I am Jeff Sanders and am here representing the Pharmaceutical Care Management Association (PCMA). I am Senior Vice President of PCS Health Systems, one of the two largest pharmacy benefit managers in the United States. I am responsible for product development and management, client analytical support, and pharmacy networks. PCS is a wholly owned subsidiary of Rite Aid Corporation, one of the nation’s largest drug store chains. I thank you for the opportunity to present our views and extend, in person, a willingness to help craft an efficient, high quality, and workable Medicare pharmacy benefit program.

The testimony that follows presents an overview of the PBM industry and the services and programs we offer.

We also present a summary of the trends in prescription drug costs payers confront and a summary of prescription drug costs for seniors. These are supported by PCS analyses in two appendices.

We also highlight the PBMs values ensuring quality pharmaceutical care, producing savings in the prescription drug benefit, and making the benefit patient-friendly. The testimony stresses the innovation that occurs regularly within our industry.

We feel it is extremely important that a Medicare prescription drug benefit support the valued services PBMs now provide and allow the type of continuing innovation now occurring for private plans.

The Pharmaceutical Care Management Association (PCMA) represents managed care pharmacy, pharmacy benefits management companies (PBMs), and their partners in pharmaceutical care. PCMA serves its members and America's healthcare system by promoting education, legislation, practice standards, and research that foster high quality, affordable pharmaceutical care. PCMA members serve more than 150 million individuals and employ more than 9,000 pharmacists. To further put our role into perspective, over two-thirds of the 2.8 billion prescriptions dispensed annually are covered by managed healthcare.

PCMA's mission is to assure quality standards throughout managed care pharmacy, manage escalating healthcare costs for providers and patients, and promote managed pharmaceutical care as a high quality, cost-effective method of prescription medicine delivery.

PCMA has more than 140 members that range widely in size, structure, scope, and variety of the services they provide. PCMA members are leaders in innovation, quality improvement, and the utilization of new technology to deliver and constantly improve pharmaceutical care. Besides dispensing prescription medicines and processing claims, our member organizations provide a number of patient-centered services, such as compliance monitoring, disease management, case management, outcomes assessment, and drug utilization review.

Approximately 227 million Americans have some sort of health insurance coverage. Of these, PCS estimates that approximately 194 million have prescription drug benefits. Of the 33 million individuals who have health coverage but not drug coverage, approximately 13 million are enrolled in Medicare.

Drug management responsibility falls into three distinct categories. PBMs (e.g. PCS, Merck-Medco Managed Care, and Express Scripts) provide benefits for approximately 137 million individuals, which represents 71 % of those members with third party pharmacy coverage. Other non-third party processors, including internally managed HMO-based PBMs such as Kaiser Permanente and Aetna provide benefits for approximately 39 million people. The remaining 18 million are covered by various state administered Medicaid plans. (See diagram below.)

PCS Health Systems, Inc. manages and monitors 300 million individual prescriptions each year, representing $10 billion in drug expenditures, for 56 million Americans. Included among PCS’ customers are about 5 million people under the Federal Employees Health Benefit Program (FEHBP), 10 million HMO/PPO members, 15 million employees of self-insured companies, 143 insurance carriers, many Blue Cross Blue Shield plans, state employees, and union members. These customers are served by PCS through dedicated teams of sales and customer service representatives and are supported by 17 regional sales offices and a clinical operations office in Minneapolis, Minnesota.

In The Beginning - While prescription drug benefits are now common in today’s workplace, this has not always been the case. Thirty years ago, most employees could count on medical, surgical, and dental coverage from their group health plans, but prescription drug coverage paled by today’s standards. By the late 1960s insurers were being asked to provide prescription drug coverage; however, with this new benefit came a myriad of problems for insurers. Most notably, prescription drug coverage posed a claims administration nightmare for insurance companies who, at that time, were only geared to administer large, well-documented medical or surgical claims.

In order for prescription drug coverage to work on a large scale, it became apparent that a specially developed claims administration system had to be created. This system had to be able to effectively and economically handle the high volume of prescription drug claims that was equal in number to all other forms of health claims.

