Order Code RL31316
Report for Congress
Received through the CRS Web
President Bush’s Proposed Medicare-Endorsed
Drug Discount Card Program:
Status and Issues
Updated June 20, 2002
M. Angeles Villarreal
Analyst in Industrial Organization
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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President Bush’s Proposed Medicare-Endorsed Drug
Discount Card Program: Status and Issues
Summary
On July 12, 2001, President Bush announced a Medicare-endorsed prescription
drug discount card program to help seniors lower their out-of-pocket drug costs. The
President stated that the discount card program would be an interim measure until
a broader Medicare prescription drug benefit for seniors can be created. Many
seniors do not have adequate prescription drug coverage. In 1998, an estimated 10
million elderly people, or 27% of Medicare beneficiaries, did not have any form of
prescription drug coverage.
The proposed card program would be similar to prescription drug discount card
programs that are currently available from a number of sources. The Administration’s
card would endorse and promote a number of qualified privately-administered
prescription drug discount card plans at a maximum enrollment rate of $25 per plan.
Since the announcement of President Bush’s proposal, several pharmaceutical
companies announced that they would offer their own senior discount card plans for
low-income seniors beginning in early 2002.

The Administration has stated that the Medicare-endorsed card plans would
offer discounts in the range of 10% to 25% on retail prescription drug prices. The net
overall effects of President Bush’s proposed program would depend on the details of
the individual card plans, including formularies and the level of discounts, which are
not yet available. Much depends on whether the card program would provide
sufficient market leverage for card sponsors to negotiate lower drug prices from drug
manufacturers and whether the card sponsors and pharmacies agree upon acceptable
reimbursement rates for the pharmacies. Congressional critics of President Bush’s
proposal dispute the Administration’s estimates of potential discounts. Some
Members of Congress believe that the card program would not provide additional
benefits for seniors. They cite a recent study by the U.S. General Accounting Office
(GAO) on prescription drug discount prices available at retail pharmacies, Internet
pharmacies, and existing drug discount card programs. The Members believe that
the study indicates that seniors already have access to drug discount cards and that
these programs offer little savings for seniors.
The Administration planned to implement the card program in January 2002,
but it was put on hold because of a federal court order. Pharmacy groups filed a
lawsuit against CMS on July 17, 2001, asking a federal court to issue an injunction
that would halt the card program on the grounds that the Administration had no
statutory authority to establish the program. In September 2001, a federal judge
issued an injunction. The Administration proceeded with plans to modify the
program and use a formal rulemaking process for a new proposal. On February 28,
2002, the Administration announced the revised proposal which would require card
sponsors to share manufacturer rebates or discounts with Medicare beneficiaries. On
March 6, 2002, CMS issued a proposed rule for the card program with a 60-day
comment period. CMS and pharmacies are awaiting a ruling by the court on whether
it will allow the rulemaking process to continue. This report will be updated as
events warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Gaps in Senior Prescription Drug Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Existing Commercial Prescription
Discount Card Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
How Prescription Drug Discount Card Programs Work . . . . . . . . . . . . . . . . 3
Recent Senior Discount Card Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Description of the President’s Drug
Discount Card Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Original Discount Card Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Program Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Endorsement of Card Sponsors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Consortium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Pharmacy Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Expected Discounts: Diverse Estimates . . . . . . . . . . . . . . . . . . . . . . . . . 9
Proposed Regulations to Establish Card Program . . . . . . . . . . . . . . . . . . . . 11
Administration Arguments in Support of Discount Card Program . . . . . . . . . . . 12
Pharmacists’ Challenge to Medicare Discount Card Program . . . . . . . . . . . . . . . 14
Procedural Objections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Economic Objections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

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President Bush’s Proposed Medicare-
Endorsed Drug Discount Card Program:
Status and Issues
Introduction
On July 12, 2001, President Bush announced a Medicare-endorsed prescription
drug discount card program to help Medicare beneficiaries reduce their out-of-pocket
drug costs. The President stated that the discount card program was an interim
measure that would precede broader Medicare reform measures, including a
prescription drug benefit for seniors. Medicare does not cover most outpatient
prescription drugs. Most seniors have some form of supplementary health insurance
to cover expenses not met by Medicare; however, many of these plans do not offer
drug coverage or offer limited protection for drug expenses.1
The President’s card program is controversial and immediately prompted
criticism from the retail pharmacy industry, from some Members of Congress, and
from some consumer groups. Critics of the plan have argued that the plan would not
bring additional benefits for seniors and that retail pharmacies would bear the burden
of prescription drug cost reductions for seniors. The plan was originally scheduled
to be in effect in January 2002, but it has been put on hold because of a federal court
order that prevented the program from being implemented (see section below on
Pharmacists’ Challenge to Medicare Discount Card Program). The Administration
proceeded with plans to modify the program and use a formal rulemaking process for
a new proposal. On February 28, 2002, the Administration announced the revised
proposal which would require card sponsors to share manufacturer rebates or
discounts with Medicare beneficiaries. On March 6, 2002, CMS issued a proposed
rule for a Medicare-Endorsed Prescription Drug Card and Drug Discount Card
Assistance Initiative (42 CFR Part 403) with a 60-day comment period. CMS and
pharmacies are awaiting a ruling by the court on whether it will allow the rulemaking
process to continue.
Currently, many private companies and membership organizations offer
prescription discount cards for seniors. The Medicare discount card program would
allow private companies to develop discount card plans for beneficiaries and apply
for Medicare endorsement of their plans. The President’s proposed program would,
in most respects, be similar to these other plans. One major difference is that the
discount cards offered under the President’s plan would be Medicare-endorsed and
1For more information on prescription drug coverage for the Medicare population, see CRS
Report RL30819, Medicare Prescription Drug Coverage for Beneficiaries: Background and
Issues, by Jennifer O’Sullivan.

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would provide consumers with comparative information on the formularies and
prices offered within the card program. Another key difference is that beneficiaries
could have only one endorsed card plan.

