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THROUGH THE LOOKING GLASS: RETURN TO PPV

HEARING

BEFORE THE

COMMITTEE ON VETERANS’ AFFAIRS 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

WEDNESDAY, JUNE 6, 2012

Serial No. 112–65

Printed for the use of the Committee on Veterans’ Affairs

(

ii

COMMITTEE ON VETERANS’ AFFAIRS

JEFF MILLER, Florida, Chairman

CLIFF STEARNS, Florida 

DOUG LAMBORN, Colorado 

GUS M. BILIRAKIS, Florida 

DAVID P. ROE, Tennessee 

MARLIN A. STUTZMAN, Indiana 

BILL FLORES, Texas 

BILL JOHNSON, Ohio 

JEFF DENHAM, California 

JON RUNYAN, New Jersey 

DAN BENISHEK, Michigan 

ANN MARIE BUERKLE, New York 

TIM HUELSKAMP, Kansas 

MARK E. AMODEI, Nevada 

ROBERT L. TURNER, New York 

BOB FILNER, California, Ranking

CORRINE BROWN, Florida 

SILVESTRE REYES, Texas 

MICHAEL H. MICHAUD, Maine 

LINDA T. SA ́ NCHEZ, California 

BRUCE L. BRALEY, Iowa 

JERRY McNERNEY, California 

JOE DONNELLY, Indiana 

TIMOTHY J. WALZ, Minnesota 

JOHN BARROW, Georgia 

RUSS CARNAHAN, Missouri

HELEN W. TOLAR, Staff Director and Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Veterans’ Affairs are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii

C O N T E N T S 

June 6, 2012

Page

Through The Looking Glass: Return To PPV ........................................................ 1

OPENING STATEMENTS 

Chairman Jeff Miller ............................................................................................... 1

Prepared Statement of Chairman Miller ........................................................ 54

Hon. Corrine Brown, Acting Ranking Democratic Member ................................. 3

Prepared Statement of C. Brown .................................................................... 55

WITNESSES 

Hon. W. Scott Gould, Deputy Secretary of Veterans Affairs, U.S. Department 

of Veterans Affairs ............................................................................................... 5

Prepared Statement of Mr. Gould ................................................................... 55

Accompanied by:

John R. Gingrich, Chief of Staff, U.S. Department of Veterans Affairs 

Philip Matkovsky, Assistant Deputy Under Secretary for Health for 

Administrative Operations Veterans Health Administration, U.S. 

Department of Veterans Affairs 

Glenn D. Haggstrom, Executive Director, Office of Acquisitions, Logistics, and Construction, U.S. Department of Veterans Affairs 

Jan R. Frye, Deputy Assistant Secretary, Office of Acquisition and 

Logistics, U.S. Department of Veterans Affairs 

Steven A. Thomas, Director, National Contracting Service, National 

Acquisition Center, U.S. Department of Veterans Affairs 

Michael Valentino, Chief Consultant, Pharmacy Benefits Management 

Services, U.S. Department of Veterans Affairs 

Linda Halliday, Assistant Inspector General for Audits and Evaluations, Office of Inspector General, U.S. Department of Veterans Affairs ...................... 38

Prepared Statement of The Office of Inspector General ............................... 60

Accompanied by:

Gary Abe, Director, Seattle Office of Audits and Evaluations, Office 

of Inspector General, U.S. Department of Veterans Affairs 

Maureen Regan, Counselor to the Inspector General, Office of Inspector General, U.S. Department of Veterans Affairs ......................................................... 39

Accompanied by:

Michael Grivnovics, Director, Federal Supply System Division, Office 

of Contract Review, Office of Inspector General, U.S. Department 

of Veterans Affairs 

Paul Flach, Vice President, Health Systems National Accounts, McKesson 

Corporation ........................................................................................................... 46

Prepared Statement of Mr. Flach ................................................................... 65

(1)

THROUGH THE LOOKING GLASS: RETURN TO 

PPV 

Wednesday, June 6, 2012

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON VETERANS’ AFFAIRS, 

Washington, D.C. 

The Committee met, pursuant to notice, at 10:31 a.m., in Room 

334, Cannon House Office Building, Hon. Jeff Miller [Chairman of 

the Committee] presiding. 

Present: Representatives Miller, Lamborn, Roe, Flores, Johnson, 

Denham, Runyan, Brown, Reyes, Michaud, McNerney, Donnelly, 

Walz, and Barrow. 

OPENING STATEMENT OF CHAIRMAN JEFF MILLER 

The CHAIRMAN. Good morning, everybody. This hearing will come 

to order. 

Before I begin, I want to note today’s important place in the history of this Nation. It is the anniversary of the allied invasion of 

Normandy better known as D Day. 

Nearly 160,000 troops bravely fought for and obtained a foothold 

in Europe that would prove pivotal to our victory. Many of these 

troops gave the ultimate sacrifice and to the veterans who took 

part, we say thank you. 

This Committee will always remember the efforts of those who 

were there and we will work to ensure that we fulfill our obligations to them and all veterans. 

I want to welcome everybody to this hearing this morning entitled Through the Looking Glass: Return to PPV. We are returning 

to our examination of VA’s pharmaceutical prime vendor contract 

after the hearing we held back in February. The PPV contract is the largest contract at VA valued around $4 

billion. When executed correctly, the just in time delivery system 

of the PPV contract ensures that pharmaceuticals are delivered to 

VA’s medical facilities in a timely fashion and at a competitive 

price. 

As the February hearing revealed, an important aspect of the 

PPV contract was not executed correctly for a long period of time. 

A subsequent information request to VA spurred by a subpoena 

that was authorized by this Committee confirmed this suspicion. 

When a needed pharmaceutical is either not available due to a 

supply shortage or not available through the PPV, federal acquisition regulations outline a clear path towards acquiring the pharmaceutical through an open market purchase. 

2

The open market process provides protections through due diligence, competition, and a contract. The actions of purchasing officials at VA willfully ignores these protections and were, in fact, illegal. 

In February, the illegal purchases were described as the routine 

way of doing business and according to the testimony we heard, no 

one within VA was held accountable. 

Now that VA has had even more time to consider the actions of 

its employees, it is my hope that the illegal purchases are no longer 

occurring and that the many employees involved in this throughout 

the VA have been held accountable. The problem is neither of those 

outcomes appears to have been achieved. 

While VA may boast about a reduction in unauthorized purchases of pharmaceuticals, this hearing is going to reveal that they 

still occur despite new training and policies throughout the entire 

department. 

The VA also identified employees who made unauthorized commitments and the disciplinary course of action was letters of counseling where appropriate. Not much of a disciplinary action given 

the egregious violations that have been identified. 

As VA will point out, there are ways outlined in federal acquisition regulation to review and ratify unauthorized commitments. 

The guidelines for ratification are clear. And I caution against anybody oversimplifying and misusing the ratification process as a way 

of dismissing the hundreds of thousands of unauthorized commitments made by VA employees. 

I am further disappointed to know that there was strong push 

back from many within the department in implementing the new 

procedures intended to minimize the illegal purchasing of pharmaceuticals. 

The illegal purchasing of pharmaceuticals does not help veterans. 

It is just another example of VA wishing to take the easy route instead of doing what is right and required as outlined in law, regulation, and VA policy. 

Despite VA’s new policies and procedures and occasional counseling letters, I remained very concerned that there will be employees who continue trying to find some type of work-around and that 

supervisors will not hold these employees or themselves accountable for their actions. The precedent of not holding anyone accountable is a bad one to continue to follow. 

The fact is VA knew they were heading down a slippery slope 

with regards to pharmaceutical purchases back in the 1990s, yet it 

appears that minimal effort was made to address this until this 

Committee put its oversight spotlight on it over a decade later. 

Many of those that did try to call attention to the problem were 

dismissed by their peers and even their supervisors for trying to do 

the right thing. 

We already know the problems that exist. What we need to know 

now is not only the detailed action that has been taken to fix them 

but also how it will prevent these same problems from occurring 

again in the future. 

It is my hope going forward that when VA identifies a problem 

just like this one, it is forthcoming with this Committee and Congress. 

3

We look forward to working to fix them together. Receiving VA’s 

testimony less than 24 hours before this hearing, however, does not 

help us in this effort. 

With that, I yield to the gentle lady from Florida, the ranking 

member, Ms. Brown.

[The statement of Chairman Miller appears in the Appendix] 

OPENING STATEMENT OF HON. CORRINE BROWN,

ACTING RANKING DEMOCRATIC MEMBER 

Ms. BROWN. Thank you, Mr. Chairman, and thank you for holding these hearings. 

Before I begin, let me just say one of the most profound experiences that I have ever had in my life was going to Normandy and 

visiting the visitors center which I would recommend anyone if 

they have an opportunity to go to see the contributions that the 

men made to this country, not just to this country, but to the 

world. It was profound. 

And I want to thank Mr. Obey who was Chairman of the appropriations during that time and Mr. Murtha who made it happen. 

And for years when the families would visit Normandy, it was 

not a facility there for them to go and have a moment. And I can 

tell you the visitors center that is run by our Park Service in Normandy is something that the American people would be extremely 

proud of. 

But back to this hearing. Like I said before, thank you for having 

it. 

We just had one February the 1st, but today we are going to examine what steps the Department of Veterans Affairs have taken 

to correct problems identified in the pharmaceutical prime vendor, 

PPV, contract since the Committee February the 1st, 2012 hearing. 

The hearing will also address concerns regarding the PPV contracts that have come to light since the hearing including accountability. 

I believe it is important to hold follow-up hearings to examine if 

VA is making progress, but also to ensure that the recommendations that are implemented are effective, efficient, and being monitored for these purposes. 

The recent IG audit shows that the VA fast pay system consistently provides payment within 48 hours to the PPV from the prime 

vendor shipment of the order. VA was paying the accurate amount 

for accurate goods received. VA was processing payment to the PPV 

in accordance to the law, regulations, and current terms of the PPV 

contract. VA was reimbursing by other government agencies in a 

timely and accurate fashion. All very positive steps. 

However, the audit report determined that the VA did not have 

reliable controls to ensure timely corrections of improper payments. 

This is not a new issue for VA. Lack of management control and 

not following established process procedure is a common theme in 

many former reports as well. 

The VA has proven that when determined to make correction action, they can successfully implement measures to do so. I do not 

understand why the VA has to wait for a hearing or the IG audit 

report for them to take these measures. 

4

Additionally, I would like to hear from VA what action it took 

with about how the National Acquisition Center PPV contracting 

officer who did not execute his responsibility properly for several 

months effectively stopped the process put in place. Was this individual recommended to provide additional training removed from 

his post? 

Finally, I am looking forward to hearing from VA on progress 

made since the last hearing to prevent unauthorized purchases 

through the PPV contract and how the new agreement differs from 

the previous contract because I understand that the same company 

got the contract. 

I want to thank you and I yield back the balance of my time.

[The statement of Ms. Brown appears in the Appendix]

The CHAIRMAN. Thank you very much. 

And the first panel at the table this morning, we are going to 

hear testimony from the Honorable W. Scott Gould, deputy secretary of Veterans Affairs. He is accompanied by Mr. John Gingrich, chief of staff; Philip Matkovsky, assistant deputy under secretary for Health for Administrative Operations; Mr. Glenn 

Haggstrom, executive director of the Office of Acquisitions, Logistics, and Construction; Mr. Jan Frye, deputy assistant secretary for 

the Office of Acquisition and Logistics; Steven Thomas, director of 

the National Contracting Service at the National Acquisition Center; and Michael Valentino, chief consultant of the Pharmacy Benefits Management Services. 

All of the individuals that I have just identified, I would like to 

ask if you would rise because I intend to swear you in. If you would 

raise your right hand. 

[Witnesses sworn.] 

The CHAIRMAN. Thank you. 

Deputy Secretary Gould, your complete written statement as customary in this Committee will be made a part of the official hearing record and you are recognized for five minutes. Thank you. 

5

TESTIMONY OF THE HONORABLE W. SCOTT GOULD, DEPUTY 

SECRETARY OF VETERANS AFFAIRS, U.S. DEPARTMENT OF 

VETERANS AFFAIRS, ACCOMPANIED BY: JOHN R. GINGRICH, 

CHIEF OF STAFF, U.S. DEPARTMENT OF VETERANS AFFAIRS; 

PHILIP MATKOVSKY, ASSISTANT DEPUTY UNDER SECRETARY FOR HEALTH FOR ADMINISTRATIVE OPERATIONS, 

VETERANS HEALTH ADMINISTRATION, U.S. DEPARTMENT OF 

VETERANS AFFAIRS; GLENN D. HAGGSTROM, EXECUTIVE DIRECTOR, OFFICE OF ACQUISITIONS, LOGISTICS, AND CONSTRUCTION, U.S. DEPARTMENT OF VETERANS AFFAIRS; JAN 

R. FRYE, DEPUTY ASSISTANT SECRETARY, OFFICE OF ACQUISITION AND LOGISTICS, U.S. DEPARTMENT OF VETERANS AFFAIRS; STEVEN A. THOMAS, DIRECTOR, NATIONAL 

CONTRACTING SERVICE, NATIONAL ACQUISITION CENTER, 

U.S. DEPARTMENT OF VETERANS AFFAIRS; MICHAEL 

VALENTINO, CHIEF CONSULTANT, PHARMACY BENEFITS 

MANAGEMENT SERVICES, U.S. DEPARTMENT OF VETERANS 

AFFAIRS 

STATEMENT OF W. SCOTT GOULD 

Mr. GOULD. Chairman Miller, thank you for that courtesy. 

And Ranking Member Brown and Members of the Committee, 

thank you for the opportunity to appear before you here today to 

discuss VA’s pharmaceutical prime vendor program and our very 

measurable progress towards improving internal controls since we 

first put corrective actions in place in November. 

Thank you for introducing the fellow panel members. I would 

also like to add seated behind me are Mr. Craig Robinson from the 

National Acquisition Center and Phillipa Anderson from VA’s Office of General Counsel. 

The subject of today’s hearing concerns the management and administration of the pharmaceutical prime vendor contract. But before we dive into the subject of pharmaceutical contracting, I would 

like to say that pharmacy is an essential part of our health care 

operations. 

Pharmacy personnel filled 137 million prescriptions last year 

alone. They won the J.D. Power customer satisfaction best of the 

best rating for the last three years in a row and they have held 

administrative costs per prescription filled basically level for a decade. 

I believe it is fair to say that they have set a pharmacy and clinical benchmark in the industry and that is widely recognized. 

Now, returning to the pharmaceutical prime vendor contract or 

PPV as we know it, the PPV provides warehouse and shipping 

services for pharmaceuticals and related medical products to every 

VA location across the U.S. and around the world. 

The company that provides these services is McKesson. Working 

with VA, McKesson fulfills over a half million line items of activity 

per month. 

Last year, the month of September, VA discovered that about 

70,000 of these transactions were unauthorized commitments. This 

means that the commitments to purchase items, excuse me, from 

the contract were not accomplished in compliance with all applicable law and regulation. 

6

The scope of the problem and the corrective actions taken by VA 

in November of 2011 were reported in testimony before this Committee, as Ms. Brown pointed out, in February of this year. Since 

then, we have taken continued action including the following. 

We changed—made changes to the portal that prohibit unauthorized purchases directly through this venue. 

We have increased management oversight of ordering officer activities by both automated and manual processes. 

We have improved training for ordering officers and other VA 

personnel. 

We have escalated actions to hold noncompliant personnel accountable including extensive counseling, focused retraining for 81 

individuals, entry of counseling letters in personnel files for 15 personnel which we all know affects their opportunity for promotion, 

suspension of 48 hours of ordering responsibilities for two ordering 

officers, and in one case resignation in lieu of termination. 

In addition, VA has reduced the total number of employees authorized to make commitments on the PPV from nearly 2,000 to 

less than 1,000. 

We have also expanded the number of drugs available on the 

contract markedly. 

We have completed competition of a contract under new and 

more restrictive terms that was awarded in April of 2012 and will 

go into effect in August of this year. 

I might point out that we believe that contract will save an addi- tional $150 million a year, and we are in the process of ratifying 

all transactions under the FAR to ensure that the vendor acted in 

good faith and that the goods were provided and fair value received 

by VA. 

Front-line employees continue to respond well to this new direction and oversight. In fact, these actions have already achieved a 

dramatic reduction of unauthorized commitments from 70,000 line 

items per month to less than 450 line items per month. That is 450 

out of a half million transactions. 

The overall trend continues downward and we are working hard 

to change practices that existed at VA for over 17 years. And we 

will achieve our goal of full compliance with the FAR. 

Throughout this process, the discussion that we are about to 

have about the contract and its administration, we have been working to make sure that our overriding operational goal is met which 

is to provide safe, timely deliverables of pharmaceuticals to our veterans where and when they are needed. 

Mr. Chairman, my colleagues and I thank you for your continued 

interest in our progress on the PPV contract and we are prepared 

to answer your questions.

[The statement of W. Scott Gould appears in the Appendix]

The CHAIRMAN. Thank you very much. 

Are you aware that VA has continued to purchase thousands of 

pharmaceuticals even though the practice was said to have stopped 

in November of last year and one of the ways VA has done this is 

by ordering drugs through a third party with whom VA has no relationship? 

And it appears, and, Ms. Brown, you asked me about the little 

drawing that I laid on everybody’s desk, this is one of the workVerDate 0ct 09 2002 09:26 Mar 18, 2013 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 Y:\112CONG\FC\6-6-12\74591.TXT LEN
7

arounds that we have found. The veteran asked VA for a drug. It 

appears that VA orders the drug through a third party who then 

goes to McKesson. And then, of course, the order is drop shipped 

directly to the veteran. VA never verifies that the drug is safe, accurate, or where it comes from. 

So is that a common practice within VA to go to a third party 

to order from McKesson? 

Mr. GOULD. Mr. Chairman, we are a Fortune 10 company with 300,000 employees and $130 billion a year budget. The chart in my 

written testimony shows a dramatic decrease in the number of unauthorized commitments from over 70,000 to less than 450. 

In my view as a senior manager in the private sector and as 

chief operating officer of VA, I believe this is clear unequivocal evidence that we get it, that change is happening, and our employees 

are responding. 

The CHAIRMAN. First of all, you are not a Fortune 10 company. 

You are a government agency. 

Mr. GOULD. With the equivalent size of a Fortune 10 company, 

that is correct, sir. 

The CHAIRMAN. My question is, has or does VA use a third-party 

company to order through to bypass laws, rules, and regulations to 

order from McKesson? 

Mr. GOULD. Mr. Chairman, I would like Michael Valentino to address that issue. 

Mr. VALENTINO. Thank you. 

What you are referring to is a drop shipment provision or sometimes called a pass-through provision which is part of the pharmaceutical prime vendor contract. It is a—it can be a legitimate process for moving heavy, bulky products from the manufacturer to the 

VA site. I can give you an example. 

IV fluids are essentially water. If you try to move them from the 

manufacturer to the prime vendor to the VA, you add a lot of expense. So we have set up in collaboration with the National Acquisition Center a process where we place the order with the prime 

vendor. The prime vendor places the order with the manufacturer. 

That product is then shipped directly to our facilities and the payment goes through the prime vendor. 

The CHAIRMAN. So the order goes to the prime vendor or goes to 

the third party? 

Mr. VALENTINO. In this situation, it is my understanding that 

the order goes to the prime vendor. 

The CHAIRMAN. Why would the third party be necessary and who 

is that third party? 

Mr. VALENTINO. Well, in this situation, the third party is the 

manufacturer. So we order it from the prime vendor. The prime 

vendor sends that notification to the manufacturer who then ships 

it to our location. 

The CHAIRMAN. Okay. First of all, I do not believe that IVs are 

considered pharmaceuticals. They may be, but I do not believe they 

are. 

I am talking specifically about pharmaceutical drugs going to a 

third party and going back door to the prime vendor. Why would 

you need to do that? 

Mr. VALENTINO. Well, there are other situations——

8

The CHAIRMAN. No. Specifically regarding drugs. 

Mr. VALENTINO. Yeah. Yeah. I will address that. 

The FDA for a variety of reasons usually based on safety has 

identified a small number of drugs that can only be ordered 

through specialty distributors or through their own facilities. Those 

drugs cannot come into the possession of the prime vendor. 

So these are drugs typically on VA contract. There is a federal 

supply schedule contract for those. And we have worked that issue 

with the National Acquisition Center where, again, we follow the 

same procedure as with the IVs but for a pharmaceutical product. 

So we will order it from the pharmaceutical prime vendor. They 

will notify the manufacturer or the specialty distributor. They will 

ship that product back to us and they will——

The CHAIRMAN. And it is your testimony that that is exactly the 

way it occurs? 

Mr. VALENTINO. To the best of my knowledge, that is the exact 

way that it occurs for those specialty distribution drugs. 

Now, it is true there could be situations where those procedures 

have not been followed. Perhaps there is a situation where it is a 

non-contract drug that we have arranged to be drop shipped and 

we have not followed appropriate procedures. 

We believe that in March, that may have occurred ten times out 

of 500,000 line items. We are in the process of investigating that 

trying to find out exactly what happened. We do not know at this 

point. 

The CHAIRMAN. Mr. Gingrich, who is Mel Noel; do you know? 

Mr. GINGRICH. No, sir. 

The CHAIRMAN. Does anybody at the table know who Melbourne 

Noel is? 

Mr. VALENTINO. Yes, I do. Mel Noel is a VA attorney with the 

Office of General Counsel. 

The CHAIRMAN. If somebody in the Office of General Counsel 

wrote a memo, would you expect that to be a truthful memo and 

would you trust the validity of the recommendation by somebody 

like Mr. Noel? 

Mr. VALENTINO. Are you asking me, sir, or——

The CHAIRMAN. I am asking anybody that wants to answer, but 

I will direct it to you, sir. 

Ms. BROWN. Mr. Chairman, did he see the memo? 

Mr. GINGRICH. I have not seen the memo. 

The CHAIRMAN. Okay. Ms. Brown, let me go ahead and thank VA 

very much for providing us all of this information. As the Members 

of this Committee know, we did, in fact, vote to issue a subpoena 

to the VA. We ended up not submitting the subpoena to the VA 

with the agreement that VA—Ms. Brown, I am answering your 

question—with the understanding that they would provide information to us. 

