GAO-08-172R, DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting from the Uniform Formulary and Manufacturer Rebates


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entitled 'DOD Pharmacy Benefits Program: Reduced Pharmacy Costs 
Resulting from the Uniform Formulary and Manufacturer Rebates' which 
was released on October 31, 2007. 

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October 31, 2007: 

Congressional Committees: 

Subject: DOD Pharmacy Benefits Program: Reduced Pharmacy Costs 
Resulting from the Uniform Formulary and Manufacturer Rebates: 

Rising pharmacy costs have been a long-standing issue for the 
Department of Defense (DOD). In 1998, we reported that DOD's fiscal 
year 1997 total pharmacy costs were $1.3 billion--a 13 percent increase 
from fiscal year 1995.[Footnote 1] In fiscal year 2006, DOD dispensed 
115 million prescriptions to about 6.5 million beneficiaries at a cost 
of about $6 billion. 

One effort to control pharmacy costs is through the use of a uniform 
formulary, which is a list of preferred drugs that are generally 
available to beneficiaries. The National Defense Authorization Act for 
Fiscal Year 2000 directed DOD to establish a pharmacy benefits program 
that included a uniform formulary.[Footnote 2] DOD implemented the 
uniform formulary in 2005.[Footnote 3] Drugs on the uniform formulary 
are generally available at military treatment facilities (MTF), the 
TRICARE Mail Order Pharmacy (TMOP), and retail pharmacies.[Footnote 4] 
Each quarter, DOD reviews drugs for inclusion on the uniform formulary. 
DOD's decision to designate a drug as either formulary or nonformulary 
is based on the drug's clinical and cost-effectiveness relative to the 
other drugs in its therapeutic class.[Footnote 5] In its decision- 
making process, DOD considers information such as the drug's 
indications, clinical outcomes, and the price a manufacturer is willing 
to charge DOD if the drug is selected for placement on the uniform 
formulary. DOD's costs for a drug may vary depending on whether the 
drug is dispensed at an MTF, the TMOP, or a retail pharmacy. In 
exchange for formulary placement, manufacturers can offer DOD prices 
below those otherwise available through statutory federal pricing 
arrangements[Footnote 6] for drugs dispensed at MTFs and the TMOP, and 
voluntary rebates for drugs dispensed at retail network pharmacies. 

The John Warner National Defense Authorization Act for Fiscal Year 2007 
required that we examine DOD's pharmacy benefits program.[Footnote 7] 
In September 2007, we briefed your staff on the status of our work. 
This report responds to your request for information specifically on 
DOD's estimate of reduced pharmacy costs (1) resulting from drug costs 
avoided through its uniform formulary, and (2) from manufacturer 
rebates for drugs dispensed at retail network pharmacies. We plan to 
report more fully on DOD's pharmacy benefits program in a subsequent 
report. 

To obtain this information, we reviewed summary information provided by 
DOD officials on costs avoided for fiscal years 2006 and 2007. We also 
obtained data on the amount in rebates DOD collected in fiscal year 
2007 and the amount in rebates it expects to collect in fiscal year 
2008. Cost avoidance refers to DOD's reduced pharmacy costs at MTFs, 
the TMOP, and retail network pharmacies resulting from the decision on 
whether to include a drug on the uniform formulary. Manufacturer 
rebates that DOD receives for drugs dispensed through retail network 
pharmacies are in addition to costs avoided. We also interviewed 
officials from DOD's Pharmacoeconomic Center regarding the methodology 
used to develop the cost avoidance and rebate estimates and its 
limitations. Through these interviews we determined that the summary 
cost avoidance and rebate data provided by DOD were sufficiently 
reliable for our purposes, but we did not independently verify DOD's 
data. We conducted our work from April 2007 through October 2007 in 
accordance with generally accepted government auditing standards. 

