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Testimony: 

Before the Subcommittee on Federal Workforce, Postal Service, and the 
District of Columbia, Committee on Oversight and Government Reform, 
House of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Wednesday, June 24, 2009: 

Prescription Drugs: 

Overview of Approaches to Control Prescription Drug Spending in Federal 
Programs: 

Statement of John E. Dicken:
Director, Health Care: 

GAO-09-819T: 

GAO Highlights: 

Highlights of GAO-09-819T, a testimony before the Subcommittee on 
Federal Workforce, Postal Service, and the District of Columbia, 
Committee on Oversight and Government Reform, House of Representatives. 

Why GAO Did This Study: 

Millions of individuals receive prescription drugs through federal 
programs. The increasing cost of prescription drugs has put pressure to 
control drug spending on federal programs such as the Federal Employees 
Health Benefits Program (FEHBP), Medicare Part D, the Department of 
Veterans Affairs (VA), the Department of Defense (DOD), and Medicaid. 
Prescription drug spending within the FEHBP in particular, which 
provides health and drug coverage to about 8 million federal employees, 
retirees, and their dependents, has been a significant contributor to 
FEHBP cost and premium growth. The Office of Personnel Management 
(OPM), which administers the FEHBP, predicted that prescription drugs 
would continue to be a primary driver of program costs in 2009. 

GAO was asked to describe approaches used by the FEHBP to control 
prescription drug spending and summarize approaches used by other 
federal programs. This testimony is based on prior GAO work, including 
Prescription Drugs: Oversight of Drug Pricing in Federal Programs (GAO-
07-481T) and Prescription Drugs: An Overview of Approaches to Negotiate 
Drug Prices Used by Other Countries and U.S. Private Payers and Federal 
Programs (GAO-07-358T) and selected updates from relevant literature on 
drug spending controls prepared by other congressional and federal 
agencies. 

What GAO Found: 

FEHBP uses competition among health plans to control prescription drug 
spending, giving plans an incentive to rein in costs and leverage their 
market share to obtain favorable drug prices. Most FEHBP plans contract 
with pharmacy benefit managers (PBMs) to help administer the 
prescription drug benefit. In a 2003 report, GAO found that the PBMs 
reduced drug spending by: 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 
techniques that reduce utilization of certain drugs or substitute 
other, less costly drugs. While OPM does not negotiate drug prices or 
discounts for FEHBP, it attempts to limit spending through annual 
premium and benefit negotiations with plans, including the 
encouragement of spending controls such as generic substitution. 

Other federal programs use a range of approaches to control 
prescription drug spending. 

* Medicare—the federal health insurance program for the elderly and 
disabled—offers an outpatient prescription drug benefit known as 
Medicare Part D that uses competition between plan sponsors and their 
PBMs to limit drug spending, in part through the ability to negotiate 
prices and price concessions with drug manufacturers and pharmacies. 
Plans are required to report these negotiated price concessions to the 
Centers for Medicare & Medicaid Services (CMS), to help CMS determine 
the extent to which they are passed on to beneficiaries. 

* VA and DOD pharmacy benefit programs for veterans, active duty 
military personnel, and others may use statutorily mandated discounts 
as well as negotiations with drug suppliers to limit drug spending. VA 
and DOD have access to a number of prices to consider when purchasing 
drugs—including the Federal Supply Schedule prices that VA negotiates 
with drug manufacturers—paying the lowest of all available prices. 

* The Medicaid program for low-income adults and children is subject to 
aggregate payment limits and drug payment guidelines set by CMS. 
Medicaid does not negotiate drug prices with manufacturers, but 
reimburses retail pharmacies for drugs dispensed to beneficiaries at 
set prices. An important element of controlling Medicaid drug spending 
is the Medicaid drug rebate program, under which drug manufacturers are 
required by law to provide rebates for certain drugs covered by 
Medicaid. Under the rebate program, states take advantage of prices 
manufacturers receive for drugs in the commercial market that reflect 
discounts and rebates negotiated by private payers. 