One of the things that was provided to us, Ms. Brown, was a 

memo and this goes to show the Committee how far back this problem goes. This is not just this Administration. This is not just the 

previous Administration. This goes back to a previous Administration before that one. 

But there was a memo that was written by a group of people including Mr. Noel. There are three attorneys on this memo that baVerDate 0ct 09 2002 09:26 Mar 18, 2013 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 Y:\112CONG\FC\6-6-12\74591.TXT LEN
9

sically say the current—this was the contract that we were talking 

about—the current pharmaceutical prime vendor solicitation includes an open market item provision that was found to be 

unobjectionable by the 025 NAC and although we warned them 

that including open market items was risky and pushing the envelope. 

Additionally it says that representatives ordering from a PPV or 

a med surge distributor should still comply with FAR 13.2 actions 

at or below the micro purchase threshold. 

So what I am trying to lay out for the Committee is that this 

goes back a considerable length of time. And it is interesting that 

nothing was done until this issue was raised. And all of a sudden, 

a precipitous drop occurred even though the activity had been 

going on for well over a decade. 

And we hear people minimizing by saying that there were only 

ten purchases out of 500,000 purchases. I can promise you that we 

will show information today that will prove that that is not true, 

that veterans’ health has been put at risk, that there have been incidents whereby the VA did not comply with Trade Agreement requirements, and that there were drugs that were, in fact, purchased that we do not know where they came from. 

And with that, Ms. Brown, you are recognized. 

Ms. BROWN. Thank you, Mr. Chairman. 

Mr. GOULD. Mr. Chairman, may I respond briefly to that——

Ms. BROWN. Yes, please. 

Mr. GOULD. —please? Thank you, Ms. Brown. 

First of all, Mr. Chairman, if you do have any information that 

would be helpful to us in establishing accountability or further understanding this issue, we are open to it. To the best of my knowledge, you have not communicated that to the VA. 

The CHAIRMAN. Will the gentleman yield? 

Ms. BROWN. This is my turn. 

The CHAIRMAN. Will the gentleman——

Mr. GOULD. If I may just and I just——

Ms. BROWN. I would like for him to finish his statement. 

Mr. GOULD. I think there is an—there is certainly a duty—there 

is a duty to share that information——

The CHAIRMAN. The Chairman takes the chair back. 

Mr. GOULD. This is——

The CHAIRMAN. The Chairman takes the chair back. Mr. 

Gould——

Mr. GOULD. Mr. Chairman——

The CHAIRMAN. No, ma’am. The Chairman takes the chair back. 

You provided this information to me. Your office provided this information. 

Ms. BROWN. This is bullshit. 

The CHAIRMAN. Do not try to imply that I am trying to bring 

something to you that you are not aware of. The people behind you 

sitting behind you, sir, gave us this information. It came from your 

office. 

Mr. GOULD. Mr. Chairman, we provided over 40,000 emails at 

the Committee’s request. I assume that you have been through the 

bulk of them and may now have some issues that you want to raise 

10

with us. I hope that is a two-way process and that we have an opportunity to defend ourselves in this process. 

No one on this Committee is here—no one on this panel is here 

to mislead this Committee in any way. And I am not aware what—

what is the date of that document that you are sharing? 

The CHAIRMAN. 1998, sir. 

Ms. BROWN. Bullshit. 

Mr. GOULD. 1998. Well, none of us here——

The CHAIRMAN. Excuse me. Mr. Gould——

Mr. GOULD. —none of us on this panel were——

The CHAIRMAN. —would you excuse me just a minute? I would 

like the lady’s words taken down. Will you please read back exactly 

what the ranking member just said? 

Ms. BROWN. Yes, do that. 

The CHAIRMAN. The Committee will stand in recess. 

Ms. BROWN. Yes. I apologize, I apologize that we are here on a 

witch hunt. 

I apologize for saying bullshit and apologize that we are here on 

a witch hunt when we should be doing the veterans’ business. Yes, 

I apologize. 

The CHAIRMAN. Thank you very much. 

I would like for the record, though, that that information be provided as quickly as possible to this Committee. 

Mr. Gould, you may continue. 

Mr. GOULD. Thank you, Mr. Chairman. 

I am sorry. I was under the impression that Ms. Brown was 

about to have the floor. Is that——

Ms. BROWN. I yield my time to you. Do I still have time? Okay. 

I yield my time to you to respond, sir. 

Mr. GOULD. Thank you, ma’am. 

Ma’am, I would just say that this team identified the problem. 

We took decisive action. What you see is evidence of strong, positive results reducing from over 70,000 unauthorized commitments 

to less than 450. 

We believe we are on the right track and that we are handling 

it in the right way with a tiered approach to training, counseling, 

and, frankly, sanctions that we have taken. And that has been a 

part of the reason for our very substantial progress over the last 

five months. 

Ms. BROWN. Sir, I have another concern which is going the other 

way. You have gone from 2,000 to 1,000 people that have the authorization to issue these pharmaceuticals. 

I want to make sure that the veterans receive their medication 

in a timely fashion. And you all do a good job in this particular 

area. And I am concerned that—first of all, the question was 

whether or not the veterans ask for the medication. 

Is that the procedure? 

I would think that physicians write the prescriptions and then 

they order it from the pharmaceuticals. But help me with this process because something must be missing here because I do not think 

that veterans directly go to the pharmaceuticals and request any 

medication. 

Mr. GOULD. No, ma’am. That——

11

Ms. BROWN. Help me with the procedure. Help me. What is going 

on in the process? I need to understand. I must be missing something here. 

Mr. GOULD. So our number one goal is to make sure that veterans who need medicine get it promptly. And the whole idea behind the PPV contract is that it is delivered in basically 24 hours 

under a watchful eye of physicians and pharmacists who make sure 

that the right drugs according to our formulary are delivered 

promptly. 

I would invite Mr. Matkovsky and Mr. Valentino to describe how 

that process looks at the bedside and then leads to the purchase 

and finally the delivery of the drugs to the veteran. 

Ms. BROWN. Thank you, sir. 

Mr. VALENTINO. You are exactly right. When a patient elects to 

receive care from VA, they are assigned a primary care provider 

who evaluates them and their medical conditions, decides on a 

course of therapy. 

If that therapy involves pharmaceuticals, they write a prescription. That prescription is reviewed by a pharmacist. That data is 

entered into our electronic medical record and the prescription is 

provided to the veteran. 

Now, in between writing the prescription and having it provided, 

there is the ordering process and the things that we are talking 

about today. 

Ms. BROWN. Yes, sir. 

Mr. MATKOVSKY. Sorry. We did, in fact, introduce greater rigor 

in the ordering process, so there are specific ordering officials. The 

number of people who had the authority to order was reduced. 

Ms. BROWN. From 2,000 to 1,000? 

Mr. MATKOVSKY. Under 1,000, yes. 

Ms. BROWN. Under 1,000. Did that slow down the delivery to the 

veteran? 

Mr. MATKOVSKY. It required us to change our work patterns to 

make sure that folks were dedicated to this activity as opposed to 

performing this among other duties. It changed the way we staffed 

it and it required us to have additional resources to staff that function. 

In addition, we added contracting officer representatives with explicit delegation of authority to review the invoicing process. Again, 

an additional resource required to review that more formally. 

So a reduction in the staff, an increased focus on the staff performing this function in lieu of any other functions, and then an 

additional supervisory activity for contracting officer representatives. 

Ms. BROWN. Thank you. 

And I yield back. 

The CHAIRMAN. Mr. Frye, if you would, explain to us how a proper supervisor would screen a purchasing order. 

Mr. FRYE. Well, again, I am not in the pharmaceutical business, 

but I go back to my experience of nearly 30 years in supervisory 

positions. 

I think it is as simple as this and I will add that we looked at 

the way VHA was doing it at the Washington Hospital. I sent my 

staff out to—and they spent an entire day with the pharmaceutical 

12

personnel. And the system worked very well and it was very simple. 

An ordering officer prepared an order and the supervisor of that 

ordering officer looked at the order to make sure that there were 

not drugs on it that were not authorized and then the supervisor 

authorized the order of those drugs. 

So I think it is really a pretty simple thing from my viewpoint 

and based on what my staff told me. And I was very complimentary of VHA in the Washington Hospital situation. 

The CHAIRMAN. If you would, to Ms. Brown’s point, I think she 

is referring possibly to the warrants being removed from—I think 

that is what she was driving at. 

But emails that were received by this Committee from VA, you 

were noted as attempting to remove warrants from about 2,000 

contracting officers who were not acting in accordance with the 

law. 

And I want to know how many of those 2,000 contracting officers 

actually lost their warrants. 

Mr. FRYE. This is an ongoing process. We have been at it for 

about two and a half years. Back in 2007, the rules changed for 

contracting officers. Contracting officers have to be certified in accordance with the federal acquisition certification contracting. 

They are certified at three levels and in order to be certified, you 

have to have educational credentials. You have to have certain 

training and certain experience. 

So as we looked at VHA’s contracting officers, we found that 

there were quite a number of them that did not qualify to be contracting officers. 

I would add that most of these were not in the pharmaceutical 

arena, however. Most of these were in the prosthetics arena. 

We still have not accomplished the withdrawal of all of those 

folks who we do not deem to be totally qualified. However, we have 

got a plan in place and we plan to have them removed from their 

positions and——

The CHAIRMAN. My question——

Mr. FRYE. —repurposed in other ways by the end of the fiscal 

year. 

The CHAIRMAN. If I could, my question was, how many of those 

2,000 that you recommended have actually lost their warrants? 

Mr. FRYE. I think last I knew, and Mr. Matkovsky might be able 

to shed some more light on it, I think we are down to about 1,700. 

The CHAIRMAN. Okay. Dr. Roe. 

Mr. ROE. I thank the gentleman for yielding. 

I am trying to get my arms around exactly a couple things here. 

One, why did it take 17 years to bring this to light? 

I mean, it seems to me like that the procedures that you are implementing now protects everybody. It protects the patient. It protects the VA. It protects the system. It protects everybody in the 

system. 

Why did it take 17 years to do this, Mr. Gould? 

Mr. GOULD. Sir, the hardest problem in a large organization is 

to find something that is not a problem from the operational perspective. So what we saw was superb cost control, delivery within 

13

24 hours, high-quality drugs going to the veterans where and when 

they needed them, the right place at the right time. 

So when this finally was raised to our attention——

Mr. ROE. Let me interrupt you. How would you know that there 

are high-quality drugs going to veterans when you clearly—right 

here we clearly—the Trade Agreement Act clearly states that you 

cannot get drugs in certain countries because we do not have any 

way to know and, yet, those drugs are being shipped, because I 

have got some emails here that say they have been, to veterans? 

So how would you know? 

Mr. GOULD. Well, we have terms and conditions in our contract 

that require compliance with all of those elements. 

Mr. ROE. But that was not happening, though. My point is——

Mr. GOULD. I would like to ask Glenn Haggstrom to respond to 

your question directly——

Mr. ROE. Okay. 

Mr. GOULD. —because it clearly was not the case that we were 

in violation of the Trade Act Agreement. 

Mr. ROE. Well, I have got some emails here that said you are 

from you all. 

Mr. GOULD. And through this group of expert panel—I do not 

know where you got your emails. Again, sir, if there is anything 

that would help us do our job better, please disclose and let us 

know. 

Mr. ROE. We will definitely. 

Mr. GOULD. But we reviewed 16—we reviewed 17 contracts for 

that, 16 of the 17, I believe, if my memory serves——

Mr. ROE. So if there is a drug that has been sent to a veteran 

through this process that was produced in India which is not part 

of the Trade Agreement, maybe we should change that act. I mean, 

I am not saying we should not. And maybe those drugs are safe. 

The point is you would not know it. 

Mr. HAGGSTROM. Mr. Roe, I think when we discussed this the 

last time and in our work with McKesson, there is two issues at 

hand here. One is a Trade Agreement Act which when we do a contract in the government, if that contract has a life cycle value of 

over $203,000, the Trade Agreement Act clauses kick in. 

I think what Mike Valentino explained at our last panel was also 

there is an issue of even though a country may—we may not have 

a Trade Agreement Act with the country, that does not mean that 

that country does not have laboratories that have been certified by 

the FDA to make drugs in compliance with our processes. 

So that while we may not purchase drugs with a Trade Agreement Act country through a contract, we may still obtain those 

drugs——

Mr. ROE. But how do you know that? 

Mr. HAGGSTROM. I would have to ask Mr. Valentino. 

Mr. ROE. I mean, you can say that, but how do you know you 

did that? 

Mr. VALENTINO. As we heard from McKesson at the last hearing, 

they were the drugs directly from the manufacturer or the manufacturer’s authorized distributor. And they only purchase drugs 

that are manufactured in FDA approved manufacturing plants. 

14

So when we were ordering these non-contract drugs through 

McKesson, these are the very same drugs that they are providing 

to a CVS——

Mr. ROE. So this little drawing is inaccurate where someone 

would—I as a doctor would write a prescription for this patient 

down here, this veteran, and VA would then go over here to the—

a non-contract company which would then send it back to 

McKesson. That is not the way it works? 

Mr. VALENTINO. I cannot——

Mr. GOULD. Share a copy with us, it would——

Mr. ROE. It may be wrong. 

Mr. GOULD. —very helpful. 

Mr. ROE. I mean, this could be in error here. 

Mr. VALENTINO. I think one of the hard——

Ms. BROWN. Mr. Chairman, he has not seen it. Okay. Thank you. 

If you want to question him——

Mr. ROE. Excuse me, but reclaiming my time. Anyway, if that is 

the way, maybe we are understanding it wrong. And then while 

you are looking at that——

Mr. GOULD. Mr. Roe, I would just point out that the drugs that 

we have for our veterans are as safe or safer than the drugs that 

are received all across America. And if there is a question here that 

you may have with the larger pharmaceutical system——

Mr. ROE. No, no, no, that is not it. I mean, my question is, again, 

your internal controls, how do you know that this is, because of 

what you said about how McKesson did? Okay. Then we will go 

into that later. 

Mr. GOULD. Well, actually, we have got an answer for you here. 

Mr. ROE. Okay. 

Mr. VALENTINO. So this looks to me as if it were a diagram outlining the drop ship issue which we addressed earlier. If this were 

what we are talking about, the arrow would be from VA to 

McKesson. 

Mr. ROE. So if I write a prescription to this veteran down here 

and it is not in that particular formulary that you have, it does not 

do this then? You are telling me this is wrong? 

Mr. VALENTINO. This does not—this describes the drop ship 

issue, not——

Mr. ROE. That is what I am speaking of. If I write a prescription 

for a drug that is not in the formulary, not in the VA formulary, 

then what happens to it? 

Mr. VALENTINO. Well, just because the drug is not on the VA formulary does not mean that McKesson does not stock it. They stock 

virtually everything, formulary or not formulary, and we ordered it 

primarily through them. It just was not in conformance with the 

FAR. It was a non-contract purchase. 

But McKesson purchases drugs directly from the manufacturer, 

drugs that are FDA approved for use in this country, drugs that 

are manufactured in FDA approved plants. They do not procure 

private products from the gray market or secondary market. 

So they have an assurance that the drugs that they are buying 

and putting on their shelves to distribute to VA and other organizations, Walmart, Costco, CVS are high-quality drugs. 

Mr. ROE. Okay. We will have a chance. 

15

I yield back. Thank you. 

The CHAIRMAN. Mr. Walz. 

Mr. WALZ. Well, thank you, Mr. Chairman. 

And thank you all for being here. 

I, too, like Dr. Roe, I am just trying to get my mind wrapped 

around everything. 

Deputy Secretary Gould, what is the purpose of PPV in your 

opinion? 

Mr. GOULD. Sir, it is to get the right drugs in the right place 

within 24 hours that our physicians and pharmacists in the field 

want to get for a particular veteran. So it is health care, it is quality, and it is getting it there quickly. 

Mr. WALZ. But with a recognition that you cut back on the number of people who were able to do that? Is it your opinion that it 

was being used in times that it was not necessarily doing that? 

Mr. GOULD. My sense is that with the new processes, training, 

and technology that we have, we can accomplish that same mission 

to the same standard with fewer people. 

So what we are trying to do is bring into balance our overriding 

operational need, make sure veterans get the right drug at the 

right time, but make sure that we are being as efficient as we can 

and also responding to the requirements of the FAR so that we can 

avoid this problem in the future. 

Mr. WALZ. Well, that is the way I see it. Our mission here, obviously it is patient-centric. What is best for the patient is what is 

best in this case. 

Mr. GOULD. Yes. 

Mr. WALZ. Making sure safety is adhered to is the questions that 

were being asked, a cost-benefit analysis to see if we can do it in 

the most cost-effective manner to the taxpayer——

Mr. GOULD. Yes. 

Mr. WALZ. —while addressing some of those market fluctuations, 

drug shortages, and those types of things. 

Mr. GOULD. That is correct. 

Mr. WALZ. And we can do that in the manner. Is it fair though 

that the Committee’s concern that this was operating outside of accepted practice, that the potential for abuse was here? Is it safe to 

say that? 

Mr. GOULD. We are concerned about the fact that there were unauthorized commitments being made in the system and that is why 

together with training, focus on personnel and accountability, new 

systems, new business process, procedures, and management oversight, we have been able to lower that from 70,000 down to under 

450. So we are on track and we are doing the right thing. And we 

continue to go at our goal of zero unauthorized commitments. 

Mr. WALZ. And I certainly appreciate that. I guess I am concerned. I am hearing things and a Committee that is usually not 

very contentious, you can certainly obviously feel it in the air. 

My concern is I have not seen any of these emails. I do not know 

them. Some of this was delivered yesterday apparently and they 

are going through discs to try and get them here. It is very hard 

to ask about this. 

Is there a legitimate question on safety concerns or does it go 

back to your previous answer that the broader pharmaceutical 

16

market and how they work is very similar to how it is working in 

VA? 

I am concerned with Dr. Roe’s question that was there potential 

for unsafe drugs getting in veterans’ hands. 

Mr. GOULD. And, Mr. Walz, to the best of my knowledge, we have 

a safe veteran-focused system. You have got some of our leading 

experts at the panel here today. 

And I would just like Mike Valentino and others at the table to 

weigh in on that issue. We think we are the benchmark in the industry for pharmacy and clinical practice and we will stand by 

that. 

Mr. VALENTINO. I would say that I have no concerns about the 

safety of our drug supply because of the way we order drugs now 

and the way we have ordered them in the past. 

But I would point out that despite rigorous FDA review and approval, drugs do get into the marketplace that ultimately after they 

are in wide use are found to be problematic and are withdrawn 

from the market due to safety reasons. So I will make that distinction. 

I am not concerned over the safety of our products because of the 

way we order them, but from time to time, and we know the drugs 

that I am talking about, they get out on the market, they cause 

harm, and they are withdrawn. 

Mr. WALZ. I got this yesterday, the most requested, top five most 

purchased items, cost, and all of that. 

Are the drugs being requested predominantly on PPV drugs that 

are not in the formulary as was previously asked or are at times 

they are on the formulary and they just went around to do it this 

way? 

Mr. VALENTINO. It is a combination. Sometimes these are drugs 

that are on the formulary. A very common example is a generic 

drug where we have attempted to put a contract in place and we 

have not been successful. We had not gotten sufficient bids to do 

that. So this could be a very common formulary drug for which we 

do not have a contract and we would have to order it through another mechanism. 

Mr. WALZ. You may not have the data and, Deputy Secretary 

Gould, you may not have this in there, but is the VA’s purchase 

of drugs more cost effective than say Medicare? Is the VA’s purchase of drugs more cost effective than a private sector insurer hospital, if you could? 

Mr. VALENTINO. VA has some of the lowest drug prices available 

anywhere. This would even include other countries where they do 

index pricing. So——

Mr. WALZ. Is PPV part of the reason that it is cheaper? 

Mr. VALENTINO. It is part of the reason. It is not the primary 

reason. The primary reason is because of the agreements we have 

with the manufacturers because we will guarantee a certain 

amount of utilization. 

Mr. WALZ. So we should try and utilize those as often as possible, 

right, because our argument has always been that negotiations on 

drug prices at Medicare would be a way to lower health care costs? 

Do you think VA proves that to be true? 

17

Mr. VALENTINO. I think we have a very robust system. We have 

an extremely good track record of keeping our costs very low and 

providing high-quality services. 

Mr. WALZ. My final question, and I know I have run over time 

just a minute, do we ever get drugs cheaper by going PPV than we 

would off of a negotiated contract or is it always going to be more? 

Mr. VALENTINO. Well, let me answer that two ways. We always 

want to follow the procurement hierarchy which is national contract, FSS on down as we have heard. 

Yes, there have been times when we have been able to—when 

the price that we paid for a drug through a non-contract purchase 

was cheaper than through the procurement hierarchy. That is not 

why we want to do it. That is just sort of an incidental impact of 

what we do. But we believe in the hierarchy and we try to follow 

the hierarchy. 

Mr. WALZ. I will yield back, Mr. Chairman. Thank you for the 

extra time. 

The CHAIRMAN. Thank you, Mr. Walz. 

Very quickly and I am just trying to get a handle. 

And also, Mr. Walz, I would let you know we have been getting 

data dumps by disc for about three months from VA. And we have 

made all of that information as we got it available to the minority 

staff. So, you know, it has been coming in your direction. 

There is a memo from November 7th, 2011, the PPV integrated 

product team. And I am trying to figure out. On the last page, 

there was open discussion and it says that L. Schwartz asked if 

TAA compliance was part of the McKesson PPV contract. And the 

answer was TAA compliance is required for contract items but not 

open market. 

Could you explain the difference and why TAA compliance is not 

required? 

Mr. HAGGSTROM. Mr. Chairman, I think as we talked earlier, 

TAA compliance kicks in when the value of the contract exceeds 

$203,000. Below $203,000, the Trade Agreements Act does not have 

an effect on our a contract for the Federal Government. 

The CHAIRMAN. So if the contract was less than that——

Mr. HAGGSTROM. For an open market contract less than 

$203,000, the Trade Agreement Act would not be applicable. 

The CHAIRMAN. Okay. Mr. Runyan. 

