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VA and DOD need to control drug costs and increase joint contracting whenever it is cost-effective

Why Area Is Important

The Department of Veterans Affairs (VA) and the Department of Defense (DOD) spent about $11.4 billion on prescription drugs for beneficiaries in fiscal year 2009. Reflecting national trends, VA and DOD drug expenditures have risen significantly. Since the early 1980s, Congress has urged the departments to achieve greater efficiencies through increased collaboration. Therefore, VA and DOD have attempted to restrain pharmacy costs by jointly contracting for some drugs to obtain discounts from drug manufacturers. In 2001, GAO recommended that VA and DOD jointly procure all brand name and generic drugs for which such procurement was clinically appropriate and cost-effective and report to Congress annually on their joint drug procurement efforts. VA and DOD agreed with GAO's recommendations. Also, GAO testified that addressing differences in their health care systems could increase joint contracting for brand name drugs, which make up a smaller share of the departments' drug volume than generic drugs but account for a far higher share of expenditures.

What GAO Found

As GAO previously recommended, from fiscal year 2002 through 2005, VA and DOD increased joint procurement of brand name and generic drugs. However, GAO found that by fiscal year 2009, joint national contracts[1]for prescription drugs accounted for only a small proportion of VA and DOD spending on prescription drugs. Specifically, in fiscal year 2009, VA spent about $3.7 billion and DOD spent about $7.7 billion on prescription drugs, while spending under joint national contracts represented about 5 percent and less than 1 percent of those totals, respectively. As the following bar chart shows, although VA and DOD spending on joint national contracts increased from $183 million on 76 contracts in fiscal year 2002 to $560 million on 84 contracts in fiscal year 2005, it decreased by fiscal year 2009 to $214 million on 67 contracts.[2]


VA and DOD Joint National Contracts and Spending

VA and DOD Joint National Contracts and Spending

With regard to brand name drugs—which account for more than 80 percent of VA's and DOD's total drug spending—VA and DOD had no joint national contracts for brand name drugs in 2002, had three in 2003, four in 2004 and 2005, three in 2006, two in 2007, and none in 2008 or 2009. VA and DOD have attributed significant cost avoidance[3]to their joint contracting efforts; for example, VA estimated about $666 million in cost avoidance in fiscal year 2005 alone. These cost avoidance estimates have declined significantly as joint contract spending has decreased.

VA and DOD officials attributed the decline in joint contracting since 2005 primarily to the elimination of joint contracting for brand name drugs due to a change to DOD's drug procurement process which occurred as a result of its implementation of its uniform formulary.[4],[5]Prior to DOD's implementation of its uniform formulary process, a VA contracting officer offered formulary placement to a drug manufacturer in connection with the award of a brand name drug joint contract, taking into account clinical reviews conducted by the relevant VA and DOD committees.[6]By statute, responsibility for DOD's uniform formulary is vested under the Secretary of Defense, and by DOD regulation the Director of DOD's TRICARE Management Activity is responsible for formulary placement decisions.[7]VA and DOD officials told us that DOD's uniform formulary process therefore precludes DOD from participating in a VA-led joint contract that offers formulary placement as part of the contracting process. According to VA and DOD, they can still jointly contract for generic drugs because these contracts do not usually require formulary addition.[8]In 2001, GAO reported that a DOD uniform formulary could increase joint contracting opportunities because the larger the departments' formularies, the greater the chance they would overlap and provide opportunities to jointly procure brand name drugs.However, DOD's formulary process appears to have limited rather than increased joint contracting opportunities. VA data confirm that the decline in spending under joint national contracts since 2005 can be largely attributed to the elimination of joint contracting for costly brand name drugs. VA data show that spending under joint national contracts for generic drugs has remained relatively constant between fiscal years 2005 and 2009, fluctuating between $175 million and $196 million, while VA spending under joint national contracts for brand name drugs declined over this period, from $232 million in 2005 to $0 in 2008 and 2009.

In addition, officials told us that joint contracting is not available for a large segment of drug spending. Specifically, DOD does not contract, jointly or on its own, for drugs dispensed through retail pharmacies. In fiscal year 2009, DOD officials reported $5.8 billion in retail pharmacy drug spending, none of which currently presents a joint contracting opportunity.

Despite the limits to joint contracting, VA and DOD officials said they are independently achieving cost savings in other ways. VA officials told us that VA obtains equally good prices working independently as it does when it jointly contracts with DOD, and consequently VA officials believe VA is not missing any savings opportunities by not jointly contracting with DOD for brand name drugs. VA officials told us they do not think additional joint contracting could lead to increased cost savings for VA. Additionally, DOD officials said that while joint contracting has declined, their uniform formulary process has been more effective at producing savings, citing $926 million in cost avoidance in fiscal year 2007.[9]



[1]Joint national contracts are one of the strategies used by VA and DOD to obtain discounts on drugs from manufacturers beyond those that might otherwise be available to federal purchasers.

