TRICARE, DOD’s health care program, has 9.1 million eligible beneficiaries that include active duty, certain reservists, and retired members of the uniformed services, as well as their families and survivors. Beneficiaries may generally obtain care from either MTFs or civilian providers. TRICARE beneficiaries can obtain prescription drugs directly from MTFs, the TMOP, and network and nonnetwork retail pharmacies. The pharmacy benefits law, as passed in October 1999, directed the Secretary of Defense to establish a pharmacy benefits program. The program is, among other things required to include a uniform formulary that should ensure drugs are available in the complete range of therapeutic classes; required to make drugs on the uniform formulary available to beneficiaries at MTFs, the TMOP, and retail pharmacies; and authorized to establish copayment requirements for generic, formulary, and nonformulary drugs. The pharmacy benefits law also directed the Secretary of Defense to establish the P&T Committee to develop the uniform formulary, and the BAP to review and comment on the development of the uniform formulary. Finally, the Secretary of Defense was to implement the use of the Pharmacy Data Transaction Service (PDTS) at designated MTFs, the TMOP, and retail network pharmacies. The PDTS is an electronic service that DOD uses to maintain prescription drug information for all TRICARE beneficiaries worldwide. In 2001, DOD established the current pharmacy copayment structure, which is based on whether a drug is classified as formulary generic (tier 1), formulary brand-name (tier 2), or nonformulary (tier 3). The copayment also depends on where the beneficiary chooses to fill his or her prescription. (See table 1.) The NDAA for Fiscal Year 2007 directed DOD to establish the Task Force on the Future of Military Health Care to assess health care services provided to members of the military, retirees, and their families and to make recommendations for sustaining those services. In addition to other aspects of DOD’s health care system, the task force reviewed DOD’s pharmacy benefits program. It issued an interim report in May 2007 and a final report in December 2007 to the Secretary of Defense on its findings and recommendations. The Secretary of Defense may comment on the recommendations provided in the task force’s final report and, within 90 days of its issuance, must forward the report to the Committees on Armed Services of the Senate and the House of Representatives. DOD’s spending on prescription drugs more than tripled from $1.6 billion in fiscal year 2000 to $6.2 billion in fiscal year 2006. Retail pharmacy spending accounted for the greatest increase, rising almost ninefold from $455 million to $3.9 billion. It also grew from 29 percent of DOD’s overall drug spending to 63 percent—the largest increase of the points of service. TMOP spending rose from $106 million to $721 million and increased from 7 percent of total spending to 12 percent. MTF pharmacy spending rose from $1 billion in fiscal year 2000 to $1.7 billion in fiscal 2004, but declined slightly to $1.5 billion in fiscal year 2006. In fiscal year 2000, MTF spending accounted for 65 percent of DOD’s overall drug spending but declined to 25 percent in fiscal year 2006. (See fig. 1.) Three overarching factors influenced these trends. First, because federal pricing arrangements that generally result in lower prices were not applied to drugs dispensed at retail pharmacies during this time period, these drugs were generally more expensive for both DOD and its beneficiaries than the drugs dispensed at MTFs or the TMOP. However, the NDAA for Fiscal Year 2008 requires that federal pricing arrangements now be applied to TRICARE prescriptions filled at retail pharmacies. Second, the increased use of retail pharmacies has exacerbated the effect of higher retail prices. More beneficiaries are using only retail pharmacies to obtain their prescriptions—about 2 million in fiscal year 2006, up from about 1 million in fiscal year 2002 (see fig. 2). Further, beneficiaries are obtaining more maintenance drugs—drugs for long-term conditions, such as high blood pressure or cholesterol—at retail pharmacies (see fig. 3). From fiscal year 2004 through fiscal year 2006, the number of maintenance drug prescriptions dispensed at retail pharmacies increased by more than 11.6 million. Those dispensed at the TMOP increased much less, by about 1.5 million, while those at MTFs decreased by about 2.5 million. DOD officials cited additional reasons that they believed contributed to the increased use of retail pharmacies, though they could not quantify the effect of these reasons. These reasons included: base closures, which have decreased the number of MTF pharmacies; deployment of MTF personnel, which limits MTF appointment availability, resulting in more beneficiaries going to civilian providers and filling their prescriptions at retail