In addition, Part D, VA and DOD, and Medicaid use techniques similar to 
FEHBP to limit drug spending, such as generic substitution, prior 
authorization, utilization review programs, or cost-sharing 
requirements. 

View [hyperlink, http://www.gao.gov/products/GAO-09-819T] or key 
components. For more information, contact John E. Dicken at (202) 512-
7114 or dickenj@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here as you examine approaches to control the rising 
spending for prescription drugs within the Federal Employees Health 
Benefits Program (FEHBP). As you know, the FEHBP provides health 
coverage, including prescription drug coverage, to about 8 million 
federal employees, retirees, and their dependents. As with other public 
and private employer-sponsored health plans, prescription drug spending 
has been a significant contributor to FEHBP cost and premium growth. 
Projected increases in the costs of prescription drugs alone would have 
accounted for about a 3 to 5 percent annual increase in FEHBP premiums 
from 2002 through 2007. The Office of Personnel Management (OPM), the 
federal agency that administers the FEHBP, predicted that prescription 
drugs would continue to be a primary driver of program costs in 2009. 
[Footnote 1] 

Because of the importance of controlling prescription drug spending by 
the federal government, you asked us to describe prescription drug 
spending control approaches used by the FEHBP and summarize the 
approaches used by other federal programs. Accordingly, my testimony 
today will describe the approach used by FEHBP to control prescription 
drug spending and summarize approaches used under Medicare, the 
Department of Veterans Affairs (VA), the Department of Defense (DOD), 
and Medicaid. My remarks are based on prior work performed from 2003 to 
2009 on federal programs that purchase or cover prescription drugs, 
with selected updates from relevant literature on drug spending 
controls prepared by other congressional and federal agencies.[Footnote 
2] We used various methodologies to complete our work; please see the 
individual products for the details. Our work was performed in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

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. 
[Footnote 3] 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.[Footnote 4] 
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.[Footnote 5] 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.[Footnote 6] 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.[Footnote 7] In fiscal year 
2008, approximately 63 million beneficiaries were enrolled in Medicaid. 
[Footnote 8] 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.[Footnote 9] 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 between Health Plans to Control Prescription 
Drug Costs: 

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.[Footnote 10] 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.[Footnote 11] 

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.[Footnote 12] In preparation for 2010 benefit and rate 
negotiations, OPM reiterated its desire for proposals from plans to 
substitute lower cost for higher cost therapeutically equivalent drugs, 
adding emphasis to using evidence-based health outcome measures. 
[Footnote 13] 

Other Federal Programs Use a Range of Approaches to Control 
Prescription Drug Spending: 

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 Uses Competing Prescription Drug Plans: 

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.[Footnote 14] 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. 

Part D sponsors or their PBMs also use other methods to help contain 
drug spending similar to FEHBP plans. For example, most plans assign 
covered drugs to distinct tiers, each of which carries a different 
level of cost sharing. A plan may establish separate tiers for generic 
drugs and brand-name drugs--with the generic drug tier requiring a 
lower level of cost sharing than the brand-name drug tier. Plans may 
also require utilization management for certain drugs on their 
formulary. Common utilization management practices include requiring 
physicians to obtain authorization from the plan prior to prescribing a 
drug; step therapy, which requires beneficiaries to first try a less 
costly drug to treat their condition; and imposing quantity limits for 
dispensed drugs. Additionally, all Part D plans must meet requirements 
with respect to the extent of their pharmacy networks[Footnote 15] and 
the categories of drugs they must cover.[Footnote 16] Plan formularies 
generally must cover at least two Part D drugs in each therapeutic 
category and class, except when there is only one drug in the category 
or class or when CMS has allowed the plan to cover only one drug. 
[Footnote 17] CMS has also designated six categories of drugs of 
clinical concern for which plans must cover all or substantially all of 
the drugs.[Footnote 18] 

VA and DOD Use Statutorily Mandated Prices and Negotiate Directly with 
Drug Suppliers: 

While FEHBP and Medicare Part D use competition between health plans to 
control prescription drug spending, VA and DOD rely on statutorily 
mandated prices and discounts and further negotiations with drug 
suppliers to obtain lower prices for drugs covered on their 
formularies. 

