Contract Management
Further Efforts Needed to Sustain VA's Progress in Purchasing Medical Products and Services Gao ID: GAO-04-718 June 22, 2004The Department of Veterans Affairs (VA) provides healthcare to millions of veterans at VA's medical centers and healthcare facilities across the country. To support veterans, VA manages a Federal Supply Schedule (FSS) program and a national contract program. Both use VA's sizeable buying power to provide VA and other federal agencies discounts on medical products and services. To cover its costs in running the FSS program, VA charges its customers a user fee. Although sales through VA's FSS and national contracts totaled almost $7 billion in fiscal year 2003, concerns have been raised about the efficiency of these contract programs. GAO was asked to determine whether the FSS and national contracts have provided medical products at favorable prices and to identify opportunities to improve purchasing practices and increase savings. GAO was also asked to determine if VA's user fee is sufficient to cover program cost.
The more than 1,200 FSS and 330 national contracts that VA has awarded have resulted in more competitive prices and have yielded substantial savings. VA has achieved these favorable prices and savings, in part, by exercising its audit rights and access to contractor data to pursue best prices aggressively for medical supplies and services. For example, pre-award audits of vendors' contract proposals and post-award audits of vendors' contract actions resulted in savings of about $240 million during fiscal years 1999 to 2003. VA has also taken steps to further leverage its buying power on widely used healthcare items--such as pharmaceuticals and high-tech medical equipment--through its national contracts. According to VA, its national pharmaceutical contracts have led to a cost avoidance of $394 million in fiscal year 2003. However, VA has not taken the same aggressive approach to negotiate more competitive prices for healthcare services, such as radiology. In fiscal year 2003, healthcare services totaled about $1.7 billion, yet VA facilities only purchased about $66 million through VA FSS contracts. Instead, most medical healthcare services are purchased through contracts that individual VA medical centers have negotiated, a process that may not provide the most favorable prices. VA could also realize additional savings through improved medical center purchasing practices. Despite increases in medical centers' FSS purchases--which more than doubled between fiscal years 1999 and 2003--medical centers have not always taken advantage of the best prices available through VA's contracts. For example, in fiscal year 2001, a VA Inspector General (IG) report stated that VA medical centers frequently purchased healthcare products from local sources, instead of from available FSS contracts. Although VA has since implemented policies and procedures that generally require its medical centers to purchase medical products and services through VA's contract programs, a more recent VA IG report found that medical centers continued to make purchases from local suppliers. The VA IG estimated that, with improved procurement practices at medical centers, VA could save about $1.4 billion over 5 years. However, ensuring VA medical centers comply with VA's purchasing policies and procedures will be a challenge for VA, in part, because its monitoring of purchases lacks adequate rigor. The user fee that VA collects on FSS purchases--0.5 percent of sales--is expected to approximate the program costs. VA, however, does not have complete information on the costs to administer the FSS program. Without this cost data, VA is unable to know whether it is charging an appropriate user fee.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-718, Contract Management: Further Efforts Needed to Sustain VA's Progress in Purchasing Medical Products and Services
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Report to the Committee on Government Reform, House of Representatives:
United States General Accounting Office:
GAO:
June 2004:
Contract Management:
Further Efforts Needed to Sustain VA's Progress in Purchasing Medical
Products and Services:
GAO-04-718:
GAO Highlights:
Highlights of GAO-04-718, a report to the Committee on Government
Reform, House of Representatives
Why GAO Did This Study:
The Department of Veterans Affairs (VA) provides healthcare to millions
of veterans at VA‘s medical centers and healthcare facilities across
the country. To support veterans, VA manages a Federal Supply Schedule
(FSS) program and a national contract program. Both use VA‘s sizeable
buying power to provide VA and other federal agencies discounts on
medical products and services. To cover its costs in running the FSS
program, VA charges its customers a user fee.
Although sales through VA‘s FSS and national contracts totaled almost
$7 billion in fiscal year 2003, concerns have been raised about the
efficiency of these contract programs. GAO was asked to determine
whether the FSS and national contracts have provided medical products
at favorable prices and to identify opportunities to improve purchasing
practices and increase savings. GAO was also asked to determine if VA‘s
user fee is sufficient to cover program cost.
What GAO Found:
The more than 1,200 FSS and 330 national contracts that VA has awarded
have resulted in more competitive prices and have yielded substantial
savings. VA has achieved these favorable prices and savings, in part,
by exercising its audit rights and access to contractor data to pursue
best prices aggressively for medical supplies and services. For
example, pre-award audits of vendors‘ contract proposals and post-award
audits of vendors‘ contract actions resulted in savings of about $240
million during fiscal years 1999 to 2003. VA has also taken steps to
further leverage its buying power on widely used healthcare items”such
as pharmaceuticals and high-tech medical equipment”through its national
contracts. According to VA, its national pharmaceutical contracts have
led to a cost avoidance of $394 million in fiscal year 2003. However,
VA has not taken the same aggressive approach to negotiate more
competitive prices for healthcare services, such as radiology. In
fiscal year 2003, healthcare services totaled about $1.7 billion, yet
VA facilities only purchased about $66 million through VA FSS
contracts. Instead, most medical healthcare services are purchased
through contracts that individual VA medical centers have negotiated, a
process that may not provide the most favorable prices.
