The distribution of and payment for prescription drugs involves interactions among multiple entities. These entities include drug wholesalers, independent pharmacies, PSAOs, and third-party payers and their PBMs. Interactions among these entities facilitate the flow of and payment for drugs from manufacturers to consumers. Drug wholesalers (hereafter referred to as wholesalers) purchase bulk quantities of drugs from pharmaceutical manufacturers and then distribute them to pharmacies, including independent pharmacies. For example, a wholesaler may fill an order from an independent pharmacy for a specified quantity of drugs produced by manufacturers and deliver the order to the pharmacy. In addition to supplying drugs, some wholesalers offer ancillary services to independent pharmacies such as helping them manage their inventory. Three wholesalers—AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health Inc.— accounted for over 80 percent of all drug distribution revenue in the United States in 2011. Independent pharmacies are a type of retail pharmacy with a store-based location—often in rural and underserved areas—that dispense medications to consumers, including both prescription and over-the- counter drugs. In this report, we define independent pharmacies as one to three pharmacies under common ownership. Approximately 21,000 independent pharmacies constituted almost 34 percent of the retail pharmacies operating in the United States in 2010. Although independent pharmacies offer other products such as greeting cards and cosmetics, prescription drugs account for the majority of independent pharmacy sales. These sales accounted for almost 17 percent of the $266 billion in prescription drug sales in the United States in 2010. In addition to products, independent pharmacies provide patient-care services such as patient education to encourage patients’ appropriate use of medications. According to a 2009 survey of pharmacists, independent pharmacies spend the majority of their time dispensing prescription drugs and providing patient-care services. Independent pharmacies primarily purchase drugs from wholesalers (although they may also purchase them directly from manufacturers) and represented slightly over 15 percent of wholesalers’ total sales to retail pharmacies in 2010. Independent pharmacies are an important part of a wholesaler’s customer portfolio because, in addition to purchasing drugs, independent pharmacies may also pay the wholesaler to provide logistical functions and ancillary services such as direct delivery of drugs to individual stores and inventory management. Thus, a wholesaler’s relationship with an independent pharmacy may result in multiple business opportunities for the wholesaler and administrative efficiencies for the pharmacy. After receipt of drugs from a wholesaler or manufacturer, pharmacies then fill and dispense prescriptions to consumers, such as health plan enrollees. These latter prescriptions are dispensed according to contractual terms agreed upon with each enrollee’s health plan, that is, with each third-party payer or its PBM. According to the National Community Pharmacists Association (NCPA), payments based on the contractual terms of third-party payers or their PBMs significantly affect the financial viability of independent pharmacies. Consequently, these pharmacies must carefully choose which contracts to accept or reject. Accordingly, most independent pharmacies rely on PSAOs to negotiate directly, or to make recommendations for negotiating contracts on their behalf with third-party payers or their PBMs. When a PSAO enters into a contract with a third-party payer or its PBM, the pharmacies in its network gain access to the third-party payer or PBM contract—and the individuals it covers—by virtue of belonging to the PSAO’s network. Third-party payers accounted for almost 80 percent of drug expenditures in 2010, which represents a significant shift from 30 years ago when payment from individual consumers accounted for the largest portion of expenditures. Third-party payers include private and public health plans such as those offered by large corporations and the federal government through Medicare and the FEHBP, many of which use PBMs to help them manage their prescription drug benefits. As part of the management of these benefits, PBMs assemble networks of retail pharmacies, including independent pharmacies, where the health plan’s enrollees can fill prescriptions.or its PBM’s network by entering into an agreement with the third-party payer or its PBM. It does so either directly or through a PSAO that has negotiated with that third-party payer or its PBM on the pharmacy’s behalf. Contract terms and conditions may include specifics about A pharmacy becomes a member of a third-party payer’s reimbursement rates (how much the pharmacy will be paid for dispensed drugs), payment terms (e.g., the frequency with which the third-party payer or its PBM will reimburse the pharmacy for dispensed drugs), and audit provisions (e.g., the frequency and parameters of audits conducted by the third-party payer, its PBM, or designee), among other things. The reimbursement rate that third-party payers or their PBMs pay pharmacies significantly affects pharmacy revenues. Retail pharmacies participating in a PBM’s network are reimbursed