Pharmacy Advantages for Military Retirees

Managing costs without compromising health care

Like the private health care sector, the military health care system has seen its costs rise rapidly over the past decade. As health care costs in the private sector have risen over the past decade, so have the costs of treating active duty soldiers, their families, and retirees, due in part to a double-digit increase in prescription drug costs.

At a time when the federal government is proposing a prescription drug benefit to be offered to elderly Medicare beneficiaries, the Department of Defense asked researchers at RAND's Center for Military Health Policy to help assess the factors contributing to the rising cost of prescription drugs for military retirees and their families, and to suggest ways to contain costs without compromising patient safety or quality of care.

Because a prescription filled at a retail pharmacy is significantly more expensive for military personnel than the same prescription filled at a military or mail-order pharmacy, the researchers first assessed how participants chose where to obtain their medications. The researchers then analyzed the potential cost savings of introducing a three-tiered pharmacy benefit. The results of the study are as follows:

  • Retirees still fill more than half of their prescriptions at central hospitals or the Army's TRICARE Mail Order Pharmacy (TMOP), but a growing number – currently 43 percent – are filling their prescriptions at retail pharmacies.
  • Most of the cost of medications is for those purchased at retail pharmacies, as the cost of these medications to the military is higher than the cost of the same medications provided by an MTF or mail order pharmacy. Therefore, defense force costs could be reduced if retirees were to switch from retail pharmacies to military outlets or TMOPs.
  • The use of retail pharmacies is related to the distance from the nearest international pharmacies and the fact that some of the more expensive popular drugs are not available at international pharmacies.
  • An analysis of health insurance data from large private companies suggests that introducing a three-tier reimbursement system into the military health system can curb the growth of pharmaceutical costs.
  • To achieve the significant savings proposed in this study without negatively impacting beneficiaries' health status, the Department of Defense should carefully consider which drugs and drug classes should be placed in the third most expensive tier.

Key findings

  • Military retirees fill more than half of their prescriptions through international pharmacies, but they are also increasingly turning to retail pharmacies.
  • Due to higher prices charged by the Department of Defense, most of the cost of medications is borne by retail pharmacies.
  • The use of retail pharmacies is related to distance from the nearest MDC and the lack of availability of certain drugs in MDCs.
  • The introduction of the three-tier reimbursement system in the private sector has slowed the growth of pharmaceutical spending.
  • To reduce costs without harming beneficiaries' health, DOD should carefully consider the drugs it places in the third most expensive tier.

For the TRICARE Senior Pharmacy program, costs are affected by where prescriptions are filled

In 2001, Congress mandated the expansion of pharmacy services to 1.8 million military personnel age 65 and older and their elderly dependents. Prior to this expanded coverage, retirees could only use their prescription drugs at MTF pharmacies, where prescriptions were dispensed free of charge. Under the TRICARE Senior Pharmacy Program (TSRx), retirees participating in this program can now use their TRICARE pharmacy benefits to obtain prescriptions from four sources:

(1) MTF pharmacies, (2) TRICARE network retail pharmacies, (3) TMOPs, and (4) non-network retail pharmacies. All prescriptions dispensed by retail pharmacies and TMOPs are subject to a modest co-payment of $3 for generic drugs and $9 for brand name drugs (out-of-network retail pharmacies charge a higher co-payment), while MTF pharmacies do not charge a co-payment for prescriptions.

Prior to Medicare expansion, drug costs for the military increased fairly steadily, but in 2001, costs increased substantially, partly due to a change in pharmacy patterns (Medicare expansion) and partly due to the general trend seen for the civilian population. DOD's costs for drugs purchased at retail pharmacies are generally higher than the costs DOD can negotiate with pharmaceutical companies for drugs provided in multinational military operations (MTFs) and TMOPs.

