Blue Cross and Blue Shield: Change in Pharmacy Benefits Affects Federal
Enrollees (Testimony, 09/05/96, GAO/T-HEHS-96-206).
Of the 400 health plans available to federal workers, the Blue Cross and
Blue Shield plan is the largest, covering nearly 42 percent of the four
million federal enrollees. To control drug costs, Blue Cross and Blue
Shield recently began requiring federal enrollees to pay 20 percent of
the price of prescriptions purchased at participating retail pharmacies.
Previously, federal enrollees did not have to pay anything for
prescription drugs. Enrollees may continue to receive drugs free of
charge, however, if they buy them through the plan's mail order program.
Members of Congress and retail pharmacies have raised concerns about the
quality of mail order services and the effect of the change on the
business of retail pharmacies that serve plan enrollees. To provide
pharmacy services to its federal employee health plan, Blue Cross and
Blue Shield contracts with two pharmacy benefit managers: PCS health
Systems, Inc., which provides retail prescription drug services, and
Merck-Medco Managed Care, Inc., which provides mail order drug services.
This testimony discusses (1) Blue Cross and Blue Shield's reasons for
the benefit change, (2) how it was implemented, (3) the change's effect
on retail pharmacies, and (4) the extent to which PCS and Medco have met
their contract requirements for services provided to the federal health
plan.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-HEHS-96-206
TITLE: Blue Cross and Blue Shield: Change in Pharmacy Benefits
Affects Federal Enrollees
DATE: 09/05/96
SUBJECT: Federal employees
Health insurance cost control
Pharmaceutical industry
Health services administration
Insurance premiums
Customer service
Contractor performance
Employee medical benefits
Drugs
IDENTIFIER: Federal Employees Health Benefits Program
Blue Cross and Blue Shield Service Benefit Plan
Medicare Program
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Cover
================================================================ COVER
Before the Subcommittee on Civil Service
Committee on Government Reform and Oversight
House of Representatives
For Release on Delivery
Expected at 9:30 a.m.
Thursday, September 5, 1996
BLUE CROSS AND
BLUE SHIELD - CHANGE IN PHARMACY
BENEFITS AFFECTS FEDERAL ENROLLEES
Statement of Sarah F. Jaggar, Director
Health Services Quality and Public Health
Health, Education, and Human Services Division
GAO/T-HEHS-96-206
GAO/HEHS-96-206T
(108293)
Abbreviations
=============================================================== ABBREV
PBM - x
OPM - x
PCS - x
NACDS - x
FEHBP - x
MAC - x
COB - x
DUR - x
============================================================ Chapter 0
Mr. Chairman and Members of the Committee:
We are pleased to be here today to discuss the Blue Cross and Blue
Shield Association's recent change in prescription drug benefits
covered by its federal employee health plan. Of the approximately
400 health plans available to federal employees, the Blue Cross and
Blue Shield Association's plan is the largest, covering almost 42
percent of about 4 million federal enrollees.
In recent years, prescription drug costs have accounted for an
increasing share of the total benefits paid by the Association's
federal employee health plan. To help control the plan's drug costs,
as of January 1, 1996, the Association began requiring enrollees
insured under the plan's Standard Option and covered by Medicare part
B\1 to pay 20 percent of the price of prescriptions purchased at
participating retail pharmacies. Before this change, these federal
enrollees, like those in some other federal health plans, did not
have to pay anything for retail prescription drugs. The enrollees
may continue to receive drugs free of charge, however, if they
purchase them through the plan's mail order program.
The benefit change gave enrollees an incentive to use the plan's mail
order program. It also raised concerns, however, from Members of
Congress and retail pharmacies about the quality of mail order
services and the change's effect on the business of retail pharmacies
that serve the plan's enrollees. To provide pharmacy services to its
federal employee health plan (referred to as the Blue Cross and Blue
Shield Service Benefit Plan), the Association contracts with two
pharmacy benefit managers (PBM): PCS Health Systems, Inc., provides
the plan's retail prescription drug services, and Merck-Medco Managed
Care, Inc. (referred to as "Medco"), provides mail order drug
services.