This report will discuss prescription drug coverage gaps for seniors, private
sector discount card programs, and the discount card program the President originally
proposed in July. Implementation issues of the program, as well as asserted benefits
and limitations, will also be explored. This report will be updated as events warrant.
Gaps in Senior Prescription Drug Coverage
In 1998, an estimated 10 million elderly people, or 27% of Medicare
beneficiaries, did not have any form of prescription drug coverage. The remaining
28 million Medicare beneficiaries had some form of drug coverage for at least part
of the year. However, coverage is not always stable and access to drug benefits for
seniors is declining.2 Medicare beneficiaries are among the highest users of
prescription drugs. They represent 14% of the total U.S. population, and account for
43% of the nation’s total drug expenditures.3 With national spending on prescription
drugs rising, Medicare beneficiaries face increasing challenges in being able to pay
for their prescription drug needs.
Although most Medicare beneficiaries have some form of prescription drug
coverage, they still pay a portion of their total drug expenses out of pocket. In 1998,
beneficiaries with coverage paid approximately 33% of their total drug expenses out
of pocket. Average out-of-pocket drug expenditures for beneficiaries with coverage
was $325 in 1998, while expenditures for those without coverage was $546. For
those in poor health, the out-of-pocket expenditures for uncovered beneficiaries
averaged $820. According to the 1998 Medicare Current Beneficiary Survey
(MCBS), covered beneficiaries paid a larger percentage of their total drug costs out
of pocket in 1998 than in 1997. Between 1997 and 1998, out-of-pocket expenditures
for covered beneficiaries increased by almost 18 percent, while beneficiaries with no
coverage had no change in expenses.4
Existing Commercial Prescription
Discount Card Programs
Prescription drug discount cards are widely available through some private
companies and membership organizations, such as AARP (formerly the American
Association of Retired Persons). These companies have set up buying clubs that
offer savings on prescription drugs and other medical services to attract consumers
2Poisal, John A. and Lauren Murray, “Growing Differences Between Medicare Beneficiaries
With and Without Drug Coverage,” Health Affairs, March/April 2001.
3Ibid.
4Ibid, pp. 81-82.

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looking for a better price on these items. The companies vary from Internet mail
order service companies to pharmacy benefit managers (PBMs) that offer discount
card services, such as Merck-Medco and the AARP Member Choice Program
(provided through the United Health Group Incorporated, with mail order
prescriptions filled by Express Scripts). Card plans usually require an annual
membership fee that can range from $15 to $50 per year and offer discount cards that
are accepted by a network of drugstores and/or doctors.5 The plans offer a discount
to card holders on their prescription drug purchases at retail pharmacies. Since the
announcement of President Bush’s proposal, several pharmaceutical companies
announced that they would offer their own senior discount card plans beginning in
early 2002. (These plans are described in the section below titled Senior Discount
Card Plans).
How Prescription Drug Discount Card Programs Work
Card sponsors arrange a network of retail pharmacies that will participate in the
program and offer discounts to card holders. The retail pharmacies in the network
agree to accept the card sponsor’s reimbursement rate. This reimbursement rate is
often lower than what retail pharmacies charge cash-paying customers who have no
healthcare coverage. Pharmacies generally accept the lower price agreed to in the
program because belonging to the program network results in a larger volume of
business. However, the lower prices accepted by the pharmacies may result in lower
prescription drug revenues for the store.
The operators of card programs typically control the costs of a prescription drug
benefit by developing formularies.6 A formulary is a list of drugs that the card
sponsor generates to provide the higher benefits to participating members at a
reduced cost. In deciding which drugs to include in the formulary, the card sponsor
determines which drugs are most cost-effective to include in the list. Discount card
programs generally use restricted formularies. Patients may obtain discounts only on
the drugs included in the formulary offered by the card program and must pay full
price for the drugs not included in the card’s formulary.
Private discount card programs are similar to other drug benefit programs, such
as those offered by private health insurance plans, in that they generally develop
formularies by consulting with an independent pharmacy and therapeutics (P&T)
committee. A number of drugs may be used to treat a certain condition or disease.
Such drugs are said to be therapeutically equivalent or belonging to the same
therapeutic category. A formulary does not always include every drug in a given
therapeutic category, but usually includes at least one brand-name drug per category.
The P&T committee evaluates the safety, efficacy, substitutability and cost of
therapeutically equivalent drugs. The members of the committees and the decision-
making process vary by healthcare plan, but most often include physicians,
pharmacists, medical directors, and/or health plan staff members. Some larger drug
5The New York Times, “‘Buyers’ Clubs’ for Medical Services Crop Up,” by Milt
Freudenheim, Aug. 25, 2000.
6For more information on formulary development see CRS Report RL30754, Pharmacy
Benefit Managers, by Christopher J. Sroka.

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benefit sponsors, however, do not allow their staff to participate in P&T committees
because of potential conflict of interest. Some health plans say that they emphasize
outcomes in choosing formulary drugs, while others look more at clinical
comparability, bioequivalency and cost.7
Formularies allow card providers to contain the cost of prescription drugs
primarily through manufacturer rebates and retail pharmacy discounts. Drug
manufacturers give rebates to the card providers to increase market share and/or
utilization. If a manufacturer’s products are included in the formulary, the
manufacturer expects the use of its drugs to increase. The amount of the rebate
offered by a manufacturer to a sponsor varies by plan. These rebates vary
significantly across the industry, and there is no reliable data to suggest the size of
such rebates. The rebates effectively lower the net prices that the benefit sponsor
must pay for the prescription drugs its members use. Retail pharmacies provide
discounts in order to gain access to card plan members.
In addition to retail pharmacy discounts, many card programs offer mail order
services to their members. Mail order pharmacies operate at lower costs than
traditional retail pharmacies and tend to be less expensive for the card sponsor.
Some card sponsors encourage their members to use the mail order pharmacy by
offering lower prices through the mail order service than are available at retail
pharmacies.
Some card sponsors perform drug utilization review (DUR) to evaluate whether
a patient was prescribed the proper dosage, whether the patient is getting the
appropriate dosage, or if prescriptions are being refilled too frequently. DUR also
screens prescriptions for drugs that may be inappropriate for the patient, for
dangerous drug interactions, for duplicate prescriptions, for the overuse of controlled
substances, and for fraud and abuse. Actions resulting from incidents uncovered
through DUR may result in the card sponsor sending educational material to the
physician or pharmacist, or in dropping coverage for the patient.
Recent Senior Discount Card Plans
A number of pharmaceutical companies recently announced the development
of new discount card plans for low-income seniors. GlaxoSmithKline (GSK),
Novartis, Pfizer, Eli Lilly, and a coalition of seven pharmaceutical companies have
each formed senior discount card plans for medications they produce. The programs
are intended for low-income seniors and are limited to those Medicare beneficiaries
who meet the eligibility requirements defined by each company. In addition, a
pharmacy group announced their own card program which is also intended to benefit
the nation’s elderly low-income population. Details of the plans include the
following:
! GSK Orange Card: The card is available to Medicare beneficiaries who have
annual incomes below 300% the federal poverty level, or $26,000 for a single
person and $35,000 for a couple. The card, in effect since January 2002,
7Managed Care, “Getting Serious About Formularies, ” by Jean Lawrence, March 1998.