for prescriptions below the level paid by cash-paying customers (those whose prescriptions are not covered by a third-party payer). In addition, pharmacies must undertake additional administrative tasks related to transactions for customers who are covered by third-party payers that are not required for cash-paying customer transactions. For example, for customers covered by third-party payers, pharmacy staff must file claims electronically and may be required to counsel them on their health plan’s benefits. However, most retail pharmacies participate in PBM networks because of the large market share PBMs command, which represents potential pharmacy customers. The five largest PBMs operating in the first quarter of 2012 represented over 330 million individuals.benefit from the prescription and nonprescription sales generated by customers that PBMs help bring into their stores. (See fig. 1 for a diagram of the network of entities in the distribution of and payment for pharmaceuticals.) At least 22 PSAOs, which varied in the number and location of pharmacies to which they provided services, were in operation in 2011 or 2012. In total, depending on different data sources, these 22 PSAOs represented or provided other services to between 20,275 and 28,343 pharmacies in 2011 or 2012. (See table 1.) The number of pharmacies contracted with each PSAO across these sources ranged from 24 to 5,000 pharmacies; however, according to NCPDP data most contracted with fewer than 1,000 pharmacies. The largest 5 PSAOs combined contracted with more than half of all pharmacies that were represented by a PSAO in 2011 or 2012. Because pharmacies may change their PSAO, the number of pharmacies contracting with each PSAO fluctuates as For example, according to one PSAOs enroll and disenroll pharmacies.PSAO, member pharmacies will change PSAOs whenever they think that another PSAO can negotiate better contract terms with third-party payers or their PBMs. Some PSAOs contracted primarily with pharmacies located in a particular region. These PSAOs generally represented fewer pharmacies than PSAOs representing pharmacies across the United States. For example, the Northeast Pharmacy Service Corporation represented 250 independent pharmacies while the RxSelect Pharmacy Network represented from 451 to 569 independent pharmacies. According to NCPDP data, PSAOs provide services primarily to independent pharmacies. Of the 21,511 pharmacies associated with PSAOs in the 2011 NCPDP database, 18,103 were identified as independent pharmacies. These independent pharmacies represent nearly 75 percent of the total number of independent pharmacies in the 2011 NCPDP database. This is close to an estimate reported by NCPA and the HHS OIG, both of which conducted surveys in which approximately 80 percent of responding independent pharmacies were represented by PSAOs. In addition to independent pharmacies, some PSAOs also contracted with small chains and franchise pharmacy members.small chain pharmacies ranging in size from 25 to 150 pharmacies under For example, Managed Care Connection provides services to common ownership, and the Medicine Shoppe only offers its PSAO services to its franchise pharmacies. PSAOs provide a broad range of services to independent pharmacies including negotiating contractual agreements and providing communication and help-desk services. These and other services are intended to achieve administrative efficiencies for both independent pharmacies and third-party payers or their PBMs. Most PSAOs charge a monthly fee for a bundled set of services and separate fees for additional services. While PSAOs provide a broad range of services to independent pharmacies and vary in how they offer these services, we found that PSAOs consistently offer contract negotiation, communication, and help- desk services. Several entities, including industry experts, trade associations, and PSAOs we spoke with, referred to one or all of these services as a PSAO’s “key service(s)”—meaning that a PSAO can be distinguished from other entities in the pharmaceutical industry by its provision of these services. In addition, PSAOs may provide many other services that assist their member pharmacies—the majority of which are independent pharmacies—in interacting with third-party payers or their PBMs, although those PSAOs we spoke with did not provide these other services as consistently as their key services. On behalf of pharmacies, PSAOs may negotiate and enter into contracts with third-party payers or their PBMs. Both the HHS OIG and an industry study reported that small businesses such as independent pharmacies generally lack the legal expertise and time to adequately review and negotiate third-party payer or PBM contracts, which can be lengthy and complex.independent pharmacies that we reviewed indicated, and all of the PSAOs we spoke with stated, that the PSAO was explicitly authorized to negotiate and enter into contracts with third-party payers on behalf of member pharmacies. By signing the agreement with the PSAO, a member pharmacy acknowledges and agrees that the PSAO has the right to negotiate contracts with third-party payers or their PBMs on its behalf. All of the model agreements between PSAOs and PSAOs we spoke with had different processes for negotiating and entering into contracts with