As part of an ongoing study of federal employee health plans' use of
PBMs, we are looking at several issues concerning this benefit change
and the performance of the PBMs that serve the Blue Cross and Blue
Shield Service Benefit Plan.\2 Today, I would like to discuss the
Association's reasons for the benefit change, how it was implemented,
the change's effect on retail pharmacies, and the extent to which PCS
and Medco have met their contract requirements for all services they
provide to the Association's federal health plan.
To obtain information on the benefit change, we met with
representatives of the Office of Personnel Management (OPM), Blue
Cross and Blue Shield Association, Medco, PCS, National Association
of Chain Drug Stores (NACDS), and American Pharmaceutical
Association. Regarding the potential effect of the benefit change on
retail pharmacies, we reviewed PCS data on recent changes in payments
to retail pharmacies for prescriptions dispensed to the Association's
federal enrollees. To determine the extent to which Medco and PCS
met their contract requirements, we reviewed the Association's
contracts with the PBMs and analyzed reports submitted to the
Association on their performance in meeting contract requirements.
In summary, the Blue Cross and Blue Shield Association made the
benefit change to try to control an average annual 21-percent
increase in its federal health plan's drug costs and, as a result,
hold down enrollees' premiums. At the inception of the change in
early 1996, however, the volume of prescriptions the mail order
pharmacy received was much greater and occurred more quickly than
Medco or the Association had anticipated. During the last week of
January, for example, prescriptions reached 233,000--an amount about
66 percent greater than anticipated. As a result, Medco could not
meet its customer-service performance measure for prompt dispensing
and delivery of prescriptions to enrollees for several weeks during
the benefit change's implementation. Medco, PCS, and the Association
collaborated, however, to respond to this increased volume, and, by
mid-March 1996, Medco was meeting its customer-service performance
measure.
Although the Association and Medco appear to have corrected the
problems experienced in implementing the benefit change, NACDS and
other critics of the change are concerned about its economic effect
on retail pharmacies. Federal enrollees' shift to the Association's
mail order program has been substantial. During the first 5 months
of 1996, the total amount paid retail pharmacies for prescriptions
dispensed to the enrollees affected by the benefit change decreased
by about 36 percent, or about $95 million, from the amount paid
during the same period in 1995.
In addition to assessing Medco's performance related to the benefit
change, the Association reviewed both PBMs' overall performance in
meeting their contract requirements in 1995. According to the
Association, the PBMs saved the Blue Cross and Blue Shield Service
Benefit Plan about $505 million. The Association also indicated that
the PBMs met most customer-service performance measures, such as
dispensing prescriptions or answering customer calls within specific
time frames.
--------------------
\1 Medicare part B is a voluntary program financed by enrollee
premiums and general federal revenues. It covers physician services
and a variety of other health care services, such as laboratory and
outpatient hospital services.
\2 Blue Cross FEHBP Pharmacy Benefits (GAO/HEHS-96-182R, July 19,
1996).
BACKGROUND
---------------------------------------------------------- Chapter 0:1
OPM contracts with almost 400 health plans, including fee-for-service
plans and health maintenance organizations, to operate the Federal
Employees Health Benefits Program (FEHBP). The Blue Cross and Blue
Shield Association's plan is the largest, covering almost 42 percent
of about 4 million FEHBP enrollees in 1994. The Association's
contract with PCS for retail prescription drug services began in
1993; its contract with Medco for mail order drug services began in
1987.
In operating the retail drug program, PCS contracts with a network of
pharmacies to provide the Association's federal employee health plan
prescriptions at discounted prices. In 1996, this network included
44,751 pharmacies, about 60 percent of which were chain drug stores;
the remaining 40 percent were independently owned. In operating the
mail order program, Medco provides the plan prescriptions also at
discounted prices. Medco receives and dispenses prescriptions from
pharmacies in Florida, New Jersey, Ohio, and Texas.