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offers discounts of 25% on the GSK list price for wholesalers, which is the
Average Wholesale Price (AWP) reported by First Data Bank, for all GSK
outpatient prescription products. The card does not have an enrollment fee.
A cardholder would present the discount card at participating pharmacies and
realize the savings at the point of sale.8
! Novartis Care Card. The card is available for Medicare beneficiaries who
lack prescription drug coverage and whose annual income is below 300% the
Federal Poverty Level (approximately $26,000/single or $35,000/couple).
Eligible participants must be U.S. citizens. The card is free of charge and
offers discounts of 25% off the AWP price for select Novartis outpatient
prescription products at participating pharmacies. Seniors would realize their
savings at the point of sale.9
! Pfizer Share Card. The card is available for low-income Medicare
beneficiaries ($18,000/single or $24,000/couple annual income) who have no
other prescription drug coverage. Plan participants would pay a $15 fee for
each 30-day Pfizer prescription drug supply and have no limits on the number
of prescriptions. The plan also includes two co-promoted drugs. The program
was in effect as of March 1, 2002.10
! Eli Lilly Lilly Answers. The card is available for Medicare-eligible seniors
and the disabled with yearly individual incomes under $18,000 of annual
household incomes under $24,000. The card is free for qualifying individuals.
Card holders would be able to buy a 30-day supply of any Lilly prescription
drug for $12. The company estimates that card users could save up to $850
per drug per year.11
! Together Rx Card from Abbott Laboratories, Aventis, Bristol-Myers Squibb
Company, GlaxoSmithKline, Johnson & Johnson, and Novartis. The card is
available for Medicare beneficiaries with yearly incomes up to $28,000 for
individuals and $38,000 for couples. The companies announced that card
holders would save 20-40% on retail prices on over 150 widely prescribed
medicines through a variety of savings options.12
! Pharmacy Care Alliance Pharmacy Care One Card. The Pharmacy Care
Alliance was created by the National Association of Chain Drug Stores and
created the card program to offer low-income seniors access to drug
8GlaxoSmithKline Fact Sheet, GlaxoSmithKline - Orange Card Key Facts, undated.
9Novartis Fact Sheet, Fast Facts: Novartis Care Cardsm, undated. For more information, see
[http://www.novargis.com/carecard/fast_facts.shtml].
10Pfizer Fact Sheet, The Pfizer for Living Share CardTM Program, undated. For more
information, see [http://www.pfizer.com/pfizerinc/about/sharecard/factsheet.html].
11Eli Lilly Fact Sheets, LillyAnswers, undated. For more information, see
[http://www.lillyanswers.com/questions_answers.html].
12Bureau of National Affairs, Daily Report for Executives, “Drug Companies to Unveil
Joing Medicare Prescription Drug Card,” April 10, 2002.

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manufacturer programs through one card. The pharmacies announced that the
card will allow seniors to access multiple manufacturer discount and subsidy
programs using only one card at the pharmacy of their choice.13 This card
program is different from the others in that it is open to all drug manufacturers
and community pharmacies for participation.
The pharmaceutical companies issuing the cards stated that they developed the
cards to assist seniors who do not have prescription drug coverage while a
prescription drug benefit is added to Medicare. Critics of these card discount
programs argue that the pharmaceutical companies are trying to deflect public
pressure away from the rising costs of prescription drugs and attempting to switch
consumers to products manufactured by these companies. They claim the
companies’ efforts are only a marketing tool and would not lower prices.14 Retail
pharmacies have been critical of discount card programs offered by drug
manufacturers, arguing that discounts come entirely from reductions in the prices
charged by pharmacies and not from the manufacturers.15
Description of the President’s Drug
Discount Card Proposal
The President’s Medicare-endorsed prescription drug discount card program is
currently on hold as a result of the injunction issued on September 6, 2001. The
court allowed CMS to use a formal rulemaking process for a modified version of the
original program. This section describes general features of the program as originally
proposed, but that also apply to the revised version of the proposal, and key features
of the revised proposal.
Original Discount Card Program
President Bush’s proposal was a voluntary program that was, in many respects,
modeled on existing plans offered by private companies, membership associations,
and pharmacy benefit managers.16 The primary objective of the President’s program
was to provide Medicare beneficiaries immediate prescription drug benefits at
discounted prices. Under the program, Medicare beneficiaries would have the ability
to obtain a discount card from one of a number of card sponsors. Each card would
offer discounts from the retail prices of certain prescription drugs.
13National Association of Chain Drug Stores news release, “Pharmacy Care Alliance Stacks
Multiple Drug Savings Into One Senior Benefit Card,” March 11, 2002.
14National Journal Group, Inc., American Health Line, “Rx Discount Cards: More Available,
But Do They Help?,” February 8, 2002.
15Brown, Joseph, “Pharma Companies Take Lead for Drug Discounts: As the Government
Works on Long-Term Prescription-Drug Coverage for Seniors, GlaxoSmithKline and
Novartis are Issuing Discount Cards,” Med Ad News, No. 1, Vol. 21, p. 32, January 1, 2002.
16 Centers for Medicare and Medicaid Services website, http://www.cms.gov.

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The Medicare-endorsed card programs would be different from existing plans
in that they would be required to provide cardholders with comparative information
on prices and formularies. This would provide Medicare beneficiaries with one
central source of information to compare features of all Medicare-endorsed cards,
including drug-specific discounted prices, pharmacy networks, enrollment fees, and
other drug services. In addition, the card sponsors would be required to follow
certain guidelines provided by the Centers for Medicare and Medicaid Services
(CMS), the office responsible for administering the program.
The President’s program would endorse and promote a number of qualified
privately-administered prescription drug discount cards. It is unknown whether the
program would have used existing discount cards or would have created new card
programs that would have qualified for endorsement by Medicare.17 The Medicare-
endorsed card programs could charge no more than a maximum one-time enrollment
rate of $25 per plan. Medicare beneficiaries would be given the option to choose one
card from the card programs offered by competing private companies, but could
change plans on a semi-annual basis. The Medicare card sponsors would be required
to provide informational materials to beneficiaries, which would include information
on drug prices, formularies, and pharmacy networks of all Medicare-endorsed
prescription drug discount card programs. The intention was to help beneficiaries
compare plans and choose the one most appropriate for their needs.
Program Administration. As proposed, President Bush’s drug discount card
program would be managed by CMS, but, in general, would entail limited
government involvement. The government’s role would mainly consist of providing
Medicare beneficiaries with information on the card program and facilitating access
to the private companies that offer Medicare-endorsed discount cards. CMS
oversight would consist of annual certification of card providers based on criteria that
included membership thresholds, pharmacy network thresholds, and inclusion of all
drug classes in the discount program. CMS has stated that it expects most of the
funding for the program would come from the consortium of card providers, and that
the federal administrative costs would be small. The federal administrative costs for
the program would be funded through the CMS budget.
Upon implementation of the program, CMS would provide detailed information
on each endorsed discount card program to Medicare beneficiaries. The information
provided by CMS would include descriptive information on the endorsed discount
cards through the Medicare website, and general information by telephone on the
Medicare toll-free line. CMS would promote the cards to beneficiary and consumer
groups, health care providers, states, and other interested groups.
Endorsement of Card Sponsors. Each company endorsed by the Medicare
discount card program would be responsible for administering the discount card plan
it is offering and determining the discount amounts and formulary. Card sponsors
would enter into the program on a voluntary basis and not charge any fees to CMS.
17 CMS received 28 applications from private entities for Medicare-endorsement of their
proposed discount card plans. The names of the applicants were not released, but CMS
stated that not all were pharmacy benefit managers.

