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NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance.
Support for this study was provided by the Department of Veterans Affairs (Contract No. V-101-(93)P-1637, Task Order 10). The views presented are those of the Institute of Medicine VA Pharmacy Formulary Analysis Committee and are not necessarily those of the funding organization.
Description and Analysis of the VA National Formulary is available for sale from the
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VA PHARMACY FORMULARY ANALYSIS COMMITTEE
DAVID BLUMENTHAL (Chair), Director,
Institute for Health Policy,
Professor of Medicine and Health Care Policy,
Harvard Medical School
REINHARDT HENRY BODENBENDER, Director of Medical Services,
Paralyzed Veterans of America, Washington, D.C.
J. LYLE BOOTMAN, Professorand Dean, Executive Director,
Center for Health Outcomes and PharmacoEconomic Research, University of Arizona College of Pharmacy
JOHN P. BURKE, Professor of Medicine, Chief,
Department of Clinical Epidemiology, Latter Day Saints Hospital, Salt Lake City, Utah
ELIZABETH DICHTER, Executive Vice President,
PCS Health Systems, Scottsdale, Arizona
THOMAS R. FULDA, Program Director,
Drug Utilization Review, U.S. Pharmacopoeia, Rockville, Maryland
MARTHA N. HILL, Professor, Director of the Center for Nursing Research,
Johns Hopkins University School of Nursing
JOHN D. JONES, Director of Pharmacy Networks and Legal Affairs,
Prescription Solutions, Costa Mesa, California
JAMES JONATHAN LIPSKY, Director of Clinical Pharmacology, Professor of Medicine and Pharmacology,
Mayo Clinic and Foundation, Rochester, Minnesota
ALBERT SIU, Professorand Chief of General Internal Medicine,
Mount Sinai School of Medicine
FRANK A. SLOAN, Professor of Health Policy and Management, Professor of Economicsand Director,
Center for Health Policy, Law, and Management, Duke University
RICHARD A. WANNEMACHER, JR., Associate National Legislative Director,
Disabled American Veterans (DAV), Washington, D.C.
OTTO F. WOLKE, President of Schellen & Partners USA, Inc.,
Danville, Pennsylvania
ALLAN ZIMMERMAN, Senior Executive Vice Presidentand General Manager,
National Prescription Administrators, East Hanover, New Jersey
Consultants
JEFFREY S. BROWN,
Schneider Institute for Health Policy, The Heller School, Brandeis University
ARNOLD M. EPSTEIN,
Harvard School of Public Health, Department of Health Policy and Management
RICHARD FRANK,
Harvard Medical School, Department of Health Care Policy
HAIDEN A. HUSKAMP,
Harvard Medical School, Department of Health Care Policy
Preface
Medications have captured the imagination of the American people and the attention of policy makers. New scientific findings have demonstrated the extraordinary power and promise of drags to prevent and cure disease, relieve suffering, and improve the quality of life for many Americans. Media reports, the World Wide Web, and aggressive advertising by the pharmaceutical industry have kept consumers informed of every advance, large or small, in the development of new medications. Pharmaceuticals have become as vital to good health care as hospital and physician services. Propelled by new, expensive products and consumer demand, national spending on medications is increasing at double-digit rates and may soon rival physician and even inpatient hospital expenditures.
This latter prospect has naturally attracted the interest of policy makers responsible for the publicly funded programs that have become so important to so many Americans. Most Medicaid programs have adopted measures, including formularies, to control the costs of pharmaceuticals. The Medicare program does not cover outpatient drugs, but debate rages over whether it should. If, as seems likely, Medicare does provide pharmaceutical benefits for its 39 million beneficiaries, then programs to control expenditures will be part and parcel of this reform.
As the steward of the nation's largest and most comprehensive publicly owned and managed health care program, the U.S. Department of Veterans Affairs (VA) and its Veterans Health Administration (VHA) are also confronting the opportunities and challenges associated with the national surge in the use and costs of medications. The VHA is the largest single purchaser of pharma
ceuticals in the United States. It cares for a population that is disproportionately elderly and ill, including many veterans with service-related disabilities. With pharmaceutical expenditures rising at more than 10% a year, the VHA in 1997 implemented a new National Formulary intended to help control costs and improve the quality of prescribing in the VHA's 172 hospitals, more than 600 ambulatory facilities, 132 nursing homes, and other health care facilities.
The VA National Formulary generated controversy, which motivated congressional scrutiny and a directive to the VA to commission this report reviewing the experience with the National Formulary and formulary system. This Institute of Medicine committee was pleased to assist the Congress with this review, in part because the committee saw in the VHA example an opportunity to understand and anticipate problems that all publicly funded programs are likely to encounter in this new age of pharmaceuticals.