Under its FEHBP contract, the Association must submit to OPM any
proposal to change its federal employee health plan benefits. OPM
reviews such proposals to assess their cost-effectiveness to the
program and potential effect on the delivery of benefits to federal
enrollees. In addition, the Association oversees the activities of
Medco and PCS and must report to OPM any significant problems that
could affect the delivery of benefits to enrollees, such as those
Medco initially experienced in implementing the benefit change.
BENEFIT CHANGE INTENDED TO HELP
CONTROL DRUG COSTS
---------------------------------------------------------- Chapter 0:2
The Association submitted its benefit change proposal to OPM on May
31, 1995, citing the need to control the Blue Cross and Blue Shield
Service Benefit Plan's rising prescription drug costs while
maintaining quality service for enrollees. Between 1988 and 1995,
the Association's payments for the plan's prescription drugs
increased at an average annual rate of about 21 percent, compared
with an average annual rate of about 12 percent for total benefit
payments. Moreover, prescription drug payments have constituted an
increasingly greater share of total benefit payments, rising from
about 13 percent in 1988 to about 23 percent in 1995 (see fig. 1).
These payment increases appear to result mainly from increases in the
number of prescriptions per enrollee and the price of prescriptions.
Figure 1: Prescription
Payments as a Percentage of
Total Benefit Payments, 1988 to
1995
(See figure in printed
edition.)
Source: Blue Cross and Blue Shield Association.
Before the benefit change, the approximately 800,000 people\3
insured under the Association's Standard Option Plan who also had
Medicare part B coverage did not pay anything for prescription drugs
purchased at network retail pharmacies or through the mail order
program. These people must now pay 20 percent of the price of
prescriptions purchased at network retail pharmacies.\4 Copayments
for retail prescriptions were already required of other enrollees and
are similar to those required in several other federal employee
health plans. Without the benefit change, the Association contended
that it would have had to increase monthly premiums for all of its
federal enrollees with Standard Option coverage.
--------------------
\3 This number includes federal enrollees and their dependents.
\4 In 1995, federal enrollees with Medicare part B coverage paid 20
percent in copayments for prescriptions purchased at retail
pharmacies not included in the plan's network of pharmacies. In
1996, this amount increased to 40 percent.
PLAN DEVELOPED TO MEET INCREASE
IN MAIL ORDER PRESCRIPTIONS
---------------------------------------------------------- Chapter 0:3
To review Medco's strategy for managing the anticipated increase in
prescriptions and calls about them, Association staff met with Medco
representatives on August 24, 1995. According to Medco officials,
they estimated the size and timing of the increase by relying
primarily on their own claims experience in managing pharmacy
benefits for about 50 million people as well as data from a
comparable benefit change made by Massachusetts Blue Cross and Blue
Shield.
The resulting Medco forecast estimated a gradual 64-percent growth in
1996 mail order prescriptions. Using this data, Medco planned to
gradually increase its capacity to handle prescriptions from about
110,000 a week during the last quarter of 1995 to 180,000 a week
during the last quarter of 1996. Medco also planned to handle
occasional surges in demand of up to 13 percent more than the
forecasted number and increase its telephone capacity to respond to
greater demand for customer service. More immediate growth in mail
order prescriptions could have been expected from this cost-conscious
group of enrollees, however, according to our actuarial consultant's
review of this forecast.
OPM notified the Association that the benefit change had been
approved in September 1995. Both OPM and Association officials
contended that the change would promote more cost-effective use of
the prescription drug benefit by encouraging enrollees to use the
less expensive mail order program. According to the Association's
actuarial analysis, which included Medco savings estimates related to
its contract, the benefit change would save the plan about $193
million in 1996. OPM's actuarial analysis supported this estimated
level of savings. Although these analyses did not include an audit
of Medco's estimates or related supporting documentation, our
actuarial consultant's review of the Association and OPM analyses
indicated that the overall savings estimates were reasonable, though
possibly understated.