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They would be required to enroll all Medicare beneficiaries wishing to participate in
their program and provide a discount on at least one brand and/or generic prescription
drug in each therapeutic category. Card sponsors would have to guarantee that for
drugs listed in the program formulary, beneficiaries would receive the lower of the
program’s discounted price or the price the pharmacy would pay a charge-paying
customer. They would also be required to offer cardholders retail access to a national
or regional pharmacy network. The company would be expected to use volume
leverage and market-share agreements to secure discounts or rebates from drug
manufacturers and pharmacy networks.
Endorsed card sponsors would be required to have at least five years of private
sector direct experience in the United States in pharmacy benefit management or in
providing a discount card program. They also would have to demonstrate experience
in managing at least two million covered lives in an insured national pharmacy
benefit or drug discount card program, and one million covered lives in a regional
program.
Card sponsors could offer value-added information services such as advice on
medications and prescription interactions. Card sponsors could offer discount mail
order services for prescription drugs, but only as an optional service because,
according to the Administration, the main objective of the program was to provide
retail pharmacy discounts. Card sponsors could also market additional services to
cardholders, but could not make participation in these services mandatory. Card
sponsors could utilize cost-containment strategies that are common in private plans,
such as formularies, preferred networks, and patient and physician education
programs.
Consortium. Sponsors of the Medicare-endorsed card plans would be
responsible for participating in and financing a consortium to handle all enrollment
and eligibility functions and avoid duplicate card issuance. The consortium would
manage a joint computer system to permit seniors to compare card programs using
basic information on formulary content, networks, and discounts, as well as the mail
order options offered by the various card programs. The system would be in place
soon after the card program implementation. During the first year of the program,
CMS would expect the system to have information on the anticipated discounts and
prices, expressed as a percentage of the average wholesale price (AWP), as reported
by FirstDatabank. By the second year, CMS would expect the consortium to publish
the actual prices that beneficiaries would pay. Card sponsors would be required to
comply with the Health Insurance Portability and Accountability Act of 1996
(HIPAA) and related privacy rules and regulations.
Pharmacy Participation. Retail pharmacies participating in Medicare-
endorsed card programs would agree to belong to a network of pharmacies arranged
by the card sponsor. Most pharmacies already belong to one or more networks
organized by PBMs. To obtain discounts, card holders would be required to use the
pharmacies belonging to the card network. As part of the agreement with the card
sponsor, retail pharmacies would accept a negotiated reimbursement rate from the
card sponsor. The reimbursement rate could be lower than the usual price the
pharmacy charges for a drug, and, possibly, result in lower profit margins for the
pharmacy. However, the proposal’s promoters note that pharmacies typically agree

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to join card networks because they gain access to the large number of members
belonging to the card plan, which would be expected to increase their customer base
and sales volume. Pharmacies not electing to join a network arranged by card
sponsors risk losing customers.18 As proposed, the main stated objective of the
President’s discount card program was to offer discounts for seniors at retail
pharmacies, although mail order services would also be an option.
Pharmacies have opposed the card program alleging the discounts will
effectively lower the prices they charge for prescription drugs without reducing their
costs for covered drugs, thus reducing or eliminating their profit margin. They also
argue that the card programs’ sponsors would encourage seniors to use more mail
order services instead of retail pharmacies for their prescription drug purchases.

Expected Discounts: Diverse Estimates. The savings provided by the
program were expected to come from the market leverage that card sponsors obtain
from the formulary and pharmacy network, and also from the “education attributes”
of the program. The educational aspect, consisting of the informational material on
drug prices, formulary content, and the pharmacy network offered by the card
program, was intended to improve the ability of consumers to comparison shop and
choose the plan that meets their needs at the lowest cost.
The Bush administration suggested that seniors would be able to obtain a 10%
to 25% discount on prescription drug retail purchases through the Medicare-endorsed
card program.19 A fact sheet issued by the White House indicated that seniors could
receive up to 24% reduction in costs per person, relative to ‘usual and customary’
(U&C) prices. The fact sheet mentioned two pharmacy benefit manager (PBM)
reports that estimate the amount of savings beneficiaries would receive under their
programs. One report states that seniors would save an average of 23% at a
pharmacy or 32% through a mail-order program, relative to U&C prices for the top
four brand name drugs used by seniors. Another report states that for the top seven
brand drugs used by seniors, seniors would save 20% at a pharmacy or 26% through
mail order. For generic equivalents, estimated savings on U&C prices may be even
greater: 40% at a pharmacy and 50% through mail order.20
Some observers have commented that the Bush Administration’s proposed
discount program would probably provide seniors with some savings on their overall
prescription drug bill. Questions have been raised about the actual size of the
discounts that will be available. Specific information is not available on the discount
amounts and formularies the proposed discount cards would have provided. The
actual size of retail discounts may not be known until after the first year of program
18 PriceWaterhouseCoopersLLP. “Study of Pharmaceutical Benefit Management.” HCFA
Contract No. 500-97-0399/0097. June 2001. See pp. 57-58 for a discussion of how
pharmacy networks are created by PBMs.
19U.S. Department of Health and Human Service (HHS), HHS News, “Medicare will
Endorse Discount Programs, Giving Purchasing Power to Beneficiaries for Drug Savings,”
July 12, 2001.
20 White House Fact Sheet, “The President’s Medicare Prescription Discount Program,”
undated.