Mr. RUNYAN. Thank you, Mr. Chairman. 

I just want to touch on one thing I think we bring up every time 

we have a hearing like this. And I think coming, Secretary Gould, 

from your boss, Secretary Shinseki, is accountability. 

And we talk about it all the time and you just brought it up, 

brought an example up where you had contracting officers that 

were not qualified to be a contracting officer. 

Where is the accountability? Where is the teeth of people motivated fearful of losing their position? 

I mean, you stated earlier that training, counseling, sanctions. I 

mean, I know sometimes people are going to lose their jobs. And 

I think a lot of times we shy away. And I think the secretary 

agrees with the statement that people need to do their job or bad 

things are going to happen to them. 

18

I know in my life, fear is a hell of a motivator and then having 

consequences to your actions a lot of times keep people doing the 

right thing. 

I mean, when you say the word sanctions, can you elaborate on 

that a little bit? What are the teeth? I mean, I know we deal with 

it, but the teeth of how we are actually going to get people to do 

what they are supposed to do? 

Mr. GOULD. Right. And accountability and discipline are the hallmark of a great organization. 

Mr. RUNYAN. Well, that’s inherent in an individual. But from a 

leader perspective, you have got to——

Mr. GOULD. Absolutely. So we started first with the principle of 

fairness. So you go to somebody and just fire them out of the blue 

for something they have been doing for 17 years, I do not think we 

would agree that that would be fair. 

So we started by sitting down and training every individual and 

making sure we had the right policy in place, coming to terms with 

the fact that we had not been able to come into compliance. And 

we knew we had to change our policies and train our people to do 

it. 

So we began with the training and then we escalated through 

that. Meanwhile, the numbers start to come down immediately, 

70,000 all the way down to less than 450. That is the journey we 

have been on the last five months. Something is working. 

And now what we did is we walked through counseling, individual counseling. If you do this, this will be the consequence. We 

had over a dozen counseling letters entered into people’s files. That 

affects their promotion, their paycheck, their families. 

We also suspended two individuals for a 48-hour period, saying, 

look, if you do that, you are going to lose the right to do it in our 

organization. 

And, finally, an individual decided to retire in lieu of being dismissed. 

So what—that, I believe, strikes the right balance between career 

teeth. If you continue to do this, bad things will happen and responsibility and that responsibility to fairness, to teach, to train, to 

coach as you have seen in your career many times is essential to 

maintain trust with employees and senior management. 

And that is what we think we have achieved together here over 

the last five months. The numbers have gone from 70,000 to less 

than 450. We think that is evidence of dramatic change. It means 

our field folks are getting it and we did not have to fire 300 of them 

to make that happen. 

Mr. RUNYAN. No. And I agree getting the right people in place, 

but I think also is not becoming complacent in the downturn to 

450. Obviously you said it before. You want zero and that is the 

goal because at the end of the day, we are talking about taxpayer 

dollars at the end of the day. And——

Mr. GOULD. Mr. Matkovsky is very, very close to this, done a superb job, and I would like him to add to the—to my response. 

Mr. MATKOVSKY. The discussion about warrants and the removal 

of warrants, in the field, all pharmacy staff who had previously had 

contracting officer warrants have had those warrants pulled back. 

The same is true for our logistics staff in the field. 

19

So any hospital staff who were logisticians, not contracting series 

had their warrants pulled back. As Mr. Frye alluded, the only remainder are the prosthetics staff and we are on a plan to complete 

the transition of those warrants to contracting. 

We think that is part of imposing discipline, that those who are 

trained, educated, are in the contracting officer job series are going 

to be those that we entrust to have a contracting officer’s warrant. 

In addition to that, week in, week out, there is management attention, month in, month out, there is management attention and 

scrutiny to the actions of our staff be they ordering officials or contracting officers’ representatives. Repeat memos from leadership, 

repeat communications to pay attention, that this is something 

that both on the contracting side and the health care administration side, we are jointly committed to this. 

I think we have struck that tone that you have addressed of organizational discipline and commitment. 

Mr. RUNYAN. And my time is expired, but I think when you look 

at it, we have just scratched the surface. And you have got to continue to press across the board and not allow—I would respectively 

say to have your organization in line so we do not have to drag you 

up here and do this to you all the time. 

So thank you. I yield back. 

Mr. GOULD. You have that commitment and we are on the case 

here. And we think that is the reason why we have seen such dramatic change over the last five months. 

Mr. RUNYAN. Thank you. 

The CHAIRMAN. Mr. Gould, are all purchases TAA required authorized or not? 

You may have in the last hearing said that all purchases that 

VA made were TAA compliant. Is that——

Mr. GOULD. Comply with the law and that has the $203,000 

limit. 

The CHAIRMAN. Okay. So that opens up a question then. So if it 

is less than that, it does not have to be? 

Mr. GOULD. Well, when Congress passed that law, the decision was $203,000 and we do abide by that. 

The CHAIRMAN. So if it is less than $203,000, it may not be TAA 

compliant? 

Mr. GOULD. It is not required to be TAA compliant below $203,000. 

The CHAIRMAN. So it could not be TAA required, right? 

Mr. GOULD. Right. Yes. 

The CHAIRMAN. I know the law says it does not have to be. 

Mr. GOULD. Correct. 

The CHAIRMAN. But it could be? Under $230,000 or $203,000, it 

could be? 

Mr. GOULD. Two hundred and three, it could be. 

The CHAIRMAN. Okay. 

Mr. GOULD. Yes. 

The CHAIRMAN. Could VA stack those contracts at less than 

$203,000 on top of each other in order to circumvent the law? 

Mr. GOULD. It is an interesting hypothetical. I think the over—

the paramount drive that we have as an organization is when there 

is a need, we go out to contract for it. We go out to get it done. 

20

So waiting or delaying to be able to bundle or aggregate con- tracts so they reach above $203,000 seems far fetched to me, but 

let me see if there is anybody else on the team that has——

The CHAIRMAN. I apologize. I am going the other direction. I am 

wondering if there is ever a time where they would be a split contract, that it could be a $5 million contract, $1 million, whatever 

the number is, but that it is segmented or split into smaller segments and if that happens, what happens to the TAA compliance 

requirement? 

Mr. GOULD. Philip. 

Mr. MATKOVSKY. So you are asking us would there be a concerted action to split a transaction so it falls below the 203? 

The CHAIRMAN. Has it occurred. 

Mr. MATKOVSKY. We do not believe it has occurred, sir. 

The CHAIRMAN. And I do not have an email from 1998 that says 

that happened, but——

Mr. MATKOVSKY. Sir, you know, again, you know, the overriding 

drive here, this is a just in time medication inventory system. I 

really do not have any knowledge of somebody willfully splitting 

transactions to occur below. 

The CHAIRMAN. Mr. Michaud. 

Mr. MICHAUD. Thank you very much, Mr. Chairman, and I want 

to follow that same vein of thinking as far as TAA on the open 

market. 

You said you did not think it occurs. Could you provide the Committee with what in the instance of the drugs and where they came 

from, can you provide the Committee with that information that 

fall underneath the 203? 

Mr. GOULD. Sir, we would certainly be willing to look into that 

and see if it is possible to do and deliver that to the Committee. 

Mr. MICHAUD. Now, if it goes through, and there will be the 

same question for McKesson, I mean, if it has to go through 

McKesson or whoever, it seems to me there must be a record of 

that occurring. 

And I would like to know how many contracts are out there, 

what drugs, where they came from that might be below that 

$203,000, if you can provide that for the Committee. 

My other question is, is dealing with the drug shortage, has that 

affected the VA supply for the open market purchasing at all? 

Mr. GOULD. Mr. Michaud, this is—obviously we are part of a 

broader system that does have periodic shortages from time to 

time. 

Michael, would you care to comment on that? 

Mr. VALENTINO. Yes. That is absolutely correct. As I am sure a 

lot of Members know, drug shortages are occurring with increasing 

frequency and for a longer duration. There are a lot of factors leading to those drug shortages which we probably do not need to go 

into. 

But VA is impacted just as every other organization in the country and beyond is impacted. So we have developed a number of 

ways that we can mitigate the impact on the veterans. 

So, for example, a lot of our chronic medications we dispense in 

three-month supplies. There have been times when we have had to 

reduce that to one-month supplies. There have been extreme situaVerDate 0ct 09 2002 09:26 Mar 18, 2013 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 Y:\112CONG\FC\6-6-12\74591.TXT LEN
21

tions where we have had to switch patients from one drug to another. 

But I do not think you can say that the change in our procedures 

has been a direct contributing factor or really exacerbated that in 

any significant way. At least with the information that we have, we 

believe that not to be the case. 

Mr. MICHAUD. Moving forward since you have given the award 

out, do you foresee under any circumstances where the VA would 

allow to make open market purchasing through the PPV? 

Mr. HAGGSTROM. No, sir, we do not. We have worked very closely 

with McKesson who was the successful awardee of the follow-on 

pharmacy prime vendor contract. We have taken the experiences 

that we have dealt with these last many years and we have asked 

McKesson to engineer out of the system the opportunity to do that. 

I believe when you will hear McKesson testify, in looking 

through their testimony, they have implemented what they call a 

restrict and notify component that will automatically remove noncontract items from the order in the new contract and notify the 

pharmacy that it has done so. 

Mr. MICHAUD. Thank you. 

My last question, and we were just handed this document. I 

think it was a lot of the information which I have not seen either 

coming from different memos that you provided the Committee. 

But—and I do not know if the chair might want to add in—on 

the very last page, on December 2011, the second paragraph up 

says Mel, which I assume is Mel Noel, specifically noted that VA 

should ask McKesson to offer these TAA noncompliant drugs like 

Stesavin on its fast pay list. 

Are you aware of that happening? And this is just something 

that was handed out this morning. Have you ever asked McKesson 

to do something that—to provide drugs that are not TAA compliant? 

Mr. GOULD. Mr. Michaud, I think there would be a real value in 

us seeing that document and be able to give you a careful answer. 

I think Steve Thomas might be able to share a little bit of light 

on that here. 

Mr. THOMAS. Yes. I can tell you on the new contract, we have 

something called whack-based generics and those will not—will be 

compliant with the TAA. And that is going to take a lot of work 

on the part of McKesson because they are not used to doing this 

to make sure that the drugs that they distribute to us are in accordance with TAA. 

They are not accustomed to doing that because the other pharmacies in the United States will get products from India and from 

China so they are—they have a concerted effort right now to assure 

us that we will not be getting—we will be getting drugs that are 

compliant. 

Mr. MICHAUD. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. Thomas, does that mean that McKesson may 

have been providing drugs that were not TAA compliant that, in 

fact, came from countries that we do not want them coming from? 

22

Mr. THOMAS. Again, I would refer to what Mike Valentino said. 

In spite of the fact that some products come from other countries 

like India and China, they are still FDA approved facilities. 

So when I get my prescriptions filled or possibly when you get 

your prescriptions filled, you may get product from India and 

China. It is the government that is restricted to not getting products from non-TAA agreement countries. 

The CHAIRMAN. Thank you. 

Mr. Johnson. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

Secretary Gould, according to the VA’s ratification policy and acquisition regulations for each illegal purchase, the VA must 

produce records, documents, statements of facts, explanations, a description of work, an estimated and agreed upon price, a citation 

of the appropriation, the name of the individual responsible for the 

unauthorized commitment, and more. 

Are you stating today that you have done this for each and every 

one of the hundreds of thousands of illegal purchases made? 

Mr. GOULD. No, we are not. That process is still underway. It involves review by VHA, by OALC, and by general counsel. 

And for the folks that are listening into this and veterans especially listening to this process, I just want to describe at a general 

level what ratification means. 

Mr. JOHNSON. We are going to get into that. 

Mr. GOULD. We have an unauthorized commitment and what we 

want to be sure is we want to be sure that we got good value, we 

actually received those drugs, and that——

Mr. JOHNSON. Mr. Gould, I do not mean to interrupt you, but I 

have got limited time and I have got a number of questions. So you 

have answered that one. 

Mr. GOULD. It is a VA——

Mr. JOHNSON. The VA can only—Mr. Gould, reclaiming my time, 

I do not want to go any further into this. 

Mr. GOULD. Yes, sir. I understand. 

Mr. JOHNSON. The VA can only ratify a purchase made by an unauthorized individual if it has not been paid for. Since the VA’s fast 

pay system pays within 24 to 48 hours, the VA has been paying 

for a product before they confirm that they have received it. Therefore, it cannot be ratified. 

Since we know the fast pay system paid for items before VA confirmed that they received these items, how did you ratify these purchases or how do you ratify these purchases? 

Mr. GOULD. First of all, we have very strong general counsel that 

has rendered an opinion that we, in fact, can ratify that. As I described to you a moment ago, the process is still underway. 

Our contract is based on fast pay. What that means is our veterans and taxpayers enjoy a substantial discount for prompt pay of 

services that we provide. The vast majority of them, over 99 percent, there is no question about——

Mr. JOHNSON. So you are saying that you ratify them after they 

have been paid for? 

Mr. GOULD. That is correct by definition. 

Mr. JOHNSON. But you cannot do that by your own policy. 

23

Mr. GOULD. Sir, that is not correct. That is not correct. So we 

have a process for ratification after payment. It is essentially a 

cure for this process. It is stated under the FAR and the VAR. We 

are following that to the letter of the law and we are in the process 

of doing that now. 

Mr. JOHNSON. Okay. Legal precedent notes that ratification can 

only occur where the person ratifying the agreement has knowledge 

of the material facts pertaining to the agreement as a rare occurrence. VA’s decade and a half long abuse is not a rare occurrence 

of institutional ratification. 

Did VA ever conduct a detailed investigation into this issue and, 

if so, why has Congress never been informed? 

Mr. GOULD. First I would argue strongly that this is a very rare 

event in VA. As I have tried to stress to the Committee today, a 

half a million line item events per month of which today less than 

450 fall into the category that we are discussing. It is a rare event. 

Mr. JOHNSON. Back to the question. Did VA conduct an investigation? Has VA ever conducted an investigation? 

Mr. HAGGSTROM. Yes, sir. I believe an investigation had—the 

ratification authority within the department rests with our heads 

of contracting activities that has been delegated. 

Mr. JOHNSON. Has VA ever conducted an investigation? 

Mr. HAGGSTROM. VHA is in the process right now of reviewing 

these unauthorized commitments, gathering the information on 

who, what, when, where, and how and the cost. And we are in the 

process right now of reviewing——

Mr. JOHNSON. So the investigation is ongoing? 

Mr. HAGGSTROM. It is ongoing, sir. 

Mr. JOHNSON. Okay. All right. So if the VA did not investigate, 

they could not know all of the material facts. Therefore——

Mr. GOULD. Sir, I would also point out the IG——

Mr. JOHNSON. —the purchases cannot be ratified? 

Mr. GOULD. —is also conducting an investigation now. 

Mr. JOHNSON. Okay. So the investigation is ongoing and by your 

own policy, it requires that the person doing the ratification knows 

the material facts. The fact that the investigation—you cannot 

know the material facts until the investigation is completed. The 

ratification cannot be done. Is that not correct? 

Mr. GOULD. Philip, would you care to add to this? 

Mr. MATKOVSKY. I will add just a little bit. 

So, Mr. Chairman, I know you are aware of the FAR’s seven components in a ratification action, so I am not going to go through the 

litany of them. 

In the process as we have applied it, and we would be happy to 

share these documents with you after the fact, it is a contracting 

officer who is reviewing every single line item for the month in 

which the transactions were committed. 

In that line item, we have the individual who had committed the 

order. We have the item that was ordered, the quantity that was 

ordered, the unit price, the extended price, and any mitigating circumstance that may have resulted in the unauthorized commitment. 

24

The FAR also requires us to actually explain how we would intend to avoid this in the future as well. That is part of the action 

that we are engaged in. 

That CO who performs that analysis, the program requests the 

ratification. That goes through a review. It then goes up through 

our head of contracting activity. Because of the scrutiny of this 

process, sir, we have requested that that go through OALC, 

through the senior procurement executive, as well as to general 

counsel to ensure that we have dotted all the Is. 

Mr. JOHNSON. Well, Mr. Chairman, my time has expired, but 

what is clear to me is that the VA’s argument of ratification is inaccurate and not in accordance with normal laws and regulations 

and it appears that they are attempting to redefine ratification to 

suit this particular purpose. 

And with that, I yield back. 

Mr. GOULD. Mr. Chairman, I strongly disagree with that statement. I think that the facts that we put forward here show that 

we know what the law is. We are abiding by it step by step. We 

defined that we are in the middle of a process with three principal 

players. 

And at the bottom of this, at the end of the day is the notion that 

McKesson, a private sector company, provided us with a good we 

asked for. And that pill or pharmaceutical was taken and used for 

a veteran. No one at this table is disputing that that happened. 

So I believe that it is fair for them to be in a position where they 

might like to be paid. And so we are going through that process 

to ratify. It is a legal process to cure and we are in that process 

now. And we believe that it is likely that these individual unauthorized events will be ratified. 

The CHAIRMAN. Are you contending that all of the issues that are 

being involve—that ratification is involved and now McKesson has 

not been paid? 

Mr. GOULD. No. As Mr. Johnson pointed a moment ago, we are 

obligated under contract to pay them. 

The CHAIRMAN. I am sorry. But you made a statement that 

would lead somebody that may be listening on the webcast that 

McKesson has not been paid. That is kind of the issue in the ratification question that Mr. Johnson has raised and I have raised with 

the fast pay system. 

I guess my question is, if you can ratify anything, which it appears that that is what may be occurring, what is the FAR and the 

VAR even for? 

Mr. GOULD. Well, go to a simple example. Let’s assume for a moment that one of these transactions is not ratified. McKesson has 

already received payment. How would we deal with that? 

The answer is we would reconcile payment in the next round. 

This is a long-term relationship with a company. If we find a problem, we will be able to deal with that accordingly. 

The CHAIRMAN. But under the fast pay system, they are paid, 

bam. Within 48 hours, they are paid. 

Mr. GOULD. And we receive a discount immediately within 48 

hours. 

The CHAIRMAN. But they are paid. So, I mean——

Mr. GOULD. That is correct. 

25

The CHAIRMAN. —it is not that McKesson is not getting paid. 

And I think everybody here agrees that the veteran needs to get 

their medication and the vendor needs to be paid. 

Mr. GOULD. Yes. 

The CHAIRMAN. I think the thing that we are most focused on is 

why for 17 years up until actually November of last year, I mean, 

your own charts show a drastic drop from $14 million to under $2 

million and it gradually goes down. I would point out that your 

chart shows a tick up in April in cost. I do not know what the 

bump is. It is not large, but, I mean, it kind of bounced off the bottom. 

I am just trying to figure out why it sounds like you can ratify 

anything and kind of wipe the slate clean for the last however 

many years. Is that kind of what you are doing through the ratification process? If not, why are you doing it? 

Mr. GOULD. We are doing a number of things. And I will ask 

Philip to chime in. 

First and most important, we are striving to improve how we use 

this contract mechanism and we have shown evidence of that occurring through additional training, business procedures, accountability, and technology steadily over the last five months. Results 

indicate that we are fixing this problem. 

When it comes to the issue of ratification, in each instance, we 

want to learn where we went wrong so that we can correct the 

process and we want to make sure that both the government and 

the vendor were fairly treated. And that is our goal in this process, 

to comply with the law and to make sure that those two things are 

brought into balance. 

We believe that most, if not all, of the transactions are likely to 

be ratified. If they are not, if we find there is a reason that it 

should not be ratified, we will take that action and we will pull 

money back for that services from McKesson. 

At the end of the day, McKesson had someone call them from VA 

who they would fairly have reason to believe had the authority to 

place an order. They accepted the order and delivered. And a veteran used that medicine to get well. And now we are coming back 

through our process to ratify that that transaction was fair for both 

parties. And we are intent on doing that and we are in the middle 

of doing it now. 

The CHAIRMAN. And there is not a Member of this Committee, 

either side of the aisle, that does not want the veteran to get their 

medication and to get well. 

Mr. GOULD. Yes. 

The CHAIRMAN. The issue that we are all trying to get to the bottom of is all of a sudden in November of last year——

Mr. GOULD. Right. 

The CHAIRMAN. —there was a sea change at VA. Something was 

done prior to and we are trying to get to the bottom of why was 

it done that way. 

And with that, Mr. McNerney and then we will have an opportunity to have another round. 

Mr. MCNERNEY. Thank you, Mr. Chairman. 

It appears to me that there are two issues here. First there are 

illuminating past errors and to decide if there is blame to be asVerDate 0ct 09 2002 09:26 Mar 18, 2013 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 Y:\112CONG\FC\6-6-12\74591.TXT LEN
26

signed and the second is to make sure that future pharma deliveries are done properly, accurately, safely, and timely and that 

there are no overpayments. 

So let’s talk about the first issue in my mind first. What I do not 

understand is how, and the Chairman has hit on this before, how 

these unregulated purchases were allowed to take place for so long 

despite warnings dating back to 1998. 

So was there intentional obstruction? Specifically did Mr. 

Haggstrom or others refuse to comply with Committee requests for 

information? Those are my questions. 

Mr. GOULD. No, I do not believe that to be the case. I think the 

Chairman put it nicely a moment ago. In November, there was a 

sea change. Why I think that happened is that this management 

team that you see testifying here today recognized they had a problem, took corrective action, and now five, six months later, we are 

seeing the results of that corrective action clearly and objectively. 

Mr. MCNERNEY. Okay. But why would it take so long for that to 

come about and was there obstruction or was this panel or others 

in the VA intentionally obstructing us in this Committee from getting information? 

Mr. GOULD. No, sir. Our intent and everyone at this table is to 

live the first of our five values as an organization and that is integrity. 

So if there is any issue about the amount of time that it took, 

and we all believe that it took a while to get here, it is not because 

of a lack of integrity of any member here, but the process of finding 

out, getting the facts, doing the analysis, obtaining legal opinion, 

working through the contentious issues, and packaging that up to 

come up here to The Hill. 

Mr. MCNERNEY. Is there blame to be assigned for this lack of—

for how long it took to correct the unauthorized purchases? 

Mr. GOULD. Sir, our view is that as soon as we recognized there 

was a problem, the senior management team here took action. 

