President Bush's Proposed Medicare-Endorsed Drug Discount Card Initiative: Status and Issues

Report for Congress
President Bush’s Proposed Medicare-Endorsed
Drug Discount Card Initiative:
Status and Issues
Updated February 7, 2003
M. Angeles Villarreal
Analyst in Industrial Organization and Business
Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

President Bush’s Proposed Medicare-Endorsed Drug
Discount Card Initiative: Status and Issues
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 Administration planned to implement the card program in January 2002,
but it was put on hold because of a federal court order. Pharmacy groups
successfully filed a lawsuit against CMS in 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. The Administration proceeded
with plans to modify the program and use a formal rulemaking process for a new
proposal. On August 30, 2002, CMS issued the final rule. Pharmacies continued to
claim that the Administration lacked the statutory authority to implement the
initiative. On January 29, 2003, a federal district court ruled that the Administration
did not have the statutory authority to offer the card program. CMS issued a
statement saying that it would be evaluating its options and it would likely appeal.
In the 108th Congress, Representative Mark Foley introduced a bill (H.R. 513) in the
House on January 31, 2003 to authorize the Secretary of Health and Human Services
to endorse prescription drug discount cards for use by Medicare beneficiaries.
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 which would have a one-time maximum
enrollment rate of $25 per plan. Since the announcement of President Bush’s
proposal, several pharmaceutical companies have implemented 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 13%, and up to 15%, 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, which are not yet available.
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.
This report will be updated as events warrant.

Background ......................................................1
Gaps in Senior Prescription Drug Coverage.............................2
Existing Commercial Prescription
Discount Card Programs........................................3
How Prescription Drug Discount Card Programs Work................3
Discount Card Plans for Low-Income Seniors........................5
Description of the Medicare-Endorsed
Drug Card Initiative............................................7
General Features of Drug Card Initiative ...........................7
Program Administration.........................................8
Final Rule for Medicare Drug Card Initiative........................8
General Rules for Endorsement...............................9
Eligibility Requirements for Endorsement......................9
Beneficiary Enrollment....................................10
Public Comments.........................................11
Key Differences between Proposed and Final Rule...............11
Pharmacy Participation........................................12
Expected Discounts from Card Initiative:
Diverse Estimates.............................................12
Administration Arguments in Support of Discount Card Program...........14
Pharmacists’ Challenge to Medicare Discount Card Program...............16
Procedural Objections.........................................16
Economic Objections..........................................17
Observations ....................................................20

President Bush’s Proposed Medicare-
Endorsed Drug Discount Card Initiative:
Status and Issues
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. Shortly after the card initiative was
announced in 2001, pharmacy groups successfully filed a lawsuit against CMS,
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.
The Administration proceeded with plans to modify the program and used a formal
rulemaking process for a new proposal. On March 6, 2002, CMS issued a proposed
rule for the card program with a 60-day comment period. On August 30, 2002, CMS
issued the final rule. Although pharmacies continued to assert that the
Administration lacked the authority to implement the initiative, CMS proceeded with
the program. On January 8, 2003, CMS formally solicited applications from parties
interested in offering Medicare prescription drug discount cards. Applications were
due on March 7, 2003.
On January 29, 2003, a federal district court judge ruled against the Medicare
discount card initiative, stating that the Administration did not have the statutory
authority to implement the program. CMS withdrew its solicitation for applications
and issued a statement saying that CMS is evaluating the court decision and the

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.

various options CMS has, including a likely appeal.2 The Bush Administration has
stated that it would include prescription drug coverage in its plan to revise Medicare,
but it is unclear whether the prescription drug discount card would be included in the
Administration’s proposal. In the 108th Congress, legislation has been introduced
(H.R. 513) to authorize the Secretary of Health and Human Services to endorse
prescription drug discount cards for use by Medicare beneficiaries.
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. The major difference is that the
discount cards offered under the President’s plan would be Medicare-endorsed and
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 Medicare-endorsed card plan.
This report will discuss prescription drug coverage gaps for seniors, private
sector discount card programs, the discount card program the President originally
proposed in July, and the key differences in the final regulation issued in August
2002. 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 for3
seniors is declining. Medicare beneficiaries are among the highest users of
prescription drugs. They represent 14% of the total U.S. population, and account for4
43% of the nation’s total drug expenditures. 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

