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[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

          EXAMINING VA'S PHARMACEUTICAL PRIME VENDOR CONTRACT

=======================================================================

                                HEARING

                               before the

                     COMMITTEE ON VETERANS' AFFAIRS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 1, 2012

                               __________

                           Serial No. 112-40

                               __________

       Printed for the use of the Committee on Veterans' Affairs

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                     COMMITTEE ON VETERANS' AFFAIRS

                     JEFF MILLER, Florida, Chairman

CLIFF STEARNS, Florida               BOB FILNER, California, Ranking
DOUG LAMBORN, Colorado               CORRINE BROWN, Florida
GUS M. BILIRAKIS, Florida            SILVESTRE REYES, Texas
DAVID P. ROE, Tennessee              MICHAEL H. MICHAUD, Maine
MARLIN A. STUTZMAN, Indiana          LINDA T. SANCHEZ, California
BILL FLORES, Texas                   BRUCE L. BRALEY, Iowa
BILL JOHNSON, Ohio                   JERRY McNERNEY, California
JEFF DENHAM, California              JOE DONNELLY, Indiana
JON RUNYAN, New Jersey               TIMOTHY J. WALZ, Minnesota
DAN BENISHEK, Michigan               JOHN BARROW, Georgia
ANN MARIE BUERKLE, New York          RUSS CARNAHAN, Missouri
TIM HUELSKAMP, Kansas
MARK E. AMODEI, Nevada
ROBERT L. TURNER, New York

            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.

                            C O N T E N T S

                               __________

                            February 1, 2012

                                                                   Page
Examining VA's Pharmaceutical Prime Vendor Contract..............     1

                           OPENING STATEMENTS

Chairman Jeff Miller.............................................     1
    Prepared statement of Chairman Miller........................    45
Hon. Michael H. Michaud, Acting Ranking Democratic Member........     2
    Prepared statement of Congressman Michaud....................    46

                               WITNESSES

The Honorable W. Scott Gould, Deputy Secretary of Veterans 
  Affairs, U.S. Department of Veterans Affairs...................     5
    Prepared statement of Hon. W. Scott Gould....................    47

Accompanied by:

John R. Gingrich, Chief of Staff, U.S. Department of Veterans 
  Affairs........................................................     5
Glenn D. Haggstrom, Executive Director, Office of Acquisitions, 
  Logistics, and Construction, U.S. Department of Veterans 
  Affairs........................................................     5
Jan R. Frye, Deputy Assistant Secretary, Office of Acquisition 
  and Logistics, U.S. Department of Veterans Affairs.............     5
Philip Matkovsky, Assistant Deputy Under Secretary for Health for 
  Administrative Operations, Veterans Health Administration, U.S. 
  Department of Veterans Affairs.................................     5
Steven A. Thomas, Director, National Contracting Service, 
  National Acquisition Center, U.S. Department of Veterans 
  Affairs........................................................     5
Michael Valentino, Chief Consultant, Pharmacy Benefits Management 
  Services, U.S. Department of Veterans Affairs..................     5
Linda Halliday, Deputy Assistant Inspector General for Audits and 
  Evaluations, Office of Inspector General, U.S. Department of 
  Veterans Affairs...............................................    30
    Prepared statement of Linda Halliday.........................    51

Accompanied by:

Mark Myers, Director, Healthcare Resources Division, Office of 
  Contract Review, Office of Inspector General, U.S. Department 
  of Veterans Affairs............................................    30
Michael Grivnovics, Director, Federal Supply System Division, 
  Office of Contract Review, Office of Inspector General, U.S. 
  Department of Veterans Affairs.................................    30
Sharon Longwell, Vice President, Health Systems, National 
  Accounts McKesson Corporation..................................    38
    Prepared statement of Sharon Longwell........................    53

                   MATERIAL SUBMITTED FOR THE RECORD

Post-Hearing Questions and Responses for the Record:

Hon. Bob Filner, Ranking Democratic Member, Committee on 
  Veterans' Affairs to Hon. Eric K. Shinseki, Secretary, U.S. 
  Department of Veterans Affairs.................................    57
Responses from Hon. Eric K. Shinseki, Secretary, U.S. Department 
  of Veterans Affairs to Hon. Bob Filner, Ranking Democratic 
  Member, Committee on Veterans' Affairs.........................    59

 
          EXAMINING VA'S PHARMACEUTICAL PRIME VENDOR CONTRACT

                              ----------                              

                      WEDNESDAY, FEBRUARY 1, 2012

                     U.S. House of Representatives,
                            Committee on Veterans' Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
Room 334, Cannon House Office Building, Hon. Jeff Miller 
[Chairman of the Committee] presiding.
    Present: Representatives Miller, Stearns, Bilirakis, Roe, 
Stutzman, Flores, Johnson, Denham, Runyan, Benishek, Buerkle, 
Huelskamp, Amodei, Reyes, Michaud, McNerney, Donnelly, Walz, 
and Barrow.

              OPENING STATEMENT OF CHAIRMAN MILLER

    The Chairman. Good morning. This hearing will come to 
order. And I want to thank everybody for coming today to a 
hearing entitled Examining VA's Pharmaceutical Prime Vendor 
Contract.
    We started investigating PPVs and the contract well before 
the stories on this topic hit the press and we found enough 
that questions were raised to warrant the hearing that we are 
going to hold today and possibly subsequent hearings in the 
future.
    Now, the PPV contract when written and executed correctly 
is intended to ensure VA medical facilities receive the needed 
pharmaceuticals at a competitive price and in a timely fashion.
    Medical facilities throughout the Nation rely on this 
system to ensure that the patients get the best care, that the 
Veterans get the care they need, they deserve, and they have 
earned.
    The Committee's investigation began when discrepancies 
appeared in how VA ordering officials had been handling open 
market purchases of items not available on the PPV contract.
    These purchases go back much further than just the last 
year or two. In fact, they span multiple administrations 
showing many within VA chose to ignore rather than to fix a 
problem they knew about.
    While Federal acquisition regulations outline clear 
procedures on how agencies can acquire items when they are not 
on a contract, VA officials for years have ignored those 
procedures when purchasing supplies that were either not 
available at the time or not on the PPV contract.
    Instead of actually performing due diligence in its open 
market purchasing, VA officials took the easy route and 
requested the PPV to deliver the needed pharmaceuticals or in 
some cases non-pharmaceutical items.
    An open market purchase requires a degree of competition. 
VA's practices willfully ignored requiring competition thereby 
compromising best value to the taxpayer and potentially 
compromising patient safety.
    In short, what VA has been doing is not mere bureaucratic 
oversight, it is illegal with serious potential ramifications 
for Veterans.
    I am disheartened by VA's treatment of this matter. We know 
that senior officials at the department have known these 
practices for a long time, yet did little to address the issue 
and certainly were not forthcoming about it to Congress.
    In fact, VA has acknowledged open market purchases through 
the PPV could be problematic as far back as December of 2010, 
but only in November of 2011 did they take formal action. And 
this action was little more than a restatement of current laws 
that employees should already have been following and the 
leadership should have been enforcing.
    One thing, we will get to the bottom of this, who knew of 
VA's illegal buying and did nothing about it. As has been the 
case of several other problems identified by this committee, 
weaknesses in contracting at VA are a major cause of the 
illegal purchases we are discussing here today.
    Instead of applying temporary bandages to cover up 
problems, VA needs to address the recurring causes within its 
own department and fix them. Whether a complete contracting 
overhaul is needed or simply new leadership that can enforce 
existing law, it is my sincere desire that this committee and 
the department can resolve these issues and move forward.
    My concern about the depth and duration of this illegal 
purchasing is serious enough that I have partnered with 
Chairman Issa of the Oversight and Government Reform Committee 
in requesting needed documents and information from VA to fix 
this problem.
    I want to thank Chairman Issa for his help in investigating 
this matter and I look forward to VA's full and timely 
cooperation with us and his committee.
    Lastly, I want to note VA's continuing habit of not 
providing requested information to this committee. One request 
is now a month overdue and another is 5 months overdue.
    I want to work with your department to get our Veterans the 
services and care they deserve and that is going to require 
your congressional affairs team working with us to deliver the 
appropriate solutions.
    I now recognize the Ranking Member, Mr. Michaud, for an 
opening statement.
    [The prepared statement of Chairman Miller appears on p. 
45.]

 OPENING STATEMENT OF HON. MICHAEL H. MICHAUD, ACTING RANKING 
                             MEMBER

    Mr. Michaud. Thank you very much, Mr. Chairman, for having 
this hearing and for your leadership dealing with the Veterans' 
issues.
    I also want to thank Representative Donnelly for his 
leadership in this particular issue as well.
    We are here because once again VA has demonstrated an 
inability to properly perform its responsibilities to follow 
its procedures and policies and applicable laws and 
regulations.
    The VA admits that it did not follow all applicable laws 
and regulations for approximately $1.2 billion in what was 
called open market drug purchases since 2004.
    VA assures us that changes have been implemented to fix 
deficiencies at hand. Frankly, Mr. Chairman, we have heard this 
before.
    Today I have three questions. First, what did VA officials 
know and when did they know it? In December 2010, the VA 
decided to not include an open market clause in the upcoming 
PPV contract. What was the impetus behind this decision? Was 
there an awareness in 2010 that there were serious problems 
with open market purchases, yet nearly a year lapse before VA 
took decisive action?
    During this period, did anyone in VA leadership simply 
insist that open market purchases conform with VA policy, 
regulation, and law? Have these $1.2 billion in purchases that 
were not in accordance with applicable laws and regulation, 
have they been ratified by the VA?
    In 2009, the inspector general found a litany of problems 
with improper open market purchases for medical equipment and 
supplies. VA management and leadership should have been put on 
notice that problems might exist in other prime vendor 
programs, but no proactive steps seemed to have been taken at 
that time.
    I find it hard to believe that as the VA states, and I 
quote, ``The process that was in place since 2004 had become 
routine,'' end of quote. I have to ask what is routine about 
failure to follow established policies and procedures?
    Title 38 requires VA to submit an annual report on the 
health care procurement experience. I look forward to receiving 
those reports from VA dating back to 2004.
    My second question is, who should be held accountable for 
this failure? Time and time again, VA comes up here and 
testifies that it has wonderful policies and procedures in 
place. Unfortunately, no one ever seems to follow these 
policies and procedures and there seem to be no consequences 
for the failure to follow these procedures.
    And time and time again, the IG, the GAO testify concerning 
serious problems with VA management and controls. And time and 
time again, VA ignores these findings and fails to take action.
    VA testimony includes an illustrative example of a GS5 
pharmacy specialist confronted with the choice of ordering an 
open market item or doing without. Let me offer an example of 
how management responsibility for overseeing GSA making sure 
that pharmacy specialists knew what VA policy and procedures 
were required and ensuring that they follow them. It is 
management's responsibility.
    Third, how is this going to be fixed and how will this fix 
process improve the care we provide to our Veterans? How will 
the absence of an open market clause in the new contract, how 
will that affect our Veterans? Is VA still making open market 
purchases either through PPV or through other suppliers and how 
can we be sure that proper procedures are in place and, more 
importantly, being actively supervised by management?
    I want to be sure that VA open market purchases are from 
reliable suppliers and that all purchased drugs and 
pharmaceuticals meet all safety requirements.
    There is a saying of ignorance of the law is no excuse. I 
hope that VA can help us understand today what accountability 
we should expect from the failures that seem to arise from 
ignorance, you know, or willful neglect of VA policy and 
procedures in existing laws and regulations.
    I mean, there is no excuse for VA management in this regard 
and there is no need to blame a GS5 position. This is a 
management failure, a failure which hopefully we will be able 
to get to the bottom of this.
    And it is my hope that because of this failure, that those 
in management did not receive a bonus. One point two billion 
dollars is a lot of money.
    So with that, Mr. Chairman, I yield back and look forward 
to working with you in this regard.
    [The prepared statement of Hon. Michaud appears on p. 46.]
    The Chairman. I thank the Ranking Member.
    And following our standard practice here on the Committee, 
I would ask any Member that has an opening statement if you 
would hold it at this time and you may either give the 
statement when your turn for questioning arises or it may be 
submitted into the record here if that is your choice.
    Our first panel today, a large panel, as everybody can see. 
I will introduce Mr. Gould. Secretary Gould is here with us 
today. He is Honorable W. Scott Gould, deputy secretary of the 
Veterans Affairs.
    And, Secretary, what I would like to do instead of me 
introducing everybody at the table, I understand you have 
modified your comments today to introduce everybody at the 
table with you.
    And I would ask the clerk not to begin the clock until 
everybody has been introduced.
    You are recognized.