As I have testified previously, we first knew, I first knew in September. By November, we had policies in place, training. We had 

gone through a legal review, endless hours of review inside the 

building. 

And since that moment, we have seen a steady decline in the 

number of unauthorized commitments. I would submit that when 

we knew what we knew, we took decisive action and now five, six 

months later, you can see the results of that. Things have changed. 

There is a sea change at VA. 

Mr. MCNERNEY. Okay. About future performance. Your graph 

does show dramatic improvement. 

Mr. GOULD. Thank you. 

Mr. MCNERNEY. But what I am concerned about is that the right 

questions are not being asked or answered. So I will just ask what 

I think is the basic question. 

How often do vets not get the specific drugs as ordered and how 

often are there overpayments? 

Mr. GOULD. So thank you for raising the question about quality 

of service once again. 

And I want to come back to the team and make that clear how 

well we have been doing as an organization, that no veteran listenVerDate 0ct 09 2002 09:26 Mar 18, 2013 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 Y:\112CONG\FC\6-6-12\74591.TXT LEN
27

ing into this should be concerned that they are getting the right 

drugs at the right time and the right place. 

Michael. 

Mr. VALENTINO. So similar answer as before. Drug shortages do 

occur in this country. We have a very good way of addressing these 

through restricting quantities, shifting to other drugs, in some 

cases postponing procedures. We are affected just like everybody 

else in the country. We do the very same things. 

This contract, I do not have concrete information to suggest that 

this contract and the way we have changed our procedures has exacerbated or directly caused a veteran to not get a necessary drug. 

Mr. MCNERNEY. So as far as you are concerned, there is no cases 

of a veteran getting the wrong or a bad drug or not getting it on 

time? 

Mr. VALENTINO. I am just saying I am not aware of any cases 

or significant trends in that area. I cannot say that it has never 

happened anywhere ever. 

Mr. MATKOVSKY. What we are saying is that it is not causally because of this contract and this mechanism of managing our pharmaceutical supply. 

Mr. MCNERNEY. All right, Mr. Chairman. I will yield back. 

The CHAIRMAN. Mr. Denham. 

Mr. DENHAM. Thank you, Mr. Chairman. 

Is it your belief that even though federal acquisition regulations 

were not being followed that the VA was getting a good value for 

its purchase? 

Mr. GOULD. Yes. We went back and researched all of the prior 

transactions looking at them from a price standpoint, quality, I 

think, unambiguously there. 

Fifty percent of them were at the price that was then prevailing 

in the market. About a quarter were below it and about a quarter 

above. 

We think that in the final analysis which will be delivered by the 

IG possibly as early as next month, that we will show that there 

was no economic consequence to these unauthorized commitments. 

Mr. DENHAM. And what other matrix do you use to show that we 

are getting a good value? Is it just price? 

Mr. GOULD. Oh, of course not. The number one thing is the 

health of our veterans and making sure that the specific drugs that 

we use are targeted to have the positive effect on disease and disease management which is one of the reasons why we so carefully 

watch and monitor our formulary. Mr. Valentino is an expert in 

that. 

Mr. DENHAM. Isn’t that what Mr. Valentino just testified to was 

that we are not sure how many times or what percentage we are 

getting correct? We do not know if your answer to Mr. McNerney’s 

question was we do not know how many times we have got it 

wrong. Why wouldn’t we know? 

Mr. VALENTINO. We are not aware of any instances where that—

where a drug shortage situation has been directly linked to our 

prime vendor program or exacerbated. 

Mr. DENHAM. Well, when you say you are not aware, what does 

that mean? Do you have a matrix in place that you can say we are 

a hundred percent compliant, we have never made any mistakes? 

28

Mr. VALENTINO. We monitor—I think we might be mixing some 

issues. In terms of service delivery to the veteran, we do monitor 

that. Four out of five prescriptions are mailed to our consolidated 

mail-out patient pharmacies. We have performance metrics for 

timeliness, right drug, various things. And we operate at above six 

sigma for the majority of those. 

That is one of the reasons why our customers surveyed by J.D. 

Power have given us such high ratings. So in terms of accuracy, we 

are extremely accurate. Do mistakes occur? Yes, they occur. But it 

is—six sigma is essentially less than four issues of nonconformance 

per million transactions. So we are extremely, extremely accurate. 

And I think it is not really related to the supply issue. 

Mr. DENHAM. What percentage of our pharmaceuticals are outside of McKesson? 

Mr. VALENTINO. Prior to September, a very, very small amount. 

Mr. DENHAM. Well, what is a small amount? 

Mr. VALENTINO. It—I do not have those exact figures. I would estimate less than one percent. Since that time, we have continued 

to order some non-contract drugs through McKesson using other 

procedures and other vendors, but it is still a very, very small 

amount. I would guess at this point in time that it is probably less 

than seven or eight percent that do not go through McKesson. That 

is a—that is just a guess. We can provide the Committee with detailed information if that would be desired. 

Mr. DENHAM. Thank you. 

I yield back. 

The CHAIRMAN. Mr. Reyes. 

Mr. REYES. Thank you, Mr. Chairman. 

And I have to confess. I am still confused about a couple of 

things. One, so one agreement that this does not represent, what 

actually happens? 

The CHAIRMAN. Put the veteran and his doctor. If you just put 

veteran and doctor——

Mr. REYES. Okay. 

The CHAIRMAN. —and they order to VA. That is the drop ship. 

Mr. REYES. Okay. So the way it is portrayed here, it is not accurate because it still goes through McKesson, right, on the chart 

here; is that correct? 

The CHAIRMAN. In the hand-drawn chart, it shows going—where 

I asked the question in regards to a third party, you say that is 

incorrect? 

Mr. REYES. That is incorrect in regards to how we process transactions with McKesson? 

Mr. VALENTINO. We would go directly from VA to McKesson and 

the arrow would come right back to us. 

Mr. REYES. And so that statement down here in red says VA 

never sees the order, confirms the order, and, therefore, cannot say 

all veterans are safe and all drugs are TAA compliant. Is that inaccurate as well? 

Mr. VALENTINO. You know, I do not think I have enough information to really comment decisively, but it does not seem to be——

Mr. REYES. Accurate. 

Mr. VALENTINO. —an accurate statement. 

Mr. REYES. Okay. But let me because I want to——

29

Mr. MATKOVSKY. One thing to answer, though, you know, the 

person placing the order would be an ordering official who has an 

explicit delegation for that authority. The invoice would come in 

and it would be reconciled by a contracting officer’s representative. 

So on both sides of the transaction, there are now controls. 

Mr. REYES. And the reason I ask that question is because I may 

be the only Member of the Committee that has a VA account, diabetes as a result of Agent Orange. And there is a new medication 

that I have been on now for two months that I intend to go to the 

VA and see if it can be provided through the VA because right now 

it is fairly expensive. 

So my concern is I have from my private doctor this prescription. 

I can go to the VA and ask for that medication and it would go 

through McKesson which is the current contractor, right? 

Mr. VALENTINO. It would depend on the drug. If it is a drug that 

is not subject to a restricted distribution, then, yes, it would go 

through McKesson. We would order the product. It would be 

shipped to us and we would provide that in a finished prescription 

to you. 

Mr. REYES. Okay. And my other question is, in 17 years, how 

many—McKesson has not been the only contractor for those 17 

years, correct? 

Mr. VALENTINO. Correct. 

Mr. REYES. So how many have been, because they bid—what is 

the process? They bid every couple of years or something like that? 

Mr. VALENTINO. I will defer to Mr. Thomas, but the last contract 

was a contract for two years with three renewal options that VA 

could exercise. So a total of an eight-year contract. The ones prior 

to that were five-year contracts and there were actually two previous contracts. 

This goes back to a pilot that was done in the early 1990s and 

then it was successful. It was converted into a multi-award contract. There were several prime vendors. We solicited a single 

prime vendor for five years and then eight years. And then we are 

going to be into our new contract. 

Mr. Thomas may have some additional information. 

Mr. THOMAS. Mike is correct. The last two contracts have been 

eight-year contracts totally, two original years and three two-year 

options. 

Mr. REYES. So in the last 17 years, there have been three contractors? 

Mr. THOMAS. To the best of my recollection, that is correct, yes. 

Mr. REYES. And to the question that the Chairman asked about 

structured contracts, that is illegal under FAR, right, to take a contract, break it down so it is under $203,000 just to get around the 

issue? Isn’t that illegal under FAR? 

I know it is illegal when you are bidding out construction and all 

these other things. I would imagine that it applies to this as well. 

Mr. GOULD. Congressman, I would have to agree with you. It is 

a hypothetical. As we responded, we do not think it has happened. 

We do not see any evidence of that. 

But to respond to your specific question, would it be illegal, Jan, 

do you have a view? 

30

Mr. FRYE. I think if someone intentionally set about to do that, 

it would probably be illegal. I would have to defer to counsel and 

we would certainly look at that if it came to our attention. As was 

stated earlier by, I think, Mr. Matkovsky, we have no indication 

that that has been done. 

Mr. REYES. Yeah. But that is not on structured contracts, right, 

when you structure them to be under the ceiling so that you 

can——

Mr. FRYE. Well, again, if we did it with malice or forethought, 

if we did it to avoid some rule or regulation or law——

Mr. REYES. It would be illegal? 

Mr. FRYE. —it would be looked at with a jaundiced eye. So—and, 

again, we have no indication that I know of at this point that that 

has happened. 

Mr. REYES. Okay. Thank you, Mr. Chairman. I yield back. 

And thank you, gentlemen. 

The CHAIRMAN. Ms. Brown. 

Ms. BROWN. Thank you, Mr. Chairman. 

Once again, I think I am a little confused as to what is the real 

problem here. But I want you all to clear a couple of things up. 

It seems as if this has been going on since 1998 which is about 

three or four administrations. And I am trying to figure out what 

is the problem, what are we trying to get to, because how many 

veterans do we serve per month, per year with prescriptions? And 

do we not require that the VA work along with the Department of 

Defense so we can get the best cost for the price of the drugs? 

Mr. GOULD. Absolutely. 

Ms. BROWN. I mean, you all do a good job with that and I want 

to thank you. 

Not like what we did when that pharmaceutical bill we passed 

that we demanded that the secretary do not negotiate the price of 

the drugs. You all negotiate the price of the drugs, if that is my 

understanding, you get the best cost for the veteran. In addition to 

that, you need to pay them timely and then they give a credit to 

the veteran. Clear that up for me. 

Mr. GOULD. So, Ms. Brown, our most important duty here is the 

uninterrupted flow of medicine to our veterans. There is no government waste here. There has been no danger to veterans. There is 

no incident of harm. 

We have been moving toward our goal of zero unauthorized commitments. We are doing that. If I may quote the Chairman, there 

has been a sea change here. We have gone from 70,000 to under 

450. 

The concern that we continue to have is that any unauthorized 

commitments is inappropriate and we are bound and determined to 

try to eliminate them. 

Ms. BROWN. Can you explain unauthorized commitment because 

it seems as if we think unauthorized is improper? Did the physician not write the prescription? Explain to me this unauthorized 

because I am real confused about who should do that. 

Mr. GOULD. The best one line description of an unauthorized 

commitment that I have heard is any purchase by an individual 

without proper authority or without following proper procedures. In 

31

no way does that get into the patient/doctor relationship which you 

are pointing out. That is untouched by this process. 

Ms. BROWN. Unauthorized could be the drug that our colleague 

just mentioned and this is a drug that is not on the formulary. So, 

therefore, it is a procedure that they need to get reviewed before 

they could actually purchase that. 

Mr. GOULD. I see your distinction. One is authorization to be on 

the formulary. 

Ms. BROWN. Yes. 

Mr. GOULD. The specific lack of authorization I was pointing to 

was not authorized to place an order with McKesson so they would 

have the training and the authorization to do that. 

Philip. 

Mr. MATKOVSKY. Ma’am, the PPV contract has access to pharmaceuticals that are on contract. These ordering officials that went 

from 2,000 down below 1,000 employees, and these are good staff 

who are working hard to try to follow the rules, when they order 

a medication that does not have a VA contract through the PPV, 

when they did that, that was the unauthorized commitment. 

It could be Cisplatin, a chemotherapy drug that is on our formulary. But because there was not a contract number there for 

them to appropriately order that and they lack the authority, they 

did not have warrant authority to commit the government. That is 

what made it unauthorized. 

Ms. BROWN. Uh-huh. Okay. You were interrupted by one of my 

colleagues and you were trying to make a point. Can you finish 

that point, sir? 

Mr. GOULD. Ma’am, thank you for that opportunity. 

I believe it had to do with the ratification process. And I think 

I subsequently got to explain that ratification is a cure, a legal 

process provided under the FAR and the VAR that we are scrupulously following. It involves three principal players within VA, 

general counsel, Office of Acquisitions, Logistics, and Construction, 

and our VHA team. And our goal and our efforts are to follow that 

process to the letter and come with a final determination. 

Ms. BROWN. So in closing, because I have another meeting I have 

to go to, would you restate for the veteran that is listening that his 

prescription is safe, timely, cost effective for the veterans? 

Mr. GOULD. Yes, ma’am. This is the largest direct health care 

system in America. We do 90 million patient visits a year. We do 

200 million lab reports. We fill 137 million prescriptions. This is a 

system whose quality is second to none. 

This very, very tiny area, less than one percent of all the activity, 

we are spending all of our time focusing on the exception. And the 

number of exceptions is below 450 in a half million events a month. 

Our veterans should be confident that this is a system that is 

built to deliver quality to them. And this process can be better and 

it is getting better due to the leadership of this team. 

Ms. BROWN. Well, thank you so very much for your service and 

may God continue to bless America. 

And I yield back the balance of my time. 

Mr. GOULD. Thank you, ma’am. 

The CHAIRMAN. Thank you very much, Ms. Brown. 

32

Mr. Gould, has VHA in the past—I know there has been a sea 

change. We agree to that. 

Mr. GOULD. Thank you, Mr. Chairman. 

The CHAIRMAN. Did VHA procure non-emergency covered drugs 

through the open market and agree to pay an unadjusted open 

market price instead of the federal ceiling price? Has that occurred? 

Mr. VALENTINO. If I understood your comment and your question, 

you are asking if we purchased a non-contract drug through the 

prime vendor? 

The CHAIRMAN. A non-emergency covered drug. 

Mr. VALENTINO. Okay. 

The CHAIRMAN. Non-emergency covered drug through the open 

market, like a noncompliant drug, and agree to pay an unadjusted 

open market price instead of the federal ceiling price. 

Mr. VALENTINO. We are aware that that has occurred. If you take 

a step back and ask why would somebody do that, there—it is very 

common for the manufacturer to want to sell you a whole case or 

a dozen of a product. 

And there are cases where we do not need a dozen. We need one. 

So there have been situations where ordering officers have ordered 

that single unit through the prime vendor at a price that could be 

higher than the contract price to avoid buying an extra 11 units 

that they do not need. 

So, yes, that is an issue. We—it is one of the things that we need 

to fix. We need to try to bring those drugs through the prime vendor distribution system or alternately have those made through a 

warranted contracting officer and try to negotiate with the manufacturer for smaller quantities. 

The CHAIRMAN. And the reason I ask the question is because I 

have got a memo basically that talks about that and says the Office 

of General Counsel has always been of the opinion that it is illegal 

to do that. 

So my colleague, Ms. Brown, and I, I think we are on the same 

side but something happened. Somebody all of a sudden figured out 

that prior to November of last year, something was not being done 

correctly and it has been changed. 

I am interested to know. You talked about reaching back to 

McKesson if they are, in fact, during your ratification process you 

find that, in fact, they were overpaid. 

If McKesson was, in fact, meeting the contract, are there not 

penalties in place for the employee that, in fact, may have made 

the error and other than a letter in the file? What happens then? 

Mr. GOULD. Other than the suspension that we have already 

done, the retirement in lieu of discharge that has already occurred 

to hold people accountable. And there is a tiered process that we 

have for accountability. 

The CHAIRMAN. What level was the person that retired? What 

level person was that in the——

Mr. GOULD. He resigned. 

Mr. MATKOVSKY. It was an ordering official. 

Mr. GOULD. Yeah. 

The CHAIRMAN. Okay. 

33

Mr. MATKOVSKY. Sir, the—it was stated earlier that this was 

somehow or another a rubber stamp process. I think it is very important to underscore that the person who is going through the 

ratification process, she herself is a warranted contracting officer 

and could lose her warrant if it is found that she is doing a perfunctory or otherwise pass-through process. So I do not think she 

is doing that. 

If the contracting officer identifies that a set of transactions, a 

transaction, a commitment cannot be ratified, the government can 

seek recompense from the employee. We have that within our authority. And we can use a mechanism of offset from their paycheck 

to enforce that recoupment. We have not found that yet. And, 

again, this is a warranted official who is going through this process. 

The CHAIRMAN. Okay. Thank you. 

Dr. Roe. 

Mr. ROE. I just have one big question that Mr. Reyes brought up. 

And are there or is there a circumstance, again so I understand 

this, where VA would go around McKesson to provide a drug that 

I have written a patient at the VA a prescription for, because the 

way I understood you saying that, that there is not? 

He asked that question and you said, no, this diabetic drug he 

has would go directly to McKesson. That would then go out. 

Are there circumstances where that would not occur in a nonemergent basis? 

I could understand an emergency where you have got to go out 

and get something if it is helpful or whatever it might be. 

Mr. VALENTINO. If a blue box that goes from VA to the—and it 

says unaffiliated, no contract company, so we have no relationship 

with them, we do believe that that has occurred a small number 

of times. And we are investigating that. But I would point out——

Mr. ROE. The correct answer is, yes, it could happen? 

Mr. VALENTINO. Yes, it could happen. But there are very legitimate reasons for doing drop ship with companies we do have a relationship with. And that does occur. 

Mr. ROE. See, I think that was where my—I thought that could 

happen and I think I would be careful about making a statement 

that there is absolutely no incident of harm that occurred to the 

VA because you do not have the quality control when that occurs. 

You have great quality control measures in here and I like what 

is going on. Let me just say that. 

This has been a tremendous improvement over a year ago. It is 

unbelievable the amount of improvement you have made. But it 

would be hard to make a statement that Mr. Gould that you—because when you do that, you do not know you should have those 

quality control measures. That is the point I was——

Mr. REYES. Dr. Roe, because I think what is pertinent here is 

that it is labeled down here under the blue box unaffiliated, no contract company. 

You just said that at times when you do have an established contract or affiliation with that company, that is when you think that 

might happen; is that correct? 

Mr. VALENTINO. I think everything is correct, but let me clarify. 

The FDA sometimes will say this drug has some issues, we want 

34

to control the distribution. We cannot get it through McKesson. So 

we place the order through McKesson. McKesson transmits that 

order to the manufacturer or the manufacturer’s distributor. It 

comes back to us and then the payment goes through there. 

But we do believe that there—there have been some reports. We 

have not fully investigated them, we have not fully investigated 

them, where in March, ten times we may have ordered a non-contract drug through a third party and it was drop shipped to VA, 

but it came to us. It came to us. It did not go right to the patient. 

Mr. REYES. To the veteran? 

Mr. VALENTINO. Right. So we had an opportunity to review what 

that product was. 

Now, not to muddy the waters too much, but I will also say that 

there are situations with medical surgical supplies where we have 

a formal contract with a vendor to drop ship adult diapers, catheters, those kinds of things directly to the patient. It is a formal 

contract we have with the manufacture—with the distributor. We 

have agreed upon prices, agreed upon service delivery, but these 

are——

Mr. ROE. That is a different issue. 

Mr. VALENTINO. These are med surge issues. 

Mr. ROE. That is a different issue. 

Mr. VALENTINO. Right. 

Mr. ROE. I yield back, Mr. Chairman. 

Mr. REYES. Thank you, Dr. Roe. 

The CHAIRMAN. Mr. Walz. 

Mr. WALZ. Thank you, Mr. Chairman. 

Just a quick follow-up. Again, I have said it a lot of times in here 

and I know all of you feel that this is a zero sum proposition with 

our veterans. Our goal is to try and get a hundred percent compliance. 

But you are telling me now, Mr. Gould, you are at 99.99991 in 

terms of those 456 is where it is at. 

My question would be is, if I took this diagram and I crossed off 

VA and I put in my hospital out there and crossed out the hospital 

here, 40 percent of our drugs are coming from overseas manufacturers, is that correct, on this in the general population roughly? 

Do you know that, Mr. Valentino? 

Mr. VALENTINO. I do not. 

Mr. WALZ. I think that is WHO’s numbers, the World Health Organization’s numbers or whatever. The chance of getting a drug 

this—by the way, that this is a concern and you talk about the ten. 

You were talking about the unaffiliated. That is happening in the 

private sector, right, as the norm? 

Mr. VALENTINO. Yeah. Sir, that is a good point. The, you know, 

the pharmaceutical market is a world market now. It is not a domestic market as it once was. These drugs are being manufactured 

all over the world, raw materials coming from everywhere, FDA approved manufacturing plants everywhere. This is a global pharmaceutical——

Mr. WALZ. Because I think this is a very important point we are 

bringing up and I think looking for and doing our oversight is absolutely appropriate of what we should be doing, asking you to come 

here and do that. 

35

But when I started to look and doing a little research in preparation for this, global drug procurement is a huge issue in developing 

nations, in developed nations on how you are reaching that and 

how those models are followed between the public and private sector of getting there. 

What I want to be very clear of is that, yes, the law is being followed, yes, we are doing those things, patient-centered, safety, 

making sure that accountability to the taxpayers and all that. 

I also, though, want to be careful that we are not closing the door 

to potential avenues of making all those things more efficient if 

that potential lies there. 

Mr. VALENTINO. I personally believe—this is—I am not speaking 

on behalf of VA, but I personally believe that the Trade Agreements Act holds VA and other federal agencies to a significantly 

higher standard. The threshold is much higher for us to make sure 

that we have a——

Mr. WALZ. And does the data show that holding that to a higher 

standard improves patient safety would be the question I would 

ask? 

I think that the default position is, I think FDA and we should 

have control over those manufacturing facilities, but if they can be 

certified, if they can be policed accordingly or whatever, are we 

then cutting off our veterans from the ability to be able to get the 

drugs they need at a cheap rate? 