2Centers for Medicare and Medicaid Services, Press Release from Public Affairs Office,
“Statement by CMS Administrator Tom Scully,” January 29, 2003.
3Poisal, John A. and Lauren Murray, “Growing Differences Between Medicare Beneficiaries
With and Without Drug Coverage,” Health Affairs, March/April 2001.
4 Ib i d .

(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.5
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
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.6 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
formed their own senior discount card plans in early 2002. (Some of 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 drug7
benefit by developing formularies. 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

5Ibid, pp. 81-82.
6The New York Times, “‘Buyers’ Clubs’ for Medical Services Crop Up,” by Milt
Freudenheim, Aug. 25, 2000.
7For more information on formulary development see CRS Report RL30754, Pharmacy
Benefit Managers, by Christopher J. Sroka.

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
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.8
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
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.

8Managed Care, “Getting Serious About Formularies, ” by Jean Lawrence, March 1998.

Discount Card Plans for Low-Income Seniors
In 2002, a number of pharmaceutical companies started offering discount card
plans for low-income seniors. GlaxoSmithKline (GSK), Novartis, Pfizer, Eli Lilly,
and a coalition of seven pharmaceutical companies 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,
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.9
!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.10
!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, 2002.11
!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

9GlaxoSmithKline Fact Sheet, GlaxoSmithKline - Orange Card Key Facts, undated.
10Novartis Fact Sheet, Fast Facts: Novartis Care Cardsm, undated. For more information,
see [].
11Pfizer Fact Sheet, The Pfizer for Living Share CardTM Program, undated. For more
information, see [].

drug for $12. The company estimates that card users could save up to $850
per drug per year.12
!Together Rx Card from Abbott Laboratories, AstraZeneca, Aventis, Bristol-
Myers Squibb Company, GlaxoSmithKline, Johnson & Johnson, and
Novartis..13 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.
!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
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.14 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.15 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.16

12Eli Lilly Fact Sheets, LillyAnswers, undated. For more information, see
[http://www. questions_answers.html ].
13Bureau of National Affairs, Daily Report for Executives, “Drug Companies to Unveil Joint
Medicare Prescription Drug Card,” April 10, 2002.
14National Association of Chain Drug Stores news release, “Pharmacy Care Alliance Stacks
Multiple Drug Savings Into One Senior Benefit Card,” March 11, 2002.
15National Journal Group, Inc., American Health Line, “Rx Discount Cards: More Available,
But Do They Help?,” February 8, 2002.
16Brown, 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.

Description of the Medicare-Endorsed
Drug Card Initiative
The final regulation for the Medicare-endorsed prescription drug initiative was
announced by the Centers for Medicare and Medicaid Services (CMS) on August 30,
2002 and published in the Federal Register on September 4, 2002.17 It is not known
when or if the program will be implemented because a federal district court ruled on
January 29, 2003 that the Administration did not have the authority to implement the
card initiative. The Administration has said it is likely to appeal the court’s decision.
If the Administration decides to appeal the case, the outcome of the appeal would
determine whether or not the initiative will be implemented. The Administration
may also move forward with the initiative if Congress grants legal authority to HHS
to implement the program. On January 31, 2003, Representative Mark Foley
introduced a bill (H.R. 513) in the House to authorize HHS to endorse prescription
drug discount cards for use by Medicare beneficiaries. This section describes general
features of the drug card initiative, a description of how the program would be
administered, details of the final rule establishing the initiative, and pharmacy
participation in the card programs.
General Features of Drug Card Initiative
The Medicare-endorsed card initiative would be a voluntary program that is, in
many respects, modeled on existing plans offered by private companies, membership
associations, and pharmacy benefit managers. The primary objective of the proposal
is to provide Medicare beneficiaries immediate prescription drug benefits at
discounted prices. In his original proposal, President Bush emphasized that the
initiative would be an interim measure and that it was not intended to be a substitute
for a broader Medicare prescription drug benefit.
The drug card initiative would authorize Medicare to endorse a number of
qualified privately-administered prescription drug discount cards for Medicare
beneficiaries. Each card would offer discounts from the retail prices of certain
prescription drugs. The card program would be different from existing plans in that
a consortium of card sponsors would be required to provide participants 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.
Medicare beneficiaries would be allowed to participate in only one Medicare-
endorsed card program at a time, but could change plans on a semi-annual basis.
CMS stated that multiple enrollments could weaken the negotiating leverage of each
company offering card plans, which could lead to lower rebates from drug