  STATEMENT OF 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; 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; PHILIP MATKOVSKY, ASSISTANT 
     DEPUTY UNDER SECRETARY FOR HEALTH FOR ADMINISTRATIVE 
OPERATIONS, VETERANS HEALTH ADMINISTRATION, 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

    Mr. Gould. Mr. Chairman, thank you for the privilege of 
reporting to the Committee today.
    As you asked a moment ago, I am accompanied by Mr. John 
Gingrich to my right, VA's chief of staff; Mr. Glenn Haggstrom, 
Principal Executive Director for the Office of Acquisitions and 
Logistics and Construction; to his left Mr. Jan Frye, Deputy 
Assistant Secretary for Acquisition and Logistics; to his left 
Mr. Steven Thomas, Director of National Contracting Service at 
the National Acquisition Center; further to my right Mr. Philip 
Matkovsky, Assistant Deputy Under Secretary for Health for 
Administrative Operations within Veterans Health 
Administration; and, finally, Mr. Mike Valentino, Chief 
Consultant for Pharmacy Benefits Management Service.
    Also seated behind me are Mr. Craig Robinson, Associate 
Deputy Assistant Secretary for National Healthcare Acquisitions 
and Ms. Phillipa Anderson from the Office of General Counsel.
    With your permission, sir, I would like to submit my 
written testimony for the record.
    The Chairman. Without objection.
    Mr. Gould. At your request, our testimony and our questions 
today will center on a VA contract for distribution of drugs 
within VA called the pharmaceutical prime vendor contract or 
PPV.
    The PPV fits into a larger system of rules, regulations, 
contracts, and management procedures designed to provide a 
continuous supply of quality drugs for our Veterans.
    Let me say at the outset that VA has identified several 
areas where it did not follow applicable law and regulation for 
some drug transactions. This flawed approach was confined to 
transactions known as open market purchases under the PPV 
distribution contract.
    Since the current contract came into existence in 2004, 
open market purchases amounted to 4 percent of the total value 
of purchases through the PPV.
    Now, open market purchases are purchases made through the 
PPV of pharmaceuticals that are not on a VA supply contract or 
from vendors with contracts who do not agree to sell through 
the PPV.
    These deficiencies were the responsibility of VA to 
identify and correct. The deficiencies were not criminal. And 
the remaining 96 percent of the transactions followed all 
applicable laws and regulations.
    At no time were our Veterans put at risk. The drugs 
supplied were FDA approved and complied with applicable Trade 
Agreement Act requirements with the exception of a portion of a 
single transaction of $2,000.
    We paid fair and reasonable prices for 96 percent of the 
purchases. We cannot, however, verify that we did the same for 
the open market purchases since we did not compete these 
transactions as we should have on an individual basis.
    In fact, in some cases, the ordering officers were 
requesting generic equivalents to brand medication which we all 
know typically costs much less.
    We point out that the distributor we used provides 
pharmaceutical products for such cost conscious companies as 
Walmart, Target, Rite Aid, and Costco among others.
    When we recognized we had a problem, we acted to correct 
it. Beginning on November 8, 2011, VA mandated cessation of 
this flawed process and replaced it with a new process that 
conforms to all applicable regulations.
    We did four things. First, we removed the ability of 
ordering officers to see any drug not available through Federal 
contract on the McKesson portal. The McKesson portal is the 
device through which the ordering occurs.
    Next, we mandated training for employees authorized to 
place those orders.
    Third, we placed qualified contract officer representatives 
at the facility level to ensure compliance.
    And, finally, on a parallel track, we continued to move 
forward with a process begun in June of 2011 to issue a new RFP 
for a replacement PPV contract that will not allow the mistakes 
of the past to be repeated.
    Mr. Chairman, we thought deeply about the issue of 
accountability and after extensive internal deliberations and 
analysis concluded that there is no one individual to hold 
accountable for the pervasive misuse of the open market clause. 
It was a team failure simply put.
    The process began many years ago. It broke down to such an 
extent that the wrong way became the way we have always done 
it. The middle and senior level managers who made these initial 
decisions have left VA.
    Despite these shortcomings, timely delivery of FDA approved 
medications was not interrupted further masking the discovery 
of the problem.
    The managers involved have learned to test their 
assumptions more carefully, even those governing well-
established processes, and to increase the amount of training, 
administrative review, and oversight of these contracts at 
every level.
    The corrective actions we have taken will preserve VA's 
access to necessary drugs and complies with all applicable law 
and regulation.
    We will continue to provide our Veterans with high-quality 
care with their unique medical needs as our first priority and 
we will continue to improve our pharmaceutical acquisition 
management.
    Thank you for the opportunity to testify before the 
Committee and I look forward to your questions.
    [The prepared statement of W. Scott Gould appears on p. 
47.]
    The Chairman. Thank you, Mr. Secretary.
    In your testimony, you make it clear that the purchase of 
pharmaceuticals off contract without competition did, in fact, 
occur; is that correct?
    Mr. Gould. That is correct.
    The Chairman. Is this a violation of the law?
    Mr. Gould. Yes.
    The Chairman. When did, if you would again, and I know you 
mentioned some dates in your testimony, but when did senior 
leadership first learn of the unlawful purchasing?
    And I would like to ask each individual at the table 
independently to let me know when you first heard about it and 
what you specifically did when you heard about it.
    Mr. Gould. Sir, to be responsive on that question then, 
each of us will answer that. What you will see is a range of 
dates as the problem escalated through the system.
    To answer personally for the senior management team, I 
first knew about this issue in September of last year, 
September of 2011.
    The Chairman. And we will start down here, Mr. Valentino.
    Mr. Valentino. I became aware of the issue with open market 
purchases in December of 2010 when the clause was removed from 
the draft solicitation.
    Mr. Matkovsky. I became aware in September of 2011.
    Mr. Gingrich. I became aware in September of 2011.
    Mr. Haggstrom. With respect to the improper use of the open 
market clause, I became aware of it in March of 2011.
    The Chairman. When did you hear about the illegal use?
    Mr. Haggstrom. March of 2011.
    The Chairman. Okay.
    Mr. Frye. I became aware in March of 2011, March 29th to be 
exact.
    Mr. Thomas. And I became aware in January of 2009 when a 
logistics manager from the CMOP identified this as an issue. At 
that point, I worked with general counsel, acquisition review, 
IG, others at the NAC, VHA, including PBM, and the CMOP to try 
to correct the issue for the CMOP which we became responsible 
for at the National Acquisition Center in December of 2008.
    I tried to add items to the Federal supply schedule as much 
as possible to cover that gap. I tried to have additional 
things put on requirements, types of contracts that we had 
limited success on. But the main thing I did was I corrected 
the issue for the CMOP so the CMOP follows appropriate 
procedures at that point. And that was the area of 
responsibility that I had.
    Mr. Gould. So, Mr. Chairman, today you have just gone down 
the list to see when people knew what they knew. The people at 
the table today collectively identified the problem, took 
action, and we are collectively responsible for that fact.
    The Chairman. Mr. Thomas, you took great pains just a 
second ago to talk about all the things you tried to do. Can 
you explain why you were unable to do some of the things you 
wanted to do?
    Mr. Thomas. Yes, sir.
    The Chairman. Could you turn your mic on, too, please?
    Mr. Thomas. I apologize. Yes, sir.
    I think what we have in this case is a changing industry to 
a certain degree. As you probably are aware, there are a lot of 
drug shortages that are currently going on right now. There is 
a Trade Agreements Act that we have to be responsible for to 
make sure that products are coming from appropriate countries. 
And a lot of the manufacturing for drugs right now are going 
overseas to India and China and those two countries are not 
Trade Agreement countries. So there are a number of issues 
going there.
    When we put our requirements contracts out for some of the 
generic products, we were able to award about a third of them 
as they came through. It did not stop our efforts in that, but 
it made us try to figure out how we could get more products on 
contracts.
    In the meantime, realizing that the CMOP was the largest 
purchaser of the pharmaceuticals on the prime vendor contract, 
we fixed that problem. We decided to do open market 
solicitations at the National Acquisition Center for products 
that were open market and we have been doing that ever since.
    The Chairman. A wide range of times that people knew, but I 
guess the memorandum went out in November.
    Mr. Gould. Yes, sir, November 8th.
    The Chairman. November 8. How much was spent illegally 
after the 8th of November because purchasing kept going for a 
month or two afterwards. Can you tell me how much was spent?
    Mr. Gould. Mr. Chairman, that, of course, is critical that 
not for one day did we want the flow of drugs to be interrupted 
to our Veterans. And one of the great challenges here in 
evaluating options and figuring out how to go forward is to 
preserve that need to deliver the drugs at the same time that 
we comply with the law.
    The number of transactions now that are not compliant has 
dwindled to 0.4 percent. And I would like to ask Mr. Matkovsky 
to amplify on that analysis and our ongoing effort having 
identified the problem to correct it.
    Mr. Matkovsky. Thank you, sir.
    We are conducting a monthly review at this point with OALC 
on all of the transactions to determine which of them are open 
market. And for those that are, and the number was 0.4 percent 
of all transactions for the month of December, each one of 
those transactions is going through a warranted contracting 
officer's determination for ratification to bring it into 
conformance with the FAR.
    The Chairman. I apologize, Mr. Secretary, if I did not hear 
you, but did you give me a number of what was spent after the 
8th?
    Mr. Gould. Two numbers. The first number was for the month 
of December which we are analyzing is roughly $1.4 million. The 
total number of transactions which we are reviewing for 
ratification is 5,733 transactions.
    The Chairman. You talked about drugs and certainly can 
understand your desire to keep pharmaceuticals going to the 
Veterans who need them, but this was not all about 
pharmaceuticals either, was it?
    Mr. Gould. That is correct. There are other non-drug items 
on the pharmaceutical prime vendor contract. And as you are 
aware, we have other agencies participating in the PPV, so 
other non-drug items are purchased on that contract.
    I might ask Mr. Haggstrom to comment in more detail on that 
issue.
    Mr. Haggstrom. Mr. Chairman----
    The Chairman. Your mic.
    Mr. Haggstrom [continuing]. As part of the contract, we do, 
in-fact, have certain items that would be considered medical 
and surgical items on the contract that the prime vendor is 
allowed to purchase and distribute to our customers. These 
particular items are normally found in pharmacies and 
distributed with the purpose of distribution for our pharmacy 
customers. When you look at it, it is a very limited item 
because we have other contracts in place to do that.
    The Chairman. Like the MedSurg?
    Mr. Haggstrom. That is correct, sir.
    The Chairman. I just do not want the conversation today to 
be solely focused on pharmaceuticals, although I do have a 
great concern even with the trade agreements that are out there 
in regards to how we know for sure that there were not 
adulterated drugs that were being used, but that is for another 
time.
    And the other thing that I want to get to because I know 
everybody has questions that they want to ask, but the fast pay 
system, there are some issues with the auditing of the fast pay 
and some of the things that were just discussed.
    But I will go ahead and yield to Mr. Michaud for questions 
that he may have.
    Mr. Michaud. Thank you very much, Mr. Chairman.
    Mr. Gould, do you have copies of the existing waiver 
request under the VA handbook 7408.1 for the $1.2 billion in 
open market purchases dating back to 2004?
    Mr. Gould. Mr. Michaud, let me just consult with the team 
here.
    Mr. Frye.
    Mr. Frye. Sir, I am not familiar with your question. A 
waiver for what again?
    Mr. Michaud. A waiver request for open market purchases 
that is required under the handbook. That is 7408.1.
    Mr. Haggstrom. I am not aware of any waivers. You are 
correct. The proper process is if the pharmacies desire to 
purchase other than through our VA national contracts or 
through our Federal supply schedule holders, there was a waiver 
process to be required. I am not aware of any formal waivers 
that came in.
    Mr. Michaud. So since 2004, no waivers?
    Mr. Haggstrom. I am not aware of any, sir.
    Mr. Michaud. Okay. Mr. Gould, you indicated that VA had 
decided in December of 2010 to take the open market purchase 
clause out of the next contract, PPV contract.
    What led to that decision back in 2010?
    Mr. Gould. No, sir, I did not say that the decision was 
reached in December of 2010, did you say?
    Mr. Michaud. 2010, between 2010, there was a determination 
to not include open markets into the contract.
    Mr. Gould. In June of 2011, we took action to reach out to 
the private sector to issue an RFP for a new PPV contract which 
will be competed and decided in March and go into place in May 
of this year.
    Mr. Michaud. But in 2010, it was decided at that time that 
open market would not be part of that new contract.
    Mr. Gould. In the new contract going forward, that is 
correct. We will not have open market purchasing in that 
contract.
    Mr. Michaud. And in 2010, what led to that decision not to 
have open market in that new contract?
    Mr. Gould. Let me ask Mr. Haggstrom to comment on that.
    Mr. Haggstrom. Sir, we realized, although under the current 
contract, we had an open market clause which has been well 
vetted with our general counsel in terms of legality and usage, 
what we discovered, and this issue goes back to being raised by 
the contracting officer, was do we really need this particular 