That is a broader question here, but I think that brings up the—

I would yield back, Mr. Chairman, then the remainder of my time. 

The CHAIRMAN. Mr. Denham, do you have any questions? 

Mr. DENHAM. No. 

The CHAIRMAN. Mr. Reyes? Mr. Michaud? 

Mr. REYES. Mr. Chairman, just one question. 

You stated that about seven percent of your drug purchases are 

not being done through McKesson or under PPV. Where are you 

purchasing the drugs from? 

Mr. MATKOVSKY. When we instituted the new restrictions, anything that was going to be north of micro purchase limit could not 

be purchased anymore by an ordering official. It was to be purchased by a warranted contracting officer. 

So we have examples where our field contracting officers are 

competing and awarding contracts to other than McKesson, sir. 

So—but it is a contract. It is a contract action. It is competed. It 

is let by a warranted contracting officer, et cetera. 

Mr. REYES. And can you furnish us with the number of those 

kinds of contracts? Is it——

Mr. MATKOVSKY. I think we volunteered that we would collect 

the data, yes, sir. 

Mr. REYES. Okay. All right. That is it. Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. Valentino, you said, I think, if my notes are 

correct, that VA used the inappropriate drop ship. I say illegal, but 

whatever, you know. It was used approximately ten times in 

March? Does that sound——

Mr. VALENTINO. Yeah. We have had ten—when we look at the 

unauthorized commitments, we asked for a reason. And based on 

the data that we have from March, we have not fully investigated 

this, we believe the number is approximately ten give or take. 

36

The CHAIRMAN. If you know that, can you give me an idea of 

from like November 2011 to date? I mean, you talk about March. 

How about prior to March? 

Mr. VALENTINO. We—as each month progressed, we began to collect more and more specific information, so we could really drill 

down on the causes. I am not certain that we have been collecting 

those standardized reasons back to November. 

Initially it was a free text field that obviously requires a lot of 

work on our part to categorize those. So we can attempt to do that. 

We will do our best to collect that information. 

The CHAIRMAN. Is it correct to say then to the best of your 

knowledge, there was no work-around from the November time 

frame of 2011 to date, and that is what the diagram is kind of implying, that there was a way that you did not do it directly with 

McKesson, but you went to a third party back doored into 

McKesson, but to your knowledge, that did not occur——

Mr. VALENTINO. To my knowledge——

The CHAIRMAN. —except on limited occasions like the ten? 

Mr. VALENTINO. Yeah. And, I mean, there are—you know, I am 

guessing, but there are plausible reasons why that happened ten 

times. 

So, for example, prior to October, we essentially had one payment mechanism with McKesson, the payment card. On October 

1st, we established credit card accounts with McKesson so that we 

could order open market products. So it is not inconceivable that 

when somebody contacted the manufacturer for a drop ship order 

that they gave them the wrong account number. 

We have instituted read back procedures now so when we do give 

a number, we ask the vendor to please read that back to make sure 

that we have the right one. 

The CHAIRMAN. And that raises another question. When I asked 

one question, you talked about gave them the incorrect number. 

Could they have purposely given the incorrect number in order for 

that to occur? 

My question is, I do not know where there would be anything 

plausible since it is illegal where there would be a plausible reason 

that they—unless, as you said, it was an error. And I am again just 

trying to—but you all have been here and taken our questions and 

we appreciate that. 

I would ask if there are any other Members that have any questions that they may want to ask, any comments or statements since 

I was pretty quick to shut you down after going through testimony, 

but if you do have some questions. And, again, I think this Committee will all agree that from the November 2011 time frame to 

date, you have been making great strides. We are trying to go 

backwards to figure out why it was done for so long, the way it was 

done. 

And Ms. Brown and I will have an opportunity to talk. You 

know, if there was a need for a change, all we would ask is let us 

have an opportunity to—if it is a statute, give us a chance to fix 

it so that you can better do your job. 

But I am still not convinced that prior to the time that you began 

to make these changes that something was not happening within 

the system that goes prior to the Obama administration to the 

37

Bush administration to the Clinton administration. So this is not 

political in any way. Just happens to be when we happened to figure it out. 

But with that, if you have any closing comments, Mr. Gould. 

Mr. GOULD. Mr. Chairman, thank you for your questions here 

today. 

I know that on both sides of the aisle the spirit is taking care 

of our veterans and making sure that they get the services that 

they need. 

I particularly appreciate your recognition of the sea change. 

When this team brought forward the problem and took corrective 

action, we were hoping to see the kind of results that we have been 

able to produce for you here today and we are convinced that there 

is a new culture that is a part of VA. 

And I want to thank the front-line individuals who are making 

that happen each and every day. Thank you. 

The CHAIRMAN. And, Mr. Gingrich, one quick question. When 

could the Committee expect to see the results of the investigation 

that is ongoing now that we have been talking about for the last 

two hours? 

Mr. GINGRICH. You are talking about the IG investigation, sir? 

It is supposed to——

The CHAIRMAN. Your internal investigation into what happened 

prior to November 2011. 

Mr. GINGRICH. Sir, the plan is to have the ratifications done in 

series and we will have the first come to you by July or in July. 

The CHAIRMAN. Okay. Thank you very much. Thank you. 

And what I would like to do is take about a five-minute break 

if we can and we will reconvene in five minutes. 

[Recess.] 

The CHAIRMAN. The Committee will reconvene. Thank you very 

much for allowing us a short break and thank you very much for 

sitting through the last couple of hours of questioning. 

The second panel we are going to hear from, Ms. Linda Halliday, 

the assistant inspector general for Audits and Evaluations at the 

Department of Veterans Affairs, Office of Inspector General. She is 

accompanied by Mr. Gary Abe, director of the Inspector General’s 

Seattle Office of Audits and Evaluations who could very well be 

Secretary Shinseki’s twin brother. 

We will also hear from Maureen Regan, counselor to the inspector general, and she is accompanied by Michael Grivnovics, close, 

director of the Federal Supply System Division in the IG’s Office 

of Contract Review. 

Both of your complete statements will be entered into the record. 

And, Ms. Halliday, you are recognized for five minutes. 

38

STATEMENTS OF LINDA A. HALLIDAY, ASSISTANT INSPECTOR 

GENERAL FOR AUDITS AND EVALUATIONS, OFFICE OF THE 

INSPECTOR GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS, ACCOMPANIED BY GARY ABE, DIRECTOR, SEATTLE 

OFFICE OF AUDITS AND EVALUATIONS, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS, 

MAUREEN REGAN, COUNSELOR TO THE INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT 

OF VETERANS AFFAIRS, ACCOMPANIED BY MICHAEL 

GRIVNOVICS, DIRECTOR, FEDERAL SUPPLY SYSTEM DIVISION, OFFICE OF CONTRACT REVIEW, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS 

STATEMENT OF LINDA A. HALLIDAY 

Ms. HALLIDAY. Chairman Miller and Members of the Committee, 

thank you for the opportunity to discuss the results of the recent 

OIG report addressing VA’s pharmaceutical prime vendor fast pay 

system. 

Our work was done at the request of the Committee and the VA 

secretary. We reviewed the internal controls of the VA’s fast pay 

system in support of provisions of the prime vendor contract. We 

focused on the ordering, receipt of pharmaceuticals, and payment 

activities. 

Our review assessed controls in pharmacy operations at four VA 

consolidated mail outpatient pharmacies and four VA medical centers along with the Financial Services Center and the National Acquisition Center and included a review of the invoices paid. 

Our review found VA was providing payments to the prime vendor within 48 hours of the prime vendor’s shipment of an order. VA 

was paying an accurate amount for the actual goods received, processing payments to the prime vendor in accordance with laws, regulations, and the current terms of the prime vendor contract, and 

receiving reimbursement by other government agencies in a timely 

and accurate fashion. 

Controls over corrections of overpayments are critical under the 

fast pay system since corrections are identified and adjustments 

are made after payments are processed. 

The pharmacy benefits management’s business practice is to review prices for pharmaceutical items purchased from the prime 

vendor each month beginning three months after the purchase. 

This process experienced delays as the National Acquisition Center 

contracting officer redirected his efforts to plan the future contract. 

The NAC contracting officer continued to provide the pharmacy 

benefits management price reviews to the prime vendor. However, 

he did not follow-up on the results. 

The total value of the potential pricing differences identified in 

the monthly reviews of the prime vendor purchases from December 

2009 through April 2011 was approximately $46.4 million. 

We want to emphasize and be very clear on this that these are 

pricing differences, not payment errors, and that pricing corrections 

occur for several reasons such as retroactive price adjustments, 

item count errors, and product returns. 

We determined that VA’s controls did not reliably ensure timely 

resolution of the pricing differences. However, we also found that 

39

there was reasonable assurance that the pricing differences were 

resolved over time during McKesson’s credit and re-billing process. 

We also assessed pharmacy ordering and receiving operations to 

address whether VA had established adequate controls by examining the ordering and receiving duties of pharmacy staff to ensure 

they were adequately segregated. 

We determined controls were not effective at three of the four 

VAMC pharmacies we visited. These sites did not segregate duties 

among staff to prevent any one individual from having the ability 

to both order and to receive non-controlled pharmacy supplies. 

Our report offered recommendations to ensure timely completion 

of price analysis, proper segregation of supply ordering and receiving duties, and adequate verification of supply receipts. 

The VA officials presented acceptable implementation plans to 

correct the weaknesses identified in our fast pay review. 

Mr. Chairman, Maureen Regan will now address open market 

purchases. This concludes my statement and we would be happy to 

answer any questions.

[The statement of The Office of Inspector General appears in the 

Appendix] 

STATEMENT OF MAUREEN REGAN 

Ms. REGAN. Good afternoon. Thank you. 

The primary purpose of the current review that is being conducted by the Office of Contract Review is to quantify purchases 

identified as open market for fiscal year 2011. We used a database 

maintained by McKesson and VA to identify those purchases. 

To conduct a review, we identified purchases as open market 

when there was no underlying contract number listed in the appropriate database field. And what we found was a little bit surprising. 

Of the $4.3 billion in purchases through the prime vendor, we 

found that about $290 million were identified as open market in 

the database. Of that, $283 million represented pharmaceutical 

purchases. The other $7 million was medical surgical items. 

We reviewed all the purchases for 100 of the top selling pharmaceuticals identified as open market and these purchases represented about $108 million of the $283 million or 38 percent. Of 

that, 43 of the items or 58 percent of the dollars in our sample 

were actually contract items. They had been misrepresented as 

open market in the database. 

And, we went back and looked at pricing and we found that they 

were sold at the contract price when pricing was not affected by allocations. 

We learned through this process that pricing and other adjustments are made continuously by the PPV to reflect price changes 

due to contract awards and modifications. Therefore, purchasing information cannot be quantified by simply reviewing data captured 

for a period of time. You have to look at data a long period of time 

because of the process of adjusting the dollars. 

We concluded that McKesson has done a good job of correcting 

pricing through credits and re-billing when the prime vendor system is updated by VA to reflect changes in contract pricing. 

40

But we also found that there are delays in updating the system 

and those are due in part to poor communication between Pharmacy Benefits Management and the National Acquisition Center’s 

FSS and National Contract Divisions. 

In our sample, we identified nine items that were purchased 

open market. The products were actually on Federal Supply Schedule contracts, but they were purchased through the prime vendor 

by VA at open market prices. 

This happened because the manufacturer did not agree to sell 

their product through the prime vendor. So McKesson was not required to give the VA the prime vendor price. By purchasing 

through the prime vendor, VA overpaid $4.8 million for these 

items. 

This was of concern to us because we identified this problem 

through our post-award reviews back in 2007 and reported it to 

VA. We were told that the purchasing system was changed to block 

purchasers from buying these products through the prime vendor. 

However, when we reported the problem again in 2011, also 

through our post-award reviews, we learned that at VA’s request, 

the system allows the purchaser to override the block. 

We also reviewed the accuracy of VA’s reported .4 percent in 

open market sales through the prime vendor contract in December 

of 2011. We found that the procedures implemented in November 

2011 did not preclude or prohibit open market purchasing. Instead 

open market purchases were shifted from the PPV contract, the 

prime vendor contract, to other financing accounts. We identified approximately $7 million purchased through the 

new open market purchasing system which represented about two 

percent of the total purchases by VA through McKesson, so the appropriate amount of open market purchases was about 2.4 percent, 

not .4 percent as reported. 

Based on the review that we conducted of the open market purchases and our ongoing pre- and post-award audits of the federal 

supply schedule contracts, we know that open market purchasing 

through the prime vendor is impacted by several factors including 

items that are not on contract but are needed to provide care to our 

veterans, a growing number of product allocations and shortages 

which necessitate purchasing items open market at non-contract 

prices, and purchasing items through the prime vendor for convenience instead of buying direct from the manufacturers who do not 

participate in the program. 

We also know again through our pre and post award work that 

a growing number of generic drugs are not on contract. Unlike 

branded drugs, there is no requirement that manufacturers offer 

generics on FSS contracts. 

In addition, an increasing number of products are no longer manufactured in the United States or a designated country and, thus, 

cannot be offered on contract due to Trade Agreement Act requirements. 

We are currently reviewing open market purchases to determine 

whether the purchasers violated federal procurement laws and regulations including the Trade Agreements Act. 

This concludes our statement. We will be happy to answer any 

questions the Committee may have.

41

[The statement of The Office of Inspector General appears in the 

Appendix]

The CHAIRMAN. Thank you very much. 

If you would, and this may dovetail on what you just talked 

about, Ms. Regan, and, Ms. Halliday, I think you touched on this 

a little bit, but in VISN 8, evidence suggests, and this is a peninsular part of Florida, that they purchased Letrozol—is that the 

right name, I assume it is, it is the generic name for Femara—on 

the open market even though there was a contract for the medication. 

And according to an email exchange that VA provided to us, they 

overpaid for the medication and violated their own directives and 

additionally it does not appear that Letrozol is Trade Act Agreement compliant. It apparently is manufactured in Macau, in China. 

And I would just like to know. Tell me what you know about 

this, if you know that specific instance, and is this an issue? 

Mr. GRIVNOVICS. I do not know of the specific instance you are 

referencing, but in talking to people at the CMOPs and at some of 

the facilities that we had visited, they do occasionally get noncompliant TAA products delivered either to the CMOP or to the individual facility pharmacy. 

And the individuals that are there receiving and recording that 

information do check to see if those products are coming from a 

designated country. And if they find that they are not, they do send 

them back the PPV. Does this happen in all instances, I cannot say 

for sure, but they do check to make sure the products are compliant with TAA. 

The CHAIRMAN. So if there was a contract, if the drug was on 

contract and no open market, would it not be required to come from 

a TAA compliant country? 

Ms. REGAN. Not knowing all the facts, were they buying the generic brand or were they buying the branded drug? 

The CHAIRMAN. They were buying the generic and I think that 

is where you just said the generic may not have to comply with 

that. 

Ms. REGAN. With the generic itself, if the generic is on a federal 

supply schedule or national contract, it does have to comply with 

the Trade Agreements Act. But generic drugs are not required to 

be on contract. The branded drug can be on contract, but a lot of 

times your price difference is very significant between buying the 

branded drug which would be on contract and buying the generic 

product open market. 

We would be happy to look at the issue if you want. 

The CHAIRMAN. If you would. The drug is spelled L–E–T–R–O–

Z–O–L. That is the generic name. It appears that the brand name 

is Femara. 

Ms. REGAN. Right. 

The CHAIRMAN. And maybe McKesson can answer this when 

they come up. But the evidence that I have is that there is a contract for the medication. And if that is the case, then it should be 

TAA compliant. Go ahead. 

Ms. REGAN. If they were buying the drug that is on contract, in 

other words, the NDC number would have to be the branded drug 

42

that is on contract, not a generic brand, either manufactured by 

the same company or manufactured by another vendor. 

The CHAIRMAN. So you are telling us that a generic drug does not 

have to come from a TAA compliant country? 

Ms. REGAN. If the generic drug is bought open market, there is 

no contract that requires TAA compliance by the manufacturer. 

The CHAIRMAN. Okay. I thought there was something we were talking about that there was a $203,000 level of purchase, not 

whether it was on contract or not. 

Ms. REGAN. I would have to see the specifics of how this was purchased in order to answer your question. 

The CHAIRMAN. Thank you. 

Did your audit investigate payments made before delivery of the 

pharmaceuticals under the fast pay system? 

Ms. HALLIDAY. Yes. We tested several transactions to look at the 

ordering and to look at the payments. Traditionally the fast pay 

system makes—payment within 48 hours. 

What we wanted to make sure was that there was reconciliation 

between what was being received and the order so that we did not 

have any problems or disconnects there and then that would put 

VA in a situation of paying for something they had not received. 

The CHAIRMAN. Mr. Reyes. 

Mr. REYES. Thank you, Mr. Chairman. 

In your report, you state that one medical facility pharmacy pur- chased $29.1 million of non-controlled substances from the PPV in 

2011, yet the pharmacy staff did not inventory PPV shipments of 

non-controlled pharmaceutical supplies with the invoices. 

So a couple of questions. What is your observation about this 

issue and can you please provide us some examples of what are 

non-controlled supplies versus controlled pharmaceutical supplies? 

Ms. HALLIDAY. We considered that a significant weakness at that 

medical center and that is the exact scenario that I just described 

that could put VA in the position of paying an invoice, yet possibly 

not receiving the goods. 

There has to be that reconciliation that you know you have received what you are paying for. It is more critical in the fast pay 

system because the payments are made upon shipment of goods. 

Now, adjustments are made. It takes a little time, but we also 

followed that process and found that the adjustments were happening when there was an item count difference like I referenced 

in my statement. 

So I think that there was generally a good control at most places, 

but the sites that we went to, there was the one site at the VAMC 

in Dallas that they said they were spot checking, but we could not 

find evidence of that when we were on site. 

Mr. REYES. And the other question I have involves the limits 

that the Chairman just mentioned about $203,000. In your investigation, were there any what is commonly referred to as structured contracting which means they would break it down just so 

it would be under the in this case $203,000 limit? Was there any 

instance or any evidence of that? 

Ms. REGAN. We have not seen any evidence of that yet, but the 

review is still ongoing. So we could see some as we continue to go 

through the data, but we have not seen that yet. 

43

Mr. REYES. Okay. All right. Thank you, Mr. Chairman. I yield 

back. 

The CHAIRMAN. Mr. Michaud. 

Mr. MICHAUD. Thank you, Mr. Chairman. 

Dealing with the Trade Act adjustment, have you looked at, and it is my understanding that $203,000 is the limit, have you been 

able to look at the drugs below that purchase amount that has 

been purchased from overseas, whether it is China, India, and 

what type of drugs those are? 

Ms. REGAN. That is one of the issues that we are still looking at 

to see if we can quantify that. What we do know from our pre- and 

post-award work is that drugs from non-designated countries is a 

huge issue. There are some drugs that you cannot buy on contract 

because they are not manufactured in the U.S. or a designated 

country. And so that is a problem. 

But we have even had a couple of voluntary disclosures from 

companies with contracts that mixed up TAA compliants and noncompliant products. One of them had some product made in this 

country and some made overseas and they sent the wrong one. The 

Trade Agreements Act only applies to the Federal Government purchases. But there are a lot of drugs that are just not manufactured 

here anymore. 

Mr. MICHAUD. Now, have you also looked at, I know there has 

been some discussion that you can buy them overseas as long as 

they are FDA approved, have you looked at the process whether 

FDA is actually doing the appropriate approval in those particular 

areas? 

Ms. REGAN. The issue is whether or not they are manufactured 

in FDA approved plants. And that is an FDA issue. Our contracts 

have a clause that require FDA compliance not just where they are 

manufactured but also for improper marketing, kickbacks, things 

like that in the pharmaceutical industry. 

I know we have worked with the Department of Justice on two 

cases in which products were sold to us that were made in plants 

that had not been certified or had been decertified. One of them 

was actually a plant in Puerto Rico, the Sidra case. And there is 

another case being settled now by the Department of Justice. 

So we work with them to make sure that VA’s interests get protected. But we do not have any authority to go out and look at the 

plants or anything else. 

Mr. MICHAUD. Because that would be my second concern is 

whether or not a plant is supposedly an FDA approved manufacturing plant when, in essence, it is not complying with the laws. 

In your opening remarks, you talked about on the open market 

sales through PPV that it is at 2.4 percent. The VA said it was, 

I believe, four percent as VA reported. 

Why the discrepancy? 

Mr. GRIVNOVICS. The open market purchases that went through 

the PPV contract are 0.4 percent, but we found that the facilities 

can still also buy from McKesson through a different account. I will 

just call it an open market charge account, let’s say. So facilities 

can still go that route and it is not through the PPV contract anymore. So that is that two percent that we referred to. 

Mr. MICHAUD. Okay. Great. Thank you, Mr. Chairman. 

44

The CHAIRMAN. Mr. Walz. 

Mr. WALZ. Well, thank you, Chairman. 

And, again, thank you all for being here. In full disclosure, I am 

a big fan of the IG, so I never make any bones about that. 

Ms. Halliday, in listening to Deputy Secretary Gould’s assessment, and I know it is a subjective term, that there has been a sea 

change since last year, does your work reflect that would you say? 

Ms. HALLIDAY. We looked at the fiscal year 2011 transactions 

and we could start to see what we thought were improvements, especially tightening up controls in the contracting piece. I think that 

significant deficiencies existed over time. The ordering officials and 

the reviews by supervisory contracting officers that had been very 

weak, we see attention to that now. 

Mr. WALZ. And does your analysis then show is there any correlation in doing that with either a decreased amount of service to 

veterans or an increase in their service or——

Ms. HALLIDAY. I could not comment to that. 

Mr. WALZ. —is that hard to—that is hard to say? 

Ms. HALLIDAY. Yes. 

Mr. WALZ. Because I am still getting my mind wrapped around 

if use of PPV, if it is helping the veterans and at the long run, obviously that caused part of it. 

Did you see, and I listened, you know, your detailed description, 

the PPV program, is it fraught with fraud, waste, and abuse or is 

it simply could have been managed better? 

