Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. Abstracts

04/01/2000

The articles abstracted below represent some of the best sources of material found

during the course of this study. The source of the abstract is listed at the end of each study summary. If no source is listed, it is the authors’ original abstract.


American Association of Retired Persons (1997) Profile of Older Americans

This AARP report provides a socioeconomic profile of older Americans’ in the United States for 1996. These variables include population in U.S. and by state, projected population growth, living arrangements, racial and ethnic composition, geographic distribution, income and poverty, employment, education, health and health care. It identifies older population-persons as 65 years of age and older at 33.9 million, representing 12.8%. Projections for future growth show the most rapid increase is expected between the years of 2010 and 2030 when the “baby boom” generation reaches 65. The study projects that older persons will represent 20% of the population by 2030, an increase of 100% from 1996 (staff).


Bloom N. Van Reenen J. (1998) Regulating Drug Prices: Where Do We Go from Here? Institute for Fiscal Studies, L5, L6, D4.19(3): 321–342.

This paper examines the arguments for changing the ways that UK drug prices are regulated. In the UK, NHS pharmaceutical expenditures on branded drugs, currently worth about £3 billion a year, have been regulated by the Pharmaceutical Price Regulation Scheme (PPR) since 1978. We argue that, in publicly funded healthcare systems, pharmaceutical price regulation is necessitated by a tendency towards excessive government expenditure because of over prescription and the monopoly power of firms with on-patent drugs. We briefly explain the operation of the PPRS, which is based on rate-of-return regulation, and discuss its merits and drawbacks. We then consider five alternative pricing systems: free pricing, therapeutic benefit pricing, international reference pricing, therapeutic reference pricing and RPI – X price regulation. However, we reject all these alternatives in favour of a reformed PPRS. We suggest three potential reforms of the PPRS: an RPI – X cost allowance if feasible or a widening of the rate-of-return bands otherwise; the introduction of a marketing innovation allowance; and greater regulatory transparency.


Carroll NV. Miederhoff PA. Waters LW. (1996) Profitability, Third-Party Reimbursement, and Access to Community Pharmacies. Clinical Therapeutics, 18(4): 702, 703-715.

The purpose of this study was to analyze the extent to which third-party reimbursement programs have affected the profitability and availability of community pharmacies. Data were taken from records maintained by the Virginia Board of Pharmacy and a survey of 177 community pharmacies. Between 1989 and 1994, 258 outpatient pharmacies opened and 342 closed. Chain and independent pharmacies suffered net losses, and supermarket and mass merchandiser pharmacies experienced net increases. Few significant changes occurred in the distribution of pharmacies over the study period. Fifty-nine chain and independent pharmacies and 1 supermarket pharmacy chain provided usable profit and reimbursement data. These pharmacies experienced declines in profits and increases in the percentage of prescriptions reimbursed by private third-party prescription programs over the last several years. Regression analyses indicated that higher ratios of sales of private third-party prescriptions to private-pay prescriptions were associated with lower profits. All respondents indicated that changes in private third-party reimbursement had substantially reduced profits over the past 5 years. The results indicate that the growth of private third-party payment has led to lower pharmacy profits but has not yet resulted in problems of consumer access.


Cohen RA. Bloom B. Simpson G. et al. (1997) Access to Health Care. Part 3: Older Adults. National Center for Health Statistics. Vital Health Statistics 10(198).

This report uses data from the 1993 Access to Care, the 1993 Health Insurance, and the Year 2000 surveys of the National Health Interview Survey to describe access to care for older adults. The findings indicate that health insurance status played a key role in an individual’s ability to obtain health care services. Elderly persons with Medicare only were 3 times as likely to go without prescription medicine or glasses as those with Medicare and private insurance coverage. Approximately 600,000 elderly persons were unable to get prescription medicine. (Staff)


Danis M. Biddle AK. Henderson G. Garrett JM. DeVellis RF. (1997) Older Medicare Enrollees' Choices for Insured Services. Journal of the American Geriatrics Society, 45(6): 688-94.