DEMAND FOR MAIL ORDER
SERVICE SURPASSED
EXPECTATIONS
-------------------------------------------------------- Chapter 0:3.1
The number of prescriptions received by Medco quickly surpassed Medco
and Association expectations. During the first week of January 1996,
the number of prescriptions rose to 157,000, and during the week
ending January 27, 1996, they reached 233,000--an amount about 66
percent greater than expected. By the week ending March 9, 1996, and
continuing through the week ending April 6, 1996, the number of
weekly prescriptions received ranged between 175,000 and 187,000.
Enrollees with Medicare part B benefits accounted for most of the
increase in prescriptions. About 9 percent of these enrollees'
prescriptions were purchased through the mail order program in 1995,
a percentage that increased to about 38 percent by February 1996.
Figure 2 shows the increase in mail order prescriptions contrasted
with the number of forecasted prescriptions.
Figure 2: Weekly Number of
Mail Order Prescriptions
Received, Week Ending January
6, 1996, to Week Ending March
9, 1996
(See figure in printed
edition.)
Source: Medco.
Medco's processing capacity could not absorb this rapid increase.
The number of pharmacists was insufficient to handle prescription
orders, and many enrollees did not get their prescriptions filled
promptly. For example, although Medco's contract requires that it
dispense or return 99 percent of the prescriptions it receives daily
within 5 business days, Medco reported that this performance measure
was met about 87 percent of the time in January 1996 and about 94
percent of the time in February 1996. In addition, many customer
calls were delayed or went unanswered during January and February
1996. Medco's contract specifies that no more than 2 percent of
customer calls a week receive a busy signal, known as call blockage.
Although the call blockage rate averaged 1.8 percent a week for the
2-month period, about 8 percent, or 11,000 calls, received a busy
signal during the week ending January 20, 1996.
During the last week of January 1996, OPM informed Association
officials of its disappointment with the customer service being
provided to enrollees using the mail order program and indicated that
corrective measures should be taken.
ACTIONS RESTORED SERVICE
-------------------------------------------------------- Chapter 0:3.2
Medco responded to the unanticipated demand and associated service
problems by moving quickly to increase processing capacity. For
example, during the week ending January 20, 1996, Medco officials
expanded operations at the company's Florida and New Jersey
pharmacies from a 5-1/2-day schedule to 7 days a week, with operating
hours expanded from 15 hours to 19 hours daily. Medco also
reassigned pharmacists who normally performed other Medco jobs to
confirm phone and fax prescription orders. Medco officials also
brought pharmacists and support personnel from pharmacies across the
country to one Tampa pharmacy to increase processing capacity.
OPM and the Association agreed that Medco would send medications by
overnight mail to customers who would not otherwise receive their
prescriptions within 5 business days. Between the weeks ending
January 6, 1996, and April 27, 1996, Medco sent approximately 160,000
prescription packages by overnight mail at a cost of almost $1
million.\5 In February 1996, OPM also indicated that the Association
should arrange for mail order customers who needed delayed
medications to get up to a 21-day supply from PCS network retail
pharmacies without paying the 20-percent copayment. This ad hoc
arrangement required PCS to respond quickly to the needs of the
Association and over 5,000 enrollees who used this service.\6 The
copayments for over 10,000 retail prescriptions dispensed to these
enrollees cost the plan approximately $291,000.
Although Medco continued to use extra means to deliver prescriptions
to enrollees through the last week of April 1996, Association data
show that the mail order program began to meet performance
expectations for turning around prescriptions within 5 days the week
ending March 16, 1996. Medco had already begun to consistently meet
performance expectations for customer service calls the week ending
February 10, 1996.
--------------------
\5 As of August 28, 1996, Blue Cross and Medco had not resolved which
company would pay these overnight mail costs under their contract. A
Medco official estimated the actual cost to be about $542,000,
considering the cost Medco would have incurred by using the regular
mail service.
\6 PCS officials said that although PCS was not contractually
required to implement this policy change, the company developed
procedures for it and implemented it within 1 week of learning of the
problem.