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operation. However, it is possible to compare prices available through existing
discount card programs to those at retail pharmacies or Internet pharmacies. One of
the constraining factors in conducting this kind of analysis, however, is the lack of
widely available data on retail drug prices.
The U.S. General Accounting Office (GAO) recently completed a study on
prescription drug prices for seniors offered by drug discount card programs, local
pharmacies, or over the Internet.21 The study included surveys on prices available
from five companies that administer large drug discount card programs, five Internet
pharmacies, and several retail pharmacies in four different geographic areas
(Washington, D.C., Chicago, Seattle, and rural Georgia). Prices listed in the study
show that the discounts on brand name drugs offered by the card programs ranged
from 6% to 32% on the average retail pharmacy prices. The average size of the
discount on all drugs was about 12%. The Internet pharmacy prices on the GAO
survey varied. In some cases the Internet prices were up to 19% higher than those
available by discount card programs, while for other drugs, the prices were up to 12%
lower. The Internet pharmacy prices were consistently lower than retail pharmacy
prices. The retail pharmacy prices obtained by GAO demonstrated that prices may
vary considerably in different geographic regions. For example, the average price for
a 30-day supply of 10-mg tablets of Lipitor was $7.62, or 13%, higher in rural
Georgia than in Seattle, Washington.22
Critics of President Bush’s program dispute the Administration’s statements of
potential discounts of up to 25%. Retail pharmacy groups, consumer groups, and
some Members of Congress believe that the program is not likely to produce
significant savings for seniors. Some Member of Congress argue that, based on their
interpretation of data collected by GAO, existing discount card programs do not work
and provide no more than 10% savings on retail prices.23 Some Members of
Congress have stated that the Bush proposal would provide only minimal savings for
seniors and that the program would not offer additional discounts for seniors than
those already available in the market. In a letter to the U.S. Department of Health
and Human Services (HHS), six Members of Congress state that a Medicare discount
card program is unlikely to provide significant discounts on brand name drugs for
seniors. They cite the price study by GAO and say that the study indicates that
seniors already have access to drug discount cards and that these programs offer little
savings for seniors for commonly used brand name drugs. They believe that the
findings of the GAO price study indicate that unless the proposed Medicare discount
21General Accounting Office, Report No. GAO-02-280R, Prescription Drugs: Prices
Available Through Discount Cards and From Other Sources, December 5, 2001.
22Ibid, p. 4.
23Bureau of National Affairs, Health Care Daily, “House Small Business Panel Asks CMS
to Substantially Revise Drug Card Proposal,” October 26, 2001; Goldstein, Amy. “GAO
Tests Value of Discount Cards; Savings Less Than 10%, Study Shows,” Washington Post,
January 4, 2002.

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CRS-11
card program requires a significant discount from the drug manufacturers that is
passed on to seniors, the program would not provide additional benefits for seniors.24
Proposed Regulations to Establish Card Program
The proposed regulations for the Medicare-Endorsed Prescription Drug Card
and Drug Discount Card Assistance Initiative specify general rules for the Medicare-
endorsed prescription drug card program. The proposed regulations would establish
a revised version of the original discount card program proposed by President Bush
in 2001. The revised program is similar to the original version, but with more detail
on how the program would operate. A key difference in the revised version is that
it would require card sponsors to pass discounts or rebates from drug manufacturers
to pharmacies and beneficiaries. Card sponsors applying for endorsement would be
required to submit an application and meet all the requirements outlined in the
proposed regulations.25
In the revised program, Medicare endorsement would be effective for 15 months
in the first year of the program. October 1, 2002 would be the first date that
programs would begin marketing and enrollment. Endorsed programs would have
to begin enrollment and discounts no later than January 1, 2003. Under the original
proposal, CMS was to have announced endorsements of the 14-month agreements
on September 14, 2001, with the first cycle beginning on November 1, 2001 and
ending on December 31, 2002.26
Unlike the original proposal, in which card sponsors would not have been
required to share drug manufacturer rebates with the pharmacies in the network, the
revised version includes a requirement to pass manufacturer discounts to pharmacies
and beneficiaries. Card sponsors seeking Medicare endorsement of their card
program would have to ensure that a substantial share of the manufacturer rebates or
discounts is provided to beneficiaries either directly or indirectly through pharmacies.
The preamble to the regulations states that card sponsors would be required to have
contractual arrangements with drug manufacturers for rebates or discounts and a
contractual mechanism for passing on the bulk of the rebates or discounts that are not
required to fund operating costs to beneficiaries or pharmacies either through lower
prices or enhanced pharmacy services.
The revised federal proposal includes an effort to coordinate with state programs
by proposing that states could partner with private drug card program sponsors by
selecting a Medicare-endorsed card program and offering its own endorsement and
having a distinct card. In a separate Notice issued on March 6, 2002, CMS outlined
24Six Democratic congressmen sent a letter to HHS Secretary Tommy G. Thompson on
January 3, 2002 in which the Members urge an alternative approach to President Bush’s
proposed Medicare-endorsed drug discount card program. For more information, see
[http://www.house.gov/reform/min/inves_prescrip/index.htm].
25For detailed information on requirements listed in the proposed rule, see CRS General
Distribution Memorandum, “Medicare-Endorsed Prescription Drug Card Assistance
Initiative-Summary of Proposed Regulations,” by Jennifer O’Sullivan, March 13, 2002.
26CMS Notice of Application for Medicare-Endorsed Rx Discount Card Initiative.

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additional steps it was considering to support state efforts to make affordable drugs
more readily available and invited public comments on these efforts.
CMS solicited comments on a number of issues in the proposed regulation.
According to press reports, CMS received 26 comments, including those from the
Pharmaceutical Research and Manufacturers of America (PhRMA) and AARP. Both
PhRMA and AARP expressed support for the initiative, but seek numerous changes
before a final rule is issued. The Small Business Administration submitted a
comment that stated that the proposed rule for the card could significantly reduce
profit margins of many pharmacies, noting that the financial impact analysis
conducted by CMS was “incomplete”.27 Pharmacy groups issued a comment saying
CMS should withdraw the proposed rule. Pharmacies maintain that the discount card
program would hurt pharmacy profits and that CMS lacks the statutory authority to
implement the plan. CMS and pharmacy groups are awaiting a ruling by the court
on whether it will allow the rulemaking process to continue.

