The FEHBP is the largest employer-sponsored health insurance program in the country. Through it, about 8 million federal employees, retirees, and their dependents received health coverage—including for prescription drugs—in 2008. Coverage is provided under competing plans offered by multiple private health insurers under contract with OPM, which administers the program, subject to applicable requirements. In 2009, 269 health plan options were offered by participating insurers, 10 of which were offered nationally while the remaining health plan options were offered in certain geographic regions. According to OPM, plans must cover all medically necessary prescription drugs approved by the Food and Drug Administration (FDA), but plans may maintain formularies that encourage the use of certain drugs over others. Enrollees may obtain prescriptions from retail pharmacies that contract with the plans or from mail-order pharmacies offered by the plans. In 2005, FEHBP prescription drug spending was an estimated $8.3 billion. Medicare—the federal health insurance program that serves about 45 million elderly and disabled individuals—offers an outpatient prescription drug benefit known as Medicare Part D. This benefit was established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) beginning January 1, 2006. As of February 2009, Part D provided federally subsidized prescription drug coverage for nearly 27 million beneficiaries. The Centers for Medicare & Medicaid Services (CMS), part of the Department of Health and Human Services (HHS), manages and oversees Part D. Medicare beneficiaries may choose a Part D plan from multiple competing plans offered nationally or in certain geographic areas by private sponsors, largely commercial insurers, under contract with CMS. Part D plan sponsors offer drug coverage either through stand-alone prescription drug plans for beneficiaries in traditional fee-for-service Medicare or through Medicare managed care plans, known as Medicare Advantage. In 2009, there were over 3,700 prescription drug plans offered. Under Medicare Part D, plans can design their own formularies, but each formulary must include drugs within each therapeutic category and class of covered Part D drugs. Enrollees may obtain prescriptions from retail pharmacies that contract with the plans or from mail-order pharmacies offered by the plans. Medicare Part D spending is estimated to be about $51 billion in 2009. The VA pharmacy benefit is provided to eligible veterans and certain others. As of 2006, about 8 million veterans were enrolled in the VA system. In general, medications must be prescribed by a VA provider, filled at a VA pharmacy, and listed on the VA national drug formulary, which comprises 570 categories of drugs. In addition to the VA national formulary, VA facilities can establish local formularies to cover additional drugs. VA may provide nonformulary drugs in cases of medical necessity. In 2006, VA spent an estimated $3.4 billion on prescription drugs. The DOD pharmacy benefit is provided to TRICARE beneficiaries, including active duty personnel, certain reservists, retired uniformed service members, and dependents. As of 2009, there were about 9.4 million eligible TRICARE beneficiaries. In addition to maintaining a formulary, DOD provides options for obtaining nonformulary drugs. Beneficiaries can obtain prescription drugs through a network of retail pharmacies, nonnetwork retail pharmacies, DOD military treatment facilities, and DOD’s TRICARE Mail-Order Pharmacy. In 2006, DOD spent $6.2 billion on prescription drugs. Medicaid, a joint federal-state program, finances medical services for certain low-income adults and children. In fiscal year 2008, approximately 63 million beneficiaries were enrolled in Medicaid. While some benefits are federally required, outpatient prescription drug coverage is an optional benefit that all states have elected to offer. Drug coverage depends on the manufacturer’s participation in the federal Medicaid drug rebate program, through which manufacturers pay rebates to state Medicaid programs for covered drugs used by Medicaid beneficiaries. Retail pharmacies distribute drugs to Medicaid beneficiaries and then receive reimbursements from states for the acquisition cost of the drug and a dispensing fee. Medicaid outpatient drug spending has decreased since 2006 because Medicare Part D replaced Medicaid as the primary source of drug coverage for low-income beneficiaries with coverage under both programs—referred to as dual eligible beneficiaries. In fiscal year 2008, Medicaid outpatient drug spending was $9.3 billion—including $5.5 billion as the federal share—which was calculated after adjusting for manufacturer rebates to states under the Medicaid drug rebate program. FEHBP uses competition among health plans as the primary measure to control prescription drug spending and other program costs. Under an annual “open season,” enrollees may remain enrolled in the same plan or select another competing plan based on benefits, services, premiums, and other such factors. Thus, plans have the incentive to try to retain or increase their market share by providing the benefits sought by enrollees along with competitive premiums. In turn, the larger a plan’s market share, the more leverage it has for obtaining favorable drug prices on behalf of its enrollees and controlling