a

GAO

United States General Accounting Office

Report to the Committee on Government 

Reform, House of Representatives

June 2004 CONTRACT 

MANAGEMENT

Further Efforts 

Needed to Sustain 

VA’s Progress in 

Purchasing Medical 

Products and Services

GAO-04-718
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. 

Highlights of GAO-04-718, a report to the 

Committee on Government Reform, 

House of Representatives 

June 2004

CONTRACT MANAGEMENT 

Further Efforts Needed to Sustain VA’s 

Progress in Purchasing Medical Products 

and Services 

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. 

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. 

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. 
Page i GAO-04-718 Contract Management 

Letter 1

Results in Brief 2

Background 4

Many VA Contracts Offer Favorable Prices and Savings, but VA 

Could Further Leverage Its Buying Power When Acquiring 

Healthcare Services 6

Opportunities Exist to Obtain Additional Savings at the 

Medical Centers 12

VA Does Not Have Complete Information on the FSS Program 

Costs 14

Conclusions 14

Recommendations for Executive Action 14

Agency Comments 15

Scope and Methodology 15

Appendix I Description of Products and Services Included in 

FSS Schedules 17 

Appendix II Comments From the Department of Veterans Affairs 18 

Tables 

Table 1: Results of VA FSS Audits for Fiscal Years 1999 through 

2003 7

Table 2: Fiscal Year 2003 Healthcare Services Purchased from 

Vendors and Other Providers 11

Table 3: Summary of FSS Purchases by VA Medical Centers in 

Fiscal Years 1999 through 2003 12

Table 4: FSS Schedule Name and Description of Items 17

Figure 

Figure 1: FSS and National Contract Sales, Fiscal Years 1999 

through 2003 5

Contents 
Page ii GAO-04-718 Contract Management 

Abbreviations 

BPA Blanket purchase agreement 

FSS Federal Supply Schedule 

IG Inspector General 

VA Department of Veterans Affairs 

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Page 1 GAO-04-718 Contract Management 

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 products1

 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.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. 

 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. 

United States General Accounting Office 

Washington, DC 20548 
Page 2 GAO-04-718 Contract Management 

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. 

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.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 

 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). 

Results in Brief 
Page 3 GAO-04-718 Contract Management 

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. 
Page 4 GAO-04-718 Contract Management 

VA operates one of the world’s largest healthcare systems.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 

 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). 

Background 
Page 5 GAO-04-718 Contract Management 

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 

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 

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1999 2000 2001 2002 2003

Dollars in millions

National contract sales

FSS sales

Source: VA data.

2,129 2,564

3,781

5,052

6,182

543

585

608

623

712
Page 6 GAO-04-718 Contract Management 

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.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.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. 

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. 

 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). 

Many VA Contracts 

Offer Favorable 

Prices and Savings, 

but VA Could Further 

Leverage Its 

Buying Power 

When Acquiring 

Healthcare Services 
Page 7 GAO-04-718 Contract Management 

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 postaward 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.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 Cost avoidance Recoveries Total

1999 $32.7 $10.2 $42.9

2000 20.2 5.9 26.1

2001 17.1 24.4 41.5

2002 22.6 25.0 47.6

2003 58.2 24.3 82.5

Total $150.8 $89.8 $240.6

Source: VA data. 

 7

 Pre-award audits are generally done at the request of the contracting officer. 

Audits Have Helped 

VA Obtain Most 

Favored Customer 

Prices and Savings 
Page 8 GAO-04-718 Contract Management 

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.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.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 2003.10 VA continues to 

look for opportunities for more national contracts. For example, in fiscal 

year 2003, the National Acquisition Center awarded 73 contracts for 

 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. 

National Contracts 

Have Resulted in 

Additional Savings 
Page 9 GAO-04-718 Contract Management 

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,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.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 

 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. 
Page 10 GAO-04-718 Contract Management 

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. 

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.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. 