RESERACH OBJECTIVES: The aim of this study was to: (1) explore the possibility of allowing Medicare enrollees to choose limited insurance packages personally; (2) identify which services elderly adults would like insured; and (3) elucidate the reasons for their choices. STUDY POPULATION: We recruited 118 patients (77% response rate) receiving non-urgent care from the general internal medicine practice of a major teaching institution. STUDY DESIGN: We used in-person interviews and an innovative instrument as part of an anonymous, cross-sectional survey. The instrument, a "puzzle-like" board and 12 benefit cards, simulated the health insurance purchase decision by presenting information about premium costs and covered services to allow study subjects to "purchase" coverage for desired services. PRINCIPAL FINDINGS: Only 2% of subjects selected the package currently offered by Medicare; 52 different packages were chosen. Twenty-one percent of subjects selected a package that included coverage for hospital, intensive care unit, home care, outpatient care, prescription drugs, and either vision care (13%) or preventive services (8%). Only 9% elected to purchase coverage for long-term care services. Although there was some variation, costs and current or anticipated need were the most frequently cited reason for selection of coverage. Individuals forgoing long-term care coverage deemed other services as more essential (40%); did not anticipate a need (17%); or would rely on family for care (21%). CONCLUSIONS: The preferences expressed suggest that a majority would purchase a different combination of coverage than is currently offered; coverage for prescriptions was highly desired. RELEVANCE TO POLICY: These results suggest that patients can understand the need for limiting resource use and would rather not defer these decisions entirely to policy makers. Care must be taken in designing benefit packages, requiring, at minimum, coverage of certain core services. (HealthSTAR)


Davis M. Poisal J. Chulis G. Zarabozo C. Cooper B. (1999) Prescription Drug Coverage, Utilization, and Spending Among Medicare Beneficiaries. Health Affairs, 18(1): 231-43.

Outpatient prescription drugs are not a covered benefit under Medicare. There have been proposals in the past to expand Medicare benefits to include drug coverage, and current discussions dealing with "modernizing" the Medicare benefit package have raised the issue again. Using data from the 1995 Medicare Current Beneficiary Survey (MCBS), we describe the sources and extent of drug coverage among Medicare beneficiaries. The data show that 65 percent of Medicare beneficiaries have some level of drug coverage--a figure much higher than previous published numbers--and that 95 percent of Medicare health maintenance organization (HMO) enrollees have drug coverage. The data provide a baseline to observe future changes in the level of coverage, particularly among Medicare managed care plans.


Dickson M, Redwood H. (1998) Pharmaceutical Reference Prices. How Do They Work in Practice? Pharmacoeconomics, 14(5): 471-9

Reference pricing systems are reimbursement ceilings set by payers in an effort to constrain pharmaceutical expenditure for a private or public drug benefit. In recent years, many governments have adopted reference pricing either as a replacement or in addition to product specific price controls. Program administrators should consider whether these policies are providing the intended benefits or whether there may be a more effective method. This article provides a review of reference pricing in Europe, North America and other countries. There are many similarities in the reference price policies but the markets to which they apply are more likely to be different. The European experience gives a 'once-for-all' lowering effect on pharmaceutical expenditure, often at the expense of compromises on prescribing. In Germany and The Netherlands, reference pricing has been relatively ineffective in lowering expenditure which has led to a succession of other interventions to achieve expenditure control goals. The US also has reference pricing, but it occurs in a very competitive market which may be responsible (at least in part) for the relatively modest growth in expenditure compared with European countries. The review of countries with reference pricing policies suggests that such policies are less effective than competitive markets in moderating pharmaceutical expenditure. Nonetheless, governments continue to pursue reference pricing strategies.


Ganther JM. Kreling DH. (1999) Effect of a Change in Third Party Reimbursement Rate on Prescription Gross Margin. Journal of the American Pharmacy Association, (Wash) 39(3): 346-52

OBJECTIVE: To measure the effect of a change in an insurance company's reimbursement formula on prescription department gross margins for all prescriptions and subgroups of prescriptions. DESIGN: Retrospective descriptive analysis. SETTING: Wisconsin. PARTICIPANTS: Two units of a chain pharmacy. INTERVENTION: Reimbursement changed from usual and customary price to average wholesale price less 10% plus a $2.00 dispensing fee for single-source products, and maximum allowable cost plus a $2.00 dispensing fee for multisource products. MAIN OUTCOME MEASURE: Gross margins for prescriptions dispensed in the month before and after the reimbursement change. RESULTS: The average estimated gross margin decreased 26.9% after the change in reimbursement, and the effect on the average gross margin for generic prescriptions was nearly twice that of the effect on the average gross margin for brand name prescriptions. The effect of the reimbursement change on different therapeutic classes ranged from an increase of 0.7% in the cardiovascular class to a decrease of 68.2% in the eyes, ears, nose, and throat class. The effect of the reimbursement change was greater for low-cost prescriptions than for high-cost prescriptions. CONCLUSION: The large effect of the reimbursement change, combined with continued growth in third party prescriptions, raises concerns about whether pharmacies can accept third party contracts with low reimbursement rates and still maintain current profitability and service levels.