pharmacies; the vast TRICARE retail network of about 59,000 pharmacies, which has become more convenient for beneficiaries; and the prescription copayment structure, which does not discourage beneficiaries from using the more costly retail pharmacies. Third, according to DOD officials, TRICARE expansions have led to a growing population of aging beneficiaries, who use more drugs. By fiscal year 2006, about 1.7 million beneficiaries, age 65 or older, were eligible for the pharmacy benefit through TRICARE benefit expansions that began in 2001. According to DOD data, retail pharmacy spending for beneficiaries age 65 or older increased by about 207 percent from fiscal year 2002 through fiscal year 2006—slightly higher than the 184 percent increase for beneficiaries under age 65. (See fig. 4.) DOD officials told us that the average cost per beneficiary at retail pharmacies in fiscal year 2006 was about $1,277 for beneficiaries age 65 or older, compared with about $368 for those under age 65. MTF spending declined slightly for both age groups as TMOP spending increased. Those under age 65 were more likely to use MTFs, while those age 65 or older were more likely to use the TMOP. DOD has efforts under way to limit its prescription drug spending through the use of its uniform formulary and through beneficiary outreach for the TMOP. In an attempt to further limit its drug spending, both DOD and its Task Force on the Future of Military Health Care have recommended changes to the beneficiary copayment structure intended to encourage beneficiaries to use more cost-effective points of service. However, the NDAA through Fiscal Year 2008 prohibits any increase to retail copayments through fiscal year 2008. According to DOD officials, the agency has limited its prescription drug spending primarily through costs avoided through the use of its uniform formulary, which was implemented during 2005. DOD data show that the agency avoided about $447 million in drug costs in fiscal year 2006 and $916 million in drug costs in fiscal year 2007. MTFs accounted for most of DOD’s cost avoidance, while retail network pharmacies accounted for the least. Cost avoidance is affected by the following factors that result from DOD’s formulary decisions: The prices DOD obtains for drugs. In exchange for including a manufacturer’s drug on the uniform formulary, manufacturers can offer DOD prices below those otherwise available through statutory federal pricing arrangements, which applied only to drugs dispensed at MTFs and the TMOP during the time of our review. According to DOD officials, the agency had obtained prices for drugs dispensed at MTFs and the TMOP that are about 30 percent to 50 percent lower than the prices it obtained for drugs dispensed at network and nonnetwork retail pharmacies. This difference in price can be attributed to savings achieved through the discounts obtained for uniform formulary placement as well as the lower prices obtained through federal pricing arrangements for drugs dispensed at MTFs and the TMOP. Changes in beneficiaries’ use of formulary and nonformulary drugs within a therapeutic class. Once a drug is designated nonformulary, its use may be substituted with a formulary drug, which results in lower copayments for the beneficiary and lower costs to DOD. Because MTFs are generally limited to dispensing formulary drugs, cost avoidance attributed to the use of formulary drugs over nonformulary drugs is higher at this point of service than at the TMOP and retail network pharmacies, where beneficiaries can obtain more costly nonformulary drugs. Changes in beneficiaries’ use of generic and brand-name drugs within a therapeutic class. For both formulary and nonformulary drugs, DOD requires the substitution of generic drugs for brand-name drugs at MTFs, the TMOP, and retail pharmacies when a generic equivalent is available. A brand-name drug having a generic equivalent may be dispensed only if the prescribing physician establishes medical necessity for its use. A beneficiary’s use of a generic drug in place of a brand-name drug results in lower costs to the beneficiary and to DOD. Changes in beneficiaries’ use of MTFs, the TMOP, and retail pharmacies as a result of formulary designations. For example, a beneficiary may shift from obtaining a 30-day supply of a formulary drug at a retail pharmacy, where the beneficiary’s copayment would be higher, to an MTF where the beneficiary can obtain a 90-day supply of the drug without a copayment. To calculate cost avoidance, DOD first determines the costs it incurred at MTFs, the TMOP, and retail network pharmacies for each drug as a result of its designation as either formulary or nonformulary. DOD then subtracts these incurred costs from the estimated costs it would have incurred at MTFs, the TMOP, and retail network pharmacies if the designation had not been made. Cost avoidance is the difference between the incurred and estimated costs.