clause in the contract in terms of the usage. There was much 
discussion amongst our customer who is VHA and ourselves. We 
vetted it with the team through an IPT process and we came to 
the realization that we felt it would be better that we did 
remove this particular clause from the future contract.
    As a result of the solicitation that was put out to 
industry in June of last year, that particular clause was 
removed knowing full well that we would have to address the 
issue of how to obtain those drugs that were not available to 
us through either a national contract or through the supply 
schedule.
    Mr. Michaud. The chairman had talked about the drugs since 
November 8th that were purchased on the open market.
    What percentage of those drugs was actually purchased 
through McKesson since November 8th?
    Mr. Gould. Philip.
    Mr. Matkovsky. Since November 8th, we have been acquiring 
drugs in two mechanisms. One would be through a warranted 
contracting officer. And I am sorry. I will take for the record 
the specific amounts that have been awarded to what kinds of 
firms. I do not have that today.
    But in those cases, we would be competing a contract 
action. We have several examples that we were reviewing that 
have gone to other firms. We will prepare the specific 
breakout.
    Mr. Michaud. Okay. And maybe McKesson might know off the 
top of their head since November 8.
    Do you have any waiver requests for those drugs? Did you 
have any?
    Mr. Matkovsky. For the ones that are on the contract, we do 
not have them. If we have a situation where there is no 
availability on contract, we default to an open market. And 
that is usually what we are doing, sir. So when there is none 
available and you still require the medication, you have to 
acquire them through other means.
    Mr. Michaud. My last question actually is for Mr. Thomas. 
You had mentioned following, you know, on trade deals. I guess 
my concern with the drugs that are coming in from India, 
particularly China, what do you do to make sure that those 
drugs are safe, if anything?
    Mr. Thomas. Well, first of all, we are not allowed to 
purchase drugs from China or India based on the Trade 
Agreements Act. So we prevent that as much as possible.
    The second issue regarding that is those facilities, 
although there is manufacturing being done in China or India, 
there still is an FDA approval process there. So I do not think 
there is really a safety issue with that. It is more of a 
government issue and the fact that we do not allow products 
from non-TAA countries.
    Now, if you shop and go to your local pharmacy to get your 
prescriptions filled, you will get product from India and 
China. It is the government that cannot purchase those products 
from those countries.
    Mr. Michaud. And as far as trans shipment, drugs going to 
China to another country that might have a trade deal, do you 
focus on that as well or is that out of your purview?
    Mr. Thomas. Well, there is something called substantial 
transformation that comes into play to a certain degree, but 
that is not something that we are responsible for. That is 
actually a Customs' responsibility.
    Mr. Michaud. Thank you very much, Mr. Chairman.
    The Chairman. Thank you very much.
    Mr. Roe.
    Mr. Roe. I thank the chairman.
    Let me just start by going back. And I called my local VA 
yesterday and spent some time on the phone with them to find 
out exactly how this process worked. And the way I understand 
this is you have a formulary that is approved and most of the 
time, you can fill the needs with that formulary and it works 
very well.
    With McKesson, you have lessened the supply chain, less 
stock on the shelf, less cost to the VA. I understand that and 
that has been in place for several years. The issue is with the 
drugs out there that you cannot get.
    Let's say there is a medicine on short supply. What does 
the VA do? And to make sure that I understand exactly, let me 
give you an example.
    Yesterday I talked to my local VA. Versed is an injectable 
drug that doctors cannot get. It is used to calm patients in 
the ICU, for procedures like a colonoscopy. They cannot get 
that because it is in short supply. I think chemotherapeutics 
right now are also in very short supply.
    So what do you do right now? In some of the testimony I 
read I found that if you bought something in the open market, 
it did not necessarily cost more than what was on the 
formulary.
    It is like someone who comes in to me and has a co-pay for 
$20.00. And I said, well, why would you pay a $20.00 co-pay 
when you can get a generic for $4.00 at CVS or Walmart or 
wherever you shop.
    So how do you do that and how do you make sure that that is 
done legally? And the second question I have, are there any 
penalties--it is a civil law, this law is not criminal--but are 
there any penalties for the people who knowingly broke this 
law?
    Mr. Gould. Do you want to cover the first one?
    Mr. Valentino. I can answer part of that question, sir. You 
are exactly right. The issue of drug shortages is occurring 
with increasing frequency at the national level and we do 
struggle. Many times we have to look for alternative products.
    So in the case of Midazolam and Alprazolam which are in 
short supply, we have to use other benzodiazepines. For other 
examples----
    Mr. Roe. Why don't you give them the brand name because 
nobody understood a word of what you just said.
    Mr. Valentino. Versed, Ativan, Lorazepam----
    Mr. Roe. Valium.
    Mr. Valentino [continuing]. Valium, these are the 
benzodiazepines that are similar but have different uses. And 
some are substitutable in certain clinical situations and not 
in other clinical situations. So we have been wrestling with 
this issue for a long time.
    If you go to look at the American Society of Hospital or 
Health System Pharmacists Web site, at any one point in time, 
you might see 200, 250 drugs that are in short supply. We 
struggle with this. We have to contact physicians sometimes to 
change therapy.
    But to get to your other point, that often is a situation 
that we confront. We will go to the prime vendor Web site and 
we will see out of stock, out of stock, out of stock, out of 
stock for the contract items.
    What we then do is we look and see if there are non-
contract items that have availability and, if so, we choose the 
lowest cost one that we will order. Did we do that 
appropriately in the past? No. Are we doing that appropriately 
now? Yes. Does the new contract fix that situation? We believe, 
yes.
    Mr. Roe. Because what happens, I can tell you if I am the 
doc in the VA and I do not have medicine for my patient in the 
ICU who is having problems, I am going to be beating on the 
administrator that day to get me what I need to take care of 
that patient. I can promise you I am going to be doing that.
    Mr. Valentino. Yes, sir, that happens.
    Mr. Roe. And every day it is happening.
    Mr. Valentino. Yes, sir.
    Mr. Roe. And I talk to folks. I had a discussion with one 
of our folks at the VA and this very thing of drug shortage 
happened to an OIF/OEF Veteran who had severe PTSD and they 
were going to have to change his anti-anxiety medications. The 
guy threatened to kill somebody because he was doing so well on 
what he had. It is a real problem.
    The other thing that is a real problem, Mr. Michaud, that 
you hit on that is extremely important is the importation or 
large amounts of generic drugs to this country. This goes 
beyond the VA the safety of these drugs. With China and India, 
it is a very serious problem. And it is not just the VA. It is 
our whole supply chain of drugs, I think, and that is a whole 
different hearing.
    The violation you did not mention. Is there any penalty if 
you violated this?
    Mr. Gould. Sir, if I may, thank you for drawing that 
distinction within the FAR, a collection of a lot of 
regulations, some of them very serious with criminal 
consequences, others not.
    I would like to ask Ms. Phillipa Anderson from general 
counsel to go at that more nuance since these are not criminal 
acts, but are there any consequences on the less serious side.
    Ms. Anderson. Thank you.
    With regard to the unauthorized commitments, those 
transactions entered into by personnel not authorized to do so 
as well as the competition requirements of the FAR as well as 
the VAAR, there are no penalties attached or sanctions attached 
within the VAAR or the FAR itself.
    Mr. Roe. Okay. Thank you. I yield back.
    The Chairman. Mr. Donnelly, you are recognized.
    Mr. Donnelly. Thank you, Mr. Chairman.
    When allegations of potential improper pharmaceutical 
purchases by the VA were brought to my attention last fall, my 
first concern was the safety of our Veterans.
    Could we verify that the drugs met FDA and other Federal 
standards? Were any Veterans put at risk?
    My next thought was about the cost to the taxpayer. Were 
these open market purchases totaling in the hundreds of 
millions of dollars or more wise uses of taxpayer dollars? Did 
the VA pay more than they should have for these drugs?
    And third, what steps are being taken to ensure that 
Federal and VA rules are followed in the future, that the 
continued safety of our Veterans is not compromised and that 
taxpayer dollars are spent responsibly?
    And so I want to follow-up on something I just heard where 
you mentioned you would go and it would say out of stock, out 
of stock, out of stock, out of stock and you would be forced to 
go open market then.
    Isn't it a requirement of the contract that the supplier 
have these products in stock?
    Mr. Valentino. I will actually defer to Steve for some 
additional comments. But there are fill rates that are 
associated with the contract. It is an overall global measure, 
but certainly the expectation is that the vendor will have 
these in stock. But they cannot stock what nobody has. And so 
there are----
    Mr. Donnelly. What does that mean?
    Mr. Valentino. Well, if it is a national shortage and there 
is just none being produced, none is going into the supply 
chain, our wholesaler as well as other wholesalers simply have 
no stock of that item.
    Mr. Donnelly. So then if nobody has any stock, what do you 
then do?
    Mr. Valentino. Then we will look and see if there are non-
contract items available.
    Mr. Donnelly. That is a similar product to the product that 
you cannot obtain?
    Mr. Valentino. It is a generic equivalent.
    Mr. Donnelly. Well, why can't we put that on a contract 
too?
    Mr. Valentino. We would love to have as many of those as we 
possibly can on contract. And Mr. Thomas alluded to some of the 
things that he was doing. About a third of the time it is 
possible and the rest of the time it is not possible for a 
variety of reasons.
    But you are absolutely right. In a perfect world, 
everything we need we would have on contract and we would 
simply order it through the prime vendor for delivery.
    Mr. Donnelly. Well, I am not even talking about a perfect 
world, but like a just in time supply chain. That is the whole 
idea about the VA not having to stock everywhere is that 
somebody else will have that for you. You can call and then it 
is done.
    And I would think that part of the process would be, well, 
if we cannot get A, then B is available. And, you know, you 
mentioned that a third of the time, B can go on contract, but 
for a variety of reasons, it cannot.
    Why would we not be able to contract these other products?
    Mr. Thomas. I think part of that is the reasons that I 
talked about earlier.
    The Chairman. If you could, talk into the mic.
    Mr. Thomas. This is certainly a changing industry. There 
are generic manufacturers that are falling out of this business 
that are moving their market share to other manufacturers who 
then cannot ramp up fast enough to pick up whatever is being--
--
    Mr. Donnelly. But you at some point identify here is the 
other product we have to get, right? And so you know that that 
product is out there.
    Is there any ongoing program with the vendor to say, hey, 
we need to put a contract on this product now and on this 
product? I mean, it does not come up to you in one day that 
this product is now out on the market. You know, what is the 
process for that?
    Mr. Thomas. Yes, sir. And what I would like to do is give 
you a balanced perspective on two sides. One is Mr. Valentino 
sort of keeping an eye on this whole process, evolving demands, 
new drugs, how do we get position, and then swing over on how 
we do that on a going forward basis to make sure that we 
compete and get as many of these new drugs into the system.
    So, Mike, if you would start there, please.
    Mr. Valentino. Yeah. It is a moving target for us. And in 
the situation that you described with shortages, we may have 
one manufacturer that is in a situation where they cannot ship 
product for one reason or another. There is an FDA action or 
there is a raw material shortage, but that is not affecting 
another company.
    So our primary goal, as you have heard, is, and as Mr. Roe 
has mentioned, is to get the product that we need for patient 
care using all appropriate and available----
    Mr. Donnelly. Right. First and foremost is always make sure 
the vet gets what they need.
    Mr. Valentino. Yes, sir.
    Mr. Donnelly. And we have to do whatever we have to do to 
do that. My biggest problem is I do not understand how we do 
not have some type of ongoing system that these other products 
are on contract as well.
    Mr. Gould. We do, sir.
    And, Jan, if you would address that.
    Mr. Frye. Yeah. I do not think, Mr. Donnelly, that there is 
anyone here at the table that does not agree with you, that if 
something is not on contract, because our associates here, the 
supplier, use our contract----
    Mr. Donnelly. Right.
    Mr. Frye [continuing]. We develop the contracts. We 
negotiate the prices. But if we have a drug that is not on 
contract, I do not think anyone at the table would sign up to 
go rogue and not use contracts. It happened, but that is not 
the way it was supposed to have happened. The way it is 
supposed to happen is if something is not on contract, then you 
go to a contracting officer and put an appropriate contract in 
place.
    Now, granted, we know there were shortages. There are 
shortages across the Nation in both our hospitals and other 
civilian hospitals. But in our case, we were able to get those 
drugs.
    So I think you have got a very pertinent point. Why didn't 
we put contracts in place. And as the deputy secretary has 
already stated, we did not do it right.
    Mr. Donnelly. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Just to follow-up, Mr. Donnelly, on your line 
of questioning, if you could not get a certain type of drug, to 
what extent or limits did you go to to find out where the drug 
could be found or did you go as it appears you did straight to 
the PPV?
    Mr. Gould. Sir, if I could, to start, we go through a 
hierarchy and the folks were trained to do that and did it 