VA could also realize additional savings through improved medical
center purchasing practices. Despite increases in medical centers‘ FSS
purchases”which more than doubled between fiscal years 1999 and
2003”medical centers have not always taken advantage of the best prices
available through VA‘s contracts. For example, in fiscal year 2001, a
VA Inspector General (IG) report stated that VA medical centers
frequently purchased healthcare products from local sources, instead of
from available FSS contracts. Although VA has since implemented
policies and procedures that generally require its medical centers to
purchase medical products and services through VA‘s contract programs,
a more recent VA IG report found that medical centers continued to make
purchases from local suppliers. The VA IG estimated that, with improved
procurement practices at medical centers, VA could save about $1.4
billion over 5 years. However, ensuring VA medical centers comply with
VA‘s purchasing policies and procedures will be a challenge for VA, in
part, because its monitoring of purchases lacks adequate rigor.
The user fee that VA collects on FSS purchases”0.5 percent of sales”is
expected to approximate the program costs. VA, however, does not have
complete information on the costs to administer the FSS program.
Without this cost data, VA is unable to know whether it is charging an
appropriate user fee.
What GAO Recommends:
GAO recommends that VA use its buying power to obtain more favorable
prices for healthcare services, and strengthen oversight to ensure its
medical centers obtain the best available prices. GAO also recommends
that VA identify the complete cost of the FSS program and reassess its
user fee to see if it needs to be adjusted. VA concurred with GAO‘s
recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-04-718.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David Cooper at (202)
512-4841 or cooperd@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Many VA Contracts Offer Favorable Prices and Savings, but VA Could
Further Leverage Its Buying Power When Acquiring Healthcare Services:
Opportunities Exist to Obtain Additional Savings at the
Medical Centers:
VA Does Not Have Complete Information on the FSS Program Costs:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Scope and Methodology:
Appendix I: Description of Products and Services Included in FSS
Schedules:
Appendix II: Comments From the Department of Veterans Affairs:
Tables:
Table 1: Results of VA FSS Audits for Fiscal Years 1999 through 2003:
Table 2: Fiscal Year 2003 Healthcare Services Purchased from Vendors
and Other Providers:
Table 3: Summary of FSS Purchases by VA Medical Centers in Fiscal Years
1999 through 2003:
Table 4: FSS Schedule Name and Description of Items:
Figure:
Figure 1: FSS and National Contract Sales, Fiscal Years 1999 through
2003:
Abbreviations:
BPA: Blanket purchase agreement:
FSS: Federal Supply Schedule:
IG: Inspector General:
VA: Department of Veterans Affairs:
United States General Accounting Office:
Washington, DC 20548:
June 22, 2004:
The Honorable Tom Davis:
Chairman:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
In fiscal year 2003, the Department of Veterans Affairs (VA) spent
over $26 billion to provide healthcare to 4.5 million veterans at VA's
medical centers and other VA healthcare facilities across the country.
To provide healthcare services for veterans, VA operates a Federal
Supply Schedule (FSS) program, which provides VA and other federal
agencies access to over 1,200 contracts for buying medical
products[Footnote 1] and services from a wide range of vendors. Vendor
prices are expected to be at least as good as those offered to the
vendors' most favored customers.[Footnote 2] To cover the cost of
operating the FSS program, VA charges its customers a user fee. Once VA
has awarded an FSS contract for a medical product, it looks for
opportunities to award a national contract that can provide even better
prices. In fiscal year 2003, VA sales through the FSS program were
$6.2 billion, and sales from national contracts were $712 million.
As one of the largest buyers of medical equipment, products, and
services, VA has the ability to realize significant savings and achieve
management efficiencies by leveraging its vast purchasing power. At
your request, we reviewed VA's contract programs. Specifically, you
asked us to (1) determine whether VA's FSS and national contracts
provide medical products at favorable prices and achieve savings,
(2) identify opportunities to improve purchasing practices and increase
savings at VA medical centers, and (3) determine if the FSS user fee is
sufficient to cover the program's costs.
To conduct our work, we reviewed VA's policies, procedures, and
internal controls associated with awarding and administering FSS and
national contracts. We also reviewed a May 2002 report by VA's
Procurement Reform Task Force and determined the status of VA's
implementation of task force recommendations to improve procurement
practices across VA. We met with officials from procurement and
financial management activities at VA Headquarters and officials at the
National Acquisition Center, which is responsible for managing both the
FSS program and the national contracts program. We conducted our review
from July 2003 through April 2004 in accordance with generally accepted
government auditing standards. A more detailed discussion of our scope
and methodology is at the end of the letter.
Results in Brief:
VA's FSS and national contracts generally provide favorable prices
and have achieved savings--in part, because VA has built into its
contracts important clauses that allow it to aggressively pursue best
prices for medical products and services. For example, through its FSS
contracts, VA exercises audit rights and access to contractor data,
which have helped VA negotiate better prices and achieve savings
totaling about $240 million from fiscal years 1999 to 2003. Consistent
with a prior GAO recommendation, VA has also emphasized using national
contracts to standardize and further leverage VA's buying power on
widely used healthcare items, such as pharmaceuticals, medical
supplies, and high-tech medical equipment.[Footnote 3] According to VA
officials, VA plans to expand the use of national contracts to
negotiate even better prices. However, VA could achieve additional
savings. For example, to date, VA has rarely used its contracting
programs to leverage its buying power when acquiring healthcare
services. In fiscal year 2003, these services totaled about
$1.7 billion, yet VA only purchased about $66 million through VA FSS
contracts. Instead, most healthcare services are currently contracted
for by individual VA medical centers, a process that may not result in
the centers receiving favorable prices.
