Through it, about 8 million federal employees, retirees, and  their dependents received health coverage—including for prescription  drugs—in 2008. 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. The VA pharmacy benefit is provided to eligible veterans and certain  others. Medicaid, a joint federal-state program, finances medical services for  certain low-income adults and children. 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. 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. 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. 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. 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. 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. Additionally, si to FEHBP and Medicare Part D, DOD uses utilization management  methods to limit drug spending including prior authorization, dispensin limitations, and higher cost sharing for nonformulary drugs and drugs  dispensed at retail pharmacies. Medicaid Uses Aggrega Payment Limits, Drug Pricing Guidelines Required Rebates

Unlike VA and DOD, Medicaid programs do not negotiate drug prices with  il  manufacturers to control prescription drug spending, but reimburse reta pharmacies for drugs dispensed to beneficiaries at set prices. 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. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony. Federal Employees Health Benefits Program: Premiums Continue to  Rise, but Rate of Growth Has Recently Slowed. Prescription Drugs: Oversight of Drug Pricing in Federal Programs. GAO-07-481T. 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.
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. (1) 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. (2) 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. (3) 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.