Ms. HALLIDAY. Well, when we looked at the fast pay procedures, 

we found it to be a good system. You are processing millions of 

transactions and there were controls over these transactions and 

the payment. There seemed to be a conscious effort to try and reconcile the payments with the actual invoices. 

Mr. WALZ. And that is to be a good partner with our private sector suppliers, correct, and make sure that they are not waiting? 

This was always a big problem I had on small contracts. Nobody 

wanted to mow the yard at the armory because they were not sure 

they would get paid or that type of thing. 

Ms. REGAN. One thing about the prime vendor contract, and I 

know I am dating myself here, but back in the early 1990s, we 

bought direct from the manufacturers. We did not use a prime vendor and we had a large depot system. When the Federal Acquisition Streamlining Act and the Federal Acquisition Reform Act were 

passed in the mid 1990s, all that had to go away. 

I know from our pre and post awards at that point in time, we 

were actually paying a little more for the product because the manufacturers and commercial customers go through a prime vendor, 

a distributor. So McKesson does not just have the VA. They have 

a lot of other hospitals in the private sector. 

Mr. WALZ. Walmart, correct? 

Ms. REGAN. Yes. A lot of your hospital systems used a prime vendor before VA did. And, actually, it is a negative fee that the VA 

gets for using the prime vendor. 

Mr. WALZ. I found this kind of interesting, Mr. Chairman. I have 

to say I was noticing again the title of this hearing. The through 

the looking glass part I am getting at is we are kind of arguing 

45

against using private sector for reduction of costs which might be 

my through the looking glass. 

But that aside, two last questions. Ms. Regan, you mentioned 

something that was—it sounded somewhat troubling to me and it 

was in your testimony. The VA was able to override the block they 

had and shift from the PPV to other areas. 

What did that mean exactly or what was happening there? 

Ms. REGAN. Manufacturers are not required to sell through the 

prime vendor. They have to actually have an agreement with 

McKesson. To get into detail, it is a charge back issue. If McKesson 

pays $100 for the drug and our price is $80, there is a charge back 

system that they would get back the $20. 

So there has to be an agreement with the manufacturer of the 

product and the prime vendor. And there are some manufacturers 

who have not agreed to do that. So VA is supposed to order directly 

from the manufacturer to buy these products. These are usually 

branded drugs which means prices are capped at the Federal Ceiling Price. We are not supposed to pay more than the contract price. 

When it is purchased not from the manufacturer in those cases 

but through McKesson, we do not get and we do not have any right 

to get the contract price. We have done a couple reviews where we 

paid a lot more than the contract price. In fact, in this one, I think 

it was about $9 million in sales of which 4.8 of that was overpriced. 

That is significant——

Mr. WALZ. Yeah. 

Ms. REGAN. —even though it is a few products. When we recognized it in 2007, we talked to VA about it and they told us they 

blocked it so that when a purchaser went in the system, they could 

not buy it. We found in 2011 when we did other work that the purchases were not blocked. 

And so I worked with the IPT for the new contract and the issue 

came up. And that is where I found out that, the block is there, 

but they can just override it. 

Mr. WALZ. Now, that is an important oversight piece. And I am 

going to ask you this and I ask from your experience on this. Just 

ask you to be candid on this. 

Has McKesson been good actors in this for you? I mean, you have 

got a private sector company trying to do what they should do, 

make profit. 

Ms. REGAN. I think as we said, we thought McKesson has done 

a really good job. This is really complicated especially with contract 

pricing changing every couple days. I mean, the new prices for 

branded drugs go into effect in January. With modifications, additions, subtractions, the prices on other drugs are changing all the 

time. And as we looked over the issues over time, we found we 

were paying the contract price. So we did not find any problems 

with McKesson. 

Mr. WALZ. So if there were overpayments, it was not the case of 

McKesson or a private entity overcharging on purpose? They were 

following the rules, following the——

Ms. REGAN. Right. 

Mr. WALZ. —procedures that were in place? 

Ms. REGAN. I would say what we found was VA overpaid because 

they did not order correctly. But as far as McKesson, the prices 

46

that they charged the VA were comparable to the contract prices. 

The other problem you get into is with allocation and shortages 

where we do not get the contract price sometimes. 

Mr. WALZ. Right. 

Before I yield back, Mr. Chairman, I know this is not your area, 

but maybe you can influence the look at this. I keep coming back 

to this Trade Agreements Act with the very changing dynamics of 

global pharmaceuticals. And I think in the future, that is going to 

be even a bigger issue. And if this Committee can drive some of 

that talk, it would be great. 

But I yield back. 

The CHAIRMAN. Thank you very much. 

Members, any other questions? 

I apologize for shortening our question period, but we are about 

to back up against a vote and I would like to get the next panel 

before us for their testimony and their questions. 

So thank you very much for your work and your testimony this 

morning. You are excused. 

Ms. HALLIDAY. Thank you. 

The CHAIRMAN. And as the second panel leaves the table, I invite 

the third to come on forward. And on this panel, we will hear from 

Mr. Paul Flach. He is the vice president of Health Systems National Accounts for McKesson Corporation. 

Mr. Flach, you have heard me say this already. Your complete 

written statement will be made part of the official hearing record. 

Thank you for being here with us today and you are recognized for 

five minutes. 

STATEMENT OF PAUL FLACH 

Mr. FLACH. Thank you, Mr. Chairman. 

Good afternoon, Mr. Chairman and Members of the Committee. 

My name is Paul Flach, as the Chairman had stated, and I am vice 

president of McKesson Health Systems National Accounts for 

McKesson Corporation. 

On behalf of McKesson, the company committed to our veteran 

employees and to the contract we have with the VA, I would like 

to acknowledge and thank the Committee and the Department of 

Veterans Affairs for all that you do for America’s veterans every 

day. 

Mr. Chairman, as you know, McKesson provided testimony on 

the pharmaceutical prime vendor contract before this Committee 

earlier this year. We understand your oversight responsibility for 

the Department of Veterans Affairs and particularly as it relates 

to the PPV contract. 

We recognize the importance of this contract to the VA’s health 

care system and ultimately to America’s veterans. 

I am here today to provide the Committee with some additional 

information about the PPV contract as well to answer to your questions. 

As our PPV contract requires, McKesson provides thousands of 

products to the VA at prices set under federal supply contracts 

which the VA has secured through direct negotiation with pharmaceutical manufacturers. 

47

In April of 2012, the VA purchased through the prime vendor 

contract 99.83 percent of its products under the VA negotiated contract with manufacturers. 

There are circumstances, however, when contracted pharmaceuticals are in short supply or other critical medicines are needed 

to treat patients. 

Purchase of pharmaceuticals that are not on contract are frequently referred to as open market purchases. Stated simply, open 

market purchases are for products which are not subject to a contract price negotiated by the VA with the manufacturer. 

We would like to emphasize that all pharmaceutical products 

purchased by the VA from McKesson whether under VA contract 

or an open market item have the required FDA approvals. 

Purchases of open market products are a standard practice in the 

private sector. In the private sector, for instance, 30 to 40 percent 

of the purchases made by hospitals and institutional customers are 

for open market products. 

Since November when the VA asked for our assistance, we have 

been working closely with them to restrict open market purchases 

under the PPV contract. 

As a result of these efforts and other steps taken by the VA, open 

market purchases under the PPV contract have dramatically declined from less than five percent previously to less than 2.1 percent in November 2011 and to .17 percent in April of 2012. 

In collaboration with the VA last fall, we modified our on-line 

electronic ordering systems. Open market items can no longer be 

viewed on the ordering screen by those who are placing an order 

under the PPV contract. McKesson was given 48 hours to make 

this change and we met the VA’s deadline. 

McKesson is preparing for the new PPV contract that will go into 

effect in August. We will be enhancing our technology beyond what 

is required to meet the VA’s intention to restrict open market purchases. 

Our systems are complex and must be able to process over a million line items on a daily basis. Therefore, we are making these enhancements judiciously because the VA relies on the timely delivery of the medications and orders to provide medical care for our 

Nation’s veterans. 

As part of developing technology enhancement, we are building 

a restrict and notify component with plans for this functionality to 

be available later this fall. If the VA attempts to order a pharmaceutical product from our distribution centers, it will result in an 

open market purchase under the PPV contract. Our system will 

automatically remove the item from the order and send a corresponding notification back to the VA. 

This notice will alert the VA that we are not delivering the specified pharmaceutical product and enable it to identify alternatives 

to meet the patient’s need on a timely basis. 

Mr. Chairman, in April, McKesson was selected by the VA to 

continue as the pharmaceutical prime vendor. The VA conducted a 

rigorous competition for this contract award and we are honored to 

be selected again as the PPV and are committed to continuing to 

deliver outstanding value and service to the VA and our veterans. 

48

On behalf of McKesson, I want to thank the VA for the trust they 

continue to place in our performance, our people, and our company. 

McKesson is very proud of our unique ability to improve the delivery, cost efficiencies, and quality of care for our Nation’s veterans. 

America’s veterans deserve the best health care and McKesson is 

committed to a partnership that continually enhances the VA’s 

ability to provide critical services to the veterans they serve. 

Mr. Chairman, thank you for the opportunity to appear here 

today. I am happy to answer your questions.

[The statement of Paul Flach appears in the Appendix]

The CHAIRMAN. Thank you very much, Mr. Flach. 

If you would, we have heard from a couple of panels that there 

are ways that VA employees can purchase a pharmaceutical off 

contract, and what I would like to get from you is, if you would, 

are you aware of the methods that they may be using and can you 

explain your understanding of the methods that they may use? 

Mr. FLACH. Mr. Chairman, by purchasing off contract, you mean 

off the PPV contract, purchasing open market product? 

The CHAIRMAN. Yes. 

Mr. FLACH. Open market product, as I mentioned, in November, 

we put in a block that restricted the ability for the VA facilities to 

be able to view any open market product on the ordering system 

of McKesson. That would not allow them to place any orders directly into the system. 

However, there are instances, such as the scanning of the shelf, 

where like Walmart, Costco, they use these hand-held order entry 

devices to scan to order product. They scan the bar code label on 

the shelf and if one of those items happens to be an open market 

product and they import that into our ordering system, that item 

will go into that purchase order to be ordered. 

Now, we have informed the VA that we had this issue and that, 

there were ways that the facility could identify those items and delete them from the order. 

When we put this enhancement in place in the late fall with the 

new contract, that component will not be there anymore. That will 

go away because if they do scan that item and it does go into the 

system, it will be eliminated from the order and we will notify the 

facility that that has taken place. 

The CHAIRMAN. The question would be, do you think it was done 

unintentionally, was it done intentionally by the employee in order 

to get the item ordered? 

I mean, we have all seen where people take a bar code and tape 

it to something and then they just zip, zip, zip. You see it as you 

go through a home building store. 

And my question is, why would an employee want to do that? 

Mr. FLACH. Mr. Chairman, I really cannot speak to whether or 

not they are doing it intentionally or not. I mean, the fact of the 

matter is the shelf label may have the bar code there that indicates 

it is a non-contract product. And when they scan it, it ultimately 

is imported into the ordering system. 

The CHAIRMAN. So you do not believe that a VA employee is attempting to do a work-around after the November 2011 time frame 

in order to keep being able to buy that open market product? 

49

Mr. FLACH. I would not believe that they would do it intentionally. I think it would probably be inadvertent, that it was done 

when they scanned the shelf. 

I will say, though, also that when they do that scan, they have 

the ability at that point to eliminate that item off the hand-held 

unit as well as eliminate the item from the order when it gets 

transmitted into the system. 

So the capability does exist to remove the item from the order 

before they transmit to McKesson. 

The CHAIRMAN. Can you talk about the differences that you have 

seen recently within VA in their ordering process? 

Mr. FLACH. As I mentioned, dramatically the number of orders 

and the dollars have gone down from November 2011 to almost 

nothing in the month of March or April. It was like $600,000. Understanding that as the Committee strives to get this number to 

zero, the drop has been dramatic. I mean, the open market purchases have decreased on a substantial basis. 

The CHAIRMAN. Mr. Reyes. 

Mr. REYES. Thank you, Mr. Chairman. 

And as a veteran with a VA account, I want to thank you for the 

diligence that McKesson has in providing drugs to the VA for our 

veterans. 

But I want to ask is there a circumstance where VA would purchase from you but not under the PPV contract? 

Mr. FLACH. Yes. There are other ways to order from McKesson 

besides the PPV account. 

Mr. REYES. Can you explain some of those? 

Mr. FLACH. When we were approached in October or back in 

2011, we were informed that in October the open market purchases 

were no longer going to be allowed on the PPV contract. 

At that point in time, there was no other vehicle for which the 

VA could order through McKesson because it was only that prime 

vendor account that was in place. 

So we, working with the VA, put together a credit card account 

that would allow them to purchase within the micro threshold of 

$3,000. So they could, in fact, order open market product under 

that credit card that would not then go under the PPV account. 

Mr. REYES. And it is also my understanding that the discount 

under the new contract is 8.65 percent which is up from the previous 5.15. 

Can you tell us or explain to the Committee how you arrive at 

this percentage and can you explain to us how the discount works? 

Mr. FLACH. How the discount basically works is you get 8.65 percent off of any product that is purchased or any item purchased 

through the prime vendor program. 

As far as the details on how that price is derived, I would have 

to default to our accounting folks on that piece because it is a very 

convoluted and complex process how they come up with that pricing. So I am not sure if the Committee wants to get into all that 

today. 

Mr. REYES. Okay. I will yield back, Mr. Chairman. 

Thank you very much. 

Mr. FLACH. Thank you. 

The CHAIRMAN. Mr. Michaud. 

50

Mr. MICHAUD. Thank you, Mr. Chairman. 

Thank you very much for coming today. 

You mentioned the open market has dropped dramatically since 

November from the VA. 

Are you concerned of where the VA might be getting open market products from or——

Mr. FLACH. Obviously when they purchase the open market product, according to the regulations as I understand it, they have to 

have fair and open competition. They have to go to other companies 

to get pricing in my understanding. 

We may win, we may lose on the price. I mean, obviously we 

would like to keep that business. But if through their process it 

goes to another company, then that is the nature of the game unfortunately. 

Mr. MICHAUD. Uh-huh. You heard a lot of discussion this morning about the Trade Act Agreement and what the VA might be purchasing from overseas and not McKesson as a whole. 

I know that the VA has to comply with the Trade Act. But for 

your total products that you provide for whether it is hospitals or 

what have you, how much of it is—do you do analysis if it is Trade 

Act compliant even though you do not have to or is a lot of it coming from overseas? 

Mr. FLACH. Sir, we only buy from FDA approved suppliers. Now, 

you have the restriction within the VA of the TAA compliance component. And we have always been under the impression that the 

TAA compliance for this contract was at the discretion of the VA. 

Now, as you have heard testimony on the next contract, 

McKesson is going to be responsible for the TAA compliance in that 

new category that they have designed called WAC price generics. 

At that point, we will be compliant. We will have to be compliant 

to TAA. The only way we can be compliant with TAA on those 

products is we have to go to the supplier for them to tell us if they 

are compliant to the TAA. There is no other way for us to know 

that information. 

Mr. MICHAUD. Uh-huh. But for your other customers other than 

the VA, do you know if they are, even though they do not have to 

be, do you know if they are TAA compliant? 

Mr. FLACH. It is my understanding that the majority, if not all 

the commercial customers that we do business with, do not take 

into account the TAA compliance. 

Mr. MICHAUD. Okay. 

Mr. FLACH. They could buy from whatever country that it is 

manufactured in. 

Mr. MICHAUD. Okay. Now, you mentioned you would have to go 

to the supplier manufacturer to find out whether or not they are 

FDA approved. 

How would you know if they really are? I mean, if they tell you 

they are, but they are really not, I mean, how would you really 

check that out? 

Mr. FLACH. Our agreement with any supplier that we do business with requires that they are the FDA approved supplier. It has 

to be verified by that supplier that the FDA has, in fact, approved 

them. 

51

My assumption, and I cannot speak for the purchasing folks, but 

my assumption would be that if we find out that they are not, we 

would no longer do business with that company. 

Mr. MICHAUD. Okay. And in your contract with those particular 

companies, if on day one they might be FDA approved, but 30 days 

into the process they are not for whatever reason, what would happen with your contracts with that particular company? 

Mr. FLACH. It would be my understanding that we would, and, 

again, I would have to defer to the processes in place for our purchasing department, but it would be my understanding that we 

would stop business with that customer, that supplier. 

Mr. MICHAUD. But how would you know unless they told you and 

if they were going to deceive you in the first place, what makes you 

think that they will let you know that they are no longer FDA compliant? 

Mr. FLACH. I am sure somehow along the way it will come to 

light and we would address it. I mean, we would have to go by 

what they tell us or if someone else, a customer, whoever it may 

be, would find out that they are no longer FDA compliant or the 

FDA notifies us that they are not compliant, we would then cease 

and desist business with that customer, that supplier. 

Mr. MICHAUD. Thank you very much. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. Mr. Flach, a great deal of attention was paid to 

a drawing whose artist will remain unnamed this morning, but basically it was showing possibly where a doctor would prescribe a 

drug, VA would go to a third party, and I can get the artist to sign 

that for you if you would like. 

Mr. FLACH. I will have it framed later. 

The CHAIRMAN. It would go to a third party and that third party 

then would order from McKesson. McKesson would drop ship it 

then to the veteran. 

Are you aware of this ever occurring? 

Mr. FLACH. Yes. In the commercial world, this is common practice. 

The CHAIRMAN. I am just talking about within VA. 

Mr. FLACH. In the VA, yes. I mean, as Mike Valentino addressed, 

there are situations where there are products that we cannot handle. The supplier has specifically stated that it is a specialty product that has to go through the supplier. It cannot go through 

McKesson as the prime vendor. 

It may require special handling such as vaccines that the supplier does not want to go through the wholesaler or it may be manufacturer control problems where the supplier says, look, I do not 

want to put it in the wholesale channel because what is going to 

end up happening is you are going to have a hoarding of that product, so I want to control the supply chain. So it has to be purchased 

direct. 

Those situations occur all the time and I am sure that they have 

occurred with the VA. 

The CHAIRMAN. But why wouldn’t VA deal directly with 

McKesson, McKesson go to the third party and backwards? Why 

would the VA go around to the other supplier? If you are the PPV, 

52

why would they go to somebody else and then the billing come 

through drop shipping and billing through you? 

Mr. FLACH. My understanding, and correct me if I am wrong, Mr. 

Chairman, but the third party in my mind is the supplier. When 

a drop ship is ordered, the customer can either call the supplier directly and place the order and have the order shipped to them and 

then the supplier can either bill the facility directly or they can do 

what we call a drop ship bill through where they would drop ship 

the product to the customer and then they would bill through 

McKesson. 

The other situation occurs where the VA facility can call 

McKesson. We have a dedicated VA service department, all they 

handle is the VA. The VA could call the VA service department. 

They would say I want to order these products. Here is my account 

number. We would then call the supplier on behalf of the VA and 

place the order with the supplier. Then the same situation occurs. 

The supplier then ships the product directly to the VA without having to go through another party which is McKesson and then bill 

through us. 

The CHAIRMAN. It seems to me as the PPV, that is the way you 

would want it to occur so you have pretty much control over what 

goes on instead of you being left out of the original ordering of the 

product. 

Mr. FLACH. I am sorry. I missed——

The CHAIRMAN. Well, you said there are two options. 

Mr. FLACH. Yes. 

The CHAIRMAN. One, they can go to McKesson. 

Mr. FLACH. Yes. 

The CHAIRMAN. McKesson can make the request of the manufacturer or VA can go straight to the manufacturer. 

Mr. FLACH. Correct. 

The CHAIRMAN. Why wouldn’t they just go to the PPV? Why 

wouldn’t they go to McKesson? Why would they go around you? 

Mr. FLACH. There are instances when they may not want to bill 

through McKesson. Now——

The CHAIRMAN. But can you think of a reason why they wouldn’t 

want to go through the people who hold the largest contract in the 

VA? 

Mr. FLACH. One of the things they do have at their discretion is 

there are some items that are on our ordering screen that are drop 

ship only like the Baxter IVs, that they can order those directly on 

the system and it goes directly to Baxter electronically. 

So that can be done in that manner. Now, under the new agreement, all the drop ship orders, it is my understanding, are to go 

through McKesson. They want them to be called into McKesson. 

Now, when that happens, what that does is that gives us the 

ability to ask the customer or verify that the item you are buying 

is, in fact, on contract. And if it is on contract, we are going to use 

your prime vendor contract account. If it is not on contract, it is 

open market, then we are going to use your open market account. 

So we can help eliminate more of this open market issue. 

The CHAIRMAN. Mr. Reyes, any questions? 

Thank you very much. We have six minutes to get to the floor 

for our vote. Thank you, McKesson. 

53

Mr. FLACH. Thank you, Mr. Chairman. 

The CHAIRMAN. And I apologize for not swearing you in by the 

way. I do not want VA to think we singled them out. I actually 

should have done the second and third panel. 

But I appreciate everybody coming today for this second leg in 

this PPV issue. 

All Members will have five legislative days for which to revise 

and extend and add any extraneous material. And without objection, so ordered. 

And this hearing is adjourned.

[Whereupon, at 1:25 p.m., the Committee was adjourned.] 

(54)

A P P E N D I X 

Prepared Statement of Hon. Jeff Miller, Chairman 

Good morning. This hearing will come to order. 

Before we begin, I would like to note today’s important place in world history as 

the anniversary of the Allied invasion of Normandy, better known as D–Day. 

Nearly 160,000 troops bravely fought for- and obtained- a foothold in Europe that 

would prove pivotal to our victory. 

Many of those troops gave the ultimate sacrifice, and to the veterans who took 

part, including those no longer with us, we say thank you. 

This Committee will always remember your efforts and work to ensure we fulfill 

our obligation to you and all veterans. 

I want to welcome everyone to today’s hearing titled ‘‘Through the Looking Glass: 

Return to PPV.’’

We are returning to our examination of VA’s Pharmaceutical Prime Vendor (PPV) 

contract after a hearing this Committee held in February. 

The PPV contract is the largest contract at VA, valued around $4 billion. 