 13 Healthcare services were not included on the FSS until 2001. 

VA Has Potential for 

Additional Savings 

When Contracting for 

Healthcare Services 
Page 11 GAO-04-718 Contract Management 

Table 2: Fiscal Year 2003 Healthcare Services Purchased from Vendors and 

Other Providers 

Description Expenditures Percent

Medical care contracts and agreements $665,502,189 40.25

Off-station fee basis-medical and nursing servicesa 385,884,936 23.34

Scarce medical specialist contracts 228,178,372 13.80

Contract hospital and outpatient treatment 187,735,882 11.36

Emergency treatment of veteran 66,759,769 4.04

Other contract hospitalization 58,591,270 3.54

On-station fee basis-medical and nursing servicesb 45,677,016 2.76

Off-station fee basis-dental servicesa 12,318,546 0.75

Consultants 1,855,481 0.11

On-station fee basis-dental servicesb 637,007 0.04

Counseling 187,727 0.01

Total $1,653,328,195 100.00

Source: VA data. 

a

Service provided at a non-VA medical facility. 

b

Service provided at a VA medical facility. 

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. 
Page 12 GAO-04-718 Contract Management 

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 

 Fiscal year 

Description of Federal Supply Schedule 1999 2000 2001 2002 2003

Pharmaceuticals $1,239 $1,571 $1,957 $2,477 $3,237

Medical equipment and supplies 231 278 297 302 365

In-vitro diagnosis and test kits 54 47 59 50 46

Lab tests: blood/blood products 52 69 63 75 86

Patient mobility devices 29 28 38 46 50

X-ray equipment and supplies 20 18 18 16 16

Dental supplies 7 7 7 8 13

Healthcare services N/A N/A N/A 15 66

Total $1,632 $ 2,018 $2,439 $2,989 $3,879

Source: VA Data. 

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 

Opportunities Exist to 

Obtain Additional 

Savings at the 

Medical Centers 
Page 13 GAO-04-718 Contract Management 

purchasing practices. In November 2002, VA implemented a new policy14

requiring VA medical centers to purchase medical products first from a 

national contract, second from a blanket purchase agreement (BPA),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.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 

 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). 
Page 14 GAO-04-718 Contract Management 

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. 

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.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. 

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. 

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 

 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. 

VA Does Not Have 

Complete Information 

on the FSS Program 

Costs 

Conclusions 

Recommendations for 

Executive Action 
Page 15 GAO-04-718 Contract Management 

• 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. 

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. 

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. 

Agency Comments 

Scope and 

Methodology 
Page 16 GAO-04-718 Contract Management 

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. 

David E. Cooper 

Director 

Acquisition and Sourcing Management 
Appendix I: Description of Products and 

Services Included in FSS Schedules 

Page 17 GAO-04-718 Contract Management 

Table 4: FSS Schedule Name and Description of Items 

Name Description 

Medical/surgical equipment and supplies 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 

Dental equipment and supplies Other medical and dental supply 

Medical, dental, and scientific equipment 

Medical, dental and scientific equipment—non-capitalized 

Patient mobility devices Equipment rentals 

Prosthetic repair services and supplies 

X-ray equipment and supplies Medical supplies 

Medical, dental, and scientific equipment 

Medical, dental and scientific equipment—non-capitalized 

In-vitro diagnostics, reagents and test kits Blood and blood products 

Healthcare services Medical care contracts and agreements 

Off-station fee basis medical & nursing servicesa

On-station fee basis medical & nursing servicesb

Emergency treatment of veteran 

Off-station fee basis dental servicesa

On-station fee basis dental servicesb

Other contract hospitalization 

Consultants and counseling 

Scarce medical specialist contracts 

Contract hospital and outpatient treatment 

Pharmaceuticals Drugs, medicines and chemical supplies 

Prescriptions 

Medicines, drugs, and chemicals 

Laboratory tests, clinical analyzers Blood and blood products 

Source: VA Data. 

a

Service provided at a non-VA medical facility. 

b

Service provided at a VA medical facility.

Appendix I: Description of Products and 

Services Included in FSS Schedules 
Appendix II: Comments From the Department 

of Veterans Affairs 

Page 18 GAO-04-718 Contract Management 

Appendix II: Comments From the 

Department of Veterans Affairs 
Appendix II: Comments From the Department 

of Veterans Affairs 

Page 19 GAO-04-718 Contract Management (120256) 
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