Administration Arguments in Support of Discount
Card Program
President Bush emphasized that the discount card program would not be a
substitute for a new prescription drug benefit provision under Medicare. The
discount program was intended to be an interim solution that would provide some
immediate cost relief for seniors while other options were under consideration.
The Bush administration highlighted four key elements that it believed would
make the Medicare-endorsed cards different from existing discount cards.28 The first
was that the Medicare discount card programs would have a lower enrollment fee
than most existing programs. Administration officials estimated that drug discount
card programs usually had annual enrollment fees of $15 to $125, while the Bush
plan would have a maximum one-time enrollment fee of $25 per plan. This would
be comparable to that of several other popular discount card plans. Two existing
discount card programs, AARP and YOURxPLAN, have enrollment costs of $10 and
$25, respectively. Another card program recently announced by Citizens Health,
which will be offering retail discounts on prescription drugs, has a membership cost
of $12 for an individual and $28 for a family.29 On the other hand, most other card
programs charge a yearly fee, while the enrollment fee for a Medicare-endorsed
program would be paid only once per plan.
The second difference mentioned by the Administration is that President Bush’s
plan was expected to offer larger discounts because the membership in the Medicare-
endorsed programs would be better defined. The Administration believed this could
27BNA, Daily Report for Executives, “SBA, Interest Groups Seek Changes in Medicare
Discount Card Proposal,” May 9, 2002.
28HHS Fact Sheet, p. 3.
29The Green Sheet, “Bristol, Glaxo Offering Rx Discounts Through Citizens Health Card
Program,” October 8, 2001.

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CRS-13
help card sponsors negotiate bigger discounts for beneficiaries. Because the
membership in the Medicare-endorsed programs would consist entirely of seniors
and some disabled persons, it seems likely that the Medicare card program could
provide card sponsors with some market leverage in negotiating discounts with the
drug manufacturers on the most commonly prescribed senior drugs. However, no
information is publicly available on the amount of the proposed discounts. It is
difficult to assess whether the President’s proposed program would result in further
discounts than the various options that are currently available in the marketplace.
Third, the Administration believed that the “one-stop-shopping” feature of the
Medicare-endorsed card program would benefit seniors in that they could compare
price, formulary, and pharmacy network information on the various card programs
and choose the best plan for their needs. Discount program participants would be
able to switch from one card program to another at 6-month intervals, although this
could result in additional enrollment fees of up to $25 per switch. The informational
feature is potentially one of the most valuable features of the President’s discount
program, because it would provide a single source of information on drug prices,
formularies, and pharmacy networks of all Medicare-endorsed discount card
programs. Some existing card programs individually provide information on prices
and formularies, but information on competing programs is not available in one
easily accessible location.
The publication of drug price information could eventually put pressure on
pharmaceutical manufacturers, pharmacies and/or card sponsors to match lower
prices offered by competitors. Although this could result in additional savings for
seniors, the retail pharmacy industry believes that pharmacies would face reduced
profit margins if they were pressured to reduce prices without a change in what they
pay the wholesalers or drug manufacturers for the drugs, while the latter two groups
would benefit at the pharmacists’ expense.
Another factor to consider is whether the card sponsor plans under the proposed
Medicare program include drug utilization review to determine whether patients are
using therapeutically equivalent drugs. Patients sometimes use drugs prescribed by
different doctors to treat the same condition and are not aware of it. Drug utilization
review may prevent the duplicative use of drugs that fall within the same therapeutic
category, thereby enhancing patient safety while lowering prescription drug costs.
Also, promoting lifestyle changes which may improve overall health could lessen the
dependence on prescription drugs. Some observers have suggested that a Medicare-
endorsed card plan should be careful in using the Medicare name for private discount
card plans. They believe that a Medicare card program should have strict standards
and controls in the structure of the individual plans and that these should be
established by Medicare and not by the private card sponsors. Other observers have
suggested that a Medicare card program be transparent and provide detailed
information on prices and where the discounts are coming from.
The final point mentioned by the Administration was that because the discount
card was only for Medicare beneficiaries, features of the program such as customer
service, marketing material, and included drugs would be geared toward Medicare
beneficiaries. The card program could result in more coordination among companies
offering card discount programs and CMS, which could improve the service and

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CRS-14
information seniors receive when shopping for their prescription drugs. The
consortium of card sponsors would be required to provide information on key
characteristics of the various card programs and this could lead to an improvement
of marketing materials and drug price information for seniors. However, for the
many seniors who do not have access to a computer or the Internet, published
information would continue to be the most important vehicle for ensuring that
program participants realized the informational benefits of the program. The success
of this aspect of the program would depend on the final details of the individual card
programs and how well the companies managed the consortium and provided
customer service.
Pharmacists’ Challenge to Medicare Discount Card
Program
Procedural Objections
On July 17, 2001, the National Association of Chain Drug Stores (NACDS) and
the NCPA, as plaintiffs, filed a suit in the Federal District Court for the District of
Columbia against Department of Health and Human Services Secretary Tommy
Thompson and the CMS Administrator Tom Scully to block the Administration’s
prescription discount card program. On July 26, 2001, the NACDS/NCPA asked the
court to issue an injunction preventing the Bush administration from proceeding with
the discount card initiative on the grounds that, among other arguments, the
Administration exceeded the statutory authority granted to it by the Social Security
Act and that the Administration failed to comply with the procedural requirements
of the Administrative Procedure Act.
On September 6, 2001, U.S. District Court Judge Paul Friedman issued an
injunction, stating that the pharmacy groups “had a substantial likelihood of success”
in winning their case on two grounds: that the Administration did not have the legal
authority to establish the program and that it had not followed the proper rulemaking
process.30 On October 9, 2001, the Administration asked the court for a stay of the
proceedings to allow it to use the formal rulemaking process for a new Medicare
discount card proposal that could be different from the original one announced in
July. The NACDS/NCPA opposed the motion for a stay on the grounds that HHS
does not have the statutory authority to implement it. The Administration responded
by submitting a memorandum to the court seeking permission to undertake
rulemaking to develop a new card proposal. The Administration stated that it would
take several months to finalize the new policy on the card program. On November
5, 2001, Judge Friedman issued a stay of the proceedings to allow HHS to submit “its
proposed policy for notice and comment pursuant to the Administrative Procedure
Act.”31 On November 8, 2001, Judge Friedman issued a clarification of his order
30The Washington Post, “Judge Blocks Prescription Discount Plan,” by Amy Goldstein,
September 7, 2001, p. A01.
31BNA Health Care Daily. “Court Allows HHS to Submit New Plan for Providing Medicare
(continued...)

