizens Health card costs $12 a year for an individual and $28 a year for a family. As of October 2002, 16 states had passed laws regulating one or more aspects of prescription drug discount card programs (see table 1). While the scope of each of the laws varies, the sponsors of several of the laws have characterized their purpose as consumer protection. Thirteen of the states require that a notice appear prominently on the card declaring that it does not represent insurance coverage. Eleven of the states require that the reporting of discounts offered by the cards not be misleading, deceptive, or fraudulent. New Hampshire’s law, for example, requires that the advertising for any discount card expressly state that the discount is available only at participating pharmacies. The law was enacted in May 2001 after some consumers complained about confusion in how and where discount cards could be used. The sponsor of the New Hampshire law told us that she heard from consumers in her state who said they would pay for a card over the telephone, only to later find that the nearest pharmacy honoring it was 50 to 100 miles away from their home. Twelve states require that the discounts be specifically authorized by separate contracts between the card administrator and each participating pharmacy or pharmacy chain. South Dakota’s law, which includes such a provision, was enacted following complaints from pharmacists that companies were selling cards that promised discounts at various pharmacies, but that the companies did not have agreements with all of those pharmacies to actually provide the discounts. The sponsor of the South Dakota law said some cardholders claimed that certain pharmacies that the card’s sponsor advertised as accepting the card did not do so. The sponsor of the law told us that it is intended to protect consumers and pharmacies from deceptive sales practices by drug discount card sponsors. Mississippi’s drug discount card law bars a program administrator, such as a PBM, from requiring pharmacies to accept a card as a condition of receiving a contract for the PBM’s other business, unless the administrator “pays a portion” of the cost of the discount given by the pharmacy. According to a representative of the Mississippi Attorney General’s office, which is responsible for enforcing the law, the state has not defined “portion” in regulation and the meaning of the term has not been the subject of litigation. We provided a draft of this report for review to the five PBM administrators whose cards we examined, four of whom responded. We also obtained comments from a pharmaceutical manufacturer that sponsors its own card and participates in the Together Rx card, and one independent expert reviewer. They provided technical comments that we incorporated as appropriate. As agreed with your offices, unless you publicly announce this report’s contents earlier, we plan no further distribution until 30 days after its issue date. At that time, we will send copies to the Administrator of CMS, the PBMs that administered the cards we examined, the pharmaceutical manufacturers that sponsored cards we examined and other interested parties. We will also make copies available to others upon request. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please call me at (202) 512-7119 or John Hansen at (202) 512-7105. Major contributors to this report were Roseanne Price, Michael Rose, and Jeff Schmerling. Washington, D.C.

Summary: While prescription drugs have become an increasingly important part of health care for the elderly, more than one-quarter of all Medicare beneficiaries have no prescription drug coverage. Over the past decade, private companies and not-for-profit organizations have sponsored prescription drug discount cards that offer discounts from the prices the elderly would otherwise have to pay for their prescriptions. These cards are typically administered by pharmacy benefit managers (PBM). Pharmaceutical manufacturers also sponsor and administer their own discount cards. The Administration has been interested in endorsing specific drug cards for Medicare beneficiaries to make the discounts more widely available. Legislative proposals in the Senate and House of Representatives have included drug cards as a means to lower prescription drug prices for Medicare beneficiaries. GAO was asked to examine how existing drug discount cards work and the prices available to card holders. Specifically, GAO evaluated the extent to which PBM-administered drug discount cards offer savings off non-card prices at 40 pharmacies in California, North Dakota, and Washington, D.C., and the differences between PBM-administered cards and cards sponsored by pharmaceutical manufacturers. Medicare beneficiaries can receive prices with prescription drug discount cards at retail pharmacies that are generally lower than those available to seniors without cards. Prices available for a particular drug tend to be similar across PBM-administered cards. Savings from PBM-administered cards, however, can differ because retail pharmacy prices vary widely. For example, in Washington, D.C., which had the highest median retail pharmacy prices of the three areas GAO surveyed, median savings using a PBM-administered card ranged from $2.09 to $20.95 for a 30-day supply of the nine drugs frequently prescribed for the elderly that GAO examined. This was after accounting for the 10 percent discount for senior citizens given by each of the 14 surveyed pharmacies. Savings in California with the use of a card tended to be lower because 10 of the 13 California pharmacies GAO surveyed participated in the state's Medicaid program (Medi-Cal) and are required to give Medicare beneficiaries the Medi-Cal price. For seven of the nine drugs, savings ranged from $0.44 to $13.06. For the other two drugs the cards offered no savings at Medi-Cal-participating pharmacies because the Medi-Cal prices were lower than the median price available with a PBM-administered card. Savings in North Dakota for the nine drugs ranged from $0.54 to $7.72 even though 10 of the 13 pharmacies there did not offer a senior discount. Any savings achieved with a card are reduced by the annual or one-time fee charged by the PBM-administered cards. Prices available with a pharmaceutical-manufacturer-sponsored card for a particular drug are typically lower than prices obtained using PBM-administered cards, and are often a flat price of $10 or $15. PBM-administered cards differ from pharmaceutical-manufacturer-sponsored cards with respect to eligibility and the range of drugs they cover, as well as the price available with the card. PBM-administered discount cards are available to all adults and can be used to purchase most outpatient prescriptions. Pharmaceutical-manufacturer-sponsored cards are available only to Medicare beneficiaries with incomes below a certain level who have no prescription drug coverage and can be used to purchase only outpatient prescription drugs produced by the sponsoring manufacturers.