PCS was founded in 1969 with the objective to develop a prescription drugs claims administration system that would satisfy the needs of the payers and patients, provide proper processing of claims, and accomplish this at minimum cost. Out of this effort, Pharmaceutical Card System, Inc. was born. (Our company’s name was later changed to PCS Health Systems, Inc.)

1970s: Rapid Growth - Innovation was the key to PCS’ and our competitor’s rapid growth. Eligible employees received a plastic identification card that could be presented to any of the thousands of pharmacies in the PBM network. The eligible employee paid only a small copayment required by his or her health plan. The pharmacist collected the balance due from the PBM. For the employee and the employer, the card greatly simplified the prescription drug benefit. The PBM industry also pioneered mail service pharmacy benefits, which allowed patients to easily get their medications through the mail at discounted prices.

The 1980s: PBMs Goes Online - PCS, followed by other PBMs, introduced online electronic drug claims processing in 1987. Online processing was welcomed by payers, pharmacists, and patients as the new standard for handling prescription drug claims.

The 1990s: Managed Pharmaceutical Care - During the 1990’s, PBMs really became pharmacy care benefit managers, evolving from administrative agents or mail service providers. Services were added that produced savings and improved the quality of care.

The following chart outlines the recent evolution and innovation in our industry:

Today, insurance companies, managed care organizations, employers, and consumers are demanding that PBMs provide programs to both control rising drug costs and deliver clinically appropriate, high-quality health care for patients.

To respond to these market dynamics and address the needs of both payers and patients, PBMs have developed a broad range of services to meet the dual objectives of improving both clinical and economic outcomes.

PBMs adjudicate pharmacy claims, identify pharmaceutical cost outliers, deliver educational and therapeutic-support materials, administer effective disease prevention and management programs, guide patients and physicians to the most appropriate, cost-effective drug options, and track health and economic outcomes.

Most importantly, PBMs are increasingly called upon to tailor combinations of programs and services to meet unique requirements of each market segment and each client. For example, PCS offers four standard formularies, yet manages over 200 different formularies on behalf of its clients. PBMs are called upon to advise customers on which mix of services and programs, plan design, and program features will deliver the best results and meet customers’ objectives.

Following is a summary of programs and services that PBMs can offer to help health care providers and payers reduce their drug costs, while ensuring quality for members.

Claims processing and adjudication – Unlike the medical claims processing industry, which continues to be viewed as costly, slow, and prone to data collection errors, PBMs have set the highest standards in the health industry through the use of electronic pharmacy claims adjudication.

For example, PCS alone processes over 300 million claims annually, most in less than two seconds. Each claim adjudicated is run through several hundred clinical and financial edits, ranging from drug-drug, drug-age, and drug-pregnancy edits to eligibility and plan design edits. This electronic system also allows us to offer a discounted drug pricing structure at the point of service. In fact, the efficiency of computerized systems has helped reduce the cost of processing a prescription claim from $6 to less than $1. This dramatic reduction in cost has enabled many employers, both large and small, to be able to provide their employees with a prescription benefit.

Retail Pharmacy Networks – PBMs are expert at contracting with pharmacies to develop pharmacy networks that can meet unique client demands and for balancing beneficiary access with deeper pricing discounts. PCS offers clients choices of pharmacy networks with varying levels of discounts (narrower networks usually having deeper discounts). PCS offers four broad national networks; but, it manages over 365 custom pharmacy networks.

In addition to the standard pharmacy networks and pricing terms, PCS recognizes pharmacies make discretionary decisions that can have an impact on costs and quality. Because of this, PCS has worked aggressively to involve and reward the retail pharmacist for providing services that can help the plan and the member. These services include special "performance networks" which reward pharmacies for meeting goals around such measures as generic dispensing, therapeutic intervention, and most cost-effective bottle size. Pharmacies are measured against peers, regionally and nationally. PCS has developed customized software, distributed to thousands of pharmacies, to aid these pharmacies in measuring and improving their own performance.