CUSTOMER SERVICE SURVEYS
REFLECT DIFFICULTIES
-------------------------------------------------------- Chapter 0:3.3
The difficulties enrollees had with the mail order program during
early 1996 were reflected in an Association's customer satisfaction
survey of mail order customers. During the first quarter of 1996,
about 81 percent of those surveyed indicated that they were satisfied
with services. Enrollee responses indicated that they were most
concerned about the time it took to fill prescriptions. About 75
percent responded that their prescriptions were filled promptly, down
from quarterly averages of 94 percent in 1994 and 92 percent in 1995.
CONCERN ABOUT THE EFFECT OF THE
BENEFIT CHANGE ON RETAIL
PHARMACIES
---------------------------------------------------------- Chapter 0:4
NACDS and many chain and independent pharmacies foresee the benefit
change shifting millions of dollars in prescription drug sales to the
mail order program. Because the benefit change is recent, we could
not determine how many federal enrollees affected by the change will
continue to shift prescriptions to the mail order program.
Therefore, determining the benefit change's effect on retail
pharmacies' sales is difficult. Nevertheless, payments to retail
pharmacies for prescriptions dispensed to enrollees affected by the
benefit change decreased substantially from 1995 to 1996, according
to our analysis of PCS payments to retail pharmacies.\7 (See fig.
3.)
Figure 3: Payments to Retail
Pharmacies for Prescriptions
Dispensed to Enrollees With
Standard Option and Medicare
Part B Coverage, January to
May, 1995 and 1996
(See figure in printed
edition.)
Source: PCS.
Figure 3 shows that between January and May 1995, total prescription
payments to retail pharmacies for prescriptions dispensed to
enrollees affected by the benefit change were about $259.6 million,
compared with about $164.9 million between January and May 1996--a
decrease of about 36 percent.
Retail pharmacies serving the largest percentages of the federal
enrollees affected by the benefit change experienced similar
percentage decreases in prescription payments, according to PCS data.
Between 1995 and 1996, Walgreens, Rite Aid, CVS, Revco, and Wal-Mart
had, on average, a 41-percent decrease in total retail payments for
prescriptions dispensed to the enrollees with Medicare part B
coverage and a 14-percent decrease in total payments for
prescriptions dispensed to all plan enrollees.
Total payments to all retail pharmacies for prescriptions dispensed
to enrollees in the Association's federal employee health plan also
decreased between 1995 and 1996. This total includes payments to
enrollees affected by the benefit change. PCS data indicate that
between January and May 1995, total payments were about $473.3
million, compared with about $439.8 million between January and May
1996--a decrease of about 7 percent.
--------------------
\7 All analyses of payments to retail pharmacies included copayments
and deductibles paid by enrollees.
PBMS MET MOST BLUE CROSS 1995
PERFORMANCE MEASURES
---------------------------------------------------------- Chapter 0:5
The Blue Cross and Blue Shield Association contracts with Medco and
PCS include annual performance measures that focus on savings and
customer service. The contracts provide financial incentives for
exceeding certain performance measures and penalties for not meeting
them. According to information from Association officials, in 1995,
Medco and PCS met most of their savings and customer service measures
for the Blue Cross and Blue Shield Service Benefit Plan.
PBM PERFORMANCE PRODUCED
SAVINGS IN 1995
-------------------------------------------------------- Chapter 0:5.1
The Blue Cross and Blue Shield Association estimated that its two
PBMs saved the plan about $505 million in 1995. Association
officials indicated that these savings are used to support the
pharmacy benefit program, as well as to contain enrollee premiums,
deductibles, and copayments.
Savings in 1995 resulted from seven categories of PBM services,
according to Association estimates. These estimated savings were
based on what the Association projected it would have paid for
prescription drugs and related services had it not contracted with
the PBMs. The Association developed this methodology, which
represents one way to determine potential savings from PBM services.
We plan to evaluate the soundness of this methodology and compare it
with those developed by other federal health plans for our final
report.
Figure 4 shows the percentage of total savings each of seven service
categories represents.
Figure 4: 1995 Blue Cross
FEHBP Pharmacy Savings
(See figure in printed
edition.)
Source: Blue Cross and Blue Shield Association.