VA also has opportunities to improve purchasing practices and increase
savings at its medical centers. Most notably, VA medical centers have
not always taken advantage of the best prices available through FSS and
national contracts. In fiscal year 2001, a VA audit report stated that
VA medical centers frequently purchased healthcare products from local
sources instead of from an FSS contract, in part because FSS contracts
were not used as a primary source of supply. In response to the
Procurement Reform Task Force's May 2002 recommendations, VA
implemented purchasing policies and procedures that require its medical
centers to use VA's contracts, to the extent feasible, to purchase
medical supplies and services. However, a March 2004 VA audit report
found that medical centers have continued to make purchases from local
suppliers, indicating that VA's oversight of medical center purchasing
may not be sufficient to ensure that centers comply with its purchasing
policies and procedures. The audit report estimated that VA could save
about $1.4 billion over 5 years by using FSS and national contracts
with more favorable prices.
To operate the FSS program, VA is supposed to identify all program
costs and charge a fee to its customers to recover these costs.
Currently, VA charges FSS users a fee of 0.5 percent of sales. VA,
however, does not have complete information on the costs to administer
the FSS program. While VA maintains FSS data on some program costs, it
has not identified the amount of the FSS fees associated with each of
the activities that support the program.
To improve VA procurement practices, we are recommending that VA take
steps to (1) explore opportunities to use its buying power to obtain
more favorable prices for healthcare services, (2) strengthen oversight
to ensure medical centers use FSS and national contracts to get the
best prices available, and (3) identify the complete cost of the FSS
program and reassess its user fee to determine if it needs to be
adjusted. In commenting on a draft of this report, VA agreed with GAO's
conclusions and concurred with its recommendations. VA's comments are
included in appendix II.
Background:
VA operates one of the world's largest healthcare systems.[Footnote 4]
In fiscal year 2003, VA spent about $26 billion to provide healthcare
to 4.5 million veterans. More than 1,300 VA healthcare facilities,
which include 160 medical centers, provide a range of medical,
surgical, outpatient, rehabilitative, and long-term care products and
services. Between fiscal years 2001 and 2003, VA experienced over a 15-
percent growth in the number of patients treated.
The General Services Administration established the FSS program in 1949
to facilitate federal agencies' acquisition of products and services
from commercial suppliers through schedule contracts. In 1960, the
General Services Administration delegated authority to VA to manage and
award FSS contracts for all medical products and services needed
throughout the federal healthcare system. VA currently operates eight
schedules that cover a wide range of medical products and services.
(See app. I for a complete list of the schedules.) In addition, VA
currently has two new schedules under consideration. The first,
laboratory tests, will be an expansion of VA's "clinical analyzers"
schedule and will be used for off-site tests such as cytology,
pathology, and endocrinology. The second schedule, "home infusion,"
will be used for intravenous services at nonmedical facility sites,
such as patients' homes. VA projects that these two schedules will be
available by the end of fiscal year 2004.
Currently, VA has over 1,200 FSS contracts in place for the eight
schedules. These FSS contracts are available for use by all government
agencies, including VA, the Department of Defense, Bureau of Prisons,
Indian Health Services, Public Health Services, and some state veterans
homes. All schedules are multiple award contracts with performance
periods up to 5 years, under which many vendors that meet all
competition requirements have contracts to sell products and services
to the federal government. For example, under the pharmaceutical
schedule, all manufacturers of aspirin can have a contract to sell
their products to government agencies.
Since 1993, VA has been competitively awarding national contracts
with vendors for a larger discount based on volume purchasing. As of
April 2004, VA had about 330 national contracts. National contracts are
best suited for products that are widely used and where competition is
practical, such as pharmaceuticals and basic surgical supplies, and
where clinicians are likely to agree to standardized product use across
all VA medical centers. A national contract may also include
requirements of other federal agencies such as the Department of
Defense.
Since 1999, VA's FSS and national contract sales have steadily grown
(see fig. 1).
Figure 1: FSS and National Contract Sales, Fiscal Years 1999 through
2003:
[See PDF for image]
[End of figure]
VA medical centers account for more than half of all VA FSS sales. In
fiscal year 2003, for example, VA medical center purchases represented
$3.9 billion, or over 63 percent, of the $6.2 billion in total sales
from VA's schedule contracts. While purchases from national contracts
were much less than those from the schedules--totaling approximately
$712 million in fiscal year 2003--VA medical centers accounted for
about $591 million, or 83 percent, of the purchases from these
contracts.
VA's National Acquisition Center is responsible for awarding and
administering FSS and national contracts. The National Acquisition
Center negotiates contracts, seeking to leverage VA's overall
government buying power by achieving pricing and terms equal to or
better than those a vendor offers its most favored customers. Vendors
submit offers to the National Acquisition Center, and contracting
officers perform price analyses to arrive at a fair and reasonable
price.[Footnote 5] Once the contracts are in place, it is then up to
the purchasing offices at the VA medical centers to buy products and
services from the schedules.
In fiscal year 2001, the VA Inspector General (IG) issued a report that
expressed significant concerns about the effectiveness of VA's
acquisition system.[Footnote 6] As a result, the Secretary of Veterans
Affairs established, in June 2001, a Procurement Reform Task Force to
review VA's healthcare procurement system. In its May 2002 report, the
task force set five major goals that it believed would lead to
improvements in VA's acquisition system: (1) leverage purchasing power,
(2) standardize commodities in VA, (3) obtain and improve comprehensive
procurement information for better decision making, (4) improve the
effectiveness of the procurement organization, and (5) ensure that it
maintained a talented and sufficient procurement workforce. The task
force made recommendations to help VA achieve these goals.