PBMs are called to help employers and health plans identify possible cases of prescription drug fraud and abuse, which is an estimated $100 billion annual burden. PCS’ fraud and abuse detection program, which utilizes our extensive prescription claims database, identifies not only pharmacists who show patterns of unusual prescription activity, but physicians and plan members as well. Computer analyses are reviewed quarterly, comparing actual activity to performance standards. These reviews trigger on-site pharmacy audits and educational visits to further investigate and resolve the issues.

In support of our network pharmacies, PCS maintains a dedicated pharmacy help desk staffed by a team of specialists who are available to answer questions relating to a member’s prescription drug benefit.

Mail Service Pharmacy – Many PBMs provide a mail service pharmacy option to clients. Mail service offers certain clients even higher discounts on drugs and also provides a benefit that is more for certain populations. For example, receiving prescriptions by mail can be especially helpful for seniors on long term maintenance medications. Clinical programs, such as DUR and disease management, are provided with mail service benefits.

Formularies – A formulary is a specific list of drugs that are included with a given plan for a client. Insured members are covered for prescriptions if the drug appears on the formulary list. Formularies have enabled PBMs to successfully achieve price concessions from drug manufacturers, while ensuring clinical program integrity. In that regard, PBMs have developed a variety of formularies to meet the differing needs of our clients. These range from open or voluntary formularies to restricted or closed formularies. PCS offers several "off-the-shelf" formularies or preferred drug list options; yet, because of the unique demands of our client base, we have developed and currently manage approximately 200 client specific formularies.

Rebate Arrangements – PBMs negotiate with manufacturers for rebates on behalf of our clients. Rebates are generally available on branded, single source products. While there are no hard and fast rules, rebate levels are usually related to how effectively the formulary is managed. Manufacturers will pay higher rebates if they believe the volume or market share of their products of their products will increase due to better formulary management. As a result, PBMs offer clients choices of how to manage their formulary, with rebate levels that may vary in some situations. Rebates belong to our clients (employers or insurers), although PBMs often negotiate a portion of the rebates as part of a financial arrangement with the client for managing the pharmacy benefits program.

Generic Dispensing/Alternatives Programs – PBMs offer a number of services to clients, such as Maximum Allowable Cost (MAC) programs. These programs are incorporated into pharmacy network agreements and our claims adjudication processes to encourage increased dispensing and the use of generic alternatives to maximize savings.

Therapeutic Alternatives – Another major driver in the quest for more cost-effective prescribing has been the use of therapeutic alternatives when products are equivalent in efficacy. These programs, used to various degrees in the industry, have helped clients achieve higher utilization of more cost-effective products, and have helped increase rebate levels. PCS currently has over 26 million members participating in its own voluntary therapeutic interchange program.

Drug Utilization Review (DUR) – These programs are run retrospectively, concurrently, or prospectively to help identify potential utilization issues and to correct them at the patient, physician, or pharmacy levels.

Last year, PCS sent over 2.5 million retrospective DUR letters to physicians. PCS also pioneered Quantum Alert^®, the first nationwide, on-line pharmacist messaging and clinical data system. This concurrent DUR program alerts the pharmacist to therapeutic duplications, high drug doses, possible drug interactions, and excessive utilization at the point of service. In 1998, PCS issued more than 61 million concurrent DUR alerts, five (5) million of which concerned potentially dangerous or even life-threatening adverse drug events.

Utilization Management – Drug utilization continues to climb, due to a combination of factors including demographics, changing medical practices, direct-to-consumer advertising, and expensive new therapies. To assist our clients, PBMs have applied a wide range of utilization control measures, including prior authorization, managed drug limitations, managed access for specific patients, and step therapy (e.g., for antibiotics and ulcer medications). These programs are intended to reduce unnecessary drug use, assure drugs are used in proper clinical circumstances, and safeguard the patient. These programs allow for unique combinations that reflect the goals of each client and balance clinical objectives with potential member disruption. For example, the FDA and clinical experts recommend the following:

In PCS’ case, we have implemented specific programs that allow our clients to limit the use of Toradol consistent with manufacturer recommendations in order to help ensure the safe use of this drug by our client's members. The criteria used by PCS for the drug limitations and prior authorization programs for Toradol have been developed by PCS' clinical staff and reviewed and approved by an independent medical committee to ensure that the criteria are appropriate and aligned with optimal pharmaceutical care with the drug. This program is specifically designed to help ensure that Toradol, while covered as a benefit by most of PCS’ clients’ plans, is used safely and effectively.