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CRS-15
granting the defendant’s motion for a stay of proceedings. The judge stated that he
had not lifted the preliminary injunction, but that he had granted a stay of “court
proceedings in reliance upon defendants’ express representation that they will
continue to comply with the injunction and will not take steps to implement the
Medicare Prescription Discount Card Program...”.32 Judge Friedman also noted that
HHS is not going forward with its original program, but instead will be proposing a
new policy on the issue, which will be published for comment. In addition, he wrote
that the stay of proceedings will continue only while HHS submits its proposed
policy for notice and comment. The plaintiffs, he stated, may return to court at any
time after such a policy has been published.
On November 19, 2001, CMS Administrator Thomas Scully announced that
CMS intended to publish a proposed rule with comment period by December 2001.
Scully acknowledged that the new prescription drug plan would need approval from
a federal judge or be able to be implemented by a law passed by Congress that the
President would have to sign. According to Scully, the November 5 decision to stay
the lawsuit will require the judge to rule on the legality of the new proposal before
a final rule could be issued.33 On December 14, 2001, a federal judge stated that the
legality of the new proposal will be decided when the pharmacies ask the court to
review it, which is expected to happen as soon as the proposed rule is issued.
Alternatively, Scully noted that Congress could grant the Administration the statutory
authority to proceed.34
Economic Objections
In addition to the procedural issues that the pharmacy associations successfully
raised, they also criticized President Bush’s Medicare discount card program on
economic grounds. The coalition of pharmacy organizations, which represents all
segments of pharmacy practice, issued a letter on July 11, 2001 to President Bush
opposing any form of prescription discount cards.35 The pharmacy associations argue
that discount card programs put the burden of cost reductions for seniors on the retail
pharmacies. They say that the card programs do not reduce the prices that
31(...continued)
Discount Drug Cards,” November 7, 2001.
32U.S. District Court for the District of Columbia. Judge Paul L. Friedman. Memorandum
Opinion to Clarify Order Staying Proceedings. November 8, 2001.
33Daily Report for Executives. “CMS Chief Says New Drug Card Proposal with ‘More Meat
on its Bones,’ Coming Soon,” November 20, 2001.
34Ibid.
35Eight organizations representing pharmacist owners, managers, and employees united to
oppose President Bush’s discount card program. The organizations include the National
Community Pharmacists Association (NCPA), the American College of Clinical Pharmacy
(ACCP), the American Pharmaceutical Association (AphA), the American Society of
Consultant Pharmacists (ASCP), the American Society of Health-System Pharmacists
(ASHP), the Food Marketing Institute (FMI), the National Association of Chain Drug Stores
(NACDS), and the National Council of State Pharmaceutical Association Executives
(NCSPAE).

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CRS-16
pharmacies pay for medications and claim that providing discounts will
disproportionately reduce net profits of pharmacies vis a vis card sponsors and drug
manufactures. The associations estimate that the price a pharmacy pays for the
medications represents about 78 percent of the average prescription price. The
remaining 22 percent represents gross margins, and after accounting for operating
expenses, results in a net profit of only 2 percent. The pharmacies also claim that the
proposal could limit seniors’ access to the pharmacy of their choice and that price
incentives would encourage the use of mail order pharmacies, resulting in an
underutilization of lower-cost generic drugs.36 They argue that the formularies used
by the card plans would not always include generic equivalents of brand name drugs,
and, therefore, promote the use of brand name drugs. It is difficult to assess the
statements made by the pharmacy associations, because the effect on pharmacies
would depend on specific formularies and prices offered by the proposed card
programs, which is information that is not publicly available
The National Community Pharmacists Association (NCPA) and the National
Association of Chain Drug Stores filed a declaration with the Washington, D.C.
federal court on July 25, 2001 in support of the lawsuit filed against the federal
government. The declaration by Stephen Schondelmeyer, Ph.D., Director of the
University of Minnesota’s PRIME Institute states that pharmacies will lose almost
$2 billion in revenues as a result of the discount card program and that 2,500 to
10,000 community pharmacies will cease to operate within three years if the card
program is implemented. According to Schondelmeyer’s declaration, the card
program would encourage the use of mail order pharmacies which would steer card
users away from retail pharmacies. Schondelmeyer also states that the card discounts
would reduce profit margins for pharmacies.37
Although drugstores’ profit margins on prescription drug sales may decrease as
a result of discount cards, some analysts believe that overall net profits may increase
due to larger volumes of prescription drugs sold and higher sales in non-
pharmaceutical items. While the profit margins of drug stores have fallen
considerably since the 1970s, recent data suggests that this trend may change in
coming years as prescription drug sales increase. A recent Standard and Poor’s
(S&P) Industry Survey38 reported that drugstores’ gross profit margins were expected
to fall again in 2001, as they had in 2000 and 1999, due to increases in prescription
drug sales to third-party plans.39 For the drugstore industry as a whole, however, total
sales increased 7.7%. The number of prescriptions dispensed by traditional drugstore
chains increased 7.1% in 2000, while that of independent drugstores increased by
36NCPA news release. NCPA, Others Issue Letter to the President Opposing Discount Card
Program. July 12, 2001.
37Declaration of Stephen W. Schondelmeyer, Pharm.D., Ph.D., filed by the National
Association of Chain Drug Stores and the National Community Pharmacists Association
in the United States District Court for the District of Columbia, July 25, 2001.
38Standard and Poor’s. Industry Surveys, Supermarkets and Drugstores. August 2, 2001.
39Gross profit margins are calculated as net sales minus the cost of goods sold, as a
percentage of gross sales. Gross margins reflect a company’s product mix and operational
efficiency.

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0.3%. The S&P report indicated that rising prescription volumes helps increase the
sales of over-the-counter drugs and front-end merchandise (nonpharmacy-related
goods) which accounts for the overall net profit increase of 6% for the drugstore
industry in 2000.40 In the larger chains, such as CVS and Walgreens, net income
increased an average of 19.5%. Although gross margins have been falling in recent
years, the S&P report indicated that these are expected to improve in the long term
as drugstore chains negotiate better agreements with third-party payers, and decline
to renew plans that are marginally profitable.41 The S&P report did not evaluate the
potential impact of the Administration proposal.
The lack of available information on the details of the President’s discount card
proposal for seniors makes it difficult to assess the potential economic impact on
retail pharmacies. The Administration has issued general statements about the
expected size of the discounts and has stated that the administrative cost of the
program would primarily be borne by the card sponsors. However, very little
information has been issued on potential card sponsors and their individual programs.
Until the details on individual card programs are available, an analysis on the
economic impact on pharmacies would be based on speculation of how the
Administration plans to modify its original proposal and how card sponsors would
determine their discounts.