VA and DOD have access to a number of prices to consider when 
purchasing drugs, paying the lowest available. 

* Federal Supply Schedule (FSS) prices. VA's National Acquisition 
Center negotiates FSS prices with drug manufacturers, and these prices 
are available to all direct federal purchasers.[Footnote 19] FSS prices 
are intended to be no more than the prices manufacturers charge their 
most-favored nonfederal customers under comparable terms and 
conditions. Under federal law, drug manufacturers must list their brand-
name drugs on the FSS to receive reimbursement for drugs covered by 
Medicaid.[Footnote 20] All FSS prices include a fee of 0.5 percent of 
the price to fund VA's National Acquisition Center. 

* Federal ceiling prices. Federal ceiling prices, also called Big Four 
prices, are available to VA, DOD, the Public Health Service, and the 
U.S. Coast Guard. These prices are mandated by law to be 24 percent 
lower than nonfederal average manufacturer prices.[Footnote 21] 

* Blanket purchase agreements and other national contracts. Blanket 
purchase agreements and other national contracts with drug 
manufacturers allow VA and DOD--either separately or jointly--to 
negotiate prices below FSS prices. The lower prices may depend on the 
volume of specific drugs being purchased by particular facilities, such 
as VA or military hospitals, or on being assigned preferred status on 
VA's and DOD's respective national formularies. 

In a few cases, individual VA and DOD medical centers have obtained 
lower prices through local agreements with suppliers than they could 
have through the national contracts, FSS prices, or federal ceiling 
prices. 

In addition, VA's and DOD's use of formularies, pharmacies, and prime 
vendors can further affect drug prices and help control drug spending. 
Both VA and DOD use their own national, standard formulary to obtain 
more competitive prices from manufacturers that have their drugs listed 
on the formulary. VA and DOD formularies also encourage the 
substitution of lower cost drugs determined to be as or more effective 
than higher cost drugs. VA and DOD use prime vendors, which are 
preferred drug distributors, to purchase drugs from manufacturers and 
deliver the drugs to VA or DOD facilities. VA and DOD receive discounts 
from their prime vendors that also reduce the prices that they pay for 
drugs. For DOD, the discounts vary among prime vendors and the areas 
they serve. As of June 2004, VA's prime vendor discount was 5 percent, 
while DOD's discounts averaged about 2.9 percent within the United 
States. Additionally, similar to FEHBP and Medicare Part D, DOD uses 
utilization management methods to limit drug spending including prior 
authorization, dispensing limitations, and higher cost sharing for 
nonformulary drugs and drugs dispensed at retail pharmacies. 

Medicaid Uses Aggregate Payment Limits, Drug Pricing Guidelines, and 
Required Rebates: 

Unlike VA and DOD, Medicaid programs do not negotiate drug prices with 
manufacturers to control prescription drug spending, but reimburse 
retail pharmacies for drugs dispensed to beneficiaries at set prices. 
CMS sets aggregate payment limits--known as the federal upper limit 
(FUL)--for certain outpatient multiple-source prescription drugs. 
[Footnote 22] CMS also provides guidelines regarding drug payment. 
States are to pay pharmacies the lower of the state's estimate of the 
drug's acquisition cost to the pharmacy, plus a dispensing fee, or the 
pharmacy's usual and customary charge to the general public; for 
certain drugs the FUL or the state maximum allowable costs may apply if 
lower.[Footnote 23] 