The Congress asked the committee to review the restrictiveness of the National Formulary, its impact on the costs and quality of care in the VHA, and how it compared to formularies and drug management practices in the private sector and in other public programs, especially Medicaid. Detailed in the pages that follow, the committee's findings and conclusions on these questions are, the committee believes, highly instructive, though not always in the ways that we anticipated.
The committee found that formularies and formulary systems (the many policies and procedures necessary to manage implementation of formularies) are an essential part of modern health care systems and that the VHA therefore was justified in creating its National Formulary. Further, we found that the VA National Formulary is not overly restrictive, and the limited available evidence suggests that it has probably meaningfully reduced drug expenditures without demonstrable adverse effects on quality.
This is the good news. The committee also concluded that there are manifold opportunities to improve the management of the formulary system used by the VHA. The National Formulary lacks essential systems to assure that new drugs are expeditiously reviewed for inclusion, that a responsive process for assuring access to medically necessary exceptions to the formulary is consistently in place system-wide, that therapeutic interchange is accomplished in a flexible and consistent way, sensitive to patient risks, across the far-flung VHA system, and that views of critical constituencies of both providers and patients are represented in the management of the National Formulary.
Perhaps most troubling, the committee found a dearth of information to evaluate the full impact of the National Formulary on veterans —their health and satisfaction—and on the VHA. Although the VHA has made efforts to improve quality monitoring generally, no data exist that allow an assessment of the effect of the VA National Formulary on the structure, processes, and outcomes of care received by VHA patients. Committee consultants made valiant efforts to assess quality effects using data on rates of hospitalization for conditions associated with drugs most closely regulated by the National Formulary—those in closed
and preferred classes. The committee considers such analyses helpful, but insufficient to reach a satisfactory conclusion on quality effects. Available cost data do not allow a full evaluation of the indirect effects of the VA National Formulary on the use of other health care resources such as other drugs and services. Such effects have been significant in the Medicaid experience and could greatly reduce net savings on drugs themselves. There are also few data on the administrative costs of the National Formulary, including its important but subtle effects on the time health professionals must spend with and for patients in managing changes in medications.
Gaps in the information available for policy making concerning the VA National Formulary are not unique to this system. The committee found a comparable paucity of data on the quality effects of formularies in Medicaid and the private sector. Reliable information on the policies of the fast-changing private companies that manage formularies for private health care plans—so-called pharmacy benefits management companies or PBMs—were also lacking when the committee initiated its review. The committee is indebted to representatives of several PBMs who organized a survey of their companies and supplied valuable new data on their policies and procedures.
Given the rapid pace of policy development with respect to Medicare and other public and private programs, the lack of data to support decision making is disturbing. It is difficult to imagine a modern health care system that does not employ a formulary. It is also difficult to imagine how such formularies can now be effectively designed and managed given our limited understanding of their effects on cost and quality of care and patient and provider satisfaction. The VHA, because of its central control and comprehensive benefits, has a unique opportunity to study its own experience with formularies and formulary systems. The committee strongly urges the Congress and the VHA to take advantage of this opportunity.
The committee's work benefited enormously from the contributions of a dedicated and talented staff. Roger Herdman, its study director, and Christine Coussens, his assistant, accomplished an extraordinary amount of work in a very modest period of time—reviewing the copious literature on the history and current status of formularies, conducting field work to understand the National Formulary and its functioning, designing and supervising the collection of primary data on PBMs, and supervising able contractors. Drs. Herdman and Coussens were invariably rigorous in their review of data and diplomatic in their management of the committee. The committee is also indebted to Haiden Huskamp and Richard Frank, who conducted an excellent analysis of the cost effects of the National Formulary, and to Jeffrey Brown, who expertly reviewed and summarized the Medicaid experience with drug management.
The importance and salience of drug benefits in modern health care systems is more clear than ever from the committee's work. The central role of formularies in providing high-quality and affordable drug coverage is also clear. It will
REVIEWERS
The report was reviewed by individuals chosen for their diverse perspectives and technical expertise in accordance with procedures approved by the National Research Council's Report Review Committee. The purpose of this independent review is to provide candid and critical comments to assist the authors and the Institute of Medicine in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The contents of the review comments and the draft manuscript remain confidential to protect the integrity of the deliberative process. The committee wishes to thank the following individuals for their participation in the report review process:
Jerome Avorn, Brigham and Women's Hospital, Boston
Enriqueta C. Bond, Burroughs Wellcome Fund, Durham, North Carolina
Christine K. Cassel, Mount Sinai Medical Center, New York City
David H. Kreling, School of Pharmacy, University of Wisconsin
Joseph P. Newhouse, Harvard University
Judith Wagner, Congressional Budget Office, Washington, D.C.
Albert L. Wertheimer, Merck and Co., West Point, Pennsylvania
Mel Worth, Senior Scholar in Residence, Institute of Medicine, Washington, D.C.
While the individuals listed above provided many constructive comments and suggestions, responsibility for the final content of the report rests solely with the authoring committee and the Institute of Medicine.