17Federal Register. 42 CFR Part 403. Medicare Program: Medicare-Endorsed Prescription
Drug Card Assistance Initiative. Final Rule. Vol. 67. No. 171. September 4, 2002.

manufacturers, and, therefore, lower discounts to card holders. Medicare
beneficiaries could enroll in other discount card plans that are not Medicare endorsed.
CMS expects to endorse 15 card sponsors if the drug card initiative is
implemented. It is unknown whether the program would use existing discount cards
or create new card programs that qualify for endorsement by Medicare.18
Program Administration
As outlined, President Bush’s drug discount card initiative 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
certification of card providers based on criteria that would include 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
to 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.
Final Rule for Medicare Drug Card Initiative
The final rule for the Medicare-Endorsed Prescription Drug Card Assistance
Initiative appeared in the Federal Register on September 4, 2002. The revised
initiative was similar to President Bush’s original proposal, but with more detail on
how the program would operate and with changes to some key aspects of the
program. The final regulations specify general rules for the Medicare-endorsed
prescription drug card program. Card sponsors applying for endorsement would be
required to submit an application and meet all the requirements outlined in the final19
The final 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, offering its own endorsement and

18 On the original proposal, CMS received 28 applications from private entities for
Medicare-endorsement of their proposed discount card plans, but no details of the individual
card programs were released.
19For 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.

having a distinct card. In a separate Notice issued on March 6, 2002, CMS outlined
additional steps it was considering to support state efforts to make affordable drugs
more readily available and invited public comments on these efforts.20
General Rules for Endorsement. The regulations provided a number of
requirements for entities seeking Medicare endorsement of their card programs. All
candidates would be required to submit applications announced in the solicitations
by CMS and meet all requirements for endorsement. Applicants may sponsor up to
a maximum of two card programs, but may have operational responsibilities in
multiple card programs. Endorsements would be effective for a period of 12 to 24
months in year one of the initiative, and 12 to 15 months in year two of the initiative.
CMS could terminate endorsement of a card program at any time, while card
sponsors could choose not to continue participation in the card initiative at any time.
In the event of the termination of an endorsed card program, the card sponsor would
be responsible for giving 90-day notice to beneficiaries that the card program will be
Eligibility Requirements for Endorsement. The regulations list a set of
requirements that applicants must meet in order to have their card programs endorsed
by Medicare. Applicants must meet specific criteria related to experience, structure
of their proposed card program(s), ability to manage a consortium and provide
customer service. The following sections summarize the requirements listed in the
final rule.
Experience, structure, and participation in administrative
consortium. Applicants must demonstrate three years experience in pharmacy
benefit management, in administering a prescription drug discount program, or in
administering a low income drug assistance program. They must demonstrate
experience in managing at least one million covered lives in an insured pharmacy
benefit, prescription drug discount program, or a low income drug assistance
Applicants must demonstrate they have formed a pharmacy network serving all
fifty states and the District of Columbia, or have a regional pharmacy network
serving at least two contiguous states, with the exception of Hawaii and Alaska
which can partner with two or more contiguous states.
Applicants must be financially solvent and have a satisfactory record of integrity
and business ethics. They must agree to jointly administer, abide by the guidelines
of, and fund a private administrative consortium with other Medicare-endorsed
prescription drug card program sponsors in accordance with CMS requirements.
They must also demonstrate the ability to manage such a consortium. Applicants
must comply with all applicable federal and state laws.
Customer Service. Applicants’ proposed card programs must follow certain
guidelines in offering customer service. They must limit their one-time enrollment