As a result, the costs to DOD of allowing TRICARE participants to fill prescriptions at retail pharmacies are significantly higher than if prescriptions are filled only through MTFs and TMOPs, particularly for expensive and widely prescribed drugs. For example, when retirees began filling a significant portion of their prescriptions at retail pharmacies in 2001, the change in drug supply location may have contributed to higher drug prices. Thus, as a first step in identifying the causes of rapidly rising costs and developing methods to reduce costs, RAND researchers were asked to assess where TRICARE beneficiaries purchase their prescription drugs.

By examining TRICARE pharmacy consumption data, the researchers found that the majority of TSRx prescriptions are dispensed by international drug suppliers (see figure). However, they also found that the use of international pharmacies to dispense prescriptions decreased significantly-from 100% to 60% of prescriptions dispensed in the two years following the launch of the new program-and that the use of retail pharmacies increased accordingly.


A positive aspect of the policy change for beneficiaries was improved access to medications. In addition, new users of pharmacy benefits have been added to the TRICARE system. However, for DoD, the new policy had one major drawback: although most TSRx prescriptions were still dispensed through international drug distribution outlets or by mail order, researchers found that drugs dispensed through retail pharmacies accounted for the majority of the TSRx program's pharmacy expenditures (see figure).

Therefore, TSRx costs would be reduced if drug distribution could be shifted from retail pharmacies to sources where federal prices limit defense drug costs. For example, if all prescriptions for Zocor (a cholesterol-lowering drug) dispensed to TSRx participants were filled only from international drug distributors or through TMOP, DOD would save 76 percent of the retail price of this drug, or nearly $14 million annually.

What factors influence where TSRx participants fill their prescriptions?

If saving money was the only concern for participants, most prescriptions would be filled at a multistate health center that does not accept copayments. The researchers also considered other factors, such as the proximity of the MTF closest to participants' homes and the availability of frequently used medications at the MTF.

It is well known that proximity to a business offering a product or service increases the likelihood that consumers will use it. Researchers used the zip code of older TRICARE participants' residence to measure the distance they had to travel to the nearest MTF. When the researchers compared military retirees' distance to the nearest MTF and their pharmacy use, they found that retirees who lived within 20 miles of an MTF were more likely to participate in the TSRx program and use an MTF to fill their prescriptions than retirees who lived more than 20 miles from an MTF.

The farther a retiree lived from an MTF, the more likely he or she was to use a retail pharmacy or TMOP rather than an MTF (see Table 3). Proximity to an MTF affects not only whether a retiree uses an MTF, but also the proportion of prescriptions filled at an MTF. Most Americans live within 5 miles of a retail pharmacy, whereas more than half of TSRx participants live more than 20 miles from an MTOP. Not surprisingly, older adults, whose driving distance may be limited for health or financial reasons, seek out more accessible pharmacies.

The researchers also examined the availability of the most commonly used medications for older adults. The medications sold in the pharmacy of each international military operation are determined by the range of medications established by the military. For each drug category, the Defense Pharmaceutical and Therapeutics Committee designates a particular brand or brands as “preferred” drugs based on a number of factors, including the agreed-upon cost of that brand to the defense forces.

If a generic drug is available, it is generally the preferred drug. MTFs do not dispense “non-preferred” medications (i.e., brand name medications that are generally more expensive) unless a military physician certifies medical necessity. Prescriptions for non-primary medications generally must be filled at a retail pharmacy.

In examining the medication choices of participants who had prescriptions for the two most commonly prescribed types of drugs (cholesterol-lowering and antacids), the researchers found that the availability of a drug at an international pharmacy was associated with increased utilization, not only for that drug but also for other prescriptions. In contrast, when the CCM did not offer a specific drug, users who went to retail pharmacies to fill their prescriptions were more likely to fill their other prescriptions at a retail pharmacy.

The effect of proximity and availability of nonprimary products suggests that convenience strongly influences the decision to use retail pharmacies. However, to control costs, DOD must find ways to encourage more seniors to fill their prescriptions at multinational drug outlets or TMOPs, or at least to reduce the use of retail pharmacies. As an extension of this study, the researchers were asked to investigate the potential impact of a third option that would add a third tier to the current TRICARE co-payment structure.