When executed correctly, the ‘‘just-in-time’’ delivery system of the PPV contract 

ensures pharmaceuticals are delivered to VA’s medical facilities in a timely fashion 

and at a competitive price. 

As the February hearing revealed, an important aspect of the PPV contract was 

not executed correctly for a long period of time. 

A subsequent information request to VA, spurred by a subpoena authorized by 

this Committee, confirmed this. 

When a needed pharmaceutical is either not available due to a supply shortage, 

or not available through the PPV, federal acquisition regulations outline a clear 

path toward acquiring the pharmaceutical through an open market purchase. 

The open market process provides protection through due diligence, competition, 

and a contract. 

The actions of purchasing officials at VA wilfully ignored these protections and 

were, in fact, illegal. 

In February, the illegal purchases were described as the routine way of doing 

business, and according to the testimony we heard, no one within VA was held accountable. 

Now that VA has had even more time to consider the actions of its employees, 

it is my hope that the illegal purchases are no longer occurring and that the many 

employees involved in this throughout VA have been held accountable. 

The problem is neither of those outcomes has been achieved. 

While VA may boast about a reduction in unauthorized purchases of pharmaceuticals, this hearing will reveal that they still occur despite new training and policies throughout the entire department. 

VA also identified employees who made unauthorized commitments and the disciplinary course of action was letters of counseling ‘‘where appropriate.’’

Not much of a disciplinary action, given the egregious violations identified. 

As VA will point out, there are ways outlined in federal acquisition regulation to 

review and ‘‘ratify’’ unauthorized commitments. 

The guidelines for ratification are clear, and I caution against oversimplifying and 

misusing the ratification process as a way of dismissing the hundreds of thousands 

of unauthorized commitments made by VA employees. 

I am further disappointed to know that there was strong pushback from many 

within the department in implementing new procedures intended to minimize the 

illegal purchasing of pharmaceuticals. 

The illegal purchasing does not help veterans; it is another example of VA wishing to take the easy route instead of doing what is right and required as outlined 

in law, regulation, and VA policy. 

Despite VA’s new policies and procedures and occasional counseling letters, I remain concerned that there will be employees who continue trying to find some 

55

workaround, and that supervisors will not hold these employees or themselves accountable for their actions. 

The precedent of not holding anyone accountable is a bad one to follow. 

The fact is, VA knew they were heading down a slippery slope with regards to 

pharmaceutical purchases back in the 1990s, yet minimal effort was made to address this until this Committee put its oversight spotlight on it, over a decade later. 

Many of those that did try to call attention to the problems were dismissed by 

their peers and even their supervisors for trying to do the right thing. 

We already know the problems exist- what we need to know now is not only the 

detailed actions VA is taking to fix them, but also how it will prevent these same 

problems in the future. 

It is my hope going forward that when VA identifies problems such as this, it is 

forthcoming with Congress about them, and we work together to fix them. 

Receiving VA’s testimony less than 24 hours before this hearing, however, does 

not help in that effort. 

With that, I now yield to the gentlelady from Florida, Ms. Brown.

Prepared Statement of Hon. Corrine Brown,

Acting Ranking Democratic Member 

f Thank you, Mr. Chairman, for holding this hearing. 

Today we are going to examine what steps the Department of Veterans’ Affairs 

has taken to correct problems identified in the Pharmaceutical Prime Vendor (PPV) 

contract since the Committee’s February 1, 2012 hearing. The hearing will also address concerns regarding the PPV contract that have come to light since the hearing, including accountability. 

I believe it is important to hold follow-up hearings to examine if VA is making 

progress, but also to ensure that the recommendations that are implemented are effective, efficient and being monitored for those purposes. 

The recent IG audit showed that the VA’s Fast Pay System consistently provided 

payments within 48 hours to the PPV from the prime vendor’s shipment of an order; 

VA was paying the accurate amount for actual goods received; VA was processing 

payments to the PPV in accordance with laws, regulation, and current terms of the 

PPV contract; VA was reimbursed by other government agencies in a timely and accurate fashion. All positive steps. 

However, the audit report determined the VA did not have reliable controls to ensure timely correction of improper payments and the controls were not sufficient to 

reduce the risk of program fraud or abuse. 

This is not a new issue for VA. Lack of management controls and not following 

established procedures is a common theme in many former reports as well. 

The VA has proven that when determined to make corrective actions they can 

successfully implement measures to do so. I don’t understand why the VA has to 

wait for a hearing or an IG audit report for them to take those measures. 

Additionally, I would like to hear from VA what action it took with about how 

the National Acquisition Center’s PPV contracting officer who did not execute his 

responsibilities properly for several months effectively stopping the process put in 

place. Was this individual reprimanded, provided additional training, removed from 

his or her post? 

Finally, I look forward to hearing from VA on progress made since the last hearing to prevent unauthorized purchases through the PPV contract and how is the 

new agreement different from the previous contract. 

Thank you and I yield back.

Chairman Miller, Ranking Member Filner, and members of the Committee, thank 

Prepared Statement of Mr. Gould 

f you for the opportunity to appear before you today to discuss the Department of Veterans Affairs’ (VA) Pharmaceutical Prime Vendor (PPV) program and the activities 

we have undertaken to improve internal controls since we testified before this Committee on February 1, 2012. I am accompanied today by Mr. John Gingrich, VA’s 

Chief of Staff; Mr. Glenn Haggstrom, Principal Executive Director for the Office of 

Acquisition, Logistics and Construction; Mr. Jan Frye, Deputy Assistant Secretary 

for Acquisition, Logistics and Construction; Mr. Steven Thomas, Director of National 

Contract Service at the National Acquisition Center; Mr. Philip Matkovsky, Assistant Deputy Under Secretary for Health for Operations and Management for AdminVerDate 0ct 09 2002 09:26 Mar 18, 2013 Jkt 000000 PO 00000 Frm 00059 Fmt 6604 Sfmt 6621 Y:\112CONG\FC\6-6-12\74591.TXT LEN
56

istrative Operations, Veterans Health Administration (VHA); and Mr. Michael 

Valentino, Chief Consultant for Pharmacy Benefits Management Services, VHA. 

When we testified before this Committee in February, we described how VA’s PPV 

system provides timely access to pharmaceuticals for Veterans with very favorable 

pricing for the Department and the American taxpayer. In fiscal year (FY) 2011 

alone, the PPV contract returned $225 million to VA through purchase discounts 

and provided significant additional service delivery benefits to VA. We also described some of the problems we experienced with our execution of the PPV contract, specifically related to conformance with all applicable Federal procurement 

laws and regulations. Today, I will describe the actions we have undertaken with 

the PPV program to improve conformance with procurement laws and regulations 

and the effect of these actions during the five month period between November 2011 

and March 2012. I will also describe the initiatives we will implement that will further improve our procurement compliance. 

Background 

Initial concern about the PPV program grew from an internal review early in 

2011 that revealed that four percent of our total PPV expenditures were unauthorized commitments. An ‘‘unauthorized commitment’’ is any purchase of a pharmaceutical item from the PPV made by an individual without the appropriate authority 

or made without following the proper procedures. This occurs when a Pharmacy Ordering Officer (OO) orders an item that is not currently covered by a valid government contract. VA has made procedural and systems changes that have significantly 

reduced the incidence of unauthorized commitments. Today, the number of unauthorized commitments is less than 0.1 percent. 

VA has continued its efforts since November 2011 to improve the PPV program 

in several key areas by: improving training and implementing systems and process 

changes; bringing unauthorized commitments into conformance with laws and regulations via a review and formal ratification process; increasing management oversight; and implementing personnel actions when necessary to hold individuals responsible for violating procedures. 

Improving Training and Processes 

VA has implemented procedural changes, reduced the number of authorized pharmacy ordering officers, provided repeated training, and increased management oversight to reduce unauthorized commitments. As a result of these efforts, between 

September 2011 and March 2012, VA has reduced PPV unauthorized commitments 

from 70,309 in September 2011 to 434 in March 2012, and reduced the number of 

employees making unauthorized commitments from 327 in November 2011 to 81 in 

March 2012. The following graph shows the reduction in unauthorized commitments 

from September 2011 through March 2012. In March 2012 there were approximately 490,000 line items ordered. Of the total, roughly 434 individual line items 

may have constituted unauthorized commitments. This reflects less than one-tenth 

of one percent of all items ordered in the month of March. Those orders were placed 

by 132 ordering officers. Of the 132 individuals, 81 individuals placed orders that 

were not due to either system or vendor errors.

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74591.001

Ratifying Unauthorized Commitments 

As I noted earlier, an unauthorized commitment is any purchase of a pharmaceutical item either made by an individual without warrant authority or made without following proper procedures. When a vendor has acted in good faith to provide 

VA with a good or service and VA has received that good or service, Federal Acquisition Regulation (FAR) provides a mechanism for that unauthorized commitment to 

be reviewed and retrospectively brought into conformance with the FAR. FAR Subpart 1.602–3 provides a policy for ratifying unauthorized commitments and restrictions for performing those ratifications. VA has applied ratification processes to unauthorized commitments. Unauthorized commitments that occurred before November 10, 2011 were determined by the Office of General Counsel as institutionally 

ratified. Unauthorized commitments occurring after November 10, 2011 underwent 

a formal ratification process in accordance with the Federal Acquisition Regulation. 

The approximately 434 unauthorized commitments that occurred in March are currently undergoing formal ratification. These formal ratification actions bring the unauthorized commitments into conformance with the FAR. It must be noted that, in 

addition to following the policy and restrictions of FAR Subpart 1.602–3, agencies 

are required to make positive efforts to minimize unauthorized commitments. VA 

has undertaken significant efforts to minimize these unauthorized commitments. 

For example, VA implemented a number of procedural changes that placed new 

management responsibilities on our field staff and required our staff to change how 

they use the PPV system. To ensure staff members are adequately trained, VA has 

taken several important steps. VA identified and designated a Contracting Officer 

Representative (COR) for each PPV ordering location. The FAR and VA Acquisition 

Regulations (VAAR) require that CORs have separation of duties to prevent the 

same individual who places an order against the PPV contract from also receiving 

that order. CORs were officially appointed in writing by the Administrative Contracting Officers (ACO) and have completed Federal Acquisition Certification (FAC–

COR) Level I training. This 8-hour training course requires a final exam that the 

student must pass with a score of 100 percent. COR training completion is documented in VA’s Talent Management System. The Office of Acquisition and Logistics 

(OAL) also has developed supplemental specialized COR training specific to the PPV 

contract. The PPV specific training helps ensure that PPV CORs conduct their duties under the direction of the Procurement Contracting Officer (PCO) at the National Acquisition Center (NAC). Currently, all 317 CORs have completed their 

training. 

In addition, the Pharmacy Benefits Management (PBM) office developed several 

tools for use by its 984 Ordering Officers (OO) including a SharePoint page with 

58

daily reports from McKesson of unauthorized commitments. The purpose of these 

tools is to provide an additional means for OOs to monitor PPV purchases at a facility level. 

Fast Pay Payment Reconciliation Training was provided to all Chiefs of Pharmacy 

on March 21, 2012, and all VISN Pharmacy Executives on March 27, 2012. The 

training provided instruction on: checking in; signing and dating pharmaceutical receipts; and, accurately reconciling invoices to ensure payments to the PPV are made 

only for drugs that have been received. 

Approximately 81 OOs were identified who potentially made unauthorized commitments in March 2012. VA provided targeted training to each of these individuals 

to manually check and ensure that unauthorized commitments are prevented. The 

training occurred on May 18th, 2012, for all OOs on duty and will be completed for 

the remaining OOs on the day they return to duty. 

Increasing Management Oversight 

VA also has strengthened oversight of PPV contract administration. The NAC’s 

Procurement Contracting Officer (PCO) is now supported by ACOs and CORs. The 

CORs monitor proper execution of the OOs’ responsibilities in accordance with the 

contract assigned to each PPV ordering location. The CORs report contract administration issues to the ACOs. A working group of ACOs, CORs, and other representatives are in the process of fine tuning the duties, responsibilities and communication 

processes for the ACOs and CORs to further improve the oversight function. The 

Office of Acquisition, Logistics and Construction (OALC), the Office of the Under 

Secretary for Health, and the Pharmacy Benefits Management Service jointly monitor purchase data. 

Implementing Personnel Actions 

PPV Ordering Officers were required quickly to learn new ordering procedures for 

open-market pharmaceuticals. VHA has employed a tiered approach beginning with 

training. If inappropriate ordering continues to occur after appropriate training is 

administered, counseling is given followed by administrative action, possible removal of delegated ordering authority or loss of employment. 

The individuals that made unauthorized commitments for pharmaceuticals were 

identified by location and name. To date, no malicious intent was found, but network and facility management were apprised of all the named employees who had 

executed unauthorized commitments. This number was 342 individuals. All orders 

were reviewed by VA headquarters and network management staff, and, where appropriate, formal letters of counseling were issued to the individuals. In fact, as a 

result of this process of progressive discipline, one VA employee elected to resign 

rather than face disciplinary action. 

Although it will be difficult to achieve a zero defect standard based on the volume 

of orders and human involvement, our goal remains compliance with the FAR. Efforts to date have yielded significant results. A preliminary review of the March 

data indicates that there are substantially fewer unauthorized commitments than 

during any previous month. PPV ordering data will continue to be monitored. We 

will take appropriate personnel actions where required. The Under Secretary for 

Health and Principal Executive Director for OALC recently issued a joint memo to 

Veterans Integrated Service Network (VISN) directors, medical center directors, and 

designated PPV ordering officers. The memo clearly reiterated the expectation that 

any improper ordering of non-contract items must cease. It provided three additional opportunities for ordering officers to prevent unauthorized commitments, and 

confirmed that individual ordering officer delegations may be removed or suspended 

if unauthorized commitments continue. 

Expanding the Number of Drugs Under Contract 

VA believes awarding additional contracts for VA’s known pharmaceutical requirements also will help resolve the majority of open market purchases and will 

help bring previously unauthorized commitments further into conformance with applicable laws and regulations. VA has pursued two simultaneous approaches to increasing the number of drugs available under contract: awarding a new PPV contract, and awarding additional contracts for pharmaceuticals. 

The New PPV Contract 

There will always be pharmaceutical needs of Veterans that are not fully met by 

existing government contracts. VA will need to retain FAR compliant purchasing 

flexibility to meet Veterans’ needs. The new PPV contract does not include open 

market purchasing, but does include a mechanism to reduce the need for open market items. The mechanism is termed Wholesale Acquisition Cost (WAC) Based 

Priced Generics (WBPG), which results in PPV contract pricing for generic drugs 

59

that have a published WAC, a National Drug Code (NDC), and are Trade Agreement Act (TAA) compliant. The WBPG items are last in the priority of purchasing 

after all other government contract vehicles are exhausted. VA’s policy for obtaining 

drugs not available through any contract will be to either: procure them through 

the Government Purchase Card program if the dollar value of the purchase is no 

more than $3,000; or have a warranted contracting officer execute the procurement 

using the streamlined acquisition procedures allowed by the Federal Acquisition 

Regulation. 

Looking forward, a new PPV contract was competitively awarded to the McKesson 

Corporation on April 10, 2012, following all applicable procurement laws and regulations. The contract allows for a 120-day implementation period which ends on August 10, 2012. The initial period of performance for this contract will be from August 

10, 2012 through August 9, 2014. The contract has three 2-year renewal options. 

A bridge contract covering the period May 10, 2012, (when the current PPV contract 

expired) through August 9, 2012, was recently awarded to provide continuity of access to pharmaceuticals. 

Like the previous contract, this new contract provides drugs and supplies to VA 

and other government agency customers to over 750 separate accounts, including 

State Veterans Homes, the Virgin Islands, Saipan, Puerto Rico, and Manila, Philippines. This is accomplished through a seamless supply system that typically delivers drugs within 24 hours (often less) of order placement and provides VA a discount on all purchases. Pricing for the majority of the pharmaceutical products distributed through the PPV is established through other contracts (e.g., the Federal 

Supply Schedule (FSS), or national contracts) awarded by OALC. Unlike the previous contract, the new one places many formerly open market drugs under contract 

at the WBPG price, which was determined by a warranted contracting officer to be 

fair and reasonable. This single change in the new contract will resolve the vast majority of the concerns with the previous contract. 

VA will further improve the structure of the follow-on PPV contract to ensure 

from the onset that only medications available under Federal contract are viewable 

on the electronic catalogue from which ordering officers place their requirements, 

and that any inadvertent orders placed are not delivered by the PPV. There will 

be no option for OOs to obtain non-contract supplies under the contract. In addition, 

improved training will continue to be provided for ordering officers as the need 

arises. 

Using a Federal Acquisition Regulation compliant mechanism that was not included in the previous contract, the new contract will preserve the ability to get 

needed drugs from the PPV. The health and safety of Veterans will not be put at 

risk with the new sourcing methodology. 

On May 17, 2012, VA’s Office of the Inspector General (OIG) issued its report entitled, ‘‘Review of the Controls for the Pharmaceutical Prime Vendor Fast Pay System.’’ The report concluded that the Fast Pay system provided timely payments to 

vendors and that VA paid accurate prices, but that inadequate controls were in 

place to ensure timely correction of improper payments and to reduce the risk of 

program fraud or abuse. VA has concurred with the report and the Action Plan to 

address the OIG recommendations is underway. 

We look forward to the results of the second OIG review of PPV, which will provide additional information on the underlying causes of the unauthorized commitments and the magnitude of those purchases. We will quickly address any actionable findings to improve our pharmaceutical procurement processes. 

Awarding Additional Contracts for Pharmaceuticals 

The long-term plan to reduce the need for open market items is to increase the 

number of items on government contracts. There are currently 87 national contracts 

in place, and VA has 48 additional procurement requests in process for solicitation 

and award. VA, in collaboration with its partners in the Department of Defense, Indian Health Service, and other Federal agencies, will continue to identify drugs or 

drug classes suitable for national contracting. 

Conclusion 

VA staff members have worked diligently and conscientiously to provide needed 

pharmaceuticals to our Veterans where and when they are needed. We have also 

worked to ensure that applicable laws and regulations are being followed. Our frontline staff have proven their commitment to serve Veterans, by learning new procedures, changing their use of the PPV system, and collectively reaching current performance in excess of 99.9 percent. Our procurement staffs have instituted ratification processes that ensure any unauthorized commitments subsequently conform to 

the FAR. VA managers continue to monitor performance and provide oversight for 

60

the current PPV contract. VA has lowered the number of OOs in the system and 

increased the numbers of drugs on contract without increasing outages. Where educational efforts to prevent unauthorized commitments were unsuccessful, VA has 

taken and will continue to take appropriate personnel action. Again, the PPV ordering problems largely were procedural breakdowns that affected a small volume of 

pharmaceutical purchases and in no way compromised Veterans’ safety. 

Mr. Chairman, thank you for the opportunity to discuss on the record what actions we have accomplished, as well as the remaining work that needs to be accomplished as we transition to the new PPV contract in August 2012. We have been 

entrusted with the responsibility to effectively administer and oversee health care 

for Veterans and their families, and to do so responsibly using the resources appropriated by Congress. My colleagues and I are prepared to answer your questions.

Chairman Miller and members of the Committee, thank you for the opportunity 

Prepared Statement of The Office of Inspector General 

f to discuss the results of a recent Office of Inspector General (OIG) report dealing 

with Pharmaceutical Prime Vendor (PPV) Fast Pay System and provide an update 

on our continuing work to review purchases that were allegedly made in violation 

of the PPV contract. The OIG is represented by Ms. Linda A. Halliday, Assistant 

Inspector General for Audits and Evaluations; Ms. Maureen Regan, Counselor to the 

Inspector General; Mr. Gary Abe, Director, OIG’s Seattle Office of Audits and Evaluations; and Mr. Michael Grivnovics, Director of the OIG’s Office of Contract Review, Federal Supply Service Division. 

BACKGROUND 

In 1994, VA implemented the PPV program to reduce the costs for storing and 

distributing pharmaceutical supplies. The McKesson Corporation was awarded the 

most recent PPV contract that expired on May 9, 2012. VA competitively awarded 

McKesson a long-term contract effective August 10, 2012; a bridge contract was established to ensure continuation of services in the interim. Use of the PPV is mandatory for VA pharmacies and optional for certain Other Government Agencies 

(OGAs) and authorized users, such as the Indian Health Service (IHS) and State 

Veterans Homes. In fiscal year (FY) 2011, VA purchased approximately $4.3 billion 

pharmaceuticals from the PPV. The PPV contract is for distribution services only. 

Pharmaceutical pricing is established through Federal Supply Schedule (FSS) and 

other national contracts awarded by VA’s National Acquisition Center (NAC). Except for local Veterans Integrated Service Network (VISN) contracts, contract pricing data in the PPV purchasing system is entered by VA, not McKesson. The issue 

that arose in 2011 was that VA and other agencies were using the PPV contract 

improperly to purchase pharmaceuticals and other items open market. A related 

issue was whether the fast payment procedures in the PPV contract resulted in a 

lapse in controls regarding the purchasing and receipt of products. 

The Federal Acquisition Regulation (FAR) allows the use of fast payment procedures to help agencies meet payment timeliness requirements of the Prompt Payment Act. The PPV contract defines the Fast Pay system as an expedited payment 

procedure whereby payments are made to the PPV within 48 hours of shipment of 

an order. The current PPV contract requires all VA PPV orders to be processed 

using the Fast Pay system. The Fast Pay system procedures generally occur in the 

following sequence: authorization and ordering; receipt of the invoice; payment approval and authorization; disbursement of funds; and receipt and acceptance of 

items ordered. 

Fast Pay allows agencies to authorize and pay vendors after the vendor’s invoice 

is received but prior to receipt and acceptance of the order. Payments are made 

when the invoice is received, based on the vendor’s certification that it has delivered 

the supplies on the invoice and will remedy deficiencies in the supplies it delivers. 

The reliability of the Fast Pay system depends on promptly verifying that purchased 

items have been received, ensuring that receiving reports and payment documents 

match, and correcting discrepancies after payments have been made. 

VA’s Fast Pay system uses a U.S. Bank credit card-like account to pay the PPV 

for each VA pharmacy ordering facility’s prime vendor purchases. When the PPV 

fills a facility’s order, U.S. Bank processes the purchase through the facility’s Fast 

Pay account using an electronic interface between the prime vendor and U.S. Bank. 