Many VA Contracts Offer Favorable Prices and Savings, but VA Could
Further Leverage Its Buying Power When Acquiring Healthcare Services:
The FSS and national contracts that VA has awarded have resulted in
more favorable prices and yielded substantial savings. To strengthen
its bargaining position during FSS contract negotiations, VA has relied
on pre-award audits of vendors' contract proposals and post-award
audits of vendors' contract actions. VA has further leveraged its
buying power to achieve discounts and savings through its national
contracts--an area that the VA Procurement Reform Task Force recognized
offered significant potential for additional cost savings and other
procurement efficiencies. However, VA could achieve additional savings
through FSS and national contracts for healthcare services.
Audits Have Helped VA Obtain Most Favored Customer Prices and Savings:
To help ensure VA obtains most favored customer prices on FSS contracts
for medical products and services, VA's Office of Inspector General
entered into a memorandum of understanding with VA's Office of
Acquisition and Materiel Management to conduct pre-award and post-award
audits of FSS contracts. These audits provide VA's contracting officers
with detailed information about vendors' commercial sales and marketing
practices. With this information, VA is able to strengthen the
government's bargaining position during negotiations and achieve
savings through cost avoidance and recoveries.
VA policy requires that pre-award audits be conducted before awarding
pharmaceutical contracts of $25 million or more, and other contracts of
$15 million or more.[Footnote 7] By performing a pre-award audit on a
vendor's proposal, VA can determine whether the pricing information is
current, accurate, and complete. Pre-award audits help VA avoid
unnecessary costs by obtaining the most favored customer price during
negotiations. Post-award audits also help VA protect against
overcharging by vendors. They often result in recovery of money from
vendors who overcharged VA. Most post-award audits are prompted by
vendors' voluntary disclosures that prices charged to the government
were too high.
The financial benefits attributed to these audit efforts have been
significant. During fiscal years 1999 to 2003, VA audits identified
$151 million in cost avoidances from pre-award audits and $90 million
in recoveries from post-award audits (see table 1).
Table 1: Results of VA FSS Audits for Fiscal Years 1999 through 2003:
Dollars in millions.
Fiscal year: 1999;
Cost avoidance: $32.7;
Recoveries: $10.2;
Total: $42.9.
Fiscal year: 2000;
Cost avoidance: $20.2;
Recoveries: $5.9;
Total: 26.1.
Fiscal year: 2001;
Cost avoidance: $17.1;
Recoveries: $24.4;
Total: 41.5.
Fiscal year: 2002;
Cost avoidance: $22.6;
Recoveries: $25.0;
Total: 47.6.
Fiscal year: 2003;
Cost avoidance: $58.2;
Recoveries: $24.3;
Total: 82.5.
Total;
Cost avoidance: $150.8;
Recoveries: $89.8;
Total: $240.6.
Source: VA data.
[End of table]
National Contracts Have Resulted in Additional Savings:
VA has also taken steps when possible to consolidate its requirements
for medical supplies and equipment and pharmaceutical products it
purchases by using national contracts. Through these contracts, VA has
been able to further leverage its buying power and obtain even better
prices than are available on FSS contracts.[Footnote 8] VA uses three
methods to consolidate requirements into national contracts.
First, VA consolidates contracts through "standardization"--that is, it
agrees on particular items that VA facilities purchase and then
contracts with manufacturers of these items for discounts based on a
larger volume.[Footnote 9] By leveraging its large purchasing power, VA
can achieve significant cost savings and other procurement
efficiencies. VA's standardization efforts cover a variety of medical
products, such as medical and surgical supplies and prosthetic
equipment, but most of VA's standardization has involved buying
pharmaceutical products at large discounts. Since VA issued a policy in
June 1999 requiring medical facilities to use standardized products, VA
increased its use of national contracts. According to VA officials,
VA's pharmaceutical standardization program led to savings of
$394 million for 84 categories of drugs in fiscal year 2003.[Footnote
10] VA continues to look for opportunities for more national contracts.
For example, in fiscal year 2003, the National Acquisition Center
awarded 73 contracts for standardized medical products valued at
$34 million and 12 additional national pharmaceuticals contracts valued
at $227 million.
Second, VA consolidates its purchases of high-tech medical equipment to
achieve additional savings. For example, the National Acquisition
Center has negotiated national contracts with major equipment
manufacturers for ordering X-ray, magnetic resonance imaging,
diagnostic ultrasound, and other high-tech medical equipment for VA
medical centers and other federal customers to obtain discount prices.
Besides achieving savings through volume purchasing, consolidating
purchases expedites ordering, reduces costs of administering contracts
and placing orders, and provides needed technical assistance to users
in designing a system and resolving any equipment issues. As a result,
VA officials identified savings of $9 million in fiscal year 2003.
VA's prime vendor distribution contracts---the third contract
consolidation method VA uses--have also helped VA to achieve savings.
These contracts provide customers significant flexibility and choice.
Using these contracts, VA medical centers can place orders through the
prime vendor,[Footnote 11] which arranges for timely deliveries from
manufacturers. VA has two prime vendor distribution contracts--one for
pharmaceuticals and one for medical and surgical products.