Grabowski H. Mullins CD. (1997) Pharmacy Benefit Management, Cost-Effectiveness Analysis and Drug Formulary Decisions. Social Science Medicine, 45(4): 535-44.

Pharmacy benefit management companies (PBMs) have evolved over the past decade in response to the increased demand for health care cost containment. Their activities include the implementation of drug formularies and the negotiation of rebates from manufacturers. Our analysis of this industry is based on interviews and materials provided by the top five ranked PBM companies which account for over 80% of beneficiaries covered within formulary plans. The formularies of these companies are relatively inclusive, but they are becoming more restrictive over time. At present the use of cost-effectiveness (C-E) studies in the formulary decisions of PBMs has been limited. In this regard, the surveyed PBMs emphasized that most C-E studies have not compared therapeutic substitutes in populations with characteristics that are similar to those of their clients. Pharmacy benefit management companies also have had strong incentives to focus narrowly on drug costs because they typically manage drug benefits on a "carved-out" basis. However, PBMs anticipate a growing future role in the integrated management of patient care (disease management) for certain high cost chronic diseases and conditions. All of the leading firms we surveyed have disease management programs in development. The importance of C-E studies to PBM decisions is expected to increase significantly as disease management programs are implemented. The data infrastructure inherent to the PBM industry and the increasing number of employees with advanced training in pharmacoeconomics will permit firms to perform their own internal C-E studies. They are also establishing various alliances and joint ventures with drug manufacturers, health maintenance organizations, and academic institutions to perform these analyses. The leading PBMs tend to favor active participation in the development of methodological approaches to C-E studies over government regulations such as those proposed by the FDA in 1995.


Gross DJ. Alecxih L. Gibson MJ. Corea J. Caplan C. Brangan N. (1999) Out-of-Pocket Health Spending by Poor and Near-Poor Elderly Medicare Beneficiaries. Health Services Research, 34(1 Pt 2): 241-54.

OBJECTIVE: To estimate out-of-pocket health care spending by lower-income Medicare beneficiaries, and to examine spending variations between those who receive Medicaid assistance and those who do not receive such aid. DATA SOURCES AND COLLECTION: 1993 Medicare Current Beneficiary Survey (MCBS) Cost and Use files, supplemented with data from the Bureau of the Census (Current Population Survey); the Congressional Budget Office; the Health Care Financing Administration, Office of the Actuary (National Health Accounts); and the Social Security Administration. STUDY DESIGN: We analyzed out-of-pocket spending through a Medicare Benefits Simulation model, which projects out-of-pocket health care spending from the 1993 MCBS to 1997. Out-of-pocket health care spending is defined to include Medicare deductibles and coinsurance; premiums for private insurance, Medicare Part B, and Medicare HMOs; payments for non-covered goods and services; and balance billing by physicians. It excludes the costs of home care and nursing facility services, as well as indirect tax payments toward health care financing. PRINCIPAL FINDINGS: Almost 60 percent of beneficiaries with incomes below the poverty level did not receive Medicaid assistance in 1997. We estimate that these beneficiaries spent, on average, about half their income out-of-pocket for health care, whether they were enrolled in a Medicare HMO or in the traditional fee-for-service program. The 75 percent of beneficiaries with incomes between 100 and 125 percent of the poverty level who were not enrolled in Medicaid spent an estimated 30 percent of their income out-of-pocket on health care if they were in the traditional program and about 23 percent of their income if they were enrolled in a Medicare HMO. Average out-of-pocket spending among fee-for-service beneficiaries varied depending on whether beneficiaries had Medigap policies, employer-provided supplemental insurance, or no supplemental coverage. Those without supplemental coverage spent more on health care goods and services, but spent less than the other groups on prescription drugs and dental care-services not covered by Medicare. CONCLUSIONS: While Medicaid provides substantial protection for some lower-income Medicare beneficiaries, out-of-pocket health care spending continues to be a substantial burden for most of this population. Medicare reform discussions that focus on shifting more costs to beneficiaries should take into account the dramatic costs of health care already faced by this vulnerable population. (Medline)


Hillman A. Pauly M. Escarce J. Rippley K. Gaynor M. Clouse J, Ross R. (1999) Financial Incentives and Drug Spending in Managed Care. Health Affairs. 18(2): 189-200.

