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Francis: ‘Where’s the Beef’ in Claims That Employee Health Plans Overspend on Drugs?

In Guest Observer columns in recent weeks, Mark Merritt of the Pharmaceutical Care Management Association and David Balto of the Center for American Progress exchanged views on proposed Federal Employee Health Benefits Program legislation (H.R. 4489). The premise of this bill is that FEHBP-participating insurance plans overspend on prescription drugs because the Pharmaceutical Benefits Management firms with which they contract overcharge them. The bill rests on the assumption that Blue Cross, Aetna, United, Humana and other insurance firms are grossly incompetent in contracting for drugs.

[IMGCAP(1)]The House Oversight and Government Reform Subcommittee on Federal Workforce, Postal Service, and the District of Columbia held a hearing on the bill on Feb. 23. Chairman Stephen Lynch (D-Mass.) claimed that savings of as much as $1 billion a year would result from reform. David Balto wrote in Roll Call, “it is estimated that the FEHBP costs 15 percent to 45 percent more than any other federal drug benefit program,” an estimate asserting billions in waste. If these claims are accurate, there is indeed a serious problem.

Just where do these estimates come from? Not from any Government Accountability Office study. Not from any inspector general study. Not from any Congressional Budget Office study. Not, in fact, from any expert source.

At the hearing, Change to Win, the union organization, complained that Blue Cross enrollees are paying more than the uninsured under a charity program run by CVS Caremark. Quite apart from this absurd comparison, its study ignores the mail order program under which Blue Cross Standard Option enrollees get most maintenance drugs at lower costs. According to the Washington Post’s Joe Davidson, CVS says that Change to Win’s motive is to punish CVS over the “card check” union election issue. So the sum total of evidence for these claims of vast waste in the FEHBP is an advocacy organization’s erroneous study and Balto’s anecdotes about savings states make from reforming their own wasteful contracts.

Balto also quotes an Oversight and Government Reform majority staff report on Part D that says, “if Medicare negotiated directly with drug manufacturers … the potential savings to taxpayers increases to $156 billion.” This conclusion is irrelevant to the proposed bill, which does not authorize negotiations by the FEHBP. Regardless, the credibility of such assertions died when the CBO scored direct government negotiation as saving nothing compared with the use of PBMs by private plans.

A June 24, 2009, subcommittee hearing on FEHBP drug costs actually rebutted Lynch and Balto. A witness from the Department of Defense testified that from 2000 through 2008, total TRICARE pharmacy drug costs grew from $1.6 billion to $6.9 billion, fourfold on a per-enrollee basis. Yet the Office of Personnel Management inspector general testified that from 1999 through 2007, per enrollee spending on prescription drugs in the Blue Cross Standard Option had only doubled. These data, if accurate, demonstrate the superior performance of the FEHBP’s largest plan to TRICARE. There is no reason to think that an objective comparison of per-enrollee spending to Medicare Part D, or Medicaid — the other large programs that provide a broad array of drugs at neighborhood pharmacies — would lead to contrary conclusions.

Another possible explanation for these unsupported claims emerged at the hearing. Chairman Lynch asked a witness if her union members would be willing to accept the Veterans Affairs formulary in order to get the VA drug prices that depend on formulary restrictions. This scheme is not in the proposed legislation but is probably the only conceivable basis for these grandiose claims of waste. It is hard to believe, however, that Congress would seriously consider such a draconian limitation on federal employee choices of medicines.

It is not true, as Balto claims, that this bill “simply imposes reasonable disclosure requirements so the [FEHBP] can better monitor and reduce its prescription drug spending.” The bill would debar CVS Caremark and other firms that combine PBM and pharmacy functions from contracting with any FEHBP plan and would prohibit health-based drug substitution recommendations that did not lower costs. It would also require payment at whatever prices manufacturers charged, would impede the collection and dissemination of information on drug utilization to the Food and Drug Administration and the National Institutes of Health, would have OPM set dispensing fees for FEHBP sales in every pharmacy in America, and would impose an immense array of paperwork burdens on manufacturers, PBMs, and pharmacies.

The net effect of these restrictions would be to reduce competition (many PBMs would not or could not bid on FEHBP plan contracts), to raise manufacturer prices to all purchasers including the VA, and in these and other ways to raise prescription drug costs in the FEHBP. OPM, an agency without any competence or expertise in wholesale or retail prescription drug management or in administering national price controls, would administer all these functions.

The bill is antithetical to the program design of the FEHBP and of the Medicare Part D and Medicare Advantage programs modeled after the FEHBP. In these programs, plans compete for consumers. They compete on the basis of service, benefits and cost. If they are unable to control costs effectively, they lose business and profits. Since the Part D plans use the same mechanisms as the FEHBP (e.g., encouraging generic substitution), and many of the same firms participate as plans or PBM contractors to plans, the notion that this model is broken or flawed is rebutted by the amazing performance of the Part D program in reducing drug costs from original projections.

My recent evaluation of the Medicare and FEHBP programs shows that the FEHBP has outperformed original Medicare in cost control (and many other ways) over five decades. Abandoning this proven model of consumer-driven competition for a set of price controls administered by the government’s human resources agency, based on speculative assertions of waste rather than real evidence, seems as feckless a “reform” as could be imagined.

Walton Francis is the author of “Putting Medicare Consumers in Charge: Lessons from the FEHBP,” published by the American Enterprise Institute. He has been the principal author of the annual “CHECKBOOK’s Guide to Health Plans for Federal Employees” for 30 years. These views are his, not those of AEI or Washington Consumers CHECKBOOK. His detailed analysis of H.R. 4489 is at

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