* VA's prime vendor distribution contract for pharmaceuticals--which
has been in effect since 1991--accounts for the distribution of nearly
all pharmaceuticals used at VA medical centers. The contract provides
that the prime vendor reimburse VA about 3-percent of pharmaceutical
sales to medical centers.[Footnote 12] Because this contract
represented over $3.4 billion in sales in fiscal year 2003, VA
estimates it saved about $100 million.
* VA's medical and surgical prime vendor distribution contract has been
in effect since 2002. Total VA sales through the medical and surgical
prime vendor contract were $48.7 million in fiscal year 2003. According
to VA officials, this resulted in savings of $2 million. Currently,
only about one third of VA's medical centers opt to purchase products
through the prime vendor. To achieve even greater savings and
efficiencies, VA has made a policy that would require its medical
centers to purchase all medical and surgical products from a prime
vendor. According to VA officials, VA's policy should be in full effect
in fiscal year 2005.
VA Has Potential for Additional Savings When Contracting for
Healthcare Services:
While the National Acquisition Center has actively looked for ways to
reduce the cost of pharmaceuticals and medical supplies and equipment,
it has not taken the same aggressive approach to negotiate more
favorable prices for healthcare services.[Footnote 13] In fiscal year
2003, VA medical centers purchased $1.65 billion in healthcare services
(see table 2). Only $66 million of these services were purchased from
FSS contracts. In most cases, the healthcare services that the medical
centers purchased were for procedures or medical tests that could not
be provided at a VA medical center. For example, one VA medical center
we visited contracted out radiation therapy services to a local
hospital because the center did not have the equipment or staff to
provide such services. In other instances, healthcare services cover
additional fee-based doctor, nursing, and dental services provided
inside and outside the VA medical centers.
Table 2: Fiscal Year 2003 Healthcare Services Purchased from Vendors
and Other Providers:
Description: Medical care contracts and agreements;
Expenditures: $665,502,189;
Percent: 40.25%.
Description: Off-station fee basis-medical and nursing services[A];
Expenditures: $385,884,936;
Percent: 23.34%.
Description: Scarce medical specialist contracts;
Expenditures: $228,178,372;
Percent: 13.80%.
Description: Contract hospital and outpatient treatment;
Expenditures: $187,735,882;
Percent: 11.36%.
Description: Emergency treatment of veteran;
Expenditures: $66,759,769;
Percent: 4.04%.
Description: Other contract hospitalization;
Expenditures: $58,591,270;
Percent: 3.54%.
Description: On-station fee basis-medical and nursing services[B];
Expenditures: $45,677,016;
Percent: 2.76%.
Description: Off-station fee basis-dental services[A];
Expenditures: $12,318,546;
Percent: 0.75%.
Description: Consultants;
Expenditures: $1,855,481;
Percent: 0.11%.
Description: On-station fee basis-dental services[B];
Expenditures: $637,007;
Percent: 0.04%.
Description: Counseling;
Expenditures: $187,727;
Percent: 0.01%.
Total;
Expenditures: $1,653,328,195;
Percent: 100.00%.
Source: VA data.
[A] Service provided at a non-VA medical facility.
[B] Service provided at a VA medical facility.
[End of table]
Nearly all of VA's existing healthcare services contracts are awarded
and administered by VA's medical centers. Typically, these contracts
are with local healthcare providers. As a result, there is generally no
coordination with the National Acquisition Center as to the type of
contract arrangements being negotiated, and no assurance that contracts
represent the best available prices. VA officials acknowledged that the
area of healthcare services has not been reviewed to determine the
potential for requirement consolidation and leveraging its buying
power. These officials, however, also explained that VA needs a
database that captures the specific types of healthcare services used
by its medical centers to determine which healthcare services could be
consolidated to achieve additional savings. We believe the National
Acquisition Center is in the best position to negotiate contracts that
would help ensure more favorable prices for healthcare services--as it
does for pharmaceuticals, medical supplies, and equipment--and could
take steps to do this.
Opportunities Exist to Obtain Additional Savings at the Medical
Centers:
Over the past several years, VA medical center purchases from contracts
with more favorable prices have increased significantly, and VA has
achieved substantial savings. However, these savings could have been
even greater, as medical centers have not used these contracts as much
as they could have. Although VA has taken several actions to address
this weakness--including implementing new policies that establish
purchasing requirements and developing systems to capture data needed
to make informed acquisition decisions--it has yet to provide
sufficient oversight to ensure its new policies are adhered to.
Between fiscal years 1999 and 2003, total medical-center FSS purchases
more than doubled (see table 3). The most frequently used schedule was
pharmaceuticals.
Table 3: Summary of FSS Purchases by VA Medical Centers in Fiscal Years
1999 through 2003:
Dollars in millions.
Pharmaceuticals;
Fiscal year: 1999: $1,239;
Fiscal year: 2000: $1,571;
Fiscal year: 2001: $1,957;
Fiscal year: 2002: $2,477;
Fiscal year: 2003: $3,237.
Medical equipment and supplies;
Fiscal year: 1999: $231;
Fiscal year: 2000: $278;
Fiscal year: 2001: $297;
Fiscal year: 2002: $302;
Fiscal year: 2003: $365.
In-vitro diagnosis and test kits;
Fiscal year: 1999: $54;
Fiscal year: 2000: $47;
Fiscal year: 2001: $59;
Fiscal year: 2002: $50;
Fiscal year: 2003: $46.