20Federal Register, Vol. 67, No. 171, Rules and Regulations, September 4, 2002, pp. 56683-


fee to $25 during first year of the program initiative. CMS may adjust the amount
of the one-time fee after first year of the initiative. The proposed card programs are
required to enroll only Medicare beneficiaries, and enroll all Medicare beneficiaries
who apply for enrollment. Applicants must agree to provide information on their card
program and outreach materials to all enrolled beneficiaries. They also must
maintain a toll-free customer call center that is open during usual business hours and
that provides customer telephone service, including to pharmacists, in accordance
with standard business practices.
Discounts, Rebates, and Access. Applicants must offer a discount on at
least one brand name or generic prescription drug in each therapeutic category of the
prescription drugs most commonly needed by Medicare beneficiaries. They must
obtain pharmaceutical manufacturer drug rebates or discounts on brand name and/or
generic drugs and ensure that a substantial share is provided to beneficiaries either
directly or indirectly through pharmacies. They must ensure that no changes would
occur to drug formularies for periods of at least 60 days, and notify CMS, the
consortium, and network pharmacies of any changes to the formulary 30 days before
the change becomes effective. They must guarantee that Medicare beneficiaries
would receive the lower of either the price offered by the discount card program or
the price a pharmacy would charge a cash paying customer. Endorsed card sponsors
would be required to provide the administrative consortium with information on
drugs included in the applicant’s formulary and the prices.
Applicants must have a proposed national or regional contracted pharmacy
network sufficient to ensure that pharmacies are locally accessible to all beneficiaries.
At least 90 percent of beneficiaries, on average, must live within five miles of a
contracted pharmacy in all Metropolitan Statistical Areas (MSAs) served by the
program and within ten miles of a contracted pharmacy in all non-MSAs (rural
Administrative Consortium. Sponsors of Medicare-endorsed card plans
would be responsible for forming and financing a joint consortium to handle all
enrollment and eligibility functions and avoid duplicate card issuance. The
consortium would be responsible for ensuring that beneficiaries are not enrolled in
more than one Medicare-endorsed card program at the same time. It would facilitate
the publication of comparative price information on discounted drugs available
through the endorsed card programs, to assist beneficiaries select the most
appropriate program for their needs. The consortium would be required to ensure the
integrity of the information provided by card sponsors; develop and implement a
written data security plan for protected health information; and abide by applicable
federal and state laws including the Health Insurance Portability and Accountability
Act of 1996 (HIPPA). CMS may assist in the start-up of the administrative
consortium and perform some of these functions for a transitional period of time.
Beneficiary Enrollment. Medicare beneficiaries enrolling in a Medicare-
endorsed prescription drug card program for the first time may enroll at any time.
Beneficiaries may enroll in only one Medicare-endorsed card program at a time, but
may change enrollment to a different program on the first day of the following
January or July from after the request for the change is made. In the event the card

program is terminated by either the sponsor or CMS, enrolled beneficiaries may
enroll in a different endorsed card program effective immediately.
Public Comments. CMS solicited comments on a number of issues in the
proposed regulation which was issued in March 2002. 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 sought numerous changes before the final
rule was 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”.21 Pharmacy groups issued a comment saying CMS should withdraw
the proposed rule. Pharmacies asserted that the discount card program would hurt
pharmacy profits and that CMS lacked the statutory authority to implement the plan.
Key Differences between Proposed and Final Rule. CMS announced
that, in response to comments received during the public comment period, the final
regulation differs from the proposed regulation published on March 6, 2002 in
several respects. Some key differences include the following:22
!Enhanced information on drug prices, including information about generic
alternatives, and other endorsed card program features that would be available
through the consortium website and by telephone.
!Endorsed card sponsors would be required to secure manufacturer rebates or
discounts on brand name and/or generic drugs.
!The experience requirements changed from five years to three years, and from
managing two million lives in a national pharmacy benefit or drug discount
card program to managing one million lives. Changes to the qualifying
criteria would provide increased opportunities for pharmacy and other
organizations to offer Medicare-endorsed card programs.
!Endorsed card sponsors would be allowed to offer two program designs,
providing beneficiaries more choice.
!Endorsed card sponsors would have to ensure stable drug formularies and
prices. They would not be able to increase drug prices or change drugs from
their formulary for periods of at least 60 days, beginning on the first day of the
program’s operation.
!New privacy requirements for Medicare card sponsors would improve privacy
protection for beneficiaries. Endorsed card sponsors would be required to
align their privacy protections with privacy standards under HIPAA, including
the final changes in the recently announced update of those privacy standards.