-- Retail and mail order pharmacy discounts accounted for about
$264 million in savings. For retail, the savings represent the
discounts PCS achieved from negotiating with individual
pharmacies the amount PCS would reimburse them for
prescriptions.\8 Mail order savings were derived from discounts
that the Association negotiated with Medco.
-- Maximum allowable cost (MAC) savings accounted for approximately
$72 million in savings. MAC refers to the maximum price that
retail pharmacies in PCS' network may be paid for certain
generic drugs. Savings resulted from the difference between
drugs' MAC prices and their usual and customary prices.
-- Manufacturer rebates accounted for about $107 million in savings
and represent the guaranteed discounts that PCS and Medco
negotiated with drug manufacturers. The plan received 90
percent of the total rebates, and the PBMs retained 10 percent
as an administrative fee and incentive to increase the amount of
discounts. PCS did not meet its rebate guarantee in 1995 and as
a result incurred a penalty.
-- Concurrent and retrospective drug utilization review (DUR)
accounted for about $10 million in savings that resulted from
clinical activities the PBMS performed. Concurrent DUR is
performed before dispensing a drug to prevent problems such as
drug interactions and therapeutic duplications. Retrospective
DUR is a program PCS conducts to encourage physicians and
enrollees to use the most cost-effective drugs and regimens to
optimize drug therapies.
-- Medco's intervention program accounted for about $13.5 million
in savings. The program encourages patients to use, and
physicians to prescribe, less expensive brand-name drugs
considered as safe and effective\9 as other, more expensive
brand-name drugs.
-- The prior approval program accounted for about $36.5 million in
savings. This program covers 13 drugs that require Association
approval before dispensing and derived savings from
prescriptions denied reimbursement or never filled.\10
-- The coordination of benefits (COB) program accounted for about
$2 million in savings. COB is an industrywide method used to
avoid paying duplicate benefits to an individual covered by
another insurer.
--------------------
\8 Total retail savings resulted from the difference between the
reimbursement amount PCS paid pharmacies for all individual
prescriptions and the drugs' usual and customary prices. The usual
and customary price is what each pharmacy charges its cash-paying
customers whose prescriptions are not covered by health plans.
\9 Medco uses an independent group of health care professionals,
known as a Pharmacy and Therapeutics Committee, to evaluate drugs in
all therapeutic categories on the basis of safety, efficacy, and
substitutability.
\10 Prior approval is required for medications that may be used to
treat conditions or illnesses that are not covered by the
Association, are outside the Food and Drug Administration or
manufacturer guidelines, and have a high potential for abuse.
PERFORMANCE MEASURES FOCUS
ON PROVIDING QUALITY
CUSTOMER SERVICE
-------------------------------------------------------- Chapter 0:5.2
The Association's contracts with its PBMs also specify performance
measures for the quality of customer service provided to the federal
plan and its enrollees. For example, as previously discussed,
Medco's contract requires dispensing prescriptions and answering
customer calls within specific time frames. Medco's contract also
requires that its pharmacy dispense all of its prescriptions annually
with less than a .005-percent error rate. In addition, PCS' contract
has several guarantees for the accuracy and timeliness of
prescription claims submitted by enrollees for reimbursement. In two
instances, PCS did not meet claims timeliness guarantees and
therefore paid the Association minor penalties.\11
PCS' contract also guarantees that it provide plan enrollees
convenient access to its network pharmacies. The guarantee states
that a network pharmacy be located within 5 miles of 98 percent of
the enrollees. PCS data indicate that this guarantee was met in 1995
and as of April 1996.
--------------------
\11 According to PCS officials, neither instance disrupted service to
enrollees, and the company was within 4 days of meeting the
performance measure.
-------------------------------------------------------- Chapter 0:5.3
Mr. Chairman, this concludes my prepared statement. I will be
pleased to answer any questions.
For more information on this testimony, please call John Hansen,
Assistant Director, at (202) 512-7105. Other major contributors
included Joel Hamilton, Jennifer Arns, and Mary Freeman.
*** End of document. ***