third-party payers or their PBMs. These processes included following guidance or parameters established by a governing body such as a board of directors composed partially or entirely of representatives from the PSAO’s member pharmacies. In addition, some PSAOs’ decisions about entering into contracts are made by their contracting department or executive staff that base the decision on factors such as analyses of the contract’s proposed reimbursement rate and the efficiencies and value that the PSAO’s member pharmacies would provide to the particular market in which the contracts are offered. Decisions about entering into contracts may also include consultation with a PSAO’s advisory board composed of representatives from the PSAO’s member pharmacies. While PSAOs may review and negotiate a wide range of contract provisions, PSAOs we spoke with reported negotiating a variety of provisions including reimbursement rates, payment terms, audits of pharmacies by third-party payers or their PBMs, price updates and appeals, and administrative requirements.areas, PBMs and PSAOs we spoke with reported that audits and reimbursement rates were of particular concern to pharmacies. One Regarding these contract PSAO reported that its negotiations about a contract’s audit provisions were intended to minimize member pharmacies’ risks and burdens as audit provisions can include withholding reimbursement on the basis of audit findings. In addition, according to some PSAOs that we spoke with, reimbursement rates to pharmacies have decreased over time, and PSAOs and other sources we spoke with reported that PSAOs’ ability to negotiate reimbursement rates has also decreased over time. Over half of the PSAOs we spoke with reported having little success in modifying certain contract terms as a result of negotiations. This may be due to PBMs’ use of standard contract terms and the dominant market share of the largest PBMs. Many PBM contracts contain standard terms and conditions that are largely nonnegotiable. According to one PSAO, this may be particularly true for national contracts, in which third-party payers or their PBMs have set contract terms for all pharmacies across the country that opt into the third-party payer’s, or its PBM’s network. For example, a national contract exists for some federal government programs, such as TRICARE. In addition, several sources told us that the increasing consolidation of entities in the PBM market has resulted in a few PBMs having large market shares, which has diminished the ability of PSAOs to negotiate with them, particularly over reimbursement rates. In contrast, PBMs we spoke with reported that PSAOs can and do negotiate effectively. PBMs and PSAOs reported that several factors may affect negotiations in favor of PSAOs and their members, including the number and location of pharmacies represented and the services provided by those pharmacies in relation to the size and needs of the third-party payer or its PBM. For example, a third-party payer or its PBM may be more willing to modify its contract terms in order to sign a contract with a PSAO that represents pharmacies in a rural area in order to expand the PBM’s network in that area. In addition, a third-party payer or its PBM may be more willing to negotiate in order to add pharmacies in a PSAO’s network that offer a specialized service such as diabetes care needed by a health plan’s enrollees. One PSAO also reported that small PBMs wishing to increase their network’s size may be more willing to negotiate contract terms. We found that PSAOs vary in their requirements for their member pharmacies. Two PSAO-pharmacy model agreements that we reviewed stated that member pharmacies must participate in all contracts in which the PSAO entered on behalf of members. These PSAOs and six additional PSAOs we spoke with reported that their member pharmacies must participate in all contracts between the PSAO and third-party payers or their PBMs. The remaining two PSAOs we spoke with reported that they build a portfolio of contracts from which member pharmacies can choose. These PSAOs negotiate contracts with various third-party payers or their PBMs and member pharmacies review the terms and conditions of each contract and select specific contracts to enter into. Most of the PSAO-pharmacy model agreements we reviewed contained provisions expressly authorizing member pharmacies to contract with a third-party payer independent of the PSAO. Two additional PSAOs we spoke with confirmed that they do not restrict member pharmacies from entering into contracts independent of the PSAO. All three PBMs we spoke with confirmed that pharmacies may contract with them if their PSAO did not sign a contract with them on the pharmacies’ behalf. PSAOs serve as a communication link between member pharmacies and third-party payers or their PBMs. Such communication may include information regarding contractual and regulatory requirements as well as general news and information of interest to pharmacy owners. All of the PSAOs we spoke with provided communication services to pharmacies such as reviewing PBMs’ provider manuals to make member pharmacies Communication with pharmacies was provided aware of their contents.by means of newsletters and the PSAOs’ Internet sites. In addition to communicating contractual