Lab tests: blood/blood products;
Fiscal year: 1999: $52;
Fiscal year: 2000: $69;
Fiscal year: 2001: $63;
Fiscal year: 2002: $75;
Fiscal year: 2003: $86.
Patient mobility devices;
Fiscal year: 1999: $29;
Fiscal year: 2000: $28;
Fiscal year: 2001: $38;
Fiscal year: 2002: $46;
Fiscal year: 2003: $50.
X-ray equipment and supplies;
Fiscal year: 1999: $20;
Fiscal year: 2000: $18;
Fiscal year: 2001: $18;
Fiscal year: 2002: $16;
Fiscal year: 2003: $16.
Dental supplies;
Fiscal year: 1999: $7;
Fiscal year: 2000: $7;
Fiscal year: 2001: $7;
Fiscal year: 2002: $8;
Fiscal year: 2003: $13.
Healthcare services;
Fiscal year: 1999: N/A;
Fiscal year: 2000: N/A;
Fiscal year: 2001: N/A;
Fiscal year: 2002: $15;
Fiscal year: 2003: $66.
Total;
Fiscal year: 1999: $1,632;
Fiscal year: 2000: $ 2,018;
Fiscal year: 2001: $2,439;
Fiscal year: 2002: $2,989;
Fiscal year: 2003: $3,879.
Source: VA Data.
[End of table]
Although medical centers' FSS purchases showed an increase between
fiscal year 1999 and 2001, the VA IG reported in May 2001 that medical
centers were often not using the VA contracts to purchase medical
products because medical centers were not required to buy from FSS and
national contracts. In response, the Procurement Reform Task Force
recommended that VA establish a contract hierarchy to guide its
purchasing practices. In November 2002, VA implemented a new
policy[Footnote 14] requiring VA medical centers to purchase medical
products first from a national contract, second from a blanket purchase
agreement (BPA),[Footnote 15] and third from an FSS contract. Only when
items are not available from these sources should VA medical centers
enter into local agreements or purchase items directly from local
vendors--the least desirable option.
Despite these efforts, the VA IG again reported in March 2004 that
medical center purchases were not made from the best sources.[Footnote
16] For example, the VA IG analyzed a sample of purchases made in
fiscal year 2002 valued at $23.4 million. Although all of the products
were available through VA contracts, the medical centers purchased only
$14.2 million, or about 60 percent, of the products off the national
contracts. The remaining $9.2 million, or about 40 percent, was spent
on generally higher priced locally purchased products. The VA IG
estimated that over five years (the typical life of national contracts)
VA could save about $1.4 billion if medical centers purchased medical
products from FSS and national contracts.
There are two primary reasons why VA medical centers have not purchased
medical products from the best sources. First, as pointed out by the VA
task force, VA does not have a readily accessible database that medical
center personnel could use to determine the availability of medical
products. VA is developing a web-based searchable database to provide
catalog information from vendors holding FSS and national contracts.
The new system, which was partially implemented in July 2003, is being
designed to allow medical center personnel to search for medical
surgical products available under FSS contracts and some national
contracts. According to VA officials, the new system is expected to
provide access to national contracts by October 2004. Second, according
to the VA IG, VA has yet to provide adequate oversight to ensure that
its recently implemented policy to use the contract hierarchy is being
followed. For example, although two purchasing activities within VA had
established procedures to monitor compliance with the new policy, the
procedures only covered compliance with the use of national contracts
and BPAs and did not cover FSS contracts. Consequently, VA cannot fully
determine whether medical centers comply with the new contract
hierarchy.
VA Does Not Have Complete Information on the FSS Program Costs:
To operate the FSS program, VA is supposed to identify all program
costs and charge a fee to its customers based on these costs.
Currently, VA charges FSS users a fee of 0.5 percent of sales to cover
the cost of operating the schedules program.[Footnote 17] VA maintains
data on some FSS program costs, such as employee salaries and benefits.
However, VA has not identified the costs associated with other
activities, such as audit and legal services. Without knowing the full
cost of administering the program, VA has no assurance that the user
fee accurately covers program costs.
Conclusions:
VA's aggressive efforts to ensure most favorable pricing in awarding
FSS and national contacts for medical products and services have saved
taxpayers hundreds of millions of dollars. Despite this accomplishment,
VA could achieve significantly more savings--through leveraging its
purchasing power to negotiate FSS and national contracts for healthcare
services used at VA's 160 medical centers and through improved
oversight of medical center purchases. Without such actions, VA risks
losing opportunities to realize additional savings. At the same time,
the costs of operating VA's contracting programs need to be better
understood to ensure that the user fees VA collects from its customers
are not excessive.
Recommendations for Executive Action:
We are making three recommendations aimed at helping VA achieve maximum
savings through its contract programs. Specifically, we recommend that
the Secretary of the Department of Veterans Affairs:
* explore opportunities to use its buying power to obtain more
favorable prices for healthcare services,
* strengthen oversight to ensure medical centers use FSS and national
contracts to get the best prices available, and:
* identify the complete cost of the FSS program and reassess its user
fee to determine if it needs to be adjusted.
Agency Comments:
In commenting on a draft of this report, the Secretary of Veterans
Affairs agreed with GAO's conclusions and concurred with its
recommendations. VA's written comments are included in appendix II.