Disease Management Programs – PBMs, in general, have been successful in developing and implementing disease management programs that focus on achieving improved health outcomes through appropriate drug therapy. They do this by leveraging extensive retail and mail-based drug claims data and delivering patient-specific education to members, their pharmacists, and their physicians. Typical examples of disease management programs include those for diabetes, cardiovascular disease, and asthma. Clients’ clinical issues, members’ needs, and internal capabilities often differ. As a result, programs vary widely and PBMs offer customized combinations to suit specific needs.

Support of Physician Decision Making – Current health plan structures often require primary care physicians to make more decisions regarding drug therapy regimens. In turn, PBMs are called on to provide information about these therapies as well as provide an unbiased perspective of the clinical and economic impact of associated prescription decisions. As an example, PCS employs 130 clinical pharmacists to interface directly with physicians, providing them not only with up-to-date information on new and existing drug therapies, but also recommending clinically equivalent, cost effective alternatives for these therapies. Our significant data warehouse capabilities allow us to identify individual physicians with prescribing patterns that merit ongoing consultation, whether by phone, mail, or face-to-face. We can also generate reports for physicians that can help them understand their own patterns and identify the potential savings to payers and beneficiaries associated with prescribing changes. Many PBMs are also working to deliver pharmacy related information to physicians electronically and this approach holds great promise for the future.

Member focus – In order to help members better manage their health, PBMs have developed communications that that help them "navigate" through their benefit plan offerings. Easily understood information is more important now than ever. As examples: PCS offers a suite of member communications which can be customized at the client’s request; and, has recently developed a privacy protected web-site for members that allows them to track their prescription history, refill prescriptions, and learn more about their specific condition and appropriate drug therapies.

Member Services – PBMs maintain call centers dedicated to patient concerns. These resource services focus on responding to individual patient calls for help in resolving questions related to the individual’s prescription drug benefit.

Client Services - As clients continue to "right size" and outsource benefits administration functions, PBMs have responded by developing sophisticated and comprehensive call centers to accommodate complex questions. These questions can cover a variety of topics, ranging from eligibility to plan drug coverage.

Reporting Capabilities –In addition to paper reports, clients are asking PBMs to provide ways to access or personally manage data related to their health benefits plans. In particular, payers are interested in physician prescribing patterns, drug spend by therapeutic class, total drug spend, and member drug utilization patterns. In response to this need, many PBMs have developed unique software applications that provide clients with on-line analysis tools that can be used to measure and improve their plan’s performance. The analysis capabilities can be tailored in consideration of client needs and expertise.

Economic Arrangements - The foundation for our industry’s pricing has primarily been fee for service, typically expressed as an administrative fee per claim. PBMs generally guarantee access to pharmacy networks at a set discount off the average wholesale price (AWP) for drugs, plus a dispensing fee for the pharmacy. If formulary management services are involved, the client receives rebates from manufacturers. PBMs often contract for a share of these rebates as a means of administering the client’s drug management program. The pricing of services can also vary depending on the needs of the client.

Additional services, such as disease management programs, continue to be provided either on a fee for service basis or in exchange for a share of savings generated for the client.

Capitation is rarely used in the PBM industry for the following reasons:

1. Philosophically, pharmacy costs often offset medical costs; therefore, a capitation on pharmacy costs, alone, tends to create the wrong incentive. Focusing only on drug spend and minimizing these costs does not provide the solution to reducing overall health care expenditures, and may, in fact, increase total medical costs.
2. PBMs rarely control all factors driving drug spend. For example, HMO contracts with physicians can have a significant influence on pharmacy expenditures. Also, many HMOs run internal disease management programs with explicit objectives to increase drug utilization.