well.
    First, they started with national contracts. The number one 
goal is to get the drugs that are on contract and, therefore, 
have gone through the fair and reasonableness price competition 
and everything is buttoned down and we are complying with the 
law.
    So we start with the national contracts first. Then we go 
to the Federal supply schedule which, again, on contract, 
already been committed and so forth. And there are other 
categories of contracts that exist on the McKesson portal 
before we get to the point where we would consider going to the 
open market.
    And I would like to ask Craig to comment on that process 
where we move through all of the available contracts to a point 
in time when we realize that we do not have stock available and 
we need to meet Mr. Donnelly's point of continuous flow of 
drugs.
    Mr. Robinson. Thank you, sir. Yes.
    The Chairman. If you could, state your name for the record, 
too, please, sir, your name.
    Mr. Robinson. Craig Robinson.
    The Chairman. Okay, sir.
    Mr. Robinson. There is a provision in the VA's supplement 
to the FAR which was a result of the procurement reform task 
force of 2002 that establishes a hierarchy of contracts within 
the VA. It was put together in order for us to leverage our 
spend, to be able to capitalize on the volume that the VA has.
    And it starts off basically with any available stock that 
we already have that is legitimate stock that is available on 
hand.
    The next tier is national contracts. We then go down to 
Federal supply schedule contracts starting off with BPAs. They 
are written at the national level. We then move down to VISN 
instruments, local instruments, and the lowest tier in the 
hierarchy is open market.
    And I will say we have used open market here in the context 
of the McKesson contract as a bad thing. And in this case, it 
was in that these items were not on contract. But an open 
market purchase in many cases is a legitimate purchase when the 
proper processes and procedures are followed.
    The Chairman. Thank you.
    I am a bit confused and, Mr. Johnson, I am coming to you 
next because I cannot find it, but I have seen a document from 
the OGC that basically says you did not follow those steps as 
they were outlined.
    Are you aware of that?
    Mr. Gould. Mr. Chairman, that reference from the IG comes 
from reports that were written not on the PPV but on other 
prime vendor contracts related to Med-Surge and subsistence. So 
the observations made in those IG reports, if I am 
understanding you correctly, sir, do not pertain to the PPV.
    The Chairman. Yeah, this is not the IG report. This is from 
the Office of General Counsel. And I will try and find the 
document to allow you to have an opportunity to see it.
    Mr. Gould. Thank you.
    The Chairman. Mr. Johnson.
    Mr. Johnson. Thank you, Mr. Chairman.
    Just a brief comment before I ask my question. Secretary 
Gould, I certainly respect your testimony and your opinion that 
at no time were any Veterans put at risk. I take a little bit 
of a different slant on that, though.
    With the priorities that we have to get a single electronic 
health record in place, to eliminate the backlog, to address 
the homeless Veterans' issue, I submit that when we are 
potentially wasting or misspending, illegally spending billions 
that could be targeted elsewhere that indeed we are putting 
Veterans and their benefits at risk. So I just wanted to make 
that clarification.
    Mr. Valentino, I think you said that you became aware of--
--
    Mr. Gould. Mr. Johnson, would it be inappropriate for me to 
respond to that----
    Mr. Johnson. Not just yet.
    Mr. Gould [continuing]. A moment ago?
    Mr. Johnson. Not just yet. We may get to it.
    Mr. Gould. I will have an opportunity to do so----
    Mr. Johnson. We may get to it.
    Mr. Gould [continuing]. In a moment. I do not think it is 
the case.
    Mr. Johnson. Okay. We may get to it.
    Mr. Valentino, if I understood your testimony correctly, 
you said that you found out about the improper purchasing of 
open market pharmaceuticals through the PPV in December of 
2010, correct?
    Mr. Valentino. I found out that the clause was removed in 
December of 2010. The issue of whether it was removed because 
of improper purchases had not yet surfaced.
    Mr. Johnson. Had not yet surfaced. I am a little bit 
curious because I am having trouble connecting the dots.
    Mr. Haggstrom, you testified that the clause in the 
contract to allow the purchase of off contract items through 
the open market had worked. You thought it was an acceptable 
process, that indeed now you have the problem of figuring out 
how to solve that problem, and there was this great discussion 
in 2010 about that clause and removing it from the next 
contract.
    Why? I mean, if it was such a good idea and it is a big 
problem to solve, what were the pros and cons discussed in 2010 
that led you to the conclusion that it should not be included 
in the next round?
    Mr. Haggstrom. Mr. Johnson, if I could, I was not part of 
those discussions. Could I ask Mr. Craig Robinson to address 
that----
    Mr. Johnson. Sure.
    Mr. Haggstrom [continuing]. As the head of the NAC?
    Mr. Robinson. I think as the issue originally arose, it 
really was not directed towards the process. The fact that the 
items were not being competed, the things that we looked at, 
the----
    Mr. Johnson. So let me make sure I understand that. So you 
found out at that point or you knew in December of 2010 that 
the process was not working right?
    Mr. Robinson. We knew that the process was a vehicle that 
allowed VA to get drugs to the Veterans. We knew that at that 
point in time from an acquisition perspective the procedure was 
not correct.
    Mr. Johnson. Okay. It was not correct. So, in essence, 
there was an acknowledgment then that there were improper 
purchases of pharmaceuticals through this process, correct, 
because it was not working right?
    Mr. Robinson. It was working in that there were 
medications, to continue to allow the delivery of medications 
to Veterans. But, yes, in the contracting community, a lower 
level employee did question the fact that the items were all 
being bought through McKesson and were not being competed.
    The issues that we looked at----
    Mr. Johnson. Okay. You have answered my question.
    The Chairman. Would the gentleman yield real quick?
    Mr. Johnson. Absolutely.
    The Chairman. Sir, before you sit down, you keep talking 
about the process and that the Veterans received what they 
need. If you did not follow the process or procedure, how could 
it have worked? I mean, is success just the Veteran ultimately 
gets what they need?
    Mr. Robinson. No. I mean, this goes back to the issue of 
the practice, though it was broken, it became the normal 
accepted practice for getting the medications to the Veteran. 
As Secretary Gould mentioned before in his testimony, that was 
something that we acknowledged. We acknowledged in looking back 
that that procedurally was not correct.
    However, as it relates to the operational aspects here, I 
think that the folks from the pharmacy community will say that 
that vehicle is what allowed a continuous supply of the needed 
medications to the Veteran population.
    The Chairman. If you would, put a minute back on the clock 
for Mr. Johnson.
    Mr. Johnson. I am still a bit confused. So if it was 
acknowledged in 2010 that the process was not being followed or 
not sufficient, that, in essence, is an acknowledgment that 
these pharmaceuticals were being purchased not in compliance 
with that process, therefore, not in compliance with the law.
    Who did you tell? Who else knew about your findings that 
the process was broken at that time?
    Mr. Robinson. I mean, I think you heard the individual 
answers across the table here. As we started in----
    Mr. Johnson. That was in December of 2010. So the earliest 
date in 2011 that I heard was sometime in March.
    So was there no discussion about this broken process and 
the potential illegality of it between December of 2010 and 
March of 2011?
    Mr. Robinson. At different levels, there were, but the----
    Mr. Johnson. And who knew?
    Mr. Robinson. At the working level, the issue came up 
because----
    Mr. Johnson. No. But you are not at the working level.
    Mr. Robinson. No. No.
    Mr. Johnson. Okay. So who above you did you tell ``we have 
a process problem here?''
    Mr. Robinson. Through the period of time from December 
until March, there were discussions at the working group level 
related to how we get----
    Mr. Johnson. Who did you tell? Did you tell anyone above 
your level that there was a potential illegal violation of the 
law as it pertained to the execution of this process?
    Mr. Robinson. I mean, I would have to go back and look at 
my notes.
    Mr. Johnson. We would like you to go back and look at those 
notes and let us know who you informed.
    I have additional questions, Mr. Chairman, but I will yield 
back at this point.
    The Chairman. Mr. Donnelly, do you want to?
    And I would remind folks at the table that we have 
subpoenaed documents. You are aware of that, correct? Yes, no?
    Mr. Gould. I had heard the potential for a request but have 
not received any subpoenas.
    Has anybody at the table received a subpoena or, general 
counsel, any knowledge that we received a request for 
information?
    Ms. Anderson. A request for information.
    Mr. Gould. Request for information only, sir, no----
    The Chairman. Chairman Issa's committee on January 19 has 
made that request through a subpoena.
    Mr. Gould. We are only in receipt just a few days ago of a 
letter requesting information. No knowledge that a subpoena has 
been employed to get that. And counsel appears to be nodding 
that a subpoena has been issued. That is news to us.
    The Chairman. Okay. Because if it is not there, it is 
coming.
    Mr. Donnelly.
    Mr. Gould. Mr. Chairman, in that same spirit, if I might 
add, when a senior executive like the one that just spoke would 
encounter a problem like that, I believe its first instinct 
would be to acknowledge the problem and then start developing 
options.
    And so I think the paper trail that you have requested will 
show hard work to develop principal options and bring those up 
the chain of command.
    The Chairman. All right. Before I yield to Mr. Donnelly, 
the earliest date we have heard today is January of 2009. We 
are February now of 2012.
    What happened, Mr. Thomas, from the time you discovered it 
and why has it taken so long to work its way through the 
bureaucracy?
    Mr. Thomas. Well, I think our responsibility for it is the 
consolidated mail-out patient pharmacies. What we do is we do 
specific orders for them. So when this was identified to me 
back in January of 2009, we went through the process and we 
said, as I think Mike has said----
    The Chairman. And could you lay the process?
    Mr. Thomas. Sure. I met with people who I felt were----
    The Chairman. Who were those people?
    Mr. Thomas. People from general counsel, people from 
acquisition review, people from the IG, others at the NAC 
including the Federal supply schedule, and representatives from 
VHA, from the PBM and the CMOP side.
    The Chairman. And what was their response?
    Mr. Thomas. We need to fix this.
    The Chairman. And we had not fixed it until just recently?
    Mr. Thomas. As far as cutting off the open market 
purchases, you are correct, except for the CMOP. On the CMOP 
side, we did a separate process to make sure that we were not 
ordering open markets anymore from CMOP because we were 
responsible for that process.
    The Chairman. Mr. Donnelly.
    Mr. Donnelly. Thank you, Mr. Chairman.
    Since 2001, the inspector general has been reporting and 
has issued at least 49 reports since that time with concerns 
about open market purchases.
    How did this continue to grow and no controls were put in 
place?
    Mr. Gould. Mr. Donnelly, I would like to ask Mr. Frye to 
respond.
    Mr. Frye. We are talking about two different issues here, 
Mr. Donnelly. The open market purchases, as already explained 
by Mr. Robinson, are in and of themselves perfectly legal.
    Mr. Donnelly. Right. Okay.
    Mr. Frye. And so the open market purchases that were looked 
at by the inspector general then were in the context of are we 
using the proper order which was specified in this book and 
codified in our VAAR in 2002.
    The Secretary said that we would use a very specific order. 
I will not go through them all, but he did mention national 
committed use contracts first, VA Federal supply schedule, 
group 65 and 66 and so on.
    So the IG and my office, frankly, have always been 
concerned when people use open market buys which in this 
context means contracting with others than those that we 
specified that we wanted them to use.
    So if somebody was supposed to have used the prime vendor 
contract which would utilize Federal supply schedules for those 
drugs, then perhaps they were not getting that economy of scale 
or that leverage that Mr. Robinson talked about earlier.
    I just wanted to put that in context. It is apples and 
oranges.
    Mr. Donnelly. Mr. Frye, you keep talking about open market. 
Explain to me the difference between open market and extra 
contractual.
    Mr. Frye. Certainly. The open market, as again 
distinguished by Mr. Robinson here, on the pharmacy prime 
vendor contract equals no contract. So the default was and 
there was a clause in the contract that said that if the drugs 
were not contained on the lists that were given to the 
pharmacies by McKesson, then they could use this open market 
provision.
    What that means is they have to follow all the rules and 
regulations. It is clearly stated in the clause. It does not 
mean that you just default to a drug that is not on contract. 
But over time, as has already been explained, starting many, 
many years ago, that methodology was used.
    And, unfortunately, we never caught it. We thought, I 
thought that we were doing the right thing on the pharmacy 
prime vendor contract and on our other Federal supply 
schedules.
    In fact, we hire out of the OIG about 30 auditors who help 
us audit those individual contracts. And, frankly, they return 
millions of dollars to us a year when they find mistakes from 
pharmaceutical companies or Med-Surge companies. Because of the 
price of reduction clause, we are able to recoup millions of 
dollars a year.
    But what we did not have, what we have never had that I 
know of is a full-blown audit of the pharmacy prime vendor 
financial process. So we did not have insight and I did not 
test my assumptions. My assumptions since I have been there is 
this thing is purring along. There are no problems. There were 
no indications of any problems and it was not until I found out 
about it in March, of course, that those became a real problem 
to me.
    Mr. Gould. There were a set of tools that have been created 
in the last 3 years that dramatically changed VA's ability to 