This study estimates the impact of patient financial incentives on the use and cost of prescription drugs in the context of differing physician payment mechanisms. A large data set was developed that covers persons in managed care who pay varying levels of cost sharing and whose physicians are compensated under two different models: independent practice association (IPA)-model and network-model health maintenance organizations (HMOs). Our results indicate that higher patient copayments for prescription drugs are associated with lower drug spending in IPA models (in which physicians are not at risk for drug costs) but have little effect in network models (in which physicians bear financial risk for all prescribing behavior).


Johnson RE. Goodman MJ. Hornbrook MC. Eldredge MB. (1997) The Impact of Increasing Patient Prescription Drug Cost Sharing on Therapeutic Classes of Drugs Received and on The Health Status of Elderly HMO Members. Health Services Research. 32(1):103-22.

OBJECTIVE: To assess the impact of increased prescription drug copayments on the therapeutic classes of drugs received and health status of the elderly. HYPOTHESES TESTED: Increased prescription drug copayments will reduce the relative exposure to, annual days use of, and prescription drug costs for drugs used in self-limiting conditions, but will not affect drugs used in progressive chronic conditions and will not reduce health status. STUDY DESIGN: Each year over a three-year period, one or the other of two well-insured Medicare risk groups in an HMO setting had their copayments per dispensing increased. Sample sizes ranged from 6,704 to 7,962. DATA SOURCES/DATA COLLECTION: Automated administrative data systems of the HMO were used to determine HMO eligibility, prescription drug utilization, and health status. ANALYSIS DESIGN: Analysis of variance or covariance was employed to measure change in dependent variables. FINDINGS: Relative exposure, annual days of use, and prescription drug costs for drugs used in self-limiting conditions and in progressive chronic conditions were not affected in a consistent manner across years by increases in prescription drug copayment. Health status may have been adversely affected. Larger increases in copayments appeared to generate more changes. CONCLUSIONS: Small changes in copayments did not appear to substantially affect outcomes. Large changes in copayments need further examination.


Lecomte T. Paris V. (1998) Controlling Drug Expenditures in France, Germany, and the United Kingdom. From Économie et Statistiques, no. 312-313 Insee Studies no. 30.

In the 1990s, France, Germany, and the United Kingdom have all tested procedures to curb the growth of public expenditures on pharmaceuticals. Their diversity reflects the major differences between the three countries' healthcare systems. France combines a consensual regulation of drug prices with incentives to foster greater restraint in doctors' prescriptions (through the guidelines known as Références Médicales Opposables). Germany has introduced competitive mechanisms via regulations based on groupings of equivalent products. In the United Kingdom, a series of reforms has opened up the traditionally State-controlled healthcare sector to market rules aimed at promoting cost-conscious behavior among system players. The main innovation consists in giving doctors the opportunity to manage a budget tailored to the size of their practice. The success of these policies varies considerably from one country to another. France combines a higher individual expenditure with a lower co-payment by the State. The national differences concern not only the overall consumption level, but also the type of medicine: the French consume more anti-anxiety drugs, while the British consume more analgesics. Consumption volume appears to be a more powerful engine of spending growth than prices.


Lillard LA. Rogowski J. Kington R. (1999) Insurance Coverage for Prescription Drugs: Effects on Use and Expenditures in the Medicare Population. Medical Care, 37(9): 926-936.

BACKGROUND: Although Medicare covers most of the elderly, they potentially face large out-of-pocket costs for their health care because of excluded services. Aside from nursing home care, the exclusion of prescription drugs is one of the most significant. Several earlier policy initiatives have proposed adding prescription drug coverage to the Medicare program. To determine the effects of such an expansion, one must account for the potential increase in the demand for prescription drugs from providing insurance coverage. METHODS: The study uses a new data source, the RAND Elderly Health Supplement to the 1990 Panel Study of Income Dynamics (PSID). The endogenity of insurance coverage is tested using instruments that exploit the longitudinal nature of the data. Equations are estimated on 910 persons (> or = 66 years) using a two-part model. RESULTS: Insurance coverage for prescription drugs significantly increases the probability of use, but not of total expenditures, among those who use prescription drugs. However, insurance coverage significantly lowers out-of-pocket expenditures, thereby decreasing the financial burden on elderly households associated with prescription drug use. Medicaid coverage has effects that are smaller than those for private insurance do, but the magnitude is less precisely estimated. These findings imply that if prescription drug coverage were added to Medicare, expected expenditures on drugs would rise by on average $83 for each elderly Medicare beneficiary (in 1990 dollars), although this increase is significant only at the 90% level. If the benefit had been included under Medicare expected spending on prescription drugs by the elderly would have risen by approximately 20%, or $2.6 billion in 1990. (Medline)