Scope and Methodology:
To identify the steps taken by the VA to ensure that schedule contracts
provide medical products at favorable prices, we reviewed VA's
policies, procedures, and internal controls associated with awarding
and administering FSS contracts, as well as for national contracts that
are structured to achieve even better prices for VA's customers. We
discussed implementation of VA policies, procedures and internal
controls with agency officials at VA's National Acquisition Center in
Hines, Illinois; VA Headquarters in Washington, D.C; and the VA's
Office of Inspector General in Washington, D.C. We also visited six VA
medical centers to help determine how VA procurement practices were
being implemented. We collected data on FSS and national contracts
purchases from the National Acquisition Center and the Financial
Services Center, Austin, Texas. Further, we reviewed and analyzed VA's
cost avoidance estimates related to the purchase of pharmaceuticals
from national contracts.
To identify opportunities to improve purchasing practices and increase
savings, we met with VA medical center procurement officials. We
reviewed the VA's Procurement Reform Task Force (May 2002) report that
recommended ways to better leverage VA's purchasing power and
determined the status of VA's implementation of task force
recommendations to improve procurement practices across VA.
Additionally, we reviewed VA IG reports and analyzed VA data on medical
center procurement practices.
To determine how much the VA spends annually administering the
schedules program and the extent user fees cover program costs, we
interviewed and obtained information from officials in the program and
financial officers at VA headquarters and its National Acquisition
Center. We asked VA officials to identify the costs incurred to operate
the schedules program. Further, we reviewed the legislative authority
that allows VA to use excess fees to cover other program costs. We
discussed this information with the VA program officials and VA General
Counsel staff located in Washington, D.C.
As agreed, unless you publicly announce its contents earlier, we plan
no further distribution of this report until 30 days from its issue
date. At that time, we will send copies of this report to the Honorable
Anthony J. Principi, Secretary of Veterans Affairs; appropriate
congressional committees; and other interested parties. We will also
provide copies to others on request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff has questions concerning this report, please
contact me at (202) 512-4841 or by e-mail at cooperd@gao.gov, or James
Fuquay at (937) 258-7963. Key contributors to this report were William
Bricking, Myra Watts Butler, Jean Lee, Fred Naas, Sylvia Schatz, and
Karen Sloan.
Signed by:
David E. Cooper:
Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Description of Products and Services Included in FSS
Schedules:
Table 4: FSS Schedule Name and Description of Items:
Name: Medical/surgical equipment and supplies;
Description:
Repair service for home dialysis equipment;
Home oxygen--contractual agreements;
Other medical supply;
Home oxygen--supplies;
Oxygen equipment & supplies;
Prosthetic supplies;
Home dialysis equipment & supply;
Medical supplies;
Medical, dental, and scientific equipment;
Medical, dental and scientific equipment--non-capitalized.
Name: Dental equipment and supplies;
Description:
Other medical and dental supply;
Medical, dental, and scientific equipment;
Medical, dental and scientific equipment--non-capitalized.
Name: Patient mobility devices;
Description:
Equipment rentals;
Prosthetic repair services and supplies.
Name: X-ray equipment and supplies;
Description:
Medical supplies;
Medical, dental, and scientific equipment;
Medical, dental and scientific equipment--non-capitalized.
Name: In-vitro diagnostics, reagents and test kits;
Description:
Blood and blood products.
Name: Healthcare services;
Description:
Medical care contracts and agreements;
Off-station fee basis medical & nursing services[A];
On- station fee basis medical & nursing services[B];
Emergency treatment of veteran;
Off-station fee basis dental services[A];
On-station fee basis dental services[B];
Other contract hospitalization;
Consultants and counseling;
Scarce medical specialist contracts;
Contract hospital and outpatient treatment.
Name: Pharmaceuticals;
Description:
Drugs, medicines and chemical supplies;
Prescriptions;
Medicines, drugs, and chemicals.
Name: Laboratory tests, clinical analyzers;
Description:
Blood and blood products.
Source: VA Data.
[A] Service provided at a non-VA medical facility.
[End of section]
[B] Service provided at a VA medical facility.
[End of table]
[End of section]
Appendix II: Comments From the Department of Veterans Affairs:
CONTRACT MANAGEMENT: Further Efforts Needed to Sustain VA's Progress in
Purchasing Medical Products and Services (GAO-04-718) and agrees with
your conclusions and concurs with your recommendations.
VA is rightfully proud that its rigorous procurement practices have
resulted in significant cost savings-dollars that transfer to the care
of our Nation's veterans. As your draft report illustrates, VA's use of
pre-and post-award audits have underpinned VA's success in achieving
these savings.
The enclosure discusses VA's concurrences with the General Accounting
Office's recommendations. Thank you for the opportunity to comment on
your draft report.
Sincerely yours,
Signed by:
Anthony J. Principi:
Enclosure:
Department of Veterans Affairs (VA) Comments to:
General Accounting Office (GAO) Draft Report, CONTRACT MANAGEMENT.
Further Efforts Needed to Sustain VA's Progress in Purchasing Medical
Products and Services (GAO-04-718):
GAO recommends that the Secretary of the Department of Veterans
Affairs:
* Explore opportunities to use its buying power to obtain more favorable
prices for healthcare services,
Concur - VA agrees that some healthcare services, for example
radiology, could be pursued on a larger scale. The Veterans Health
Administration (VHA) will explore opportunities to leverage its buying
power to realize more favorable prices for health care services.
