Defense Health Care:

Fully Integrated Pharmacy System Would Improve Service and Cost-Effectiveness

HEHS-98-176: Published: Jun 12, 1998. Publicly Released: Jun 12, 1998.

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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.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: Congress may wish to provide systemwide eligibility for Medicare-eligible retirees not now eligible for such benefits.

    Status: Closed - Implemented

    Comments: Section 711 of the Fiscal Year 2001 National Defense Authorization Act (P.L. 106-398) provides permanent authority by establishment of the TRICARE Senior Pharmacy Program, effective April 1, 2001. The new program provides Medicare-eligible military retirees and their family members the same pharmacy benefit as is currently available to other military health care beneficiaries through the TRICARE preferred provider and fee-for-service options. No enrollment fee or premium is required, but the co-pays and out of network deductible expenses normally associated with the TRICARE options apply. Participants in the TRICARE Senior Pharmacy Program can continue to use military pharmacies at no cost. With enactment, the Senate committee report repeats the finding supporting GAO's recommendation that such legislation "...would meet the major unmet health care need of older retirees, access to a pharmacy benefit."

    Matter: To help DOD establish a more systemwide approach to managing its pharmacy benefit, 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.

    Status: Closed - Implemented

    Comments: Section 701 of the National Defense Authorization Act for Fiscal Year 2000 (P.L.106-65) requires DOD to establish an effective, efficient, integrated pharmacy benefits program by October 2000. The pharmacy benefits program shall include a formulary of pharmaceutical agents (i.e., prescription drugs) in the complete range of therapeutic classes. The selection for inclusion on the uniform formulary of particular drugs in each therapeutic class shall be based on the relative clinical and cost effectiveness of the drugs in such class. To ensure the availability of nonformulary drugs through either the TRICARE retail pharmacy program, or the National Mail Order Pharmacy program, the pharmacy benefit program may impose higher beneficiary copayments. Higher copayments will create incentives for physicians to prescribe, and beneficiaries to use, formulary drugs and reduce DOD program costs.

    Recommendations for Executive Action

    Recommendation: The Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In response to GAO's recommendation to undertake a top-to-bottom redesign of DOD's prescription drug benefit program, the National Defense Authorization Act for Fiscal Year 2000 (P.L. 106-65; 10 U.S.C 1074g) required DOD to establish an effective, efficient, and integrated Pharmacy Benefits Program. Since then, DOD has established a high level pharmacy benefits oversight committee, integrated its pharmacy databases, and developed an electronic billing and claims reimbursement system, initiatives that constitute significant redesign of the program.

    Recommendation: The Secretary of Defense should develop an approach for effectively involving affected stakeholders such as the DOD Pharmacy Board of Directors and Pharmacoeconomic Center, TRICARE Management Activity Office of Acquisition Management and Support, Defense Supply Center-Philadelphia, 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 pharmacy and therapeutic committee.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: To conduct its comprehensive review of the pharmacy benefit, DOD formed a working group that included military and civilian experts, private consultants with expertise in pharmacy benefit design, and the TRICARE Managed Care Support contractors' pharmacy directors. The workgroup solicited input from beneficiaries and beneficiary organizations, professional pharmacy organizations, and the pharmaceutical industry. The working group considered a wide range of best business practices used by pharmacy benefit managers in the civilian sector. The working group compared and contrasted the current benefit with the potential implementation of ten identified commercial best practices and estimated the potential cost and benefit of applying these practices to the DOD pharmacy system. In addition, since July 1998, DOD's pharmacy and therapeutic committee has had TRICARE and National Mail-Order Pharmacy contractors' members.

    Recommendation: The Secretary of Defense should expeditiously integrate the existing MTF, TRICARE retail, and national mail-order pharmacy patient databases and provide for automated prospective drug utilization review system use, rather than waiting for the Composite Health Care System II implementation in 2003.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: Millions of dollars in unnecessary costs from overutilization and patient safety problems from adverse drug reactions are likely occurring because DOD declined to invest its IT funds in a readily available, low-cost computer technology project to automatically review inappropriate prescriptions before they are dispensed. Under its April 1999 pharmacy redesign plan, DOD decided to adopt an integrated Pharmacy Data Transaction System (PDTS), similar to those used in civilian pharmacies, across military treatment facility pharmacies, TRICARE retail pharmacies, and the National Mail Order Pharmacy program. Although originally expected to finish testing PDTS in Fall 1999, various delays ensued. In June 2001, PDTS was fully in place and providing a database that consolidates information from different points of service and targets those prescriptions that would otherwise cause drug interactions. This system is enabling pharmacists and providers to screen for drug interactions and allows comprehensive pharmacy benefit management. According to DOD's Pharmacy Programs Manager, between April 1, 2001, and June 22, 2001, PDTS processed 23 million pharmacy transactions and detected about 1,500 potentially life-threatening drug interactions. Viagra-to-nitrate prescriptions--which, if taken in combination by male patients can cause fatal heart attacks--was the most common drug-to-drug interaction successfully detected and prevented by PDTS.