Consultative Services – PBMs work with clients to design benefit plan features and approaches that fit their unique needs and marketplace situations. As examples, PBMs can provide expert advice on proper copay and coinsurance structures to achieve customer goals of savings and satisfied beneficiaries.

PCS has developed computer based modeling tools to assist payers with assessing all the financial implications of proposed changes. PCS also consults with plan sponsors on the potential for aligning physician payment and incentives with the pharmacy plan objectives, as well as what information is most valuable to physicians to meet these objectives. In sum, we evaluate each of our clients separately and work with them to deliver the best mix of services, , programs, plan design, and features to meet their individual objectives.

In providing these services to health plans, patients, and physicians, PBMs utilizes the claims data obtained from processing and adjudicating the prescription transactions. At PCS, we stringently protect patient privacy and the confidentiality of this highly sensitive medical information. We take our stewardship of this information very seriously and go to great lengths to ensure that only authorized individuals have access to the data. This includes the patient's physician, the patient's health plan, and those acting on behalf of PCS who have a need to know in order to provide health benefit services under the patient’s health plan or to respond to questions from the patient. No other outside entity has access to patient-identifiable information, including PCS' parent company, Rite Aid. Patient-identifiable information is never sold or used for direct-mail marketing purposes. Beyond strictly limiting access to patient information, PCS protects its data through physical security of its computing facility, technological measures that incorporate data encryption and passwords, and a corporate policy that is stringently enforced. We understand that our competing PBMs have similar policies.

Health providers, payers, and members have all benefited from a history of innovation in the PBM industry. Competition has fostered member, physician, and pharmacy-friendly programs that have helped payers meet their goals of providing a cost-effective prescription drug benefit, without sacrificing patient confidentiality. These solutions have been developed and implemented in a customized way that reflects the continued differences in preferences and objectives of our varied clients.

The following chart illustrates the very basics of the relationship between a PBM and its key constituencies.

Retail drug costs in the United States have almost doubled from 1992 to 1998, increasing from $49 billion to $94 billion. It is important to note that these numbers represent drug spend increases for the entire U.S. population, including uninsured and cash paying customers who typically generate a lower rate of drug expenditures relative to the insured population.

Experience shows that trends for benefit plan sponsors are significantly higher, ranging from 14% to 18 % from 1997 to 1998. Many plans with rich benefit designs and/or older membership base experienced trend increases up to 40% in 1998.

Typically, about 3 percentage points of this increase are attributable to price increases on current drugs. The remaining drug cost increase is due to two factors: utilization (increasing number of prescriptions per member per year) and intensity (new, more expensive drug therapy and changes in therapy mix). PCS estimates that approximately one third of drug cost increase is due to utilization, i.e., members taking more drugs, and two-thirds is due to the introduction of newer, more expensive drugs that replace older, cheaper drugs for certain treatment regimens.

Also worthy of note is the increase in the percentage of retail prescriptions paid for by third parties. In 1991, 28% of prescriptions were covered by third parties; by third quarter, 1998, the percentage rose to more than 64%, and has continued to rise.

The leading drivers of rising drug spend can be grouped into three major categories:

1. Environmental Factors

• Aging of the American population and increasing life expectancy

• Shift toward more aggressive medical diagnosis and treatment standards, especially in chronic disease states such as diabetes, high blood pressure and high cholesterol

• Increase in third party coverage of prescription costs, especially flat copay plans, which de-sensitize consumers to the actual costs of drugs

1. New Pharmaceutical Product Development

• Dramatic increases in the number of new brand name drugs coming to market each year
• Increased product development emphasis on drugs to treat chronic conditions
• Increased emphasis on life enhancing and lifestyle drugs

1. Pharmaceutical Manufacturer Marketing Practices.

• Dramatic increases in direct to consumer drug advertising

• Increased focus on direct to physician selling, with drug sales forces increasing 48 % from 1995 to 1998

Given that many of the factors driving drug costs will continue through the turn of the century, PCS expects the overall national drug spend to continue to increase for the next few years at growth rates of 14 % to 18 %. Many drug benefit plan sponsors will face significantly greater growth rates depending upon plan design, health plan demographics, and member cost sharing.