requirements, PSAOs may also communicate applicable federal and state regulatory updates. For example, one PSAO we spoke with told us that it provides its member pharmacies with regulatory updates from the Centers for Medicare & Medicaid Services by publishing this information in its newsletter. Another PSAO we spoke with provided regulatory analyses that included examining and briefing its member pharmacies on durable medical equipment accreditation requirements, and fraud, waste, and abuse training requirements. According to the PSAO, this was to ensure that its member pharmacies were taking the right steps to comply with applicable regulations. PSAOs provide general assistance to pharmacies and assistance with issues related to third-party payers and their PBMs such as questions about claims, contracting, reimbursement, and audits. PSAOs may provide such assistance by means of a help-desk (or customer service department) or a dedicated staff person. For example, one PSAO we spoke with reported that it provides general pharmacy support services to help pharmacies with any needs they may have in the course of operating their businesses. This PSAO also had a staff person responsible for providing support services to member pharmacies including answering their questions about claims and each contract’s reimbursement rate or payment methodology. A PSAO may also help a pharmacy identify why a certain claim was rejected. PSAOs provide many other services that assist member pharmacies in interacting with third-party payers or their PBMs. For example, PSAOs may provide services that help the pharmacy with payment from a third- party payer or its PBM, comply with third-party payer requirements, or develop services that make the pharmacy more appealing to third-party payers or their PBMs. (See table 2 for a list and description of these services.) The PSAOs we spoke with varied in their provision of these other services although 9 of the 10 PSAOs we spoke with provided central payment and reconciliation services or access to reconciliation vendors that provided the service. However, other services were not provided as consistently across PSAOs. For example, only 1 PSAO reported that it provided inventory management or front store layout assistance. PSAO services have changed over time to meet member pharmacies’ interests. In some cases, this has meant adding new services, while in other cases PSAOs have expanded existing services. Several PSAOs we spoke with reported adding services intended to increase cost efficiencies and member pharmacies’ revenues. For example, three PSAOs we spoke with reported that they began offering central pay services and two of these PSAOs and an additional PSAO reported that they began offering reconciliation services. PSAOs we spoke with also reported expanding existing services. For example, one PSAO reported adding electronic funds transfers, while two other PSAOs reported that although they were already providing electronic funds transfers, they increased the frequency of transfers to five days per week. This increase was made to improve pharmacies’ cash flow by giving them quicker access to funds owed them by third-party payers or their PBMs. Two PSAOs we spoke with reported adding certification programs, particularly vaccination/immunization certification programs, because of the needs of third-party payers or their PBMs for this service to be provided through their network pharmacies. PSAOs provide services intended to achieve administrative efficiencies for both independent pharmacies and third-party payers or their PBMs. PSAO services enable pharmacy staff, including pharmacists, to focus on patient-care services rather than administrative issues that pharmacists may not have the time to address. PSAO services also reduce the number of resources that PBMs must direct toward developing and maintaining relationships with multiple independent pharmacies. PSAO services are intended to help independent pharmacies achieve efficiencies particularly in contract negotiation. For example, independent pharmacies and PBMs we spoke with told us that PSAO contract negotiation services eased their contracting burden and allowed them to expand the number of entities with which they contracted. As a member of a PSAO, pharmacies may no longer have to negotiate contracts with multiple third-party payers or their PBMs operating in any given market. Independent pharmacies also told us that PSAOs provide other services that create both administrative and cost efficiencies for them. For example, one pharmacist told us that the marketing services provided by his PSAO relieved him of advertising costs because the PSAO provided advertising circulars to its PSAO-franchise members. Another independent pharmacy reported that its PSAO provides services such as claims reconciliation less expensively than the pharmacy could perform on its own. Similar to independent pharmacies, PBMs we spoke with reported that PSAO services create administrative efficiencies for them, including efficiencies in contracting, payment, and their call centers. PSAO services create contracting efficiencies because they provide PBMs with a single point through which they can reach multiple independent pharmacies. For example, the PBMs we spoke with each had over 20,000 independent