21BNA, Daily Report for Executives, “SBA, Interest Groups Seek Changes in Medicare
Discount Card Proposal,” May 9, 2002.
22CMS Media Release, CMS News, “HHS Issues Final Regulation on Medicare-Endorsed
Prescription Drug Card Initiative,” August 30, 2002.

Pharmacy Participation
Retail pharmacies participating in Medicare-endorsed card programs would
agree to belong to a network of pharmacies arranged by the card sponsor on a
volunteer basis. Most pharmacies already belong to one or more networks organized
by PBMs. 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 have noted that pharmacies typically agree 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.23
Expected Discounts from Card Initiative:
Diverse Estimates
The potential savings provided by the program are 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.24 The educational aspect,
consisting of the informational material on drug prices, formulary content, and the
pharmacy network offered by the card program, is intended to improve the ability of
consumers to comparison shop and choose the plan that meets their needs at the
lowest cost.
CMS has estimated that seniors would be able to obtain a 10% to 13%, and
possibly up to a 15%, discount on prescription drug retail purchases through the
Medicare-endorsed card program. A fact sheet issued by CMS states that it projects
that the first year of the program would provide Medicare beneficiaries between $1.2
and $1.6 billion savings on their prescription drug purchases.
Some observers have commented that the Administration’s proposed discount
program would probably provide seniors with at least some savings on their overall
prescription drug bill. Questions have been raised about the actual size of the
discounts that would be available. Specific information is not available on the
discount amounts and formularies the potential card sponsors would offer. The
actual size of retail discounts may not be known until after the first year of program
operation. While it is possible to compare prices available through existing discount
card programs to those at individual retail pharmacies or Internet pharmacies, one of
the constraining factors in conducting this kind of analysis is the lack of widely
available data on retail drug prices.

23 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.
24CMS Fact Sheet, “Medicare-Endorsed Prescription Drug Card Assistance Initiative,”
available on the CMS website [].

The U.S. General Accounting Office (GAO) completed a study in 2002 on
prescription drug prices for seniors offered by drug discount card programs, local
pharmacies, or over the Internet.25 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 13% higher in rural Georgia than in
Seattle, Washington.26
Critics of President Bush’s program have disputed past statements made by the
Administration of potential discounts of up to 25%. More recent announcements by
CMS have stated that discounts would probably be within the range of 10% to13%,
and possibly up to 15%.27 Retail pharmacy groups, consumer groups, and some
Members of Congress believe that the program is not likely to produce significant
savings for seniors. Some Members 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.28 They have stated that the
Bush proposal would not offer greater 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 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.29

25General Accounting Office, Report No. GAO-02-280R, Prescription Drugs: Prices
Available Through Discount Cards and From Other Sources, December 5, 2001.
26Ibid, p. 4.
27CMS Factsheet, “Medicare-Endorsed Prescription Drug Card Assistance Initiative.”
28Bureau 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.
29Six 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