These drivers and their associated impact on overall costs are discussed in detail in the attached Appendix A.

As people age, they use more drugs. PCS has conducted analyses of its over-65 population to better understand how America’s seniors utilize drugs. On average, patients over 65 fill approximately 20 prescriptions per year as compared to about six prescriptions for individuals between the ages of 20 and 30 years.

Analysis of specific therapeutic classes reveals significant differences in the types of drugs used. Antibiotics, H2-Antagonists (gastric treatment), and oral diabetic agents rank as the top three drug classes in the under 65 population. In contrast, cholesterol-reducing agents (HMGs), hypertension medications (Calcium Channel Blockers), and ulcer medications (PPIs) are the top three drug classes consumed by the over 65 population. Cardiovascular drugs represent 36 % of drug use by seniors.

Among people over 65, there are wide differences in drug costs. PCS conducted a cluster analysis of its over-65 members and found that this member population can be categorized into three groups: Low Cost, Middle-of-the-Road, and High Cost.

When viewed from a total cost perspective, the "80/20" rule of thumb does not apply:

• The Low Cost segment accounts for 68% of the population but only 27% of the total costs
• The Middle-of-the-Road segment represents only 27 % of the population, yet accounts for 44 % of the total costs.
• The High Cost group, which represents about 5 % of the population, accounts for 16 % of the total costs.

Worthy of note is the observation that gender and age have less of an impact on drug costs than the disease state. In particular, patients with diabetes tend to generate significantly higher drug costs than others, especially when the diabetes coexists with other conditions such as cardiovascular disease and depression. A detailed discussion of these issues, along with the quantitative findings of PCS' analysis of the senior market is found in the attached Appendix B.

PBMs work to ensure the quality of drug care to produce savings in the pharmaceutical benefit and to make the benefit patient-friendly. And, PBMs work with clients to help them design benefits and tailor programs to meet specific needs.

PBMs ensure the quality of pharmaceutical care - For successful PBMs, clinical considerations and quality of care come first and quality of care features underlie all of our programs. PBMs offer drug-drug interaction and other drug safety alerts on line. This enables the dispensing pharmacist to identify and resolve issues before the patient obtains the prescription. PCS alone sent alerts on 5 million potentially dangerous drug interactions in 1998. PBMs also have varied programs that support physicians in their efforts to provide quality care. PCS sends letters to physicians that outline current prescribing standards and protocols, and offer the physicians unbiased cost and efficacy information. As noted earlier, we sent over 2.5 million letters to physicians in 1998 alone. We support this with face-to-face visits to physicians by clinical pharmacists.

PBMs also provide ad hoc quality efforts. For example, even prior to press reports on Viagra’s dangerous interaction with drugs containing nitrates, PCS studied its database so that we could alert physicians to the danger. Carefully complying with privacy concerns, we made the information actionable by identifying, for the prescribing physicians, any of their patients on both Viagra and nitrates. While responses varied across the industry, this approach is part of what PBMs offer. We believe there are many cases where services such as these have saved lives, prevented hospitalizations, and improved lives.

PBMs produce savings - In 1997, The General Accounting Office (GAO/HEHS 97-47 FEHBP Pharmacy Benefits) studied the savings PBMs produce for the Federal Employee Health Benefits Plan (FEHBP). GAO studied three FEHBP plans and found savings in 1995 ranged from 20%-27% relative to what would have been spent without the PBMs. Savings resulted from pharmacy and mail service discounts, manufacturer discounts negotiated on the FEHBP plans’ behalf, generic and brand interchange programs, prior approval programs, drug utilization review, disease management, and coordination of benefits. The mix of savings and programs adopted by the three FEHBP plans varied. As important as the savings, GAO also found extremely high federal employee satisfaction with the program, with 93% to 98% of respondents noting satisfaction with their benefits.