U.S. Bank pays the PPV each day for the orders it receives and transmits a daily 

transaction file of purchases to VA’s Financial Services Center (FSC). 

61

1 In February 2012, VA reported that State Veterans Homes, Howard University Hospital, the 

Indian Health Service, Bureau of Prisons, Peace Corps, U.S. Public Health Service, and Department of Homeland Security used the PPV contract. 

The FSC staff reviews the files before transmitting payment information to VA’s 

Financial Management System (FMS). The FSC staff issues a single payment to 

U.S. Bank for the prior day’s purchases from the PPV then charges each facility’s 

prime vendor obligation account for the payment amount of the billed PPV pharmaceutical supplies. Facilities then reconcile payments made to the PPV with their 

prime vendor orders. 

REVIEW OF THE CONTROLS FOR THE PHARMACEUTICAL PRIME VENDOR FAST PAY SYSTEM 

In this report, which was done at the request of the Committee and the VA Secretary, we reviewed the internal controls of VA’s Fast Pay System, specifically assessing the adequacy of VA’s internal controls in support of the provisions of the 

PPV contract. We focused on the ordering, receipt of pharmaceuticals, and payment 

activities. Specifically, we examined the controls at four Consolidated Mail Outpatient Pharmacies (CMOPs), four VA Medical Centers (VAMCs) pharmacies, the 

payment controls at the FSC and the NAC, along with reviewing a sample of invoices. We also reviewed a sample of orders placed by Other Government Agencies 1. Our review found: 

• VA was consistently providing payments to the PPV within 48 hours from the 

prime vendor’s shipment of an order. • VA was paying the accurate amount for actual goods received. • VA was processing payments to the PPV in accordance with laws, regulations, 

and current terms of the PPV contract. • VA was reimbursed by other Government agencies in a timely and accurate 

fashion. • VA did not have reliable controls to ensure timely correction of improper payments and the controls were not sufficient to reduce the risk of program fraud 

or abuse. 

Accurate Prices for Actual Goods Received 

Each week, at the eight VA facilities we reviewed, the staff reconciled their prime 

vendor purchases with summary payment reports provided by the FSC, ensuring 

that payment amounts were correct. VA financial management staff also researched 

FMS transactions that had been rejected during payment processing by the FSC 

and monitored the facility’s PPV obligations. We did not identify reconciliations that 

were not resolved or unresolved exceptions such as open items on reconciliations, 

or rejected transactions that were not paid timely. 

Seven of the eight ordering facilities had sufficient controls in place to ensure that 

pharmaceutical purchases were checked against invoices at delivery and discrepancies corrected. 

Consistent Compliance with Federal Laws 

We found VA uses Fast Pay provisions of the Prompt Payment Act to meet contractual requirements to pay the PPV within 48 hours of shipment of an order. 

Other Government Agencies Reliance on PPV 

The PPV contract allows other entities to use the PPV program and the Fast Pay 

system. According to FSC officials, only the Indian Health Service (IHS) used the 

Fast Pay system. In FY 2011, IHS purchased about $46 million in pharmaceutical 

supplies, representing about 1 percent of the total $4.3 billion of PPV purchases. We 

did not review PPV items purchased by OGAs that did not use VA’s Fast Pay System because no VA funds were at risk of loss to VA. 

IHS reimbursements were paid in the correct amounts, and IHS reimbursed VA 

within an average of 23 days from the date an order was placed. We considered IHS 

reimbursements to VA timely based on the Prompt Payment Act requirement that 

payment be made within 30 days. 

Resolving Inaccurate Payments 

Controls over corrections of overpayments are critical under the Fast Pay system 

since corrections are identified and adjustments made after payments are processed. 

In addition to our eight facilities, we reviewed procedures for identifying and resolving overpayments at the NAC and the Pharmacy Benefit Management (PBM) Services. We found no evidence that all of these responsibilities were properly executed. 

PBM’s business practice is to review prices for all pharmaceutical items purchased 

from the PPV each month, beginning 3 months after the purchase. For example, 

62

purchases made in July 2011 would be reviewed in October 2011. This delay allows 

sufficient time for price adjustments initiated by purchasing activities or the PPV 

to be adjusted to reflect correct amounts. PBM provides the NAC contracting officer 

a monthly price analysis, which shows differences between amounts paid and the 

contract prices for specific pharmaceutical items. The contracting officer is responsible for resolving PPV pricing anomalies. 

PBM staff completed their March 2011 pricing analysis in August 2011 (2 months 

late). Their price analysis for April 2011 purchases was completed in December 2011 

(5 months late). According to PBM officials, they reprioritized their work because 

the NAC’s PPV contracting officer was not timely resolving potential pricing differences identified by the PBM and completing additional analyses would only have 

increased the contracting officer’s backlog. 

The process of resolving potential pricing differences, which the NAC put in place, 

had stopped. As a result, VA was at risk of not processing appropriate pricing adjustments. The total value of potential pricing differences identified by PBM for the 

monthly reviews of PPV purchases from December 2009 through April 2011 was approximately $46.4 million. The contracting officer stated the primary reason for the 

delay in resolving pricing differences with the PPV was that he needed to use that 

time to prepare the future PPV contract. While we found that PBM and NAC controls did not reliably ensure timely correction of potential pricing differences, our 

subsequent work in the ongoing review of PPV open market purchases for FY 2011 

has shown that these potential pricing differences had been satisfactorily resolved 

through the credit and rebilling process. 

Facility pharmacy staff made timely payment corrections for overpayments. According to PPV records, the PPV reimbursed VA pharmacy facilities a total of approximately $23.5 million (.5 percent of $4.3 billion) in overpayment corrections and 

about $15.4 million (.4 percent) in return credits in FY 2011. Pricing corrections 

occur for several reasons, such as retroactive price adjustments, item count errors, 

and product returns. For example, a retroactive price adjustment is required when 

the PPV changes a price of an item on January 5, 2012, but applies it to all purchases of that item from January 1, 2012. We determined that controls at VA facility pharmacies were considered adequate and that facility pharmacy staff made 

timely payment corrections for overpayments. 

Protection Against Possible Fraud and Other Abuses 

As the highest area of risk, we assessed pharmacy ordering and receiving operations to address whether VA has established controls to reduce the risk of fraudulent payments and other program abuses for PPV. At each pharmacy, we assessed 

whether the ordering and receiving duties of pharmacy staff were adequately segregated. 

In general, we determined controls were not effective in mitigating the risk of program fraud. Segregation of duties is a strong fundamental control in ordering and 

receiving functions. Duties such as ordering supplies, receiving supplies, making 

payments, and certifying funding should be assigned to separate individuals to the 

greatest extent possible. By separating certain duties within an organization, no single employee should be in the position to perpetrate and conceal fraud. For example: 

• Three of four VAMC pharmacies needed to strengthen controls to ensure an 

adequate segregation of duties existed. They did not segregate duties among different staff to prevent any one individual from having the ability to both order 

and receive non-controlled pharmacy supplies. With regard to controlled substances, at the four VAMC pharmacy the duties were properly segregated. 

• The four CMOPs had adequate controls to segregate duties among designated 

ordering officers and staff who verified that ordered items were received. Controls in place were working effectively to ensure ordering officers and receiving 

staff held separate system access keys to log into the prime vendor account. At 

no point were individuals allowed to perform ordering and receiving functions. 

VA policy requires CMOPs establish unique individual user identification and 

passwords for all functions related to inventory maintenance and control, to include ordering and receiving on the PPV and CMOP automated inventory systems. 

QUANTIFYING OPEN MARKET AND PRICING ISSUES 

Currently we are completing our review of PPV purchases for FY 2011. The purpose of the review is to quantify the open market sales, identify reasons why items 

were not purchased through existing contracts, and evaluate whether VA was overcharged for items on contract. We also reviewed purchasing data for December 2011, 

to verify the accuracy of the reported 0.4 percent in open market purchases for that 

month and validate whether controls implemented in November 2011 were effective 

63

2For some pharmaceuticals VA is guaranteed a fixed quantity. VA can purchase additional 

quantities but those would be at open market prices. 

in controlling open market purchases. In addition, we are reviewing open market 

purchases to determine whether they violated procurement laws and regulations 

and whether the purchases were in compliance with the Trade Agreements Act. We 

expect to issue a final report in July 2012. We also have reviewed the new PPV contract to determine if additional terms and conditions will reduce open market purchases. 

FY 2011 Open Market Purchases 

Our review found that it is not possible to easily quantify open market purchases 

by simply reviewing purchasing data captured for a specific period of time. Due to 

delays in processing new pricing through contract modifications and entering the information into the PPV system, purchasing information is updated continually by 

McKesson through a system of credits and rebills. This process corrects data relating to whether the item was on contract versus open market and adjusts the price 

paid to reflect the correct contract pricing. We identified $4.3 billion in overall reported sales in FY 2011 of which approxi- mately $290 million was identified as open market because there was no underlying 

contract number listed in the appropriate data field. Approximately $283 million of 

the $290 million represented pharmaceutical purchases and remaining $7 million 

represented medical/surgical items. 

We selected 100 of the top pharmaceutical items identified as open market for re- view, which represented $108 million (43 percent) of the open market pharmaceutical purchases. • We found that 43 of the 100 items ($63 million) were on contract at the time 

of purchase. This represents 58 percent of the dollar value of 100 items in our 

sample. Of the 43 items, 29 ($36 million) were sold at the contract price. The 

14 remaining items ($27 million) were sold at a price that exceeded the contract 

price with potential overcharges of $9.4 million. However, upon further review, 

we found that $5.5 million of the potential overcharges was due to product allocation 2, not overcharging, and the remaining $3.9 million related to delays in 

contract pricing adjustments, which appear to have been corrected through the 

credit and rebilling process. • We determined that 48 of the 100 items were not on contract for all or part 

of FY 2011. These items represented $36 million (33 percent) of the open market purchases in our sample. We identified comparable items on FSS contracts 

for 15 of the 48 items ($9.1 million). For 12 of the 15 items, ($7.6 million), the 

FSS prices were lower. However, we found that many of the comparable items 

on FSS were not available at the time of purchase due to manufacturer shortages and backorder issues. We concluded that for those items that a comparable 

FSS product was available, VA paid $904,000 more than it would have paid if 

the contract item had been purchased. Although the prices paid for the remaining 3 items ($1.5 million in purchases) were less than the FSS price, the items 

should have been purchased from the FSS as required by VA policy. We could 

not identify with any degree of certainty a comparable item on FSS for the remaining 33 items ($26.6 million). These items were purchased at McKesson’s 

list price. • We also identified 9 items ($8.6 million) that were on FSS but purchased at 

open market prices through the PPV. Most of these were covered or branded 

drugs on FSS at the Federal Ceiling Price, which is the highest price VA can 

pay when purchasing from the manufacturer or the manufacturer’s authorized 

distributor. Because the FSS contractor elected not to participate in the PPV 

program, the PPV is not required to offer the FSS price. These purchases resulted in up to $4.8 million in overpayments. We have not identified a legitimate reason to justify purchasing these products open market through the PPV 

instead of the manufacturer. We initially identified this problem through our 

post-award reviews and raised this issue to VA in 2007 and again in 2011. In 

2007, we were told that the PPV purchasing system was changed to block purchasers from buying these products through the PPV. However, in 2011, when 

we found the problem continuing, we learned that at VA’s request the system 

allows the purchaser to override the block. 

We concluded that McKesson has done a good job of correcting pricing through 

credits and rebilling when the PPV database is updated by VA to include changes 

in contract pricing. However, we believe delays in identifying and correcting contract pricing are caused by poor communication between PBM and the NAC’s FSS 

and National Contracts divisions. 

64

Review of December 2011 Purchases 

We reviewed the accuracy of VA’s reported 0.4 percent in open market sales 

through the PPV contract for December 2011. However, we found the procedures implemented in November 2011 did not preclude or prohibit open market purchasing. 

Instead, open market purchases were shifted from the PPV contract to other financing accounts. We reviewed purchases through the new open market purchasing system and identified approximately $7 million in purchases, which represented 2.0 

percent of the total purchases by VA through McKesson. The percentage of open 

market purchases by VA through McKesson was approximately 2.4 percent, not 0.4 

percent as reported. Our review of open market purchasing trends under the new 

system was inconclusive because a large number of the products were actually on 

contract. 

In addition to reviewing the purchases identified in the FY 2011 data as open 

market, we sampled items identified as contract sales. We did not find significant 

problems with overcharging. As with the open market items, corrections are made 

over time as adjustments to the contract price are awarded and entered into the 

PPV system. 

Open Market Issues 

Based on our review and our ongoing pre-award and post-award audits of FSS 

contracts, we believe that open market purchasing through the PPV is impacted by 

several factors including items not on contract but needed to provide care, a growing 

number of product allocations and shortages necessitating purchasing items at noncontract prices, and purchasing items through the PPV for convenience instead of 

buying direct from manufacturers who do not participate in the PPV program. A 

growing number of items are not on contract because there is no requirement that 

manufacturers offer generic drugs on FSS contracts. In addition, a growing number 

of products are no longer manufactured in the United States or a designated country and thus cannot be offered on contract due to Trade Agreement Act requirements. We are currently reviewing open market purchases to determine whether the 

purchasers violated Federal procurement laws and regulations, including the Trade 

Agreements Act. 

Review of Terms and Conditions in Recently Awarded PPV Contract 

We also reviewed the changes made to the new PPV contract to determine if such 

changes will preclude open market purchasing and if prices paid for products previously classified as open market will be fair and reasonable. The new PPV contract 

states non-contract (open market) items are excluded from the PPV contract and Ordering Officers are prohibited from buying open market items through the PPV contract. Generic items that are not on a Federal government contract and have a published Wholesale Acquisition Cost (WAC), are approved by the Food and Drug Administration, and are compliant with the Trade Agreements Act, can now be purchased through the PPV contract at a price negotiated prior to award. These products are known as WAC Based Priced Generics (WBPG). For the most part, open 

market purchases should decrease significantly with the availability of WBPGs. 

However, open market purchases can still occur by buying such open market products via a different payment account. Such purchases are not considered a PPV purchase because they are not processed through the PPV account. 

We are also concerned that FSS vendors who sell generic products may remove 

their products from their FSS contracts and have them sold by the PPV as WPBGs. 

The FSS will no longer receive a discount off the FSS vendor’s list price but will 

pay the listed WAC price less a discount equal to the awarded distribution fee. 

Based on our experience conducting pre-award reviews of proposals for FSS contracts, we have concerns whether the negotiated PPV price for these generic products is fair and reasonable. 

CONCLUSION 

VA has implemented controls to provide timely and accurate payments for pharmaceutical items processed through VA’s Fast Pay system as well as following laws, 

regulations, and policies. However, system controls to identify and correct pricing 

differences by the PPV and to reduce the risk of fraud and other program abuses 

were either not in place or were not effective. Without strong system controls, VA 

risks paying the incorrect price for pharmaceuticals as well as increasing their vulnerability to program fraud. 

Our review of open market purchases found that the open market purchases were 

significantly less than originally stated. We found that McKesson was doing a good 

job of adjusting prices through credits and rebillings to ensure that contract items 

are purchased at contract prices when VA provides data. It is not uncommon for 

65

pricing changes to be implemented months after the fact due to delays in contract 

modifications that result in retroactive pricing. In addition, due to product shortages 

and allocations, VA does not always get contract pricing. 

Mr. Chairman, this concludes our statement and we would be pleased to answer 

any questions you or other members of the Committee may have.

Good morning, Chairman Miller, Ranking Member Filner and Members of the 

Prepared Statement of Mr. Flach 

f Committee. My name is Paul Flach, and I am Vice President of McKesson Health 

Systems, National Accounts, for McKesson Corporation. 

Mr. Chairman, before I begin today, I would like to say that my company appreciates the veterans who work for McKesson and feels both enormous pride and responsibility for our selection as the Pharmaceutical Prime Vendor to the Department of Veterans Affairs. I know that all of you on this Committee and at the Department of Veterans Affairs are working hard for America’s veterans every day. 

Thank you for your efforts. 

For 179 years, McKesson has led the industry in the distribution of medicines and 

health care products. Today, a Fortune 14 corporation, we deliver vital medicines, 

medical supplies, care management services, automation, and health information 

technology solutions that touch the lives of over 100 million patients in health care 

settings that include more than 25,000 retail pharmacies, 5,000 hospitals, 200,000 

physician practices, and over 10,000 extended care facilities and 700 home care 

agencies. In addition to the Department of Veterans Affairs, McKesson delivers 

medicines to the Department of Defense and other government facilities. We are 

also one of the nation’s largest distributors of biotechnology and specialty pharmaceutical products and services for providers and patients. 

Mr. Chairman, as you know, McKesson provided testimony on the Pharmaceutical 

Prime Vendor (PPV) contract before this Committee earlier this year. We understand your oversight responsibility for the Department of Veterans Affairs and particularly as it relates to the PPV contract. We recognize the importance of this contract to the VA’s health care system and, ultimately, to America’s veterans. I am 

here today to provide the Committee with some additional information about the 

PPV contract as well as to answer your questions. 

As the Department’s Pharmaceutical Prime Vendor since 2004, McKesson is 

proud to partner with the VA to provide pharmaceuticals to more than five million 

veterans and to continue delivering excellent quality and service to the VA. Through 

the deep negative distribution fee in our contract with the VA, we have provided 

the Department with $526 million in savings over the VA’s prior PPV contract. We 

have been able to do this while consistently exceeding the requirements of the contract and providing state of the art technology and unparalleled quality and value 

to the Department. 

Pharmaceutical Purchasing Through McKesson 

As the Pharmaceutical Prime Vendor, McKesson delivers pharmaceutical and certain medical/surgical products to more than 700 VA locations, including over 270 

medical centers and seven consolidated mail order facilities (CMOPs). 

As our PPV contract requires, McKesson provides thousands of products to the VA 

at prices set under federal supply contracts which the VA has secured through direct negotiations with pharmaceutical manufacturers. McKesson’s state of the art 

technology allows authorized VA buyers to purchase products through an electronic 

order entry system which drives them to the lowest priced item under a VA-negotiated contract. If a contract product is out of stock, the system directs the buyer 

to the lowest priced generic equivalent product that is on a VA-negotiated contract. 

When an authorized VA buyer orders product by 6pm, it is delivered the next 

morning, thereby assisting the VA with inventory management and saving the Department millions of dollars in working capital. McKesson has a dedicated ‘‘VA-only’’ 

customer service department. Our accuracy in fulfilling orders is 99.9 percent. 

Through the transparency afforded by our electronic ordering and inventory management systems, the VA can manage and track their inventory and has real-time 

access to invoice and ordering data. Furthermore, McKesson holds the largest inventory of any pharmaceutical distributor to ensure our world-class service levels. I am 

proud to say that we have consistently exceeded the PPV requirements for service 

and quality. 

66

PPV Purchases Are Almost Exclusively VA–Negotiated Contract Products 

The VA has successfully negotiated a significant number of contracts with manufacturers for the purchase of pharmaceuticals, which exceeds, by far, the number of 

pharmaceutical manufacturer contracts typically held by health care institutions 

within the private sector. In April 2012, the VA purchased, through the PPV contract, 99.83 percent of its products under VA-negotiated contracts with manufacturers. 

There are circumstances, however, when contracted pharmaceuticals are in short 

supply or other critical medicines are needed to treat patients. Purchases of pharmaceuticals that are not on contract are frequently referred to as ‘‘open market’’ 

purchases. Stated simply, open market purchases are for products which are not 

subject to a contract price negotiated by the VA with the manufacturer. We would 

like to emphasize that all pharmaceutical products purchased by the VA from 

McKesson, whether under VA ‘‘contract’’ or an ‘‘open market’’ item, have the required FDA approvals. 

Purchases of open market products are a standard practice in the private sector. 

In the private sector, for instance, 30–40 percent of the purchases made by hospital 

and institutional customers are for open market products. 

Dramatic Decline in Open Market Purchases 

Since November, when the VA asked for our assistance, we have been working 

closely with them to restrict open market purchases under the PPV contract. As a 

result of these efforts and other steps taken by the VA, open market purchases 

under the PPV contract have dramatically declined from less than 5 percent previously to less than 2.1 percent in November 2011 and then to 0.17 percent in April 

2012. 

In collaboration with the VA last fall, we modified our online electronic ordering 

systems. Open market items can no longer be viewed on the ordering screen by 

those who are placing an order under the PPV contract. McKesson was given 48 

hours to make this change, and we met the VA’s deadline. 

Additional Steps With the New Pharmaceutical Prime Vendor Contract 

McKesson is preparing for the new PPV contract that will go into effect in August. 

We will be enhancing our technology, beyond what is required, to meet the VA’s intention to restrict open market purchases. Our systems are complex and must be 

able to process over a million line items on a daily basis. We are making these enhancements judiciously because the VA relies on the timely delivery of the medications it orders to provide medical care for our nation’s veterans. 

As part of developing this technology enhancement, we are building a ‘‘restrict 

and notify’’ component with plans for this functionality to be available later this fall. 

If the VA attempts to order a pharmaceutical product from our distribution centers 

that would result in an open market purchase under the PPV contract, our system 

will automatically remove the item from the order and send a corresponding notification back to the VA. This notice will alert the VA that we are not delivering the 

specified pharmaceutical product and enable it to identify alternatives to meet patient need on a timely basis. 

Conclusion 

Mr. Chairman, in April, McKesson was selected by the VA to continue as the 

Pharmaceutical Prime Vendor. The VA conducted a rigorous competition for this 

contract award. We are honored to be selected again as the PPV and are committed 

to continue to deliver outstanding value and service to the VA and our veterans. 

On behalf of McKesson, I want to thank the VA for the trust they continue to 

place in our performance, our people and our company. McKesson is very proud of 

our unique ability to improve the delivery, cost efficiencies and quality of care for 

our nation’s veterans. America’s veterans deserve the best health care, and 

McKesson is committed to a partnership that continually enhances the VA’s ability 

to provide critical services to the veterans they serve. 

Mr. Chairman, thank you for the opportunity to appear here today. I am happy 

to answer your questions.

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