In addition to these retail pharmacy reimbursements, Medicaid programs 
also control prescription drug spending through the Medicaid drug 
rebate program.[Footnote 24] Under the drug rebate program, drug 
manufacturers are required to provide quarterly rebates for covered 
outpatient prescription drugs purchased by state Medicaid programs. 
Under the rebate program, states take advantage of the prices 
manufacturers receive for drugs in the commercial market that reflect 
the results of negotiations by private payers such as discounts and 
rebates. For brand-name drugs, the rebates are based on two price 
benchmarks per drug that manufacturers report to CMS: best price 
[Footnote 25] and average manufacturer price (AMP).[Footnote 26] The 
relationship between best price and AMP determines the unit rebate 
amount and thus the overall size of the rebate that states receive. The 
basic unit rebate amount is the greater of two values: the difference 
between best price and AMP or 15.1 percent of AMP. If the brand-name 
drug's AMP rises faster than inflation as measured by the change in the 
consumer price index, the manufacturer is required to provide an 
additional rebate to the state Medicaid program. In addition to brand- 
name drugs, states also receive rebates for generic drugs. For generic 
drugs, the basic unit rebate amount is 11 percent of the AMP. A state's 
rebate for a drug is the product of the unit rebate amount plus any 
applicable additional rebate amount and the number of units of the drug 
paid for by the state's Medicaid program. In addition to the rebates 
mandated under the drug rebate program, states can also negotiate 
additional rebates with manufacturers. 

Like FEHBP and Medicare Part D participating plans, Medicaid programs 
also use other utilization management methods to control prescription 
drug spending including prior authorization and utilization review 
programs, dispensing limitations, and cost-sharing requirements. 

Mr. Chairman, this concludes my prepared remarks. I would be happy to 
answer any questions that you or other members of the Subcommittee may 
have. 

Contacts and Acknowledgments: 

For future contacts regarding this testimony, please contact John E. 
Dicken at (202) 512-7114 or at dickenj@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this testimony. Randy DiRosa, Assistant Director; 
Rashmi Agarwal; William A. Crafton; Martha Kelly; and Timothy Walker 
made key contributions to this statement. 

[End of section] 

Related GAO Products: 

Federal Employees Health Benefits Program: Enrollee Cost Sharing for 
Selected Specialty Prescription Drugs. [hyperlink, 
http://www.gao.gov/products/GAO-09-517R]. Washington, D.C.: April 30, 
2009. 

Medicare Part D Prescription Drug Coverage: Federal Oversight of 
Reported Price Concessions Data. [hyperlink, 
http://www.gao.gov/products/GAO-08-1074R]. Washington, D.C.: September 
30, 2008. 

DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth in 
Spending at Retail Pharmacies. [hyperlink, 
http://www.gao.gov/products/GAO-08-327]. Washington, D.C.: April 4, 
2008. 

DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting from 
the Uniform Formulary and Manufacturer Rebates. [hyperlink, 
http://www.gao.gov/products/GAO-08-172R]. Washington, D.C.: October 31, 
2007. 

Military Health Care: TRICARE Cost-Sharing Proposals Would Help Offset 
Increasing Health Care Spending, but Projected Savings Are Likely 
Overestimated. [hyperlink, http://www.gao.gov/products/GAO-07-647]. 
Washington, D.C.: May 31, 2007. 

Federal Employees Health Benefits Program: Premiums Continue to Rise, 
but Rate of Growth Has Recently Slowed. [hyperlink, 
http://www.gao.gov/products/GAO-07-873T]. Washington, D.C.: May 18, 
2007. 

Prescription Drugs: Oversight of Drug Pricing in Federal Programs. 
[hyperlink, http://www.gao.gov/products/GAO-07-481T]. Washington, D.C.: 
February 9, 2007. 

Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices 
Used by Other Countries and U.S. Private Payers and Federal Programs. 
[hyperlink, http://www.gao.gov/products/GAO-07-358T]. Washington, D.C.: 
January 11, 2007. 

Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper 
Limits for Reimbursement Compared with Retail Pharmacy Acquisition 
Costs. [hyperlink, http://www.gao.gov/products/GAO-07-239R]. 
Washington, D.C.: December 22, 2006. 

Federal Employees Health Benefits Program: Premium Growth Has Recently 
Slowed, and Varies among Participating Plans. [hyperlink, 
http://www.gao.gov/products/GAO-07-141]. Washington, D.C.: December 22, 
2006. 

Medicaid: States' Payments for Outpatient Prescription Drugs. 
[hyperlink, http://www.gao.gov/products/GAO-06-69R]. Washington, D.C.: 
October 31, 2005. 

Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns 
about Rebates Paid to States. [hyperlink, 
http://www.gao.gov/products/GAO-05-850T]. Washington, D.C.: June 22, 
2005. 