Change the amount of reimbursement that TRICARE beneficiaries pay for prescription drugs

In an effort to streamline and integrate its pharmacy benefit program and contain the cost of prescription drugs, DOD is working to standardize the drugs available at each central office by developing a uniform formulary. As part of this effort, DOD is considering a transition from a two-tier to a three-tier deductible system.

Under the two-tiered system, participants would receive the least expensive (i.e., priority) drugs for free or at a lower co-payment than non-priority drugs in the same class. Under the proposed three-tier system, all TRICARE participants will be subject to a $22 co-payment (see Table 1). RAND researchers were asked to help DOD assess the potential impact of this change, i.e., how such a change might affect (1) DOD costs and (2) beneficiaries' costs and use of drugs. To answer this question, the researchers used data collected by a private insurance company to examine how beneficiaries covered by private health insurance would respond to similar benefit changes.

Specifically, the researchers calculated how plan spending, drug utilization, and member costs changed over a year between plans that moved from two to three tiers and plans that kept rates unchanged (Table 4 shows the average deductibles for each type of plan). They also assessed whether the changes affected the utilization and costs of some drug classes more than others, and whether the changes affected the demand for certain drugs.

The researchers found that between 1999 and 2000, the rate of increase in drug costs was significantly lower in the two-tier system than in the fixed two-tier system (see Table 5). However, beneficiary spending increased much more rapidly for those who joined the three-tier plans-both new and fixed-than for those who joined the two-tier fixed plans. This trend was seen in most of the most expensive drug groups, such as asthma, high cholesterol, gastric acidosis, and depression medications.

The study found that civilian plans that made changes to their benefit structure similar to the Army's uniform drug plan achieved significant savings in the year following the changes. However, some differences between the proposed uniform formula and the benefit structure changes analyzed in this study may limit the applicability of the results to DOD. For example, TRICARE's prior authorization limits and requirements may differ from the prior authorization limits and requirements of the plans for which the data were estimated, and several factors, such as rebates and appropriations, could not be taken into account.

In addition, the proposed formulary would allow third-level drugs to be obtained from a TMOP without prior authorization and with lower copayments than for drugs purchased at a retail pharmacy. Although this policy would discourage switching to less expensive drugs, in the long run it could encourage less use of more expensive retail pharmacies and more use of less expensive TMOP drugs.

Implications and Efforts for DOD, TSRx, and Medicare

If DOD decides to adopt a single tripartite drug formulary, it will have to make several choices. For example, to achieve cost savings without adverse health effects, DOD would need to carefully consider which drugs and drug classes it places in the third nonreimbursable tier.

Selection criteria include the availability of appropriate substitutes, the level of costs associated with the category, particularly for certain drugs, and the potential unintended consequences of switching drugs. Drugs in the most expensive therapeutic classes, which account for a disproportionate share of spending, should be scrutinized more closely.

In addition, to achieve additional savings, the military should evaluate the potential benefits of reducing the exemption for tertiary drugs purchased through TMOP, relaxing some prior authorization requirements in the MTF, and other changes that would limit incentives to use retail pharmacies.

Policymakers should also consider whether a reduction in drug use or a shift to generic alternatives, which could result from increased co-payments and changes in the benefit structure, would have negative health effects. The likelihood of these health effects is minimized if the third, most expensive tier is reserved for drugs with close generic substitutes.

The Medicare Modernization Act of 2003 (MMA) added prescription drug coverage to the Medicare program. Under the new program, individual participants can incur out-of-pocket costs of up to $2,850. Under the MMA, the federal government encouraged private plans that administer Medicare benefits to develop ways to close this potential coverage gap. One proposal is to establish a three-tiered deductibility structure.

Thus, the conclusion of the RAND study is that deductibles are important not only to the Department of Defense, which reallocates drug benefits to active duty service members and retirees, but also to the civilian sector, which is seeking ways to manage and redirect drug costs for the Medicare population.

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