GAO analyzed the 1995 FEHBP program. A similar study done on the 1999 program would find additional services and services in place, and savings being even greater for the FEHBP plans. The study would also find considerably higher drug spend for the FEHBP plans in 1999 than 1995, as the overall trends in drug spending have affected all third party payers. This has created an onus on PCS and the other PBMs that serve these plans to produce yet more savings in coming years.

As was the case with the GAO study, many of our clients look at savings and patient satisfaction within the pharmacy benefit. Increasingly, however, our industry looks at the pharmacy benefit’s value to the overall medical care of the patient. Study after study has documented the consequences of poor patient compliance with their therapy, patient misuse of drugs, prescribing, errors, and drug interactions because different physicians unknowingly prescribed drugs that chemically interact with each other. Studies regularly show that up to 25% of all elderly hospital admissions result from something going wrong with drug therapy, much of this being preventable. One study (Johnson and Bootman, 1995) documented $76 billion in annual drug related morbidity and mortality costs in the US ambulatory setting. As noted above, today’s PBMs actively play a role in improving pharmaceutical care; and, in fact, statistics would be much worse without our current programs.

New technologies allow PBMs to increase our linkage to overall health care and medical costs, which can provide us with the potential to put a much greater dent in the $76 billion in unnecessary costs. And, with pharmaceutical innovation continually providing new or different ways to treat conditions, the need for management of patient drug therapy is increasing dramatically.

PBMs make the benefit patient-friendly - Surveys consistently show that pharmacy benefits rank high in what members like most about their overall health care plan Not only does pharmacy rank high in relative terms, but also in absolute terms. As part of the previously described study on PBMs in the FEHBP program, GAO found patient satisfaction with their pharmacy benefit ranged from 93% to 98%.

High satisfaction results from services such as on-line adjudication of pharmacy claims which permits patients to know their total financial responsibility when picking up their prescription. If there is a problem with coverage or some other benefit nuance, they are able to know at the point of dispensing, not weeks or months after. There is no paperwork to submit. This is a standard of service that has become so ingrained and universal that no one thinks about the dramatic contrast with how medical bills are often paid.

The Internet has opened a new channel to greatly expand the communication that PBMs provide to enrollees. With this capacity, we can, with appropriate privacy protection, provide patients with more information about the drugs they are taking, how to take them, the effect of drugs on their medical conditions, and improve the ease of using mail service pharmacy. We see this as a significant opportunity to provide patients with a better understanding of their pharmacy benefit and a means to involve them in managing the pharmacy benefit for their own good.

PBM value is high; so, too, are remaining needs - PBMs offer much value, but there are many issues in managing the pharmacy benefit that still need improvement and solutions. With more new pharmaceutical compounds reaching the market today than at any time in our history, and more of these compounds representing "breakthroughs", the challenges in managing a pharmacy benefit are changing more rapidly than ever. There are many new opportunities (and some old ones) to reduce unnecessary drug use; to improve compliance and how patients take their drugs; and to assure that drug therapies regularly deliver their potential medical benefits.

Just as in medical care, pharmacy practice patterns differ across the country with varying degrees of effectiveness and cost. And, PBMs have further to go in understanding and addressing these variations. The Internet and other technological advances give PBMs and our payer customers a much better opportunity to provide patients, pharmacists, and physicians easier, more timely information so that care options will be better understood and better decisions made.

Finally, as noted earlier, the opportunities to more fully integrate the management of the pharmacy benefit with overall medical care is great.

The Pharmaceutical Care Management Association (PCMA) is proud that PBM contributions have led to an accessible, easy to use pharmacy benefit for most Americans. We are proud of the savings we produce – 20%-27% for the Federal Employees program– that make these benefits more affordable than they would be otherwise. We are proud of the innovations such as real time, concurrent drug utilization review that has improved the quality and safety of medical care. We are proud that the benefit is efficient and easy to use. We look forward to the many challenges and opportunities that are here now or coming.