    Recommendation: The Secretary of Defense should 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: Congress authorized DOD to establish a uniform formulary of prescription drugs that are preferred on the basis of their clinical value and lower price in the National Defense Authorization Act for Fiscal Year 2000 requirements for a redesign of DOD's pharmacy benefit program (P.L. 106-65, Sec. 701). Although Congress specifically did not authorize DOD to collect co-payments from non-active duty beneficiaries at military treatment facility pharmacies to encourage the use of formulary drugs, such incentive-based approaches are authorized for the TRICARE retail and mail order pharmacy programs. While Congress directed DOD to implement the uniform formulary not later than October 1, 2000, DOD has not finished its work to meet that deadline. DOD officials anticipate implementing the Uniform Formulary by April 2002.

    Recommendation: The Secretary of Defense should extend systemwide prescription drug eligibility to Medicare-eligible retirees not entitled to prescription benefits under the Medicare subvention demonstration and pharmacy base closure programs.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: Section 711 of the Fiscal Year 2001 National Defense Authorization Act (P.L. 106-398) provided DOD permanent authority to establish the TRICARE Senior Pharmacy Program, effective April 1, 2001. DOD met this deadline by modifying its current TRICARE managed care support and mail-order pharmacy contracts to include this population of beneficiaries. The new program provides about 1.4 million Medicare-eligible military retirees, and their eligible family members, the same retail and mail-order pharmacy benefits as are currently available to other military health care beneficiaries through the TRICARE preferred provider and fee-for-service options. No enrollment fee or premium is required, but the co-pays and out-of-network deductible expenses normally associated with those programs apply. Participants in the TRICARE Senior Pharmacy Program can continue to use military pharmacies at no cost.

    Recommendation: The Secretary of Defense should review national Federal Employees Health Benefits Program 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: To conduct its review, DOD formed a working group which considered a wide range of best business practices used by civilian pharmacy benefit managers. In identifying best business practices, the workgroup used the literature and its own members' input, as well as input from independent pharmacy benefit consultants, military beneficiary organizations, the pharmaceutical industry, and national pharmaceutical associations. The workgroup's analysis targeted ten practices that demonstrated significant positive effects on quality, access and cost. The ten practices identified are those most frequently used by businesses, health care organizations, and commercial insurers, including the Federal Employee Health Benefit Program. The group compared and contrasted the current DOD pharmacy benefit with the potential implementation of the ten identified best practices, and estimated the potential cost and benefit of applying these practices to the DOD pharmacy system.

    Recommendation: The Secretary of Defense should, upon integrating the existing pharmacy patient databases, institute electronic billing and claims reimbursement among MTFs and TRICARE contractors.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: DOD has developed, and is testing, electronic billing in the San Diego Naval Medical Center. A large number of pharmacy claims are now being processed electronically. DOD is working to improve the system by ensuring that data on other health insurance beyond the local level is captured. To incorporate this feature, DOD is making enhancements to the Defense Enrollment Eligibility Reporting System to document other health insurance that beneficiaries carry.

    Recommendation: The Secretary of Defense should, 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: GAO recommended that the Secretary of Defense institute mandatory third-party insurer billing for MTF prescription drugs provided to beneficiaries who have other health insurance for prescription drugs. With the introduction of an electronic billing system that DOD has developed and is testing at the San Diego Naval Medical Center, some third party collections are now occurring. Once testing is complete, DOD plans to implement third party billing system-wide as a cost savings measure.

    Recommendation: The Secretary of Defense should direct and ensure that MTF pharmacies and TRICARE contractors routinely apply accepted pharmacy benefit manager practices such as prior authorization, early refill edits, duplicate therapy edits, and physician-approved therapeutic interchange--consistent with DOD pharmacy benefit policies.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: The National Defense Authorization Act for Fiscal Year 2000 (P.L. 106-65, Sec. 701) gives DOD authority to implement several best business practices in its new pharmacy benefit program, including prior authorization for cost-effectiveness, duplicate refill edits, and therapeutic substitution. With the June 2001 installation of the computer-based Pharmacy Data Transaction System (PDTS) throughout all military and TRICARE retail and mail-order pharmacies, DOD now has the capability of automating best practices such as prior authorization, duplicate refill edits, and therapeutic substitution. PDTS will facilitate system-wide enforcement pharmacy benefits, such as the uniform formulary, generic and therapeutic substitution, quantity limits, duplicate and early refill edits, exclusion rules, and clinical protocols regardless of the point of service.

    Recommendation: The Secretary of Defense should postpone awarding a separate national retail pharmacy benefit manager 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.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In response to the GAO recommendation, the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 (P.L. 105-261, Sec. 703) required DOD to suspend any plans for establishing a national retail pharmacy program until a plan for redesign of the pharmacy system was submitted to Congress and cost-saving reforms had been implemented. As a result, DOD's April 1999 pharmacy redesign plan to Congress did not propose this approach. In response, Congress took additional action in the National Defense Authorization Act for Fiscal Year 2000 (P.L. 106-65, Sec. 701) by providing authority to DOD for military treatment facility (MTF) pharmacies and the TRICARE contractors to transfer funds to cover prescriptions filled for patients under their respective financial responsibility. To be cost-effective, reimbursement should include overhead cost for each prescription filled, much like the traditional "dispensing fee" paid in civilian pharmacy practice. Essential to implementation will be the allocation of funds based on who (TRICARE contractor or MTF) has financial responsibility for the medical care of the patient and who dispenses the prescription.

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