Observations

The proposal for a Medicare discount card program was presented as an interim
attempt to meet an immediate need. On several occasions, the Congress has
considered providing coverage for at least a portion of beneficiaries' drug costs. The
issue received renewed attention in the 106th Congress. However, there was no
consensus on how the coverage should be structured. In the 107th Congress,
numerous bills have been introduced to provide a Medicare prescription drug benefit.
The House Ways and Means Committee and House Energy and Commerce
Committee are considering a Medicare reform and prescription drug benefit bill
(H.R. 4954) proposed by Republican Members. The bill includes a provision to
provide authority to the Medicare Benefits Administrator to establish a Medicare
prescription drug discount card endorsement program and would give the
Administration legal authority to implement such a program.
While it may not be essential that a senior drug benefit be administered through
a pharmacy benefit manager (PBM), it seems clear that PBMs now play a major role
in U.S. healthcare delivery. According to a report prepared by
PriceWaterhouseCoopers LLP for the Health Care Financing Administration, “PBMs
manage the drug benefits of approximately 70% of the United States, including
40Net income is the difference between total sales and total expenses, commonly called the
“bottom line”. The net profit margin is net income as a percentage of net sales.
41Standard and Poor’s, pp. 5-6.

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CRS-18
approximately 65% of our country’s seniors.”42 In the debate over the
Administration’s drug discount card plan, the central role of PBMs has clearly
emerged as an issue, especially for the retail pharmacy sector. The issues that retail
pharmacies have raised with PBMs go well beyond President Bush’s Medicare
discount card proposal. In fact, the 2001 Drug Topics’ Redbook characterized the
relationship as follows:
Pharmacy benefit managers - can’t live with ‘em, can’t live without ‘em. Most
pharmacists would only agree with the first option, while insurers and payers
might lean more toward the second description. Survey after survey points to
the idea that pharmacists find third-party issues to be the toughest they deal
with. ... 43
For Congressional critics, discount cards are not seen as a solution to high costs
of prescription drugs for uninsured or partially insured seniors. They point to the
existence of numerous discount programs and argue that even with plans that
possibly deliver a 10% to 25% discount, the problem of high drug prices remains a
serious one. The prices of pharmaceutical products charged by pharmaceutical
manufacturers have been identified by some Members of Congress as a special
problem requiring congressional action. The complexity of drug pricing procedures
makes it difficult to understand how the system operates, let alone devise policies
that make it possible to deliver prescription drugs to seniors at prices comparable to
those paid by clients of third-party purchasers (PBMs) and their sponsors (employers,
insurers, HMOs, and drug discount card sponsors). If the President’s revised
discount program proposal manages to resolve the issues raised by the pharmacy
industry, Members of Congress may still raise concerns about whether seniors will
get prescription medications at affordable prices.
Discount drug programs may provide additional discounts to seniors, although
it is possible that many of the covered drugs would still remain expensive for low-
and middle-income seniors who do not have health insurance that covers prescription
drugs. Nevertheless, there is anecdotal evidence that suggests that consumers who
are willing to comparison shop on the Internet for prescription drugs can, in some
cases, match or beat discount card prices. The difficulty that the Administration and
Congress face in developing a senior drug benefit will be to develop a policy that
delivers necessary medications to seniors, while providing pharmaceutical
manufacturers, wholesalers, PBMs, and pharmacists with incentives to continue to
participate in the marketplace.
Numerous approaches have been suggested for providing a Medicare drug
benefit. Some policymakers have suggested that the Administration not focus on
interim solutions and instead work toward providing a more significant benefit under
a reformed Medicare program. Others have stated that alternative approaches for a
Medicare card program could require drug companies to sell prescription drugs to
seniors at certain price levels, such as those the companies offer to the federal
42PriceWaterhouseCoopersLLP. Study of Pharmaceutical Benefit Management. HCFS
Contract No. 500-97-0399/0097. June 2001. p. 14.
43Drug Topics’ Redbook, 2001, p. 94.

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government and other major purchasers.44 Pharmaceutical manufacturers have
asserted in the past that such requirements could remove market incentives for
investing in research and development for advancements in the treatment of
conditions such as strokes and asthma. Critics have disputed such claims.
In summary, a Medicare-endorsed discount card program might provide some
savings on prescription drugs for seniors, although the net overall effects are not clear
because of the lack of details on the individual card programs. The broad effect on
the senior population would depend on the size of the discounts and the formularies
that the plans offer. The size of the discounts would depend on whether the card
program would provide sufficient market leverage for card sponsors to negotiate
higher manufacturer rebates from drug manufacturers. Seniors could benefit from
certain features of the discount card program, such as more access to information on
drug prices and formularies offered by the different plans. This information could
enhance seniors’ abilities to comparison shop and save money by choosing the plan
that would best fit their needs. President Bush’s revised proposal could offer seniors
some savings on medications, depending on the final details of the various card
plans. As noted earlier in this report, critics of the Bush plan believe that the
Medicare-endorsed discount cards would not bring additional benefits for seniors.
They have argued that the benefit is very minimal and duplicates a service (discount
cards) that the marketplace already provides.45
The two most important concerns for pharmacists are related to (1) who bears
the burden of the cost for the Medicare-endorsed discount card proposal and (2) the
fear that card sponsors would structure their programs in such a way that seniors are
induced to switch from their local pharmacies to mail order pharmacies for their
prescription drug purchases. The overall effect on pharmacies would likely depend
on the potential agreements they reach with the card sponsors and whether the card
sponsors pass a portion of the drug manufacturer rebates to the pharmacies.
Seniors are equally concerned that discounts are passed all the way through the
system to the ultimate intended beneficiaries. The effect on pharmacies would also
depend on the response of seniors to the card program and whether they would
continue shopping at retail pharmacies for their prescription drug purchases or use
more mail-order options to save money. While seniors and others who must get a
prescription filled quickly will continue to patronize their local pharmacies, deeper
discounting by PBM-owned or operated mail order pharmacies could lead to
behavioral changes among those seniors who have an ongoing need for prescription
drugs to treat chronic conditions.
44Letter to HHS Secretary Tommy G. Thompson on January 3, 2002 from six Members of
Congress. For more information, see [http://www.house.gov/reform/min/inves_prescrip/
index.htm].
45See U.S. House of Representatives, Committee on Government Reform, “Problems with
Prescription Drug Cards,” prepared for Rep. Henry Waxman by the Minority Staff, July 12,
2001; The Seniors Coalition, “Medicare Prescription Discount Card Could Limit Seniors’
Access to Medicines and Increase Drug Costs, Warns The Seniors Coalition,” October 19,
2001, [http://www.seniors.org].

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