deal with the issue. And they included a new management team, 
streamline authority, the introduction of a capability to 
deliver micro purchases. We have reduced the number of HCAs in 
VA from 30 down to six.
    So a lot of the tools that we have called upon to so 
quickly and clearly solve the problem when we new about it and 
effective on November 8th have come in place in the last 3 
years by virtue of the effort of the team that you see here. So 
this is the team that is responsible for that failure.
    We identified the problem at a senior level and it took us 
6 weeks to solve the problem. We issued clear direction to the 
field to drive a stake through the misunderstanding that we 
could somehow continue this practice which was not compliant 
with the FAR. And that is what we have gone at to fix and it is 
fixed now.
    The Chairman. Is it your testimony that the time frame 
between January of 2009 and today is 6 weeks?
    Mr. Gould. No, Mr. Chairman. As I said a moment ago and you 
went down the list of folks here when did senior management 
know and I have testified that I knew in September. And by 
November 8th, the problem was solved.
    The Chairman. Does it bother you that you have somebody 
sitting at the table that knew of the issue in January of 2009 
and you or somebody at that table did not know?
    Mr. Gould. Sir, of course it does. And as I have testified, 
that is a problem for which we are collectively responsible and 
accountable. I am very unhappy with the escalation of this risk 
up the chain of command.
    All I am saying is that it did not happen and when it did, 
it was absolutely solved by this team. We got together and 
resolved the issues and came up with a clear course of action 
to fix the problem.
    Mr. Donnelly. When you find that a drug is out of stock, is 
there a system that tells you here is when that was out of 
stock this week, out of stock last week, out of stock a month 
ago? Is there any type of system that you had that told you 
here are the ones we are really struggling with and was there 
any form of preplanning where you said, okay, if this is not 
available, here is the backup, we do not have a contract on 
that, we better put something in place?
    Mr. Valentino. Yes, sir. We monitor several different 
sources that collect information on drug shortages. One of them 
I mentioned earlier is the American Health System Pharmacists 
Web site.
    Mr. Donnelly. But does your own system tell you these are 
the ones we are out of stock on?
    Mr. Valentino. Yes, sir. We also have close communication 
with our vendor and they advise us when there are shortages or 
projected shortages. So we combine a number of different 
sources of information and compare that to our needs and then 
we figure out what we are going to do.
    Are we going to reduce the quantities that we dispense from 
90-day supplies to 30-day supplies to get over the hump? Is it 
going to be so severe and so prolonged that we have to 
substitute drugs and contact providers and educate patients 
that their drugs are going to be switched?
    So, yes, sir, we do. We collect information from every 
source we can. We work on that with our clinicians across the 
system and develop a plan.
    Mr. Donnelly. And in the goal of trying to have contracts 
on these things, do you do any planning meetings where you go, 
okay, if it is not this, we have B and we have C, we do not 
have contracts on these, we need to get this done? I mean, is 
there any type of framework instead of looking up and going, 
oh, my gosh, we are out of stock, what do we do now?
    Mr. Valentino. Yes, sir. That is a great question. And they 
are really not linked. A drug shortage does not trigger us to 
say, oh, we have to get a contract on that. We know our 
utilization. We are always trying to get the contracts on as 
many drugs as we can.
    So the shortage situation amplifies that we do not have a 
contract in place for a particular drug.
    Mr. Donnelly. What would be the problem in getting that 
contract on these other things? Is it just that you did not 
think about that particular one or is it that in working with 
the vendor, you were not able to come to terms or----
    Mr. Valentino. Sir, we develop our requirements. We know 
what we need. We hand that information off to our colleagues at 
the National Acquisition Center and they turn that into a 
tender or a solicitation.
    At that point, it is really up to the manufacturers to 
decide whether they want to bid or not. Those bids are reviewed 
if we get them and then the contracting officer determines 
whether they can make an award.
    Steve may have some things to add to that, but that is the 
macro view of how we deal with that.
    Mr. Donnelly. And how long does that process take?
    Mr. Thomas. A couple of things I would like to comment on. 
First of all is we do look at the National Acquisition Center 
on a weekly basis at shortages and we publish a newsletter on a 
weekly basis to the field facilities, all the medical centers, 
and also our other government agencies that participate in our 
contract. And we inform them about issues that we know about, 
here is a shortage, here is a contract change, here is a new 
contract in place, et cetera, to minimize this as much as 
possible.
    The other thing I want to stress that I do not think we 
have talked about yet regarding the McKesson contract is that 
the McKesson contract has a fill rate of 97 percent. I see a 
report on a monthly basis. We are always there.
    So granted there are some exclusions from that calculation 
in that if they cannot get the product from a manufacturer, we 
cannot count that against them. But McKesson has consistently 
delivered.
    Mr. Donnelly. I am not worried about the contract and, you 
know, whoever it is is honestly of no interest to me at all.
    All I am trying to figure out is on the parts that are not 
filled, how do we get a program in place that works quickly, 
that works accurately, that provides safe products to our 
Veterans, and that we know what we are getting at a 
predetermined price?
    Mr. Thomas. So let me follow-up on Mike's feedback. One of 
the issues that we do, he is right, we get a requisition here 
at the National Acquisition Center for a national contract, a 
requirements type of contract. Generally that process, our goal 
is 120 days.
    Mr. Gould. Mr. Donnelly, if I might, I think you have asked 
a salient question which is how do we prevent, how does----
    Mr. Donnelly. My concern is, okay, we are out, now it is 
120 days until we can get a contract on the backup product.
    Mr. Frye. Let me add that while a normal contracting action 
might take 120 days, it does not take 120 days to put a 
contract in place. If there is an emergency, a contract can be 
put in place within hours. You have to have the money, you have 
to know what you want, and you have to have a supplier. And a 
contracting officer can put a legitimate contract in place, a 
letter contract. That can be a phone call followed by a fax 
outlining the terms and conditions in very short order.
    So while normal procedures might take that long, I think 
those procedures probably atrophied over the years as well 
since we did not go through that model. And so maybe it takes a 
little longer than it should. But there are procedures to put 
contracts in place very, very quickly.
    Mr. Donnelly. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Mr. Roe.
    Mr. Roe. Just a very quick comment. There are two issues 
that have been brought up. One is that the VA knowingly did not 
follow their procedures and two is why were the procedures not 
being followed? And I guess three is that there is a broader 
problem in the country of drug shortages. It is a huge problem. 
There is an entire industry out there.
    Let me give you all an example of what Mr. Donnelly brought 
up, Tamiflu. Let's say there is a flu epidemic and all of a 
sudden, all the Tamiflu on the shelves is gone. Well, there is 
another source out there that people go to and that is called 
compounding.
    You can go to a pharmacist, and some can do sterile 
compounding, some cannot do sterile compounding, to get these 
products that are not available on the short-term basis. 
Happens all the time. There is a whole industry across this 
country to help to supply the shortages.
    As you pointed out, you can go to a Web site every Monday, 
look at it and see what the FDA says about a certain drug. 
There are shortages around the country right now that are going 
to create problems. Currently their drugs are being filled sort 
of in an open market in the private sector. It is a little 
harder in a government situation to fill them this way.
    I am glad to hear that you can do it within hours because 
sometimes these needs are that quickly. And if there are two 
issues you have very clearly brought, it is how do we get safe 
drugs into this country because many of the generics are made 
outside and, secondly, how do we get them to our patients, 
either a Veteran or just to a patient I might see in the 
office.
    It is a real problem. There are two issues here, but there 
is a way to get around it and these community pharmacies and 
others are compounding drugs that you cannot get.
    I yield back.
    The Chairman. Mr. McNerney.
    Mr. McNerney. Thank you, Mr. Chairman.
    Mr. Gould, I was here for your testimony and it struck me 
that the gentleman on your right side did not know about the 
problem until September of 2011 whereas the gentlemen on your 
left all seemed to have knowledge before that.
    But what really strikes me is that you seem to think that 
there are systems in place now that are reliable. And how could 
you get something in place that is reliable in that short of 
time between September, say, and November of 2011? Have you 
ratified any purchase since then and what gives you confidence 
that we are on the right track at this point?
    Mr. Gould. Thank you, sir, for the opportunity to reiterate 
again in my oral the corrective steps that we took and that 
will answer your question about why I am confident that we have 
addressed this problem and that the system will work going 
forward.
    The first thing is very, very practical. We just removed 
the ability of ordering officers to see any drug not available 
through a Federal contract from the McKesson portal. They just 
do not see it anymore. It is not there for a VA ordering 
officer. So that is a simple, practical thing we worked with 
McKesson to do. They were very responsive and it happened.
    The second thing is we mandated training for our employees. 
What we are discussing today is clearly a failure of management 
and supervisory level individuals to tell our folks what to do 
and to do it in the right way. That is why I was so concerned 
that this conversation could turn to the point where we are 
trying to hold GS5 ordering officers responsible for a system 
that we as managers created. That is why I put that in my 
testimony.
    Mr. McNerney. So the VA can put people through training, 
schedule it, put them through training, and put them back in 
the job in a 2-month period?
    Mr. Gould. We have mandated training for our employees 
authorized to place orders. That will be completed by, I 
believe, the 28th of February, correct, right, right, to 
retrain, excuse me, but train them on this----
    Mr. McNerney. So if training is not finished, then you 
cannot be completely confident then?
    Mr. Gould. We have also placed qualified contracting 
officers in position to now manage this process. And, finally, 
we have continued to move forward on the new RFP which will 
correct the problem from May afterwards.
    So in a large organization of this size, it takes some time 
to do those things, train, put new people in place.
    We have also dramatically improved oversight. As we 
testified earlier, we are down to 0.4 percent of the purchases 
in December that use this clause and we are examining every 
single one of those 5,000 transactions to be sure that we 
followed procedures and got value.
    Mr. McNerney. And this has all happened, everything since 
November 8th following this guideline and you are highly 
confident at that point?
    Mr. Gould. Since November 8th, yes, sir, November, 
December, January, here we are first day of February. We are a 
large organization. We sometimes do not move as quickly as we 
should. But let me tell you the senior management team is 
focused on making sure that implementation occurs.
    Mr. McNerney. Another thing you said is that the people who 
were perpetuating the problem have left the organization. Did 
they leave voluntarily or involuntarily?
    Mr. Gould. Retirements, you know. If you are asking was 
someone fired or removed for this behavior, the answer is we 
did not know about it. Those individuals are simply not in the 
mix right now.
    What you see is new managers and leaders encountering a 
problem that we were not aware about. We finally were made 
aware about it. You have heard that time table and we took 
action. We learned in September at a senior management level 
that there were problems. We brought the team together. By 
November 8th, we had a solution in place and we are committed 
to implementing it.
    Mr. McNerney. And my last question, Mr. Gould, is, and you 
are perfectly confident that McKesson has been a good player in 
all this?
    Mr. Gould. I am. I think they have fulfilled their 
contractual obligations. When we went through the process, we 
could only conclude that we ourselves were the source of the 
problem. The contract requires us to follow the FAR and we did 
not.
    Mr. McNerney. Thank you. I yield back.
    The Chairman. Mr. Johnson.
    Mr. Johnson. Mr. Haggstrom, remind me again. When did you 
say you found out about----
    Mr. Haggstrom. The latter part of March of 2011.
    Mr. Johnson. Okay. Is it safe to say that this PPV contract 
is maybe because of the cost, the volume, or whatever, that 
that is one that you would be paying particularly close 
attention to?
    Mr. Haggstrom. It is now, sir.
    Mr. Johnson. Okay. Were you involved in the discussions in 
2010 when the decision was made to omit the clause for open 
market purchases from the follow-on compete contract? Were you 
involved----
    Mr. Haggstrom. I do not believe I was, sir.
    Mr. Johnson. Were you informed of the decision at that 
point?
    Mr. Haggstrom. I do not believe.
    Mr. Johnson. Well, you said earlier that you knew about it. 
So what did you know about those discussions?
    Mr. Haggstrom. There was a discussion over whether----
    Mr. Johnson. What was the rationale for dropping that 
clause that was presented to you?
    Mr. Haggstrom. There was discussion concerning the next 
prime vendor contract, whether we should retain that clause in 
it or not. The discussion at that time, to my recollection, did 
not go into the issue of whether the clause was being used 
properly under the existing contract.
    Mr. Johnson. Well, the documentation that the secretary 
sent recently and the enclosures that accompanied his letter in 
response to Representative Donnelly's letter said that in 2010, 