Administration Arguments in Support of Discount
Card Program
President Bush has 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.
CMS highlighted several key elements that the Administration believes would
make the Medicare-endorsed cards better than the current discount cards currently
available in the market.30 The first is that the exclusive enrollment feature, combined
with the formulary, pharmacy network, and informational attributes of the programs,
would provide the card sponsors and their members with the necessary “market
clout” to obtain larger rebates from pharmaceutical manufacturers and pass the rebate
to the consumer.31
CMS has said that the market has shown that discount cards can obtain
manufacturer rebates, but that these programs do not always pass the rebate back to
the consumer. The Administration believes that because the Medicare-endorsed card
initiative would require that card sponsors pass the rebate to the pharmacy and the
consumer, Medicare beneficiaries could obtain larger discounts than those in
currently available card programs. 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 or rebates, nor on the amount of the rebates
that would be passed on to Medicare beneficiaries.
Second, the Administration believes that the comparative price information
feature of the Medicare-endorsed card proposal would benefit seniors in that they
would have access to comparative 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 one-time per
plan enrollment fees of up to $25.
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. For the many seniors who do not have

[ reform/min/inves_prescrip/index.htm] .
30CMS Fact Sheet, pp. 3-4.
31Ib i d .

access to a computer or the Internet, however, published information would continue
to be the most important vehicle for ensuring that program participants realize 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 manage the consortium and provide customer service for easy access to
price and pharmacy network information.
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. Although the final rule requires that a
portion of the pharmaceutical rebates or discounts be provided to beneficiaries either
directly or indirectly through pharmacies, the pharmacies argue that the rule does not
specify the amount of the discount that should go to pharmacies.
Another factor to consider is whether the card sponsor plans under the proposed
Medicare program include drug utilization review (DUR) 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.
DUR may prevent the duplicative use of drugs that fall within the same therapeutic
category, thereby enhancing patient safety while lowering prescription drug costs.
DUR can also identify harmful drug interactions that may occur when a patient with
more than one medical condition treats those conditions with drugs that, when taken
together, are harmful.
The third item mentioned by CMS is that the Medicare drug card initiative
would require card sponsors to offer broad access to retail pharmacies, and only offer
mail-order services as an option. Some existing drug card programs offer only mail-
order services, and do not include a retail pharmacy network in their plan. The
Medicare initiative would not endorse these types of plans. Pharmacy associations
assert that, while mail-order card programs may provide lower prescription drugs
prices, these programs do not provide seniors with the personal help they may need
from community pharmacists. Pharmacy associations have also argued that the
Medicare drug card initiative could be an incentive for Medicare beneficiaries to shift
their prescription drug purchases from retail pharmacies to mail-order services, and
that this would come at a cost to retail pharmacies. CMS has stated that the network
pharmacy requirement in the Medicare drug card proposal would ensure that
Medicare beneficiaries continue to purchase their drugs from retail pharmacies.
The final point mentioned by CMS is that Medicare-endorsed card sponsors
would be expected to provide clear and reliable educational information services to
Medicare beneficiaries such as pharmacy counseling, generic substitution, and DUR
programs to monitor and prevent drug-drug interactions. CMS believes that this
feature would assist seniors and people with disabilities select a quality discount card

program.32 As mentioned earlier, the informational aspects of the Medicare initiative
could be valuable in helping seniors lower their drug costs by choosing the card
program most appropriate for their needs. Much, however, would depend on the
quality of service that card sponsors provide. Because the drug discount card
initiative is intended 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, it is argued, could result in more
coordination among companies offering card discount programs and CMS, which
could improve the service and information seniors receive when shopping for their
prescription drugs. A consortium of card sponsors could lead to an improvement of
marketing materials and drug price information for seniors. However, because
details of the card programs that would be proposed are not known at this time, it is
difficult to assess how much of an improvement there would be over existing drug
card programs.
Pharmacists’ Challenge to Medicare Discount Card
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 (HHS) Secretary
Tommy Thompson and the CMS Administrator Tom Scully to block the
Administration’s original prescription discount card initiative. 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.33 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. 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 the34
Administrative Procedure Act.” At a later date the judge stated that the stay of

