DOD and VA Health Care

The Department of Veterans Affairs (VA) and Department of Defense (DOD) are the largest direct federal drug purchasers, although their combined purchases are less than two percent of total domestic drug sales. They enjoy varying, but significant, discounts on their drug purchases, the largest when they contract jointly to purchase the same drugs for their systems and through their separate national contracts with drug makers. However, their joint and separate contracting have been limited. Only about 19 percent of VA and DOD combined drug purchases are made through such contracts; most are made at far smaller discounts. If they could jointly contract for most of the 30 drug classes that now make up about two-thirds of their combined drug purchases, they could save hundreds of millions of dollars annually. Obstacles to overcome include DOD's need to develop a national drug formulary and the departments' need to mitigate their institutional competitiveness and pursue such joint actions as drug contracting. For example, DOD is considering commercially contracting for its hospital pharmacies refills-by-mail workloads, even though VA has a highly efficient system that could meet DOD's needs and achieve savings in the process. Interventions may be needed to mitigate agency rivalries.

GAO noted that: (1) by April 2000, VA and DOD had awarded 18 joint, national committed-use contracts amounting to about 2 percent of their combined drug expenditures; (2) the joint contracts largely were due to a 1999 VA/DOD agreement to work toward combining their like medical supply needs; (3) the departments also have separate national contracts amounting to about 17 percent of their combined expenditures; (4) the remainder, or about 81 percent of their combined expenditures, are for drugs they buy at negotiated, noncompeted, supply schedule prices, at far smaller discounts than the contracts afford; (5) while the drug discounts DOD and VA have gotten are impressive, only about 19 percent of their combined purchases are now made through the most cost-effective mechanism--national, committed-use contracting with a supplier; (6) if DOD and VA could do most of their drug spending through such contracts, preferably joint contracts, GAO estimates they could save from about $150 million to $300 million, or about 6 to 12 percent of their annual combined drug spending; (7) the departments would need some time to clinically plan and award the contracts to achieve this annual savings level; (8) of course, GAO acknowledges the variability of drug market pricing and that drug makers may have discount limits and may or may not choose to bid on such contracts; (9) VA and DOD officials believe that the prospects for more joint contracting are limited because their patient populations differ and their drug needs vary widely; (10) however, GAO's analysis showed that about 30 high-dollar drug classes now comprise about 66 percent of VA's and DOD's combined annual drug purchases; (11) the officials stated that DOD lacks a national formulary; (12) the lack of such a formulary limits DOD's ability to enter into and thus commit to a particular drug's usage under such contracts so that the higher discounts can be achieved; (13) DOD is exploring commercial contracts as a way to handle its hospital outpatient pharmacy refill workload that could be mailed to beneficiaries; (14) VA's CMOPs now perform most of VA's drug refill functions in a highly efficient, low-cost way; (15) also, based on VA information, CMOPs would likely cost DOD less than a commercial mail-service pharmacy and may save an estimated $45 million in dispensing costs; (16) however, VA and DOD officials have had a number of discussions to date, to little effect, about using the CMOPs for DOD's refill needs; and (17) interventions by Congress may be needed to bring about successful agency interaction through joint contracting.