Mail Order Pharmacies: DOD's Use of VA's Mail Pharmacy Could Produce 
Savings and Other Benefits. [hyperlink, 
http://www.gao.gov/products/GAO-05-555]. Washington, D.C.: June 22, 
2005. 

Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns 
about Rebates Paid to States. [hyperlink, 
http://www.gao.gov/products/GAO-05-102]. Washington, D.C.: February 4, 
2005. 

Contract Management: Further Efforts Needed to Sustain VA's Progress in 
Purchasing Medical Products and Services. [hyperlink, 
http://www.gao.gov/products/GAO-04-718]. Washington, D.C.: June 22, 
2004. 

Medicare: Observations on Program Sustainability and Strategies to 
Control Spending on Any Proposed Drug Benefit. [hyperlink, 
http://www.gao.gov/products/GAO-03-650T]. Washington, D.C.: April 9, 
2003. 

Federal Employees' Health Benefits: Effects of Using Pharmacy Benefit 
Managers on Health Plans, Enrollees, and Pharmacies. [hyperlink, 
http://www.gao.gov/products/GAO-03-196]. Washington, D.C.: January 10, 
2003. 

[End of section] 

Footnotes: 

[1] OPM, News Release: OPM Announces Open Season for Health Benefits, 
Dental and Vision Insurance, and Flexible Spending Accounts (Sept. 25, 
2008). 

[2] A list of related GAO products is included at the end of this 
statement. For other reports we reviewed, please see, for example, 
Congressional Budget Office, Budget Options Volume 1: Health Care 
(Washington, D.C.: Dec. 2008); Congressional Budget Office, The Health 
Care System for Veterans: An Interim Report (Washington, D.C.: Dec. 
2007); Congressional Research Service, Medicare Part D Prescription 
Drug Benefit: A Primer (Washington, D.C.: Aug. 20, 2008); Congressional 
Research Service, Prescription Drug Coverage Under Medicaid 
(Washington, D.C.: Feb. 6, 2008); Congressional Research Service, 
Pharmaceutical Costs: A Comparison of Department of Veterans Affairs 
(VA), Medicaid, and Medicare Policies (Washington, D.C.: Apr. 13, 
2007); Federal Trade Commission, Pharmacy Benefit Managers: Ownership 
of Mail-Order Pharmacies (Washington, D.C.: Aug. 2005); and Medicare 
Payment Advisory Commission, Report to the Congress: Medicare Payment 
Policy (Washington, D.C.: Mar. 2009). 

[3] Formularies include lists of prescription drugs, grouped by 
therapeutic class (groups of drugs that are similar in chemistry, 
method of action, and purpose of use), that health plans or insurers 
encourage physicians to prescribe and beneficiaries to use. 

[4] Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2071-2152 (codified at 
42 U.S.C. §§ 1395w-101 to 1395w-152). MMA redesignated the previous 
part D of title XVIII of the Social Security Act as part E and inserted 
a new part D after part C. 

[5] Of the almost 8 million veterans enrolled, about 5 million received 
health care services. Additionally, there were over 4 million pharmacy 
users in VA in 2006. 

[6] DOD provides health care through TRICARE--a regionally structured 
program that uses contractors to maintain provider networks to 
complement health care provided at military treatment facilities. 

[7] Medicaid consists of 56 distinct programs created within broad 
federal guidelines and administered by state Medicaid agencies. The 56 
Medicaid programs include 1 for each of the 50 states; the District of 
Columbia; Puerto Rico; and the U.S. territories of American Samoa, 
Guam, Northern Mariana Islands, and the Virgin Islands. Within a 
framework established by federal statutes, regulations, and policies, 
each state (1) establishes its own eligibility standards; (2) 
determines the type, amount, duration, and scope of services; (3) sets 
the rate of payment for services; and (4) administers its own program. 

[8] Approximately 6 million of the 63 million Medicaid beneficiaries 
were 65 years or older in 2008. 

[9] Part D includes different levels of premium and cost-sharing 
assistance for dual eligible beneficiaries as well as assistance for 
other eligible beneficiaries who have low incomes and modest assets but 
do not meet the eligibility requirements for Medicaid. 