prescription drug spending. Similar to most private employer-sponsored or individually purchased health plans, most FEHBP plans contract with pharmacy benefit managers (PBMs) to help them administer the prescription drug benefit and control drug spending. In a 2003 report reviewing the use of PBMs by three plans representing about 55 percent of total FEHBP enrollment, we found that the PBMs used three key approaches to achieve savings for the health plans: negotiating rebates with drug manufacturers and passing some of the savings to the plans; obtaining drug price discounts from retail pharmacies and dispensing drugs at lower costs through mail-order pharmacies operated by the PBMs; and using other intervention techniques that reduce utilization of certain drugs or substitute other, less costly drugs. For example, under generic substitution PBMs substituted less expensive, chemically equivalent generic drugs for brand-name drugs; under therapeutic interchange PBMs encouraged the substitution of less expensive formulary brand-name drugs for more expensive nonformulary drugs within the same drug class; under prior authorization PBMs required enrollees to receive approval from the plan or PBM before dispensing certain drugs that are high cost or meet other criteria; and under drug utilization review PBMs examined prescriptions at the time of purchase or retrospectively to assess safety considerations and compliance with clinical guidelines, including appropriate quantity and dosage. The PBMs were compensated by retaining some of the negotiated savings. The PBMs also collected fees from the plans for administrative and clinical services, kept a portion of the payments from FEHBP plans for mail-order drugs in excess of the prices they paid manufacturers to acquire the drugs, and in some cases retained a share of the rebates that PBMs negotiated with drug manufacturers. While OPM does not play a role in negotiating prescription drug prices or discounts, it does attempt to limit prescription drug spending through its leverage with participating health plans in annual premium and benefit negotiations. Each year, OPM negotiates benefit and rate proposals with participating plans and announces key policy goals for the program, including those relating to spending control. For example, in preparation for benefit and rate negotiations for the 2007 plan year, OPM encouraged proposals from plans to continue to explore the appropriate substitution for higher cost drugs with lower cost therapeutic alternatives, such as generic drugs, and the use of tiered formularies or prescription drug lists. OPM also sought proposals from plans to pursue the advantages of specialty pharmacy programs aimed at reducing the high costs of infused and intravenously administered drugs. In preparation for 2010 benefit and rate negotiations, OPM reiterated its desire for proposals from plansto substitute lower cost for higher cost therapeutically equivalent drug s, adding emphasis to using evidence-based health outcome measures. Medicare Part D uses a competitive model similar to FEHBP, while other federal programs use other methods, such as statutorily mandated prices or direct negotiations with drug suppliers. Medicare Part D follows a model similar to the FEHBP by relying on competing prescription drug plans to control prescription drug spending. As with the FEHBP, during an annual open season Part D enrollees may remain enrolled in the same plan or select from among other competing plans based on benefit design, premiums, and other plan features. To attract enrollees, plans have the incentive to offer benefits that will meet beneficiaries’ prescription drug needs at competitive premiums. The larger a plan’s market share, the more leverage it has for obtaining favorable drug prices on behalf of its enrollees and controlling prescription drug spending. As a result, Part D plans vary in their monthly premiums, the annual deductibles, and cost sharing for drugs. Plans also differ in the drugs they cover on their formulary and the pharmacies they use. Part D uses competing sponsors to generate prescription drug savings for beneficiaries, in part through their ability to negotiate prices with drug manufacturers and pharmacies. To generate these savings, sponsors often contract with PBMs to negotiate rebates with drug manufacturers, discounts with retail pharmacies, and other price concessions on behalf of the sponsor. MMA specifically states that the Secretary of HHS may not interfere with negotiations between sponsors and drug manufacturers and pharmacies. Even though CMS is not involved in price negotiations, it attempts to determine whether beneficiaries are receiving the benefit of negotiated drug prices and price concessions when it calculates the final plan payments. Sponsors must report the price concession amounts to CMS and pass price concessions onto beneficiaries and the program through lower cost sharing, lower drug prices, or lower premiums. Similar to OPM, CMS also negotiates plan design with participating plans and announces key policy goals for the program, including those relating to spending control. For example, in preparation for 2010 benefit and rate negotiations, CMS noted that one of its goals is to establish a more transparent process so that beneficiaries will be able to better predict their out-of-pocket costs.