López-Casasnovas G. and Puig-Junoy J. (1999) Review of the Literature on Reference Pricing. Research Center on Health and Economics. Department of Economics and Business. Universitat Pompeu Fabra. Barcelona Spain. February.

This paper reviews the literature on reference pricing (RP) in pharmaceutical markets. The RP strategy for cost containment of expenditure on drugs is analyzed as part of the procurement mechanism. We review the existing literature and the state-of-the-art regarding RP by focusing on its economic effects. In particular, we consider: (1) the institutional context and problem-related factors which appear to underline the need to implement an RP strategy; i.e., its nature, characteristics and the sort of health care problems commonly addressed; (2) how RP operates in practice; that is, how third party-payers (the insurers/buyers) have established the RP systems existing on the international scene (i.e., information methods, monitoring procedures and legislative provisions); (3) the range of effects resulting from particular RP strategies (including effects on choice of appropriate pharmaceuticals, insurer savings, total drug expenditures, prices of referenced and non-referenced products and dynamic efficiency; (4) the market failures which an RP policy is supposed to address and the main advantages and drawbacks which emerge from an analysis of its effects.


Lyles A. Palumbo FB. (1999) The Effect of Managed Care on Prescription Drug Costs and Benefits. Pharmacoeconomics, 15(2):129-40.

This review discusses the approaches to prescription drug payment practices taken by managed care to influence drug use and costs, and presents the research evidence supporting these interventions. In the US, drugs were infrequently covered as an ambulatory benefit under fee-for-service indemnity insurance; however, health maintenance organizations almost always provide outpatient drugs and consequently have developed approaches to influence drug use and manage its costs. Managed care as a set of tools and as an organizational form is moving toward more restrictions on direct access to pharmaceuticals as a covered benefit. Options for influencing drug use and cost may address access, ingredient costs, dispensing fees and cost sharing. The formulary process is the foundation for a managed pharmacy benefit and integrates these options. The limited empirical evidence for an effect of managed care on drug costs and use is reviewed. A proposed research agenda includes evaluation of the effects of restrictive formularies, capitation, disease management and other programs to influence the cost and use of pharmaceuticals.


McArdle F. Copock S. Yamamoto D. et al. (1999) Retiree Health Coverage: Recent Trends and Employer Perspectives on Future Benefits. The Henry J. Kaiser Family Foundation: Menlo Park, CA.

This study uses the Hewitt Associates client database of large employers’ benefits plans to show trends in retiree health plans. The analysis showed that the overall health insurance coverage has declined between 1991 to 1998: there was a 13-percentage point drop in portion of large employers offering health coverage to age 65+ retirees. More than 95% of large employers offer prescription benefits to retirees. Prescription drug expenditures account for 40 to 60 percent of retiree plan costs. (Staff)


Poisal JA. Murray LA. Chulis GS. Cooper BS. (Spring 1999) Prescription Drug Coverage and Spending for Medicare Beneficiaries. Health Care Financing Review, 20(3):15-27.

Very little is known about which persons within the Medicare population have drug coverage from other sources. Using 1995 data from the Medicare Current Beneficiary Survey (MCBS), the authors present information on who has coverage by various sociodemographic categories. The data indicate higher-than-average levels of coverage for minority persons, beneficiaries eligible for Medicare because of disability, and those with higher incomes. (HealthSTAR).


Rowgowski J. Lillard LA. Kington R. (1997) The Financial Burden of Prescription Drug Use Among Elderly Persons. Gerontologist, 37(4): 475-82.