it was determined to omit that clause. So a decision point was 
reached.
    Who would make that decision?
    Mr. Haggstrom. That was made at the working level through 
the stakeholders of the contract at that time in which the NAC 
and Pharmacies Benefit Management were working jointly 
together.
    Mr. Johnson. And who is the contracting officer?
    Mr. Haggstrom. The contracting officer is part of the NAC 
and Mr. Herman Archibald.
    Mr. Johnson. Okay. All right. Mr. Frye, you said you found 
out in March, March 29th, I think you said----
    Mr. Frye. March 29th.
    Mr. Johnson [continuing]. To be exact?
    Mr. Frye. Yes, sir.
    Mr. Johnson. What did you do once you found out? Who did 
you tell and what did you tell them?
    Mr. Frye. We were in a meeting, myself, Glenn Haggstrom, 
the Chief Acquisition Officer, and a number of us to include 
Mike Valentino, the chief procurement officer from VHA, Mr. 
Fred Downs at that time. Mr. Craig Robinson was also in the 
meeting.
    And the way I discovered this was Mike Valentino came to 
the meeting. The purpose of the meeting was to discuss why we 
were eliminating the clause from this follow-on contract. And I 
did not know what the open market meant in the context of this 
contract. So I asked Mike Valentino to explain it. And he said 
we are buying drugs without a contract.
    And I was aghast and immediately said this has got to stop 
today and the Chief Procurement Officer for VHA agreed with me. 
Now, did he ever take any steps down that road, I do not know.
    Mr. Johnson. I saw a letter and I have so much 
documentation here, I should have had it out. There was a 
letter that directed that the purchase of open market drugs 
through the PPV cease immediately. There was a big time span 
between March to the issuance of that letter.
    Who did you tell up your chain when you became concerned 
that the law was being broken on these purchases?
    Mr. Frye. Well, I talked to a number of people over the 
course of time.
    Mr. Johnson. By name, who did you talk to?
    Mr. Frye. Within several days, I talked to Maureen Regan 
from the Office of the Inspector General and relayed my 
concerns to her.
    Later on in the process, in the August, September time 
frame, I sent some very pointed letters to Mr. Haggstrom, to 
Bill Schoenhard in VHA. I included Mr. Todd Grams, the chief 
financial officer. I included the deputy chief financial 
officer, Ed Murray, who also included Mr. Paul Kearns, the 
chief financial officer from VHA.
    And my concern was that since this was extra contractual 
that this was also a finance issue. And Glenn and I eventually 
met with Mr. Murray because, you know, I thought it might rise 
to the level of a--what is that term--material weakness. Glenn 
and I were both concerned about that. So we brought him into 
the office.
    Mr. Johnson. I appreciate that. Going to the issue of 
financial management, Secretary Gould, what do you think the 
impact of this failure, do you think the impact is on VA's lack 
of an integrated financial and logistics system that ties all 
of this together?
    Mr. Gould. Sir, I think the failure here has to do with 
training, with process and procedure, and with having properly 
warranted contracting officers in place. Our largest concern 
here is the people factor in the system and that is what we 
have moved to address.
    A moment ago, you raised an issue that I wanted Mr. 
Matkovsky to address and I think you will find it helpful and 
providing a fuller answer to your question.
    Mr. Matkovsky. Sir, relative the September meeting with Mr. 
Frye, it is correct that he brought this issue to Mr. 
Schoenhard and myself. We are on the health care operations and 
management segment of VHA.
    What we had done with that information, we were concerned, 
our first reaction was we heard the word illegal. We sought 
advice of counsel. Upon receipt from counsel's opinion, we 
recognized that this was not a criminal issue, but we did see 
that it was a problematic issue, sir.
    We requested that we form an IPT, integrated product team. 
And I will tell you candidly that my preference was to fix the 
current contract, try to----
    Mr. Johnson. I understand. You said, though, that it was 
not a criminal issue but a what?
    Mr. Matkovsky. Problematic issue.
    Mr. Johnson. Violation of the law is far beyond 
problematic, wouldn't you say?
    Mr. Matkovsky. Right. So it was a violation of the FAR and 
we thought it was problematic.
    Mr. Johnson. Okay.
    Mr. Matkovsky. We knew we had to fix it. We fielded a team 
of folks including the contracting officers, folks from 
contracting, folks from PBM, and we went through a set of 
alternatives that we tried to tick off first, modify the 
current contract, award a national contract in scope for 
something of this complexity that allows us to acquire this 4 
percent of dollar volume in a FAR compliant mechanism, and then 
lastly focus on the future contract.
    When we could not negotiate the current contract, when we 
could not put in place a national scope contract to address 
this 4 percent, that left us with a curtailment of the process.
    Mr. Johnson. Okay.
    Mr. Matkovsky. We learned in late October that we could not 
change it and then we issued the instruction. I also wanted to 
emphasize it is not just an issue of a cease and desist. It was 
also the issue of making sure we had sufficient instruction for 
how to acquire what you needed medically necessary and enough 
contracting officers available over weekends or whatever to 
acquire the medications we had. And as soon as we had that in 
place, we felt confident to issue the instruction.
    Mr. Johnson. Okay. Well, thank you for that clarification.
    Mr. Chairman, the clock is not running. I do not know how 
much time I have left.
    I would like to know, are there penalties associated with 
violation of the FAR?
    I know in my experience, I retired in 1999, worked a lot of 
contracting work, the contracting officers I worked with were 
very, very fearful of illegal operations and violations of the 
FAR because it could cost them their jobs and their careers. 
That is in the DoD.
    Are there penalties associated with knowingly violating 
Federal acquisition regulations?
    Mr. Gould. There are and Ms. Anderson----
    Mr. Johnson. And have any of those penalties been pursued?
    Ms. Anderson. I am happy to answer that question. Thank 
you.
    There are no penalties, sanctions attached to those 
specific violations of the FAR that we are speaking of today. 
And that is again the unauthorized commitments and the failure 
to comply with the FAR sections related to competition.
    There are other penalties, failure to comply with the Trade 
Secrets Act which is also part of the codification of the FAR, 
Procurement Integrity Act. But with regard to the violations 
that we are speaking of today, the answer is no, not with the 
FAR or the VAAR.
    Mr. Johnson. Okay. Mr. Chairman, I yield back.
    The Chairman. Thank you very much.
    One further question, and I appreciate your patience in 
answering the questions. And I know that all Members, I would 
request, that we through the Committee do one document to VA 
asking further questions for the record.
    Mr. Matkovsky, is the PPV the largest contract within VA?
    Mr. Frye. I think it may be the largest. It is over $30 
billion. It is an 8-year contract. It is certainly one of the 
largest if not the largest.
    The Chairman. We talked about contracting officers, but is 
there a contracting officer technical representative that 
provides oversight for this huge contract?
    Mr. Frye. There are no contracting officer representatives. 
We no longer use the term COTR, so that is just a technical 
issue. And it was never designed to have contracting officer 
representatives.
    When this contract was designed many, many years ago, as 
far back as 17 years ago, apparently it was designed so that we 
could have very rapid delivery of these drugs. And the system 
was designed with a fast pay system and paperless. And I am not 
sure it was designed immediately that way, but later on down 
the line, those were the designs.
    So the CORs were never part of the contract. Instead in 
pharmacy, there were representatives who receipted for the 
drugs, ordered, receipted, and stored the drugs and dispensed 
them in the pharmacies, in the particular hospitals, or in the 
respective hospitals.
    The Chairman. So who is responsible for making sure that 
the contract is adhered to and is managed properly?
    Mr. Frye. Well, that is the structural problem that was 
alluded to by the deputy secretary. In my opinion, of course, 
looking in the rearview mirror, we should have really taken a 
look at this fast pay system years ago because while it is 
designed for velocity, perhaps it was not designed with all of 
the internal controls in place.
    In other words, if you bring things in quickly, if you pay 
the supplier within 24 hours, are you taking all the necessary 
steps that are required to make a positive ID of the products 
that you ordered and put on the shelf in the hospital?
    I cannot answer that at this point. We are going to have to 
do some more research. There has been some preliminary research 
done by the auditors and the Chief Financial Office in VA. And 
it appears that we have some problems, but I cannot go into 
those now because it is preliminary.
    Mr. Matkovsky. Mr. Chairman, sir, I would simply add to Mr. 
Frye's comments that effective the end of January, I believe it 
was January 27th, we have appointed in addition to the 
contracting officers, Mr. Frye alludes, we have appointed three 
administrative contracting officers who serve as an extension 
of the contracting officer as well as nominated well over 200 
contracting officer representatives throughout VHA.
    Those folks, the ACOs and the CORs, will be formally 
trained by the end of February. And they will be compliant with 
the expected part of the FAR.
    The Chairman. Who at the table is the closest to the 
contract in regards to oversight?
    Mr. Gould. Mr. Chairman, if I could just tee that up. 
That----
    The Chairman. No. I teed it up.
    Mr. Gould [continuing]. Chain of command on policy side and 
on the customer side, very important distinction. I think you 
are asking the policy and oversight side and so we will go down 
this side of the table. And you asked closest to the front 
line; is that correct?
    The Chairman. Well, actually, I want to know who is the 
most senior person who knew this was going on and chose not to 
do anything about it.
    Mr. Gingrich. Mr. Chairman, I will take a risk on answering 
that question. I am not sure people did not choose to not do 
something about it. I think that March to September is a long 
time, but I believe that people were searching through to find 
the answer.
    Like Philip said, they were saying can we go modify the 
current contract with McKesson to give us the pricing vehicle 
that we would need to become compliant. Researched that. That 
did not work. It worked through the staff section. It worked 
between the acquisition folks and VHA.
    And in September, I am the person that they came to and 
said we have an impasse. We need to figure out how to get at 
this. So I asked three questions.
    The first question I asked is, are we putting any Veterans 
at risk? I was assured by everybody that we have not put any 
Veterans at risk for drugs and we are delivering the drugs that 
we need on time.
    The second question I asked, do we have any criminal 
activity here? Do we have any fraud or do we have any activity 
like that? And the answer I got back was, no, it is not 
criminal, but it is a violation of the FAR and regulations and 
we need to fix it.
    The third I asked is, how do we fix it not just for the 
short term but for the long term? And if we do fix it, how do 
we do it without breaking number one and that is the care to 
Veterans?
    So that process which the Member asked us, how can you go 
from September to November so quickly is we already had people 
working each one of these pieces and trying to figure out how 
to make it work.
    They came in. We had the meetings. We talked about it. I 
briefed the deputy and the secretary at a high level saying we 
are working through this problem and we have what we think is a 
solution. The solution was to implement a stop.
    I cautioned them repeatedly as before you issue the stop of 
using any method other than the credit card or the purchase 
card which we had to get McKesson to agree to accept and before 
you implemented the contracting process, how do we do it as we 
have been cautioned repeatedly by the Members without putting a 
single Veteran in harm's way?
    They came back, said we have that process in place. We 
said, okay, we are going to implement it. We started in October 
crafting the instructions, getting the word out to the field, 
briefing the right people, and the order was cut on 8 November 
directing that it cease.
    In fact, we had a conference of 600 plus contracting 
officials including from VHA which are about one-tenth of the 
contracting people that were trained in 2011. And it was 
announced on that date prior to 8 November that we were going 
to put this in place and it got a round of applause that we 
were actually putting out this.
    I said it. We are going to stop the process. We have 
already got the directive coming. And the contracting people in 
that room were a round of applause that they knew that we had 
made the right step. And I asked them when I said that, are you 
ready to implement and the answer was yes.
    So when it did come up, the questions were people were 
working around it, but the fear, concern, maybe over concern on 
my part as I briefed the secretary and the deputy was we could 
not allow a single Veteran to be put in harm's way or have a 
surgery late or have his chemotherapy late or any of those 
things that Mr. Roe has pointed out. And we had those 
procedures in place. It took us longer than we expected, but we 
did implement, Mr. Chairman.
    The Chairman. I thank you for your comments.
    I have to wonder if the applause was for the new policies 
and procedures that were put in place or the fact that they 
were no longer breaking the law.
    Mr. Gingrich. I think the answer was, to answer your 
question, that we were able to stand up and make the procedures 
and outline exactly what we were going to do.
    The Chairman. Thank you very much. You are excused.
    Thank you for your patience. On the next panel, we will 
hear from Linda Halliday, deputy assistant inspector general 
for Audits and Evaluations at the VA Office of Inspector 
General.
    She is accompanied today by Mark Myers, director of the 
Healthcare Resource Division in the Inspector General's Office 
of Contract Review, and Michael Grivnovics, director of the 
Federal Supply Service System Division also in the Office of 
Contract Review.
    Ms. Halliday, your complete written statement will be made 
a part of the record and you are recognized for five minutes.