pharmacies in their networks, however, each PBM only negotiated contracts with 15 to 19 PSAOs, representing a majority of the pharmacies in its network. PBMs also reported that PSAO services create payment efficiencies when PSAOs provide central payment services. One PBM reported that instead of mailing checks to hundreds of individual pharmacies, the PBM made one electronic funds transfer to the PSAO, which then distributed the payments to its members. Finally, PBMs benefit from reduced call center volume because PSAOs often provide similar support directly to member pharmacies. For example, a call that may have gone to the PBM about a claim that was not paid may instead go to the pharmacy’s PSAO, which will help the pharmacy understand any issues with the claim. PSAOs may also aggregate member pharmacies’ issues and contact the PBM to discuss issues on behalf of multiple pharmacies and relay pertinent information back to those pharmacies. While creating efficiencies by acting on behalf of multiple pharmacies, PSAOs must ensure that their arrangements do not unreasonably restrain trade, thereby raising antitrust concerns. The FTC and the Antitrust Division of the Department of Justice (DOJ) are the federal agencies responsible for determining whether a particular collaborative arrangement may be unlawful and for enforcing applicable prohibitions. According to FTC officials, such a determination is dependent on multiple factors including the geographic region that a PSAO is operating in and the health care program (e.g., Medicare Part D) with which a PSAO is contracting. These factors affect the PSAO’s ability (and the abilities of the pharmacies the PSAO represents) to affect the terms of a contract or the pricing of a good. For example, a group of rural pharmacies may more effectively influence contract negotiations than a single pharmacy operating in an urban area with many competitors. PSAOs we spoke with were aware of potential antitrust issues and reported taking measures to minimize them. For example, two of the PSAOs we spoke with reported developing their PSAO’s organizational structure to ensure compliance with antitrust laws. Although PSAOs’ charges to member pharmacies for their services may vary depending on how the services are provided, 8 of the 10 PSAOs we spoke with charged a monthly fee for a bundled set of services. For example, 1 PSAO charged $40 to $80 per month for a bundle of services that included contract negotiation, communication with member pharmacies, help-desk services, business advice, and limited audit support. In comparison, another PSAO’s monthly fee ranged from $59 to $149 per month depending on the combination of services that the pharmacy requested. One of the remaining PSAOs we spoke with charged an annual fee rather than a monthly fee, while the other PSAO did not charge any fees for its PSAO services. The latter PSAO provided PSAO services as a value-added service to members of its group purchasing organization, for which it charged a monthly fee. Other services that are offered by most, but not all, PSAOs we spoke with are either provided within the bundle or as separate add-on services. PSAOs may also charge fees for individual services that are based on the type or value of that service. Virtually all of the fees for PSAO services are paid for by member pharmacies. All of the PSAOs we spoke with reported that they did not receive any type of fees from other entities such as an administrative fee from a third-party payer or its PBM. Similarly, all of the PBMs we spoke with told us that they did not pay PSAOs for their services. However 1 of the 3 PBMs we spoke with reported that it paid part of a pharmacy’s dispensing fee to 1 of the 16 PSAOs with which it contracted rather than to the pharmacy. The majority of PSAOs in operation in 2011 or 2012 were owned by wholesalers and independent pharmacy cooperatives.PSAO owners varied as to whether they require member pharmacies to also use the non-PSAO services they offer. Wholesalers and independent pharmacy cooperatives owned the majority of the PSAOs in operation in 2011 or 2012. Specifically, of the 22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent pharmacy cooperatives (“member-owned”), 4 were owned by group purchasing organizations, and 3 were stand- alone PSAOs owned by other private entities. (See table 3.) Three of the 5 largest PSAOs were owned by the 3 largest wholesalers in the U.S.: AmerisourceBergen Corporation, Cardinal Health Inc., and McKesson Corporation. Across all sources included in our review, the PSAOs owned by these wholesalers represented 9,575 to 12,080 pharmacies, and PSAOs owned by independent pharmacies represented 4,883 to 8,882 pharmacies. According to one industry report, the services provided by member-owned PSAOs are similar to those offered by wholesaler-owned PSAOs. One PBM we spoke with noted that because of the financial backing of wholesaler-owned PSAOs, their PSAOs generally offer central payment services more often than PSAOs owned by other types of entities. This strong financial backing is necessary to offer these services because there is a considerable liability and risk in providing a central payment service. PSAO owners may operate PSAOs for a number of reasons, including to benefit another, non-PSAO line of their