Our industry regularly brings innovations and new capabilities to the marketplace that leverage technology, information and relationships with patients and health providers. Competition is fierce in this industry and valued innovations have become necessary to win business. These innovations will provide greater savings, add clinical value, and allow us to accomplish these goals in ways that feel less intrusive to patients and physicians than many of today’s medical and pharmacy interventions.

Medicare and its beneficiaries should benefit from today’s PBM programs, such as on-line adjudication; formulary management and manufacturer rebates; retail and mail service pharmacy network discounts; generic substitution and therapeutic alternatives; drug utilization review; utilization management techniques such as prior authorization, managed drug limits, and step therapy; a variety of beneficiary education programs; and disease management.

We also feel it is extremely important that a Medicare pharmacy benefit allow the type of continuing innovation now occurring for private plans. We simply cannot freeze our industry as it exists today through a regulatory structure in which it becomes nearly impossible to improve how we deliver the benefit and offer new value-added services. Medicare and its beneficiaries should be allowed to benefit from the new programs and capabilities.

The health care environment is characterized by diversity in the patient and provider sectors. Consequently, multiple approaches to the opportunities and challenges of managing pharmacy benefits have been developed. When confronted with managing pharmaceutical over-use, under-use, or misuse, different PBMs take different approaches. Within PCS, we often pursue more than one approach so that we can more completely address an issue in consideration of the diversity of health delivery across the country. Medicare should allow variation so that approaches can be compared, with the best approaches surviving. This method of evaluation is the very source of much of the improvement that occurs today within PBMs, and across our entire industry.

To us, this means an administrative structure that sets some broad, minimum benefit requirements and beneficiary protections. PBMs should be allowed to compete (PBMs alone or PBM/plans) and innovate, within these broad parameters.

We believe the value of pharmacy information linked to medical information is high, although privacy protection must be in place. In designing the program, pharmacy information should be available to the end medical payer, and specific medical information should be available to the PBM to help it manage the pharmacy benefit. The specifics of this may be intertwined with the overall structure of Medicare, but technology allows such information exchange to be relatively straightforward - regardless of Medicare’s structure. And, of course, we must take care, particularly where a Medicare risk plan is involved, that the PBM stay linked with the managed care plan (likely by contract, as today), so that patient management techniques are integrated between the PBM and the HMO.

Whatever its precise parameters, a Medicare drug benefit should be structured so as to allow the competitive process to operate freely. There is no mechanism better than the marketplace for filtering out the less effective and more costly approaches, and no more impartial or accurate a judge of what works and brings value to the beneficiaries. It is the discipline imposed by the market for PBM services that has brought about the tremendous savings, administrative efficiencies, and clinical advances evident in the delivery of pharmacy benefits today.

Great care must be taken to preserve not simply the current best programs in place, but the market mechanism that is responsible for constantly re-evaluating and improving upon those programs. This will require a discipline of another sort by the government, namely, to avoid micromanaging program details and encumbering benefit providers with rules regarding every aspect of their activities. While these actions may be taken with the best interests of beneficiaries in mind, they serve only to stifle innovation, reward inflexibility, and build bureaucracies. Worse, by undermining the very process upon which the government would be depending to bring about cost savings and clinical improvements, such actions would protect the inefficient and entrench the unresponsive – the very players that an efficient market system would root out first.

Beneficiaries’ interests can best be protected and advanced by the government setting minimum benefit standards, outlining broad principles of participation, providing opportunities for program variations and innovations, and establishing an oversight mechanism. Allowed to operate freely, competition will take care of the rest – providing all the incentives to improve performance, and all the penalties for failure. This is how it works today – although imperfectly – in the pharmacy benefit provided in the Medicare risk program and in the FEHBP program.

We understand several approaches are being considered to provide Medicare patients drug benefit coverage and we think several of them are workable. Both the Pharmaceutical Care Management Association and PCS stand prepared to assist in helping achieve the objectives we have outlined above through our expertise.

Thank you for the opportunity to present these views.