STATEMENT OF LINDA HALLIDAY, DEPUTY ASSISTANT INSPECTOR GENERAL 
 FOR AUDITS AND EVALUATIONS, OFFICE OF INSPECTOR GENERAL, U.S. 
   DEPARTMENT OF VETERANS AFFAIRS ACCOMPANIED BY MARK MYERS, 
  DIRECTOR, HEALTHCARE RESOURCES DIVISION, OFFICE OF CONTRACT 
    REVIEW, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF 
VETERANS AFFAIRS; MICHAEL GRIVNOVICS, DIRECTOR, FEDERAL SUPPLY 
 SERVICE SYSTEM DIVISION, OFFICE OF CONTRACT REVIEW, OFFICE OF 
     INSPECTOR GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS

    Ms. Halliday. Chairman Miller and Members of the Committee, 
thank you for the opportunity to testify on the OIG's ongoing 
reviews of VA's administration of the pharmaceutical prime 
vendor contract and to provide a perspective on contracting 
issues and open market purchases. OIG reviews provide unique 
insight into how VA purchases pharmaceuticals and health care 
services.
    Maureen Regan, the Inspector General's Legal Counsel, who 
provides oversight to our Office of Contract Review is unable 
to participate in today's hearing. She had a conflict with 
scheduled court proceedings.
    Thus, I am accompanied by Michael Grivnovics and Mark 
Myers, the Directors of the OIG Office of Contract Review, both 
in the Federal Supply Service Division and Health Resources 
Division respectively.
    These directors report to Maureen Regan and are directly 
responsible for the majority of the OIG work on the 
pharmaceutical prime vendor contract.
    Open market purchasing is not a new issue and OIG has 
issued numerous public reports that have identified concerns 
with open market purchases. The term open market describes the 
purchase of goods that are not on contract.
    We have consistently identified concerns that a vendor's 
ability to sell open market in significant volumes effectively 
reduces VA's ability to leverage prices using aggregate buying 
power.
    OIG has shared their insights with VA officials to help the 
department develop short-term and long-term solutions to 
improve the current pharmaceutical prime vendor solicitation.
    Short-term solutions implemented by VA have resulted in 
amendments to the current pharmaceutical prime vendor 
solicitation and included efforts to establish negotiated 
prices for items not on national contracts and ensure the 
requirements that products purchased comply with the Trade 
Agreement Act.
    However, identifying long-term solutions will not be an 
easy task because the causes, which are numerous and complex, 
have never been quantified.
    At this time, we are conducting a review of the 
pharmaceutical prime vendor purchases for fiscal year 2011 to 
quantify the extent and causes of the problems. This work 
includes quantifying the actual dollars spent on open market 
sales and identifying the patterns and trends of open market 
purchases of pharmaceuticals.
    Further, we are assessing whether purchases have violated 
existing procurement laws and regulations and to what extent 
open market purchases have violated the Trade Agreement Act.
    We are also reviewing the internal controls of the VA's 
fast pay system to identify the risks and vulnerabilities 
associated with the reliance on related payment and processing 
activities.
    Specifically, we are assessing whether items ordered via 
the pharmaceutical prime vendor contract are received and 
correctly priced, that payment errors are corrected in a timely 
manner, that the contract terms are met, and we are looking to 
see whether an adequate separation of duties exists in the 
processing activities, over ordering, receipt, and payment of 
items.
    Our auditors are reviewing orders placed at VA health care 
systems, orders processed through the VA consolidated mail-out 
pharmacies, along with the payment processing activities at the 
VA's Finance Service Center.
    We will provide the Committee the results of our ongoing 
work when the reviews are complete.
    Chairman Miller, this concludes my statement and my 
colleagues and I would be pleased to answer any questions you 
may have.
    [The prepared statement of Linda Halliday appears on p. 
51.]
    The Chairman. Thank you for your testimony.
    To finish up on your last comment, when do you suspect that 
you will finish the review?
    Ms. Halliday. There are two reviews going on right now. One 
is in the Office of Contract Review and the other is with the 
Office of Audit and Evaluations. We are thinking mid summer, 
hopefully a little bit earlier.
    The Chairman. Have you received everything you have asked 
for from VA at this point?
    Mr. Grivnovics. Yes, we have.
    The Chairman. Is there anything that they have not provided 
that you need?
    Mr. Grivnovics. We have not identified any additional 
information needed at this point.
    The Chairman. When did they ask you to become involved in 
this matter?
    Mr. Grivnovics. December, late December, we were asked to 
begin the review of the pharmaceutical prime vendor program.
    The Chairman. Do you know at this point how long VA knew 
about it before you were notified or is that going to be part 
of the outcome of your investigation?
    Mr. Grivnovics. That is going to be part of the review, but 
we do not know at this point.
    The Chairman. Mr. Donnelly.
    Mr. Donnelly. Thank you, Ms. Halliday.
    One question that I am wondering about is there is another 
contract coming up and it is coming up in a few months. Have 
you seen any indication that these problems are solved in the 
contract that is to be let?
    Mr. Grivnovics. There was an amendment, I believe it was 
amendment number six to the current solicitation, and one of 
the areas that was put in is that there will be, if I remember 
this correctly, for generics, a wholesale acquisition cost 
price base generic program.
    My understanding is this would help potentially cure the 
problem where items are not currently on an FSS contract but 
are out there and available for sale in the pharmaceutical 
business. They would be priced at some percentage over or under 
WAC and they now would be considered a contract purchase.
    Mr. Donnelly. The reason I ask, Ms. Halliday, is in your 
statement, you talk about for 12 years you have been doing 
this. And I would love to not have you do this for a 13th. And 
so it seems to me that with a new contract, we ought to have in 
place a way to end us having to struggle with this.
    Ms. Halliday. Congressman Donnelly, I believe we will still 
have to follow-up on the effectiveness of VA's actions.
    Mr. Donnelly. We want you to continue to follow-up. We just 
do not want you to find any problems.
    Ms. Halliday. We would hope that we see positive 
improvements.
    Mr. Donnelly. Okay. Do you have any other suggestions as to 
things that the new contract should include so that we can look 
and see, oh, okay, the next alternative there is a contracted 
price because from reviewing your statements, too, I mean, we 
are talking about millions of dollars lost to taxpayers who 
every day work their tails off, you know, to raise their family 
and a few extra bucks left over but also pay taxes every year? 
Any suggestions as to what else needs to be in that contract?
    Mr. Myers. I think as Mike has already alluded to that, 
part of the solution is the WAC-based pricing. For any generic 
drug that is not on a Federal Supply Schedule contract to have 
it part of the PPV contract and put it in there at an agreed 
upon percentage, either markup or discount, whatever the 
proposals are going to be in the ultimate awarded contract.
    We do have concerns with that. Potentially it could 
undermine the Federal supply schedule program. As vendors and 
manufacturers of generic products, it may no longer be an 
incentive for them to come and negotiate the contract and 
expend the effort needed to comply with the Federal Supply 
Schedule contract when now they can sell their products simply 
through the PPV contract and VA can purchase their drugs at a 
WAC price rather than a deeply discounted price that typically 
you find on Federal Supply Schedule contracts.
    It is a solution, I think, at least in the short term, that 
is going to fix the procedural and process question, are you 
compliant with the FAR because now you are going to have a 
legitimate contract purchase rather than an open market 
purchase.
    But I think one of the things that definitely needs to be 
done is that for certain open market purchases, for certain 
drugs, we have talked a lot about the generic market, but there 
are covered drugs.
    There is sort of two divisions of drugs, generics and name 
brand covered drugs. The name brand drugs, those drugs are 
required to be in Federal supply schedule contracts and they 
are required to be on the FSS contract at a statutory ceiling 
price.
    And one of the biggest concerns that we have seen as early 
as 2007 is that when a manufacturer who has a covered drug on a 
Federal supply schedule contract at the statutory ceiling price 
and the manufacturer does not participate with McKesson and, 
yet, we have seen specific instances, numerous manufacturers 
where those covered drugs were purchased at open market prices 
from McKesson when they were actually on a Federal Supply 
Schedule contract.
    And so that gave us a lot of concern. And those types of 
products should be simply blocked out and blocked from purchase 
through the PPV system.
    Mr. Donnelly. Thank you, Mr. Chairman.
    The Chairman. Mr. Stearns.
    Mr. Roe.
    Mr. Roe. One of the things I would like you to look at when 
you are reviewing this is are you finding any of the 
medications on the PPV, companies leaving them off because the 
margins are so thin, knowing that they will go around the 
contract into the open market system and do that?
    Have you had a chance to look at that?
    For instance, one of the big issues now are 
chemotherapeutic agents, as you know, which is really tragic 
because you have got a patient out there with cancer that knows 
the best treatment is X and they cannot get it if they are a 
Veteran unless they go around that.
    Have you noticed that at all or found that?
    Mr. Grivnovics. It is early in our review but one of the 
things we are going to cover is looking at what was purchased 
open market and if there was a comparable product that was on 
contract, and why we did not buy that product that was on 
contract?
    Mr. Roe. I do not know for sure, but what could be 
happening forcing you to the open market would be if the 
vendors and or manufacturers just said we cannot make any money 
selling this product, so we just will not provide it. We will 
not bid on that and, yet, it is a needed product.
    Mr. Myers. Yes, that is a potential risk. And I think that 
typically VA is trying to establish long-term contracts. And 
when the profit margins are thin, as you have alluded to, and 
the generic market can fluctuate wildly, I think there might be 
some hesitation out there because of that, but we have not 
validated that in a review.
    Mr. Roe. That will be something you will look at, though?
    Mr. Myers. Yes.
    Mr. Grivnovics. I would like to add one more thing to 
Mark's comments. Some of the generic drugs on the market have 
competition from McKesson themselves. Many times when we are 
going to do a Federal supply schedule contract or the National 
Acquisition Center is, sometimes it is hard to get a fair and 
reasonable price because the manufacturer does not want the 
distributor to see what prices customers are getting. They 
would prefer that we go direct to them and purchase. But our 
system, the prime vendor system is set up to go through 
McKesson to buy those drugs.
    Mr. Roe. Okay. I have no further questions. I yield back.
    The Chairman. Mr. Reyes.
    Mr. Reyes. Thank you, Mr. Chairman.
    My first question is, in your preliminary work, have you 
come across any offices that have been in compliance or is it 
across the board noncompliant?
    Mr. Grivnovics. We do not have that information at this 
point.
    Mr. Reyes. Is that something you are going to look for?
    Mr. Grivnovics. Yes, we are. We are going to do a sample to 
see if any violations occurred of the FAR and based on that 
sample, depending on the error rate that we find, we will 
expand the review to see how pervasive the problem was.
    Mr. Reyes. Will your report give the Committee an idea, in 
terms of total cost how many potential millions of dollars of 
taxpayer money was used unnecessarily in this manner? Will we 
get that?
    Mr. Grivnovics. Yes. We will define the amount of open 
market purchases. We are going for those open market purchases, 
see if we can find a comparable item on contract, we will 
quantify the differences in price.
    Mr. Reyes. The other concern that I have is will you be 
able to tell if there were instances where Veterans did not get 
either the correct medication or the medication in proportion 
to their issue because of the noncompliance with the Federal 
regulation?
    Mr. Grivnovics. I do not believe we will be able to tell 
that.
    Mr. Reyes. You will not be able to----
    Mr. Grivnovics. From the one discussion I had so far is 
that when products are ordered, if they are not available, they 
are just basically replaced on the PPV ordering screen. You do 
not know what was not ordered except if there was a national 
shortage. VA does reports on that and you can look at that. But 
from an item that was substituted, you are not going to see the 
original product that was ordered.
    Mr. Reyes. But you are satisfied that you will have in the 
system, in every system the ability to determine and audit the 
impact of this noncompliance?
    Mr. Grivnovics. Yes, we should be able to do that.
    Mr. Reyes. Okay. That is all for me, Mr. Chairman. Thank 
you.
    The Chairman. Mr. Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman.
    And thank you to the panel for being here.
    Apparently this has been a problem before in other 
purchasing. In 2009, there was an audit done on open market 
medical equipment and supply purchases. And I was reading 
through that review and that report.
    And my question is, are you seeing any parallels to your 
review now to what you found and concluded in this report and 
also did the VA follow-up on your recommendations and make any 
changes to the report in 2009?
    Mr. Grivnovics. Do you have the title or specifics about 
that 2009 report?
    Mr. Stutzman. Yes. It is the audit of VHA open market 
medical equipment and supply purchases.
    Ms. Halliday. Yes, we made several recommendations in that 
report and VHA moved forward to implement those 
recommendations. I believe all of the recommendations are 
closed and we would have expected that that would result in 
some corrective actions.
    Mr. Stutzman. So you do not know or there has been no 
follow-up necessarily to----
    Ms. Halliday. We have not done follow-up on that report at 
this point. We do program follow-up reviews in, but we give the 
department a period of time to put the corrective actions in 
place so then when we go in, we can assess the true 
effectiveness of those actions.
    Mr. Stutzman. Okay. I am new to this process. And I guess 
to me, the follow-up would take place. At some point, will you 
follow-up on this report that happened in 2009 as well?
    Ms. Halliday. We will certainly put that in our plan and 
look at the performance risks. And I would expect that would go 
into a future review.
    Mr. Stutzman. Okay. And then typically how far back would 
you look at this issue in your review?
    Ms. Halliday. We like to keep our look as a current 
snapshot in time because I think that is where you really want 
to focus on what corrective actions are needed now. So we would 
probably take the most recent fiscal year or some portion of 
that time period to look at the conditions.
    Mr. Stutzman. Okay. Well, I would be interested in not only 
this review but also any follow-up that would have taken place 
on a 2009 report or any others as well because there is no 
point in you doing reviews and recommendations and the VA is 
not doing anything about it.
    Thank you. I yield back.
    Mr. Roe. If the gentleman would yield for just a minute. 
Let me put a human face on this for you. Let's say you have a 
shortage of methadone and you have a substance abuse patient. 
You have a 10 milligram and a 20 milligram and a 40 milligram 
and an 80 milligram. If you do not get those right, that person 
can die. They can overdose and die.
    So this really happens out in the real world. Our VA folks 
are very concerned about this being done. And so this is 
critical. It is not just violating a statute or a law. It is 
about patients' lives and we have to get this right.
    I yield back.
    The Chairman. Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman.
    I regret I was not here earlier to hear all the first 
panel, but I guess you had indicated, Ms. Halliday, that your 
study is going to take six and half or mid summer which would 
appear about six and a half months.
    Is it possible to get an early summary or some information 
back to the chairman and to the Committee some of your 
tentative findings in 90 days? Is that a possibility?
    Ms. Halliday. I think that we probably could provide an 
interim briefing. It is going to take us a while because we do 
have teams at medical centers. We have them at the consolidated 
mail-out pharmacies. And the work that the Office of Contract 
Review is doing is very data intensive.
    Mr. Stearns. Okay. You might think about it.
    Ms. Halliday. We will try and do that if we can.
    Mr. Stearns. Now, you heard the first panel. Is there 
anything about the first panel and what they said that concerns 
you, that would affect your study?
    I think one of the things that I have been told by talking 
to the staff here is that the people who are responsible are no 
longer there. Is that the way you understand it, too?
    Ms. Halliday. That is still under review.
    Mr. Stearns. Okay.
    Ms. Halliday. We cannot answer that completely.
    Mr. Stearns. And the number of people that were involved, 
do you have any idea how many people were involved that they 
supposedly said has left?
    Ms. Halliday. No.
    Mr. Stearns. Do you have a ballpark? Are we talking about 
100, 200, 1,000?
    Ms. Halliday. No. We do not have information on that at 
this time.
    Mr. Stearns. Uh-huh. And your normal procedures when you do 
these studies, will you be able to identify people that did 
this that perhaps are still there?
    Ms. Halliday. I think we will be able to identify through 
the interviews what people understood the problems to be and 
the corrective actions they took and how they reported it up 
the chain.
    Mr. Stearns. That does not quite answer my question. So the 
question would be, if you find that they did something illegal, 
will you determine whether those people are still there that 
did the illegal operations? Will that be a fair question that 
you will be able to determine for the Committee?
    Mr. Grivnovics. If we do get down to the actual purchase 
order level and we look at the individual transactions if we 
have a need to do that, then we could go back to that 
individual facility and find out who placed that order.
    Mr. Stearns. I am just trying to understand. The final 
report, will it say these illegal operations occurred and it 
amounted at least to $206 million and those individuals are 
still there? Would that be something that we would be told or 
they are not there?
    Ms. Halliday. If the individuals are still in their 
positions, we would have a recommendation for VA to hold them 
accountable and take appropriate action.
    Mr. Stearns. When you say hold them accountable, as I 
understand, the first panel saying that what they did was 
illegal, but there is no enforcement, there is no civil, there 
is no penalty. Is that your understanding?
    Ms. Halliday. Generally, yes. For the violations of the FAR 
such as not meeting the competition requirements, there are 
some administrative actions you can also invoke.
    Mr. Stearns. Do you mind just sharing with us what those 
administrative actions would be under normal situations?
    Ms. Halliday. Most of the buying agents will have either an 
ordering delegation or a contracting warrant to make the 
purchases on behalf of the government. You can pull those 
warrants and that essentially is going to make it very 
difficult for that person to do their job.
    Mr. Stearns. So you stop them from doing the job, but you 
cannot fire them?
    Ms. Halliday. Depending upon the seriousness of the 
individual's actions, it would be up to the department to 
determine the disciplinary action that is appropriate.
    Mr. Stearns. Okay. Thank you, Mr. Chairman.
    The Chairman. Any other questions?
    [No response.]
    The Chairman. Thank you very much for your testimony and 
your patience.
    Ms. Halliday. Thank you.
    Mr. Grivnovics. Thank you.
    The Chairman. Invite the third panel to the table. On this 
panel, we are going to hear from Sharon Longwell, the vice 
president for Health Systems, National Accounts for McKesson 
Corporation.
    Ms. Longwell, your complete statement will be entered into 
the record.
    Ms. Longwell. Okay.
    The Chairman. And you are recognized for five minutes.