business. The wholesalers we spoke with provided various reasons for offering PSAO services, such as wanting to assist independent pharmacies in gaining access to third-party payer or PBM contracts, or to help pharmacies operate more efficiently. Additionally, one wholesaler noted that it created its PSAO because third- party payers and independent pharmacies indicated there was a need for PSAO services in the market. These third-party payers wanted a sole source for reaching multiple pharmacies, while independent pharmacies wanted a facilitator to assist them with reviewing third-party payer contracts. Other pharmaceutical entities noted that wholesalers may have an interest in developing relationships with independent pharmacies, which are potential customers of the wholesaler’s drug distribution line of business. By obtaining multiple services from a wholesaler, an independent pharmacy may be less likely to switch wholesalers. Additionally, by having their PSAOs assist independent pharmacies with entering multiple third-party payer or PBM contracts, wholesalers may benefit from the increased drug volume needed by independent pharmacies to serve the third-party payer’s or PBM’s enrollees. Other types of PSAO owners also provided a number of reasons for providing PSAO services, for instance, a number of these owners stated that they began offering PSAO services as a market-driven response to the growth of third-party payers and PBMs. In fact, one PSAO owner we spoke with stated that it reluctantly began offering these services at the request of customers of its group purchasing services, who wanted help navigating the issues and complexities of third-party payer and PBM contracting. The owners of PSAOs we spoke with varied as to whether they require PSAO member pharmacies to also use services from a separate non- PSAO line of their business. Of the nine PSAO owners we spoke with that had a separate non-PSAO line of business (e.g., drug distribution or group purchasing), six did not require their PSAO member pharmacies to use services from that non-PSAO line of business. Of the remaining three, one wholesaler-owned PSAO limited its offer of services to pharmacies that were existing customers of its drug distribution line of business, while two member-owned PSAOs reported requiring their PSAO member pharmacies to join their group purchasing organizations. Officials from the wholesaler-owned PSAO stated that their limiting the availability of PSAO services to existing customers ensures that their PSAO already has basic information about their member pharmacies and a salesperson who serves as each member pharmacy’s point of contact. While most PSAO owners do not require their member pharmacies to use services from their primary line of business, member pharmacies may choose to do so. In this case, a pharmacy must contract and pay for PSAO and other services separately. In fact, according to one wholesaler we spoke with, approximately 36 percent of its drug distribution customers were also members of its PSAOs. required to submit an application to join a PSAO network. PSAO applications we reviewed requested information about the pharmacy’s licensing, services provided, and insurance. Additionally, applications asked pharmacies to indicate whether they had been investigated by the HHS OIG, had filed for bankruptcy, or had their pharmacy’s state license limited, suspended, or revoked. PSAOs stated they used the information provided in applications to verify that the pharmacies applying for membership in their network are licensed by their state and in good standing. Pharmacies may choose to obtain PSAO services from their wholesaler, but not all do so. Instead, some pharmacies may choose to join another PSAO. Most PSAOs we spoke with operated their PSAO separately from any separate non-PSAO line of business. For example, most wholesalers we spoke with stated their PSAO staff and drug distribution staff are distinct and do not interact. One of these wholesalers reported its PSAO has a distinct corporate structure, management team, sales organization and financial component from its drug distribution line of business. However, nearly all of the PSAO owners we spoke with operate their PSAO as a subsidiary of their non-PSAO line of business. For example, two PSAOs were organized as subsidiaries of a member-owned buying group, while another PSAO operated as a branded service under the owner’s non- PSAO line of business. Most PSAO owners reported that PSAO services are not a profitable line of business. Only 1 of the 10 PSAO owners we spoke with stated that its PSAO service was profitable. Other PSAO owners reported little to no profit earned from the PSAO services they provided. For those PSAOs that are not profitable, the cost of operating them may be subsidized by the owner’s non-PSAO lines of business. As previously noted, it may be the case that offering PSAO services may benefit the owner’s non-PSAO line of business even if the PSAO service itself is not profitable. For example, one member-owned PSAO we spoke with also owned a group purchasing organization to which its members must belong in order to obtain PSAO services. The group purchasing organization may benefit from increased membership driven by pharmacies that want to obtain its PSAO services. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Chairman of the Federal Trade Commission, and interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have questions about this report, please contact John E. Dicken at (202) 512-7114 or DickenJ@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix I. In addition to the contact named above, Rashmi Agarwal and Robert Copeland, Assistant Directors; George Bogart; Zhi Boon; Jennel Lockley; Laurie Pachter; and Brienne Tierney made key contributions to this report.