* Strengthen oversight to ensure medical centers use of FSS and national
contracts to get the best prices available, and:
Concur - In the past year, VHA has taken significant steps to ensure
medical centers use the Federal Supply Schedule (FSS) and national
contracts when appropriate. VHA's Office of Clinical Logistics (CLO)
leads the effort in establishing effective cost-savings procurement
processes in all areas of medical purchasing. The CLO will continue to
work closely with VA's Office of Acquisition and Materiel Management
and the National Acquisition Center (NAC) to achieve the goal of
obtaining best pricing and value in purchases. Improved oversight and
accurate data will both be required to achieve best pricing and value
in purchases.
* Identify the complete cost of the FSS program and reassess its user
fee to determine if it needs to be adjusted.
Concur - The Office of Acquisition and Materiel Management's Fiscal
Service will work with the NAC to develop a mechanism that will
identify the actual costs (direct and indirect) associated with the FSS
Program. Once this mechanism is approved and implemented, the Office of
Management will monitor it. Currently, VA charges the lowest fee in the
Federal government. Annual assessments will be done, and
recommendations for any changes in the fee will be made to VA's Supply
Fund Board for approval.
[End of section]
FOOTNOTES
[1] Medical products include medical and surgical supplies as well as
equipment and pharmaceuticals.
[2] Most favored customer pricing refers to the vendor's best price
based on the evaluation of discounts, terms, conditions, and
concessions that are offered to commercial customers for similar
purchases. The pursuit of most favored customer pricing is consistent
with the objective of negotiating a fair and reasonable price.
[3] U.S. General Accounting Office, DOD and VA Pharmacy: Progress and
Remaining Challenges in Jointly Buying and Mailing Out Drugs,
GAO-01-588 (Washington, D.C.: May 25, 2001).
[4] U.S. General Accounting Office, VA and Defense Health Care:
Potential Exists for Savings through Joint Purchasing of Medical and
Surgical Supplies, GAO-02-872T (Washington, D.C.: June 26, 2002).
[5] During negotiations, vendors are required to disclose the prices
and concessions they offer their most favored customers. The FSS
multiple award schedules include a Price Reduction Clause that helps to
ensure that prices remain comparable to the prices granted to the
vendors' most favored customers throughout the life of the contract.
[6] Department of Veterans Affairs, Office of Inspector General,
Evaluation of VA's Purchasing Practices, Report Number 01-01855-75
(Washington, D.C.: May 15, 2001).
[7] Pre-award audits are generally done at the request of the
contracting officer.
[8] Most of the solicitations for these contracts are competitive, best
value procurements. National contracts' performance periods are
normally for one year with up to four option years.
[9] In standardizing products, VA analyzes its procurement history and
identifies like items, such as gauze bandages, for which it could
potentially standardize and negotiate national contracts directly with
vendors for a larger discount based on volume purchasing. After like
items are identified, a team of clinicians--including doctors,
technicians, and nurses--assesses the products for quality and agrees
on a specific item or items that are acceptable for use by all VA
hospitals. Acquisition officials then negotiate national contracts with
the vendors of the chosen products to obtain lower prices.
[10] To determine cost avoidance, VA compared the actual purchase cost
of the drug types and the theoretical cost had the contracts not been
awarded. For example, VA determined that a contract for Amiodarone
(heart medication) awarded in June 2000 resulted in fiscal year 2003
cost avoidance of $4.7 million, or 58 percent of the actual cost,
because the cost of the drug in fiscal year 2003 was $3.4 million, and
the theoretical cost was $8.2 million. VA estimated the theoretical
cost by multiplying the weighted average price per unit that existed
during the 3-month period before the contract took effect, by the
quantity purchased in the current fiscal year. However, VA officials
noted that its estimates of cost avoidance do not consider factors such
as inflation and price changes that occurred since some of the older
contracts were awarded. VA is currently working with DOD to develop a
more accurate methodology for estimating pharmaceutical cost avoidance.
[11] Prime vendors are contractors that buy inventory from a variety of
suppliers, store it in commercial warehouses, and ship it to customers
when ordered.
[12] Under this program, VA pays the prime vendor once the
pharmaceuticals have been shipped to VA medical centers. The prime
vendor then generally has up to 15 days to pay manufacturers, giving
substantial "use of money" benefits to the prime vendor. As a result,
there is a "negative fee." The current contract, which took effect on
April 1, 2004, is valued at $2.9 billion per year and includes a
reimbursement rate of about 5 percent.
[13] Healthcare services were not included on the FSS until 2001.
[14] The Deputy Assistant Secretary for Acquisition and Materiel
Management approved a class deviation from VA Acquisition Regulation
that changed the contracting hierarchy. Class deviation from VAAR
808.001, Priorities for Use of Government Supply Sources, Nov. 20, 2002
[15] These BPAs are simplified methods of filling anticipated
repetitive needs for supplies or services currently available on an FSS
contract. This method allows the government the opportunity to
negotiate better unit pricing based on anticipated sales volume or
market share and to provide more timely procurement of products and
services needed on a recurring basis. For example, the National
Acquisition Center has negotiated a national BPA for several types of
anti-embolism stockings.
[16] Department of Veterans Affairs, Office of Inspector General, Audit
of VA Medical Center Procurement of Medical, Prosthetic and
Miscellaneous Operating Supplies, Report Number 02-01481-118
(Washington, D.C.: Mar. 31, 2004).
[17] Department of Veterans Affairs has collected this fee since 1996.
It collected $66.1 million in user fees between fiscal years 2001 and
2003.
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