This study, using a new data source, the 1990 Elderly Health Supplement to the Panel Study of Income Dynamics (PSID), demonstrates that, among elderly persons, insurance coverage for drugs reduces the fraction of household income spent on prescription drugs by 50 percent. Groups most likely to benefit from insurance coverage are elderly women and those with common chronic conditions, low incomes, and rural residences. (Medline)


Sager A. Socolar D. (1999) Affordable Medications for Americans: Problems, Causes and Solutions. Prescription Drug Task Force. United States House of Representatives. Washington D.C.

The authors define certain existing problems with the high costs of prescription drugs and make recommendations to redistribute financial resources in order to make prescription drugs more cost effective and accessible to the American public. According to the report, ¼ of all Americans do not have prescription drug coverage. Yet, current expenditures on prescription drugs in the U.S. are more than sufficient to purchase all the medications that Americans need. U.S. retail prescription drug spending is predicted to rise to $103 billion in 1999 and $143 billion by 2002. The cost of prescription drugs is rising about three times as fast as overall health costs. According to the authors, reasons for such high expenditures include: lack of government regulation of drug pricing activities; drug manufacturers charge Americans higher prices than they do to other countries. They assert that it may be a myth that the funds are needed for research activities. The costs of pharmaceutical research ought to be shared globally. Pharmaceutical drugs in 1998 were the most profitable industry, and maintained remarkably high profits for seven decades. The profits of this industry exceed research costs in many of the top 10 U.S. drug firms. Some solutions recommended by the authors include: 1) lowering drug prices to raise demand, thus offsetting some revenue loss for drug makers, 2) pooling statewide buying power to negotiate discounts and rebates with drug manufacturers, 3) federal and state governments to negotiate “in-kind’ donations with drug manufactures, 4) partnering public and private efforts to more efficiently manage expenditures related to drug manufacturers’ advertising, public relations, and lobbying, and 5) financing should be planned cooperatively among all stakeholders. In light of these recommendations, the authors advocate for comprehensive reform of the prescription drug manufacturing industry in order to contain expenditures and make prescription drugs more affordable and accessible to the American public. (Staff)


Schulman KA. Rubenstein LE. Abernethy DR. Seils DM. Sulmasy DP. (1996) The Effect of Pharmaceutical Benefits Managers: Is It Being Evaluated? Annals of Internal Medicine, 124(10): 906-13 .

Over the last decade, the number of pharmaceutical benefits managers has increased, and their influence has expanded rapidly. These managers now provide prescription drug coverage to more than 100 million Americans. The effect of pharmaceutical benefits managers on health care delivery remains unclear. We review the development of these organizations, their current role in the delivery of pharmaceutical therapies to patients, and their relationship with pharmaceutical manufacturers. We discuss potential advantages and disadvantages of pharmaceutical benefits manager practices and suggest ways in which these organizations can be made more accountable to the employer groups that hire them.


Stuart B. Grana J. (1998) Ability to Pay and The Decision to Medicate. Medical Care. 36(2): 202-211.

OBJECTIVES: It is widely recognized that ability to pay affects access to hospital and physician services. Much less is known about the economic determinants of prescription drug use, particularly among the elderly. The authors hypothesize that persons with higher incomes and better health insurance coverage are more likely to medicate common health problems than those with lower incomes and less comprehensive coverage. METHODS: A random sample of 4,066 elderly Pennsylvania Medicare beneficiaries were asked to complete a mail survey on health insurance, income, and medicine use for 23 common health problems. The relationship between ability to pay and medication decisions was analyzed using logistic and Poisson regression models with covariates for socio-demographic characteristics and health status. RESULTS: A strong and consistent relationship was found in the hypothesized direction. Other things being equal, elderly persons with Medicare supplementation were between 6% and 17% more likely to use prescription medicine to treat their health problems than are persons with Medicare coverage alone. The presence of prescription drug coverage significantly increased the odds of prescription treatment for 10 of the 22 conditions examined. The insurance effects were generally--but not exclusively--more pronounced for less serious compared with serious health problems. Income also was shown to have a strong independent effect on medication decisions. Elderly with annual incomes greater than $18,000 were 18% more likely to treat problems with prescription drugs than were persons with annual incomes less than $6,000. CONCLUSIONS: In sum, economic factors appeared to play an important role in medication decisions by the elderly. The magnitude of the impact was sufficiently high that it could have major negative consequences on the health of elderly persons who are poor and lack drug coverage. (Medline)


Stuart B. Grana J. (1995) Are Prescribed and Over-the-Counter Medicines Economic Substitutes? A Study of the Effects of Health Insurance on Medicine Choices by the Elderly. Medical Care, 33(5):487-501.

