DOD Pharmacy Benefits Program:

Reduced Pharmacy Costs Resulting from the Uniform Formulary and Manufacturer Rebates

GAO-08-172R: Published: Oct 31, 2007. Publicly Released: Oct 31, 2007.

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John E. Dicken
(202) 512-7043


Office of Public Affairs
(202) 512-4800

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. 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. DOD implemented the uniform formulary in 2005. Drugs on the uniform formulary are generally available at military treatment facilities (MTF), the TRICARE Mail Order Pharmacy (TMOP), and retail pharmacies. 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. 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 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. 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.

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. 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. 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. 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.

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