32CMS Fact Sheet, p. 4.
33The Washington Post, “Judge Blocks Prescription Discount Plan,” by Amy Goldstein,
September 7, 2001, p. A01.
34BNA Health Care Daily. “Court Allows HHS to Submit New Plan for Providing Medicare

proceedings would continue only while HHS submitted its proposed policy for notice
and comment. The plaintiffs, he stated, could return to court at any time after such
a policy has been published.
CMS proceeded with the rulemaking process in late 2001 although CMS
Administrator Thomas Scully acknowledged that the new prescription drug plan
would need approval from a federal judge or be approved by Congress. 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 issued the final regulation on September 4, 2002.
On September 13, 2002, the Department of Justice (DOJ) filed a motion with
the U.S. District Court for the District of Columbia to require pharmacy groups to tell
the court by September 20 whether they plan to proceed with the case against CMS
and the Department of Health and Human Services to halt the program. DOJ asked
that all motions in the case be filed by October 28, 2002.35 On September 27, 2002,
pharmacies responded to this motion by rejecting the federal government’s schedule
for filing motions in the case, and suggested their own schedule in which they would
file a motion to enforce the existing injunction in the case.
On January 29, 2003, Judge Paul Friedman held that the NACD demonstrated
it had standing to show pharmacies would suffer economic harm from the Medicare
discount card initiative. Judge Friedman rejected the argument by HHS Secretary
Thompson that the federal government had the authority to implement the card
program under the Medicare Beneficiary Assistance Act of 1990.36 On the day of the
ruling, CMS Administrator Tom Scully announced that CMS would be evaluating
its options and continue to work with Congress to help strengthen Medicare and push
for a comprehensive prescription drug benefit. He also stated that the court’s
decision hastened the “course of a likely appeal.”37
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.38 The pharmacy associations argue

Discount Drug Cards,” November 7, 2001.
35BNA, Daily Report for Executives, “Justice Asks for Motion Schedule in Medicare
Prescription Drug Card Case,” September 18, 2002.
36BNA, Daily Report for Executives, “Court Rejects Drug Discount Card, Finds
Administration Exceeded Authority,” January 30, 2003.
37CMS Public Affairs Office, “Statement by CMS Administrator Tom Scully,” January 29,


38Eight organizations representing pharmacist owners, managers, and employees united to

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
pharmacies pay for medications and claim that providing discounts will
disproportionately reduce net profits of pharmacies vis a vis card sponsors and drug
The final regulation of the Medicare drug card initiative is different from the
original proposal in 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. However, pharmacies remain concerned that the revised
initiative would harm their profits because, although the card initiative requires card
sponsors to pass discounts to beneficiaries, it does not stipulate how much of those
savings should be given to seniors.39
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.40 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

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
39BNA, Daily Report for Executives, “CMS Releases Final Rule Establishing Program for
Medicare Discount Drug Card,” September 3, 2002.
40NCPA news release. NCPA, Others Issue Letter to the President Opposing Discount Card
Program. July 12, 2001.

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.41
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 Survey42 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.43 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
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 2000.44 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.45 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.

41Declaration 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.
42Standard and Poor’s. Industry Surveys, Supermarkets and Drugstores. August 2, 2001.
43Gross 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
44Net 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.
45Standard and Poor’s, pp. 5-6.

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. Thethth
issue received renewed attention in the 106 and 107 Congress. However, there was
no consensus on how the coverage should be structured. In the 108th Congress,
Representative Mark Foley introduced a bill (H.R. 513) in the House on January 31,
2003 to authorize the Secretary of HHS to endorse prescription drug discount cards
for use by medicare beneficiaries. The bill would give the Administration legal
authority to implement the Medicare drug discount card initiative.
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, including46
approximately 65% of our country’s seniors.” 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. ... 47
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.

46PriceWaterhouseCoopersLLP. Study of Pharmaceutical Benefit Management. HCFS
Contract No. 500-97-0399/0097. June 2001. p. 14.
47Drug Topics’ Redbook, 2001, p. 94.

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.
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.48
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

48See 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, [].

behavioral changes among those seniors who have an ongoing need for prescription
drugs to treat chronic conditions.