Insurance coverage on the selection of over-the-counter (OTC) and prescribed (Rx) medicines in treating less serious health problems. Because health insurance policies typically provide no coverage for OTC products, a low list price for an OTC may exceed the after-insurance expense associated with a much higher-priced prescription. Under these circumstances, rational individuals with insurance will choose prescribed medicines even if OTCs are equally effective. Ten common health problems typically managed with either Rx or OTC medicines were selected for analysis. The study population consists of elderly Pennsylvanians surveyed during 1990 who reported suffering one or more of these conditions (N = 2,962). Multivariate analysis confirmed that 1) people with prescription coverage are significantly more likely to medicate a given problem than are those without it; and 2) given the decision to medicate, the presence of insurance significantly increases the level of Rx use and significantly reduces the level of OTC use. As expected, the effect was strongest among people with the most complete prescription insurance coverage. The article discusses the implications of these findings in the context of national health reform and Food and Drug Administration policy regarding Rx-to-OTC switches. (Medline)


United States Department of Health and Human Services Office of Inspector General. (1997), Experience of Health Maintenance Organizations with Pharmacy Benefit Managment Companies. Washington, D.C. Government Document #OEI-01-00110.

This report focuses on the experience of HMO’s in using Pharmacy Benefit Managers (PBMs). As enrollment in managed care continue to grow, and because PBMs can significantly affect patients’ use of prescription drugs, it is important for the Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)) (HCFA(now known as CMS)), as well as private payers, to be informed about the HMOs experiences with them. The data used in this report are derived from a mail survey of all HMOs in the country. The response rate was 71%. Information collected also drew from discussions with staff of the U.S. Department of Health and Human Services (HHS) and several state Medicaid agencies, non-government experts, and a literature review. The report had three recommendations: 1) the HCFA(now known as CMS) should take steps to ensure that its Medicare HMOs are sufficiently accountable for the quality of the services their PBMs provide to beneficiaries, 2) State Medicaid agencies should take steps to ensure that their Medicaid HMOs are sufficiently accountable for the quality of the services their PBMs provide to beneficiaries, and 3) HCFA(now known as CMS), the Food and Drug Administration (FDA), and the Health Resources and Services Administration (HRSA), should work together with external organizations to develop quality measures for pharmacy practice that can be used in managed care settings. (Staff)


U.S. General Accounting Office (1996), Pharmacy Benefit Managers, Early Results on Ventures with Drug Manufacturers, Washington D.C. Report Number GAO-96-45

This GAO report responds to congressional concerns over recent trends among the largest pharmaceutical manufacturers in merging or forming alliances with some of the largest pharmacy benefit management companies (PBMs). Questions raised by the study focused on four general areas including: 1) the role of the PBMs in the health care industry; 2) the objectives of these ventures; 3) specific concerns about the effect of these ventures on competition in markets served by drug manufacturers and PBMs; and 4) the extent, if any, to which the PBMs have given preference to their manufacturer partners’ drugs after a merger. Information was collected though discussions with Wall Street analysts, pharmaceutical economists, health plan sponsors, pharmaceutical trade associations, and PBMs. The results indicate that drug manufacturer have merged or allied with PBMs to help maintain and/or increase the manufacturers’ profits at a time of increasing competition. It is believed that PBMs have substantial market power due to their increasing special role in health care by administering prescription drug benefits for health plan sponsors. They also have been able to affect substantial cost savings through their ability to negotiate drug discounts and rebates from both drug manufacturers and pharmacies. The objective of the manufacturers’ ventures with PBMs was to bolster profits, increase market share for their drugs, and develop new programs for treating specific diseases. While the number of people covered by PBMs has increased significantly, the market for PBMs services continues to involve a small number of firms. Although there are over 40 PBMs in the U.S., the 5 largest manage benefits for over 80% of the health plan enrollees covered by PBMs. They include PCS Health Systems, Medco, Value RX, DPS, and Caremark International Inc.’s Prescription Service Division. (Staff)


U.S. General Accounting Office (1999) Prescription Drug Benefits - Implication for Beneficiaries of Medicare HMO Use of Formularies. Washington D.C. Report Number GAO/HEHS-99-166.