Summary: Independent pharmacies dispensed about 17 percent of all prescription drugs in the United States in 2010. To obtain, distribute, and collect payment for drugs dispensed, pharmacies interact with a network of entities, including drug wholesalers and third-party payers. With limited time and resources, independent pharmacies may need assistance in interacting with these entities, particularly with third-party payers that include large private and public health plans. Most use a PSAO to interact on their behalf. PSAOs develop networks of pharmacies by signing contractual agreements with each pharmacy that authorizes them to interact with third-party payers on the pharmacy's behalf by, for example, negotiating contracts. While specific services provided by PSAOs may vary, PSAOs can be identified and distinguished from other entities in the pharmaceutical distribution and payment system by their provision of intermediary or other services to assist pharmacies with third-party payers. GAO was asked to review the role of PSAOs. In this report, GAO describes: (1) how many PSAOs are in operation and how many pharmacies contract with PSAOs for services; (2) the services PSAOs offer and how they are paid for these services; and (3) entities that own PSAOs and the types of relationships that exists between owners and the pharmacies they represent. GAO analyzed data on PSAOs in operation in 2011 and 2012, reviewed literature on PSAOs and model agreements from 8 PSAOs, and interviewed federal agencies and entities in the pharmaceutical industry. At least 22 pharmacy services administrative organizations (PSAO), which varied in the number and location of the pharmacies to which they provided services, were in operation in 2011 or 2012. In total, depending on different data sources, these PSAOs represented or provided other services to between 20,275 and 28,343 pharmacies in 2011 or 2012, most of which were independent pharmacies. While the number of pharmacies with which each PSAO contracted ranged from 24 to 5,000 pharmacies, most PSAOs represented or provided other services to fewer than 1,000 pharmacies. Additionally, some PSAOs contracted with pharmacies primarily located in a particular region rather than contracting with pharmacies located across the United States. While PSAOs provide a broad range of services to independent pharmacies, and vary in how they offer these services, PSAOs consistently provide contract negotiation, communication, and help-desk services. All of the model agreements between PSAOs and independent pharmacies that GAO reviewed stated that the PSAO will negotiate and enter into contracts with third-party payers on behalf of member pharmacies. PSAOs may also contract with pharmacy benefit managers (PBM), which many third-party payers use to manage their prescription drug benefit. In addition to contracting, PSAOs also communicate information to members regarding contractual and regulatory requirements, and provide general and claims-specific assistance to members by means of a help-desk or a dedicated staff person. They may also provide other services to help member pharmacies interact with third-party payers or their PBMs, such as managing and analyzing payment and drug-dispensing data to identify claims unpaid or incorrectly paid by a third-party payer. PSAO services are intended to achieve administrative efficiencies, including contract and payment efficiencies for both independent pharmacies and third-party payers or their PBMs. Most PSAOs charge a monthly fee for a bundle of services and may charge additional fees for other services provided to its member pharmacies. Virtually all of the fees paid for PSAO services are paid by member pharmacies, with PSAOs receiving no administrative fees from other entities such as third-party payers or their PBMs. The majority of PSAOs in operation in 2011 or 2012 were owned by drug wholesalers and independent pharmacy cooperatives. Of the 22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent pharmacy cooperatives, 4 were owned by group purchasing organizations, and 3 were stand-alone PSAOs owned by other private entities. These owners varied in their requirements for PSAO member pharmacies to also use services from their separate, non-PSAO line of business. Three PSAO owners GAO spoke with required PSAO members to also use their non-PSAO services. For example, one wholesaler-owned PSAO limited its offer of PSAO services to existing customers of its drug distribution line of business. All but one PSAO owner GAO spoke with reported that their PSAO line of business earned little to no profit. However, PSAO owners may operate PSAOs for a number of reasons, including helping pharmacies gain access to third-party payer contracts and to provide benefits to the owner's non-PSAO line of business.