[10] GAO, Federal Employees' Health Benefits: Effects of Using Pharmacy 
Benefit Managers on Health Plans, Enrollees, and Pharmacies, 
[hyperlink, http://www.gao.gov/products/GAO-03-196] (Washington, D.C.: 
Jan. 10, 2003). 

[11] In the private market, one of the key ways PBMs influence price 
negotiations with manufacturers is through formulary development and 
management. PBMs may assist health plans in developing or managing a 
formulary that the health plan will cover. Manufacturers pay PBMs 
through rebates or other payments to be included on plan formularies 
and to capture greater market share for their drugs. 

[12] U.S. Office of Personnel Management Insurance Services Program, 
Federal Employees Health Benefits Program Call Letter No. 2006-09 
(Washington, D.C.: Apr. 4, 2006). 

[13] U.S. Office of Personnel Management Insurance Services Program, 
Federal Employees Health Benefits Program Call Letter No. 2009-08 
(Washington, D.C.: Apr. 20, 2009). 

[14] The Secretary may also not require a particular formulary or 
institute a price structure for the reimbursement of Medicare Part D 
drugs. Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2098 (codified at 42 
U.S.C. § 1395w-111(i)). 

[15] All prescription drug plans must have a contracted pharmacy in 
their network that is within 2 miles of 90 percent of urban 
beneficiaries, 5 miles of 90 percent of suburban beneficiaries, and 15 
miles of 70 percent of rural beneficiaries. 42 C.F.R. 
§423.120(a)(1)(2008). 

[16] Under the MMA, prescription drug plans must cover drugs within 
each therapeutic category and class of Part D drugs. Pub. L. No. 108- 
173, § 101, 117 Stat. 2066, 2085 (codified at 42 U.S.C. § 1395w- 
104(b)(3)(C)). 

[17] 42 C.F.R. §423.120(b)(2)(2008). 

[18] Part D plan formularies must include all or substantially all 
drugs in the immunosuppressant, antidepressant, antipsychotic, 
anticonvulsant, antiretroviral, and antineoplastic drug categories. 

[19] VA and DOD directly purchase drugs from manufacturers for their 
beneficiaries. FEHBP, Medicare Part D, and Medicaid provide 
reimbursement for drugs dispensed to beneficiaries. 

[20] See 38 U.S.C. § 8126(a)(4). 

[21] See 38 U.S.C. § 8126(a)(2). The nonfederal average manufacturer 
price is the weighted average price of a single form and dosage unit 
paid by wholesalers to a manufacturer, taking into account cash 
discounts or similar price reductions. Big Four prices, in general, do 
not apply to generic drugs. 

[22] Federal regulations set specific limits for multiple-source drugs 
for which there are two or more therapeutically equivalent products. 

[23] States may establish their own methodologies for estimating retail 
pharmacies' drug acquisition costs. Most states choose to estimate 
these costs by taking a percentage discount from the average wholesale 
price. The usual and customary charge for a drug is the full retail 
price that individuals without prescription drug coverage pay when 
purchasing drugs at a retail pharmacy. Some states also administer a 
maximum allowable cost program for selected multiple-source drugs with 
the maximum price at which the state will reimburse those medications. 

[24] See 42 U.S.C. § 1396r-8. 

[25] Best price is the lowest price available from the manufacturer to 
any wholesaler, retailer, provider, health maintenance organization, or 
nonprofit or government entity, with some exceptions. Among other 
things, sales made through the FSS, single-award contract prices of any 
federal agency, federal depot prices, and prices charged to DOD, VA, 
Indian Health Service, and Public Health Service are not considered in 
determining best price. 

[26] AMP is defined by statute as the average price paid to a 
manufacturer for a drug by wholesalers for drugs distributed to the 
retail pharmacy class of trade. Under the rebate agreement 
manufacturers negotiate with HHS, AMP does not include prices to 
government purchasers based on the FSS, prices from direct sales to 
hospitals or health maintenance organizations, or prices to wholesalers 
when they relabel drugs they purchase under their own label. 

[End of section] 

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