[2]The Veterans Benefits and Health Care Improvement Act of 2000 included a provision encouraging VA and DOD to increase their level of cooperation in the procurement and management of prescription drugs. Pub. L. No. 106-419, § 223, 114 Stat. 1822, 1845 (2000).

[3]VA and DOD generally calculate the cost avoidance attributable to joint contracting efforts by determining the difference between actual costs under the joint contract pricing and estimated costs they would have incurred had the joint contract pricing not been in place.

[4]Formularies are lists of medications that health care organizations encourage or require providers to prescribe for patients. By concentrating their purchases on particular drugs, organizations can negotiate with manufacturers to secure better prices. Likewise, manufacturers have a strong interest in having their drugs listed on formularies in order to capture greater market shares for their drugs. VA and DOD each has had centralized formularies since 1997, but DOD implemented its current uniform formulary in fiscal year 2005.

[5]DOD was required by the National Defense Authorization Act for Fiscal Year 2000 to establish a uniform formulary. Pub. L. No. 106-65, §701, 113 Stat. 512, 677-80 (1999). Neither the act nor the accompanying reports addressed joint contracting with VA, and it is not clear whether ornot Congress considered the matter when passing the uniform formulary requirement.

[6]For VA these committees are the VA Pharmacy Benefits Management Strategic Healthcare Group, Medical Advisory Panel, and Veterans Integrated Service Network Formulary Leaders Committee. For DOD, this committee is the Pharmacy & Therapeutics Committee.

[7]TRICARE is DOD's regionally structured health care program for active duty personnel and their dependents, eligible National Guard and Reserve servicemembers and their dependents, and retirees and their dependents and survivors.

[8]Typically, a generic drug being considered for a joint national contract would already be included on VA's and DOD's formularies. For generic drug joint contracts, one manufacturer is selected from a group of manufacturers who make the same generic drug. In contrast, a joint contract for a brand name drug would typically involve selection of one brand name drug from a group of drugs that were determined to be therapeutic alternatives, with the selected drug being placed on the formularies.

[9]For more information about uniform formulary cost savings, see GAO, DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting from the Uniform Formulary and Manufacturer Rebates, GAO-08-172R (Washington, D.C.: Oct. 31, 2007).

Actions Needed

While VA and DOD officials assert they are independently achieving significant drug cost savings, the departments' spending on brand-name drugs has been increasing, totaling almost $10 billion dollars in fiscal year 2009, or about 85 percent of the approximately $11.4 billion in total drug spending that year. Since it is unclear whether substantial cost savings could be realized if the departments resumed joint contracting for brand name drugs, VA and DOD should analyze whether greater cost savings could be achieved through joint contracting for brand name drugs than are currently achieved through their independent strategies, and determine whether it would be cost-effective to take steps to resume joint contracting for brand name drugs. Regardless of whether joint contracting for brand name drugs is practicable, the departments face continued challenges in controlling increasing drug costs, and should make finding drug savings a priority. For example, GAO previously recommended that DOD identify, implement, and monitor efforts to control retail pharmacy spending, an area for which drug spending is increasing and cannot be controlled through joint contracting efforts.[1]DOD agreed with this recommendation. The departments should also continue their efforts to jointly contract for generic drugs, and look for opportunities to increase joint contracting efforts as generic versions of existing brand name drugs become available. Officials noted, for example, that generic versions of drugs for reducing cholesterol and controlling asthma may become available within a few years.

VA and DOD provided comments on GAO's draft analysis of this issue. VA stated that it would explore whether cost savings might be possible if it resumed joint contracting for brand name drugs, and agreed that the departments should continue and potentially increase joint contracting for generic drugs. DOD concurred with the draft and offered additional contextual information. For example, DOD noted that while its retail pharmacy network remains the largest and most costly component of its pharmacy benefit, the agency has received a total of over $960 million in federal pricing discounts[2]on purchases made through retail pharmacies in fiscal years 2009 and 2010.[3]



[1]See GAO, DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth in Spending at Retail Pharmacies, GAO-08-327 (Washington, D.C.: Apr. 4, 2008).

[2]The National Defense Authorization Act for Fiscal Year 2008 required that federal pricing arrangements be applied to drugs dispensed at retail pharmacies as of January 28, 2008.See Pub. L. No. 110-181, § 703, 122 Stat. 3, 188 (codified at 10 U.S.C. § 1074g(f)).

[3]DOD reported federal pricing discounts received through July 31, 2010.

Framework for Analysis

The information contained in this analysis is based in part on the related GAO products listed under the "Related GAO Products" tab. In addition, to determine the factors that contributed to the decline in joint contracting since 2005, GAO interviewed VA and DOD pharmacy and procurement officials and obtained and reviewed relevant documents, including articles and reports to Congress related to VA's and DOD's pharmacy management systems. GAO also reviewed VA and DOD drug spending and joint contracting data from 2002 through 2009 and determined that the data were sufficiently reliable for use in this report.

Area Contact

For additional information about this area, contact Randall B. Williamson at (202) 512-7114 or williamsonr@gao.gov.

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