This GAO report is a study of the impact of drug formularies on beneficiaries in Medicare HMOs. Medicare HMO enrollees face complex issues in selecting a plan to best meet their needs because formularies within different HMOs vary and can affect their drug benefits as well as their out-of-pocket costs. Plans are not required by HCFA(now known as CMS) to notify beneficiaries of formulary changes and may also make it difficult for physicians to obtain exceptions to allow patients to remain on their existing medication at no additional cost if it is dropped from the formulary. Ten of the 16 HMOs studied use closed formularies that limit coverage to certain drugs. Twelve of the 16 HMOs require the use of generic drugs when available. Seven of the 16 use variable co-payments, with a larger amount charged for brand-name drugs than for the generics. Currently, Medicare beneficiaries can join or leave an HMO plan on a monthly basis. However, in 2002, making informed choices among health plans will become even more important because under the Balanced Budget Act of 1997 (BBA) (Staff)


U. S. General Accounting Office (1997), Pharmacy Benefit Managers: FEHBP Plans Satisfied with Savings and Services, but Retail Pharmacies Have Concerns. Washington D.C. Report Number GAO –97-47

The Office of Personnel Management (OPM) estimates that nearly 9 million federal employees, retirees, and dependents are covered by a Federal Employees Health Benefits Program (FEHBP). Additionally, they estimated that pharmacy benefit payments for the five largest FEHBP plans amounted to about $2 billion in 1995, and accounted for an increasing share of the total FEHBP health care costs –growing from 12% in 1990 to 19% in 1995. In order to control prescription drug costs, FEHBP plans contract with PBMs to manage pharmacy benefits on behalf of plan sponsors. As a result, the role of PBMs in managing pharmacy benefits for federal enrollees is growing. The report raised four basic questions: (1) why FEHBP plans have contracted with PBMs to provide pharmacy benefits, (2) what types of services and savings the PBMs provide FEHBP plans, (3) how FEHBP plans evaluate PBM customer service, and (4) the concerns of retail pharmacists about the quality of PBM pharmacy services and the effect of some PBM practices on the retail pharmacy business. The range of cost control services offered by PBMs to FEHBP plans include negotiating lower prices on prescription drugs, developing mechanisms that support lower drug costs such as mail order pharmacy sales, checking prescriptions for adverse drug reactions, and customer services, etc. Reimbursement mechanisms employed by PBMs include industry standards such as the drug’s usual and customary price, average wholesale price (AWP), or maximum allowable cost (MAC), plus a dispensing fee. The PBMs also require network pharmacies to substitute generic drugs for brand name drugs when possible. In directing market share of certain drug formularies, manufacturers give rebates to the PBMs amounting to over $113 million collectively in 1995. These rebates accounted for between 2% and 21% of plans’ estimated savings. Because the FEHBP plans use open formularies, enrollee reimbursement is not limited to the drugs listed on the formularies. Other cost saving interventions used by the PBMs include drug utilization review (DUR), generic and therapeutic interchange programs, and disease management programs. (Staff)


U.S. House of Representatives, Committee on Government Reform and Oversight, Minority Staff Report, (1998). Prescription Drug Pricing in the United States: Drug Companies Profit at the Expense of Older Americans. Washington D.C.

This report summarizes investigations of prescription drug pricing conducted by the minority staff in 20 congressional districts. The findings indicate that many older Americans pay high prices for prescription drugs and have a difficult time paying for the drugs they need. Large corporate and institutional customers with market power are able to purchase at discounted prices, but seniors and individual customers who pay for drugs out of pocket must pay at a much higher price. By one estimate, more than one in eight older Americans has been forced to choose between buying medications and food. Case studies conducted in several states illustrate these hardships. The staff recommendations include legislation to reduce the cost of prescription drugs for seniors. (Staff)


Walser BL. Ross-Degnan D. Soumerai SB. (1996) Do Open Formularies Increase Access to Clinically Useful Drugs? Health Affairs. 15(3): 95-109.

Before 1990 many state Medicaid programs maintained "restrictive" formularies, which denied reimbursement for unlisted prescription drugs. This type of formulary has been criticized for denying important medications to poor, medically needy persons. As part of the Omnibus Budget Reconciliation Act of 1990, restrictive formularies in Medicaid programs were disallowed. Based on research into the 200 top-selling prescription drugs in the United States, we conclude that eliminating Medicaid restrictive formularies improved access to a subset of the 200 best sellers, but that the majority of these products offered only questionable or no additional therapeutic benefit.

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