DOD summary data show that through its uniform formulary DOD avoided 
about $447 million in drug costs in fiscal year 2006 and estimated that 
it would avoid about $900 million in drug costs in fiscal year 2007. 
MTFs account for most of DOD's cost avoidance because they are 
generally required to dispense formulary drugs, which are typically 
lower cost.[Footnote 8] To calculate cost avoidance, DOD determines the 
costs it incurred at MTFs, the TMOP, and retail network pharmacies for 
each drug reviewed for the uniform formulary and designated as either 
formulary or nonformulary. DOD subtracts these incurred costs from the 
estimated costs it would have incurred at MTFs, the TMOP, and retail 
network pharmacies if those drugs had not been designated as formulary 
or nonformulary. 

In addition, DOD officials told us that as of fiscal year 2007 DOD has 
collected about $28 million in voluntary manufacturer rebates for drugs 
dispensed at retail pharmacies since the program began in 2006. DOD 
expects to collect at least $120 million in fiscal year 2008 through 
voluntary rebates.[Footnote 9] Because federal pricing arrangements are 
not applied to drugs dispensed through retail pharmacies, DOD developed 
the Voluntary Agreements for TRICARE Retail Network Rebates (VARR) in 
August 2006 to allow manufacturers to offer rebates for these drugs. 
All of DOD's reduced costs achieved through voluntary rebates as of 
October 1, 2007, were through VARRs related to the uniform formulary. 
The uniform formulary VARR is an agreement between DOD and a 
manufacturer for its drugs selected for the uniform formulary.[Footnote 
10] DOD expects the amount it collects through Uniform Formulary VARRs 
to increase over time as manufacturers continue to enter into these 
agreements with DOD for drugs that are selected for the uniform 
formulary. 

We provided a draft of this report to DOD for comment. The department 
reviewed the draft and determined that comments were not necessary. 

We are sending copies of this report to the Secretary of Defense and 
other interested parties. We will also make copies available to others 
on request. In addition, the report will be available at no charge on 
GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff members have any questions, please contact me at 
(202) 512-7114 or dickenj@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Major contributors to this report were Bonnie 
Anderson, Assistant Director; Keyla Lee; Lesia Mandzia; and Tim Walker. 

Signed by: 

John E. Dicken: 

Director, Health Care: 

List of Committees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable John McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Ted Stevens: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Ike Skelton: 
Chairman: 
The Honorable Duncan Hunter: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable John P. Murtha: 
Chairman: 
The Honorable C.W. Bill Young: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Footnotes: 

[1] GAO, Defense Health Care: Fully Integrated Pharmacy System Would 
Improve Service and Cost-Effectiveness, GAO/HEHS-98-176 (June 12, 
1998). 

[2] See Pub. L. No. 106-65, § 701, 113 Stat. 512, 677-80 (1999) 
(codified as amended at 10 U.S.C. § 1074g). 

[3] The process DOD uses to develop the uniform formulary was 
established by the National Defense Authorization Act for Fiscal Year 
2000. 

[4] DOD contracts with Express Scripts, Inc., a private pharmacy 
benefits management company, to operate its retail network pharmacy 
program. The network consists of more than 59,000 retail pharmacies 
where DOD beneficiaries can pick up prescriptions. 

[5] A therapeutic class is a group of drugs that are similar in 
chemical structure, pharmacological effect, or clinical use. 

[6] Federal pricing arrangements refer to the lower of the Federal 
Supply Schedule price available generally to federal purchasers or a 
price available to four large agencies, including DOD. Federal pricing 
arrangements are not applied to drugs dispensed at retail network 
pharmacies. 

[7] See Pub. L. No. 109-364, § 718, 120 Stat. 2083, 2292-93 (2006). 

[8] MTFs can dispense nonformulary drugs if medically necessary. 

[9] DOD's estimate of the amount of voluntary rebates for fiscal year 
2008 is based on rebates that it collected in fiscal year 2007. It does 
not account for new rebate agreements that will be implemented for 
drugs that will be reviewed in fiscal year 2008. DOD officials noted 
that these rebate projections are contingent on assumptions, for 
example, about changing market conditions, and the potential for rebate 
agreements to be terminated. 

[10] Another type of VARR is the Utilization VARR, which is an 
agreement between DOD and manufacturers for drugs that have not yet 
been reviewed for the uniform formulary and for those drugs that have 
been reviewed and designated nonformulary. As of October 2007, no 
manufacturers had provided DOD with a Utilization VARR. 

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