 STATEMENT OF SHARON LONGWELL, VICE PRESIDENT, HEALTH SYSTEMS, 
            NATIONAL ACCOUNTS, MCKESSON CORPORATION

    Ms. Longwell. Thank you, Mr. Chairman and committee.
    Before I get started, I would like to say on behalf of 
myself and McKesson and all our employees, thank you for 
everything you do Veterans.
    On behalf of my brother, Jim, who served two terms in 
Vietnam and whom we lost this last summer, thank you he would 
want me to say.
    The Chairman. Thank you for his service.
    Ms. Longwell. My name is Sharon Longwell and I am vice 
president for Health Systems, National Accounts with McKesson 
Corporation.
    I appreciate the opportunity to speak with you today to 
discuss the Department of Veterans Affairs' pharmaceutical 
prime vendor contract.
    McKesson has delivered excellent quality and service to the 
VA as the pharmaceutical prime vendor. Through the deep 
negative distribution fee in our contract with the VA, we have 
provided the department with $526 million in savings over the 
term of the prior PPV contract.
    When McKesson was awarded the PPV contract in 2004 after a 
highly competitive bidding process, the negative distribution 
fee that we offered the VA in our contract was publicly 
criticized within the industry. Allegations were made that we 
could not service the contract with such unprecedented and deep 
discounts in our distribution fee.
    I am here today to report that in the 8 years that we have 
proudly served the VA, we have delivered both significant 
savings and exceptional service.
    For 179 years, McKesson has had an unwavering commitment to 
the safe, rapid, and cost-effective delivery of FDA approved 
pharmaceuticals to all of our customers from the largest 
hospital system and chain drugstores to the small mom and pop 
pharmacies and all of our government contracts.
    McKesson purchases pharmaceuticals directly from the 
manufacturer. All pharmaceutical purchases from McKesson by the 
VA, whether under a VA negotiated contract or an open market 
item, have the required FDA approvals.
    McKesson complies with all state and Federal laws and 
regulations governing sourcing, pedigree, chain of custody, and 
drug integrity.
    In our role as the PPV, McKesson delivers pharmaceutical 
products to more than 700 VA affiliated locations which include 
the VA facilities, CMOP, Indian Health Services, Bureaus of 
Prisons, and other government agencies.
    As the prime vendor, McKesson is responsible for providing 
thousands of products at a price set under the Federal supply 
contract which the VA has secured through negotiations with 
manufacturers.
    We have invested an additional $9 million in dedicated 
software, hardware, facilities, and staff for the PPV contract 
to improve the service and drive down VA cost.
    McKesson's state-of-the-art technology allows authorized VA 
buyers to purchase products through our electronic order entry 
system which drives them to the lowest price contract item.
    If the authorized buyer attempts to purchase a product that 
is not on a VA negotiated contract with the manufacturer, our 
system directs them to the lowest price contract item.
    If the product is out of stock, the system suggests the 
lowest price generic equivalent product that is on contract.
    Through the transparency afforded by our electronic 
ordering and inventory management systems, the VA can manage 
and track their inventory and have real-time access to invoice 
and ordering data.
    There are circumstances, however, when contracted 
pharmaceuticals are in short supply or where the VA may not 
have contracted with the manufacturer for critical medications 
even though they are needed to treat patients in a timely 
manner.
    The department's statement of work for the PPV states the 
PPV may be requested by the customer to supply and distribute 
open market pharmaceutical products on their behalf. Under this 
provision, purchases of open market products from McKesson are 
permitted by the PPV contract.
    It is important to note that when the VA decided to 
purchase open market products from McKesson, it paid the same 
or less than our private sector hospital and institutional 
customers paid for the same products.
    Purchases of open market product are a standard practice in 
the private sector. Based on our experience, the VA purchases 
of open market products, which are less than 5 percent of their 
total, is quite low.
    In the private sector, for instance, 30 to 40 percent of 
purchases from hospital and institutional customers can be on 
open market.
    In summary, at McKesson, we take enormous pride in driving 
efficiencies that improve the quality and delivery of health 
care to our Nation's Veterans. We have been and will always be 
committed to providing the highest level of service as we 
safely and rapidly deliver cost-effective medications to the VA 
and the Veterans they serve.
    I am now prepared to answer any questions you may have.
    [The prepared statement of Sharon Longwell appears on p. 
53.]
    The Chairman. Thank you for your testimony again. Thank you 
for your comments about your brother. That is what this 
committee is all about is taking care of those who have served 
this Nation. And I know from your comments he is still very 
close to you.
    Ms. Longwell. Yes, sir.
    The Chairman. Did VA approach McKesson about modifying the 
contract?
    Ms. Longwell. McKesson never received a formal request to 
modify the contract. There were discussions to modify the 
contract, I believe in the October time frame.
    The Chairman. Do you know what the modifications were and 
why it was modified?
    Ms. Longwell. I believe they wanted to have McKesson put 
all open market items on contract and then, therefore, comply 
with all TAA requirements.
    The Chairman. Can you give rationale behind their desire to 
do that?
    Ms. Longwell. Their desire to do it, I think, was to no 
longer have any open market items, to have them all on 
contract.
    The Chairman. Are similar pharmaceutical contracts in the 
private sector typically for the same length?
    Ms. Longwell. Pardon me?
    The Chairman. Are similar contracts like this out in the 
private sector typically for the same length of time as the PPV 
contract with VA?
    Ms. Longwell. I would say in the private sector, sometimes 
they are shorter. However, you do have a base of 2 years and 
then three 2-year options. So in that case, they are very 
aligned with what the private sector does because you do have 
an option to cancel those and not take another option period.
    The Chairman. Mr. Donnelly.
    Mr. Donnelly. Thank you, Mr. Chairman.
    And your brother, Jim is a hero to us.
    Ms. Longwell. Me, too.
    Mr. Donnelly. And we appreciate his service. And I just 
want to let you know that for Vietnam vets, at least back home 
in Indiana, every parade I am at, they get a standing ovation 
wherever they go. So they are held in extraordinary esteem by 
all of us.
    What happens to cause the shortages and stock outs and, you 
know, what processes are you using to try to identify where the 
problems are so that the items will always be in stock?
    Ms. Longwell. There are really two types of outages. There 
is ``manufacturer unable to supply'' and then what in our world 
we call ``temporary outs.'' And that is where we did not buy 
enough of the product.
    We are measured on our ``temp out'' and how much of that is 
caused by McKesson not ordering the right amount. And we have 
complied with the contract and have always exceeded the 
contract requirements.
    The ``manufacturer unable to supply'' is where the 
manufacturer for whatever reason is not able to make enough of 
the product, had facility issues, have decided to get out of 
that market.
    And we help provide on our Web site every week, we update 
any issues we are having with manufacturers and we try to put 
in there an estimated day when they will be released.
    So that is really where the two types fall.
    Mr. Donnelly. For instance, with the manufacturer piece, do 
you have a way to detect here are the problem items that are 
out of stock all the time and, if so, here are the recommended 
backups or these are the products we really struggle getting? 
Is there a way for you to determine what are the problem 
products?
    Ms. Longwell. Yes. In our purchasing facility, they work 
with manufacturers every day to try to obtain product. And when 
they find that one of the manufacturers has run into an issue 
on a product, we post this information and keep it posted 
weekly on our Web site or our portal that the customers go 
through. That allows the customers to see when there is an 
issue.
    We also ask the manufacturers can you please tell us when 
you think this item will be available. Is it, you know, April 
the 1st, April the 12th? And we are updating that every week.
    Mr. Donnelly. Okay. And when a product is not available and 
they have to purchase off of open contract, how do you 
determine the pricing for that?
    Ms. Longwell. When they are not on contract in the private 
sector, sometimes they will have negotiated other contracts, 
maybe individual contracts. But at McKesson, our pricing 
department decides what we are going to price the product if it 
is on the open market.
    I do not know how they price those, but it is going to be 
based on if there a shortage of the product. You heard them 
talk about WAC. That is a basis for it. But I cannot tell you 
specifically how they determine the price.
    Mr. Donnelly. Okay. Thank you, Mr. Chairman.
    The Chairman. Mr. Stearns, any questions?
    Mr. Stearns. No, sir.
    The Chairman. Mr. Roe.
    Mr. Roe. First of all, welcome home to your brother.
    Ms. Longwell. Thank you.
    Mr. Roe. I am a Vietnam era Veteran myself.
    So, anyway, I would like to know how big of a problem these 
shortages are for McKesson and other providers like you, are 
because we are hearing more and more about whether it is 
immunizations or chemotherapeutic agents.
    Ms. Longwell. Uh-huh. I mean, shortages are a problem not 
only for McKesson but for myself, my family, your family. We 
all want to be able to get the right product when we can. 
McKesson only will buy from FDA approved manufacturers of 
product, but we do try to make sure that we have a wide breadth 
of product we can offer, especially in the generic world. If 
one generic vendor is having a problem with it, we will have 
backup generic equivalents.
    Mr. Roe. Let me give you the old if it ain't broke don't 
fix it.
    Ms. Longwell. Okay.
    Mr. Roe. When you are out there as a doctor seeing a 
patient and you have taken months or a year to get them 
stabilized, you have no idea how disconcerting it is for that 
patient and that doctor when they cannot get the medication 
that they have finally gotten to work.
    So these shortages are creating real problems in the real 
world out here for us and the health care system to provide the 
kind of care for our patients, especially a lot of folks that 
have had anxiety or mental problems, to finally get what works 
and then find out what works is not available anymore.
    So I just wondered what kind of an issue it was for you all 
in providing and are you getting any blow back from your 
providers that this is a problem?
    Ms. Longwell. I mean, we always hear from our customers if 
we are not able to provide something. We always try to make 
sure that any product that we cannot supply, we have gone back 
to the manufacturer time and time again, is there anything they 
can do, please tell us what the expected date is, because I do 
not want to post on our portal that we expect release by Friday 
and then only to be able to tell them on Friday, no, that is 
not going to happen, it is not going to be until Monday.
    Mr. Roe. Okay. Thank you. I yield back.
    The Chairman. Mr. Stutzman, any comments?
    Mr. Stutzman. I have just got one question. Thank you, Mr. 
Chairman. I just have one question.
    Could you describe to us a little bit how you purchase from 
your manufacturers? I mean, there are so many pharmaceuticals 
out there and you obviously know what consumers or what your 
customers are needing. How fast can you react to that? Is that 
something that is within a computer system where you know the 
need and then do you--you talked a little bit about when you 
communicate to the manufacturers. How fast can they respond? 
What kind of flexibility do you have and do they have to 
provide the products? And then if you answer that question, 
that will kind of answer my second question, I believe.
    Ms. Longwell. We have our standard product that our system 
is smart enough that it looks at demand that has been going on 
and helps build demand. When we bring on a new customer, we 
also will build in demand. So we never like to bring on a large 
customer more than 45 days before the start date because we 
want to be able to get that product, that demand built.
    When we bring on new customers, we will go to the 
manufacturer and let everyone know we just got this new 
customer, please make that part of the allocation that you are 
giving us. And so we make sure that we are building up when we 
do bring on a new customer.
    When we do find out there is an issue, if we still have 
product available, but we know we are not going to be able to 
get a lot of additional product, we will put customers on 
allocation. And what that does is that limits hoarding, if you 
will. We do not want anyone to grab all the market. We want to 
be able to provide it to everyone. So we will put allocations 
in our system to prevent them from doing that.
    But our system goes in and it looks. Every week, it is 
doing updates of what our inventory should be. So we also look 
at when there are items that go off of patent. If we have a 
generic item come on and we know that generic item is going to 
be a big buy, we will buy up on that so that we will be able to 
have it.
    Unfortunately, where we run into problems and where 
doctors' offices and hospitals run into a problem is where a 
facility shuts down or where they have a problem where they 
have shut down their facility. We are caught off guard and we 
are all having to struggle.
    That is the time we go to the second manufacturer who may 
have the generic equivalent and say can you help us, how ramped 
up are you?
    Where we run into problems are where the manufacturer that 
was shut down was doing 75 percent of the overall volume. The 
backup manufacturer was only doing, you know, 10. Now he has 
got to do all, you know, 80 percent. And so they have trouble 
gearing up as well.
    We work with them as much as we can trying to make sure 
that we are getting the product we can get for our customers.
    Mr. Stutzman. All right. Thank you. I will yield back.
    The Chairman. Mr. McNerney, do you have any questions? You 
are recognized.
    Mr. McNerney. Thank you, Mr. Chairman.
    Do you feel that there are safety and quality concerns when 
drugs are purchased on the open market?
    Ms. Longwell. No, not from McKesson. I can only talk for 
McKesson. We only buy FDA approved drugs. We only buy them from 
their manufacturers. So we do not buy anything on what is 
called the secondary market. McKesson just does not buy from 
that.
    Mr. McNerney. Would you feel that pharmaceuticals purchased 
on the secondary market would be questionable or have safety 
concerns?
    Ms. Longwell. I do not know if they would or would not. And 
since I do not know, we do not buy them.
    Mr. McNerney. All right. Thank you. I yield back.
    The Chairman. Mr. Flores, you have any questions?
    Mr. Flores. Mr. Chairman, I have no questions or comments. 
Thank you.
    The Chairman. Mr. Johnson, a question?
    Mr. Johnson. I do, Mr. Chairman, and I thank you.
    Before I ask my question, though, I would like to commend 
McKesson for contracting with over 100 Veteran-owned small 
businesses, suppliers, Veteran or minority-owned business 
overall.
    There are 2,800 of those that you guys contract with and I 
appreciate that. And also in addition to sponsoring events 
focused on the Veteran community--Veteran-owned small business 
conferences you participate in. Those kinds of things. And I as 
a Veteran myself and all the Veterans really appreciate that.
    I also understand that McKesson has rebid for the PPV 
contract that is coming up with the VA. And I certainly hope 
that this hearing will not negatively affect the VA's decision 
where McKesson is concerned because I am convinced that 
McKesson has delivered exactly what the VA asked them to do in 
compliance with the contract.
    And we appreciate that. And we are going to be watching 
closely and asking the VA to do a cost benefit analysis of that 
contract award so that we can see the best option is pursued.
    Ms. Longwell, can you explain to the Committee what happens 
when the VA attempts to purchase items off contract through 
your electronic system?
    Ms. Longwell. In our electronic system, when you go to look 
for aspirin, I will use aspirin as the example, you can put in 
aspirin and it is going to pull up all the aspirin that we 
have. And it is going to show you what is on contract.
    So in the VA system, it is going to show not only if it is 
in the FSS contract, it will show FSS in a column and it will 
show the contract number. It also is going to show the 
quantity, the DC quantity we have and it is going to show if it 
is zero, is that a ``manufacturer unable to supply'' or an MUS 
issue, that button will be checked. It will show all items that 
are on contract. So if they have generic equivalents for that 
same item, it will be listed as well.
    If the customer goes to place an order and they just put in 
aspirin, the system is going to show them all of those so they 
can drive to the right contract. And it will sort it so the 
lowest price contract item is sorted to the top.
    It will, however, show if they do not have any on contract 
that is available, it will also show the open market 
equivalents of that same item.
    Mr. Johnson. Okay. Thank you. Mr. Chairman, I have no 
further questions.
    The Chairman. Mr. Denham, any questions?
    Mr. Denham. No.
    The Chairman. Mr. Runyan.
    Mr. Runyan. No, sir.
    The Chairman. Mr. Benishek.
    Mr. Benishek. No.
    The Chairman. Mr. Huelskamp.
    Mr. Huelskamp. No.
    The Chairman. Mr. Amodei.
    Mr. Amodei. No.
    The Chairman. Any further questions?
    [No response.]
    The Chairman. If not, we thank McKesson for your testimony, 
Ms. Longwell.
    Mr. Johnson. Mr. Chairman.
    The Chairman. Mr. Johnson.
    Mr. Johnson. Mr. Chairman, I make a motion under Rule 2----
    The Chairman. Just a minute. We are going to excuse the 
witness first.
    Mr. Johnson. Okay. Thank you.
    The Chairman. And then I will make a statement and 
recognize you.
    Ms. Longwell. Once again, thank you. Thank you for all you 
do.
    The Chairman. Thank you very much. Thank you.
    For the record, this hearing has adjourned.
    [Whereupon, at 12:24 p.m., the Committee was adjourned.]

                            A P P E N D I X

                              ----------                              

            Prepared Statement of Hon. Jeff Miller, Chairman
    Good morning. This hearing will come to order.
    I want to welcome everyone to today's hearing titled ``Examining 
VA's Pharmaceutical Prime Vendor Contract.''
    This Committee started investigating VA's Pharmaceutical Prime 
Vendor, or ``PPV'', contract well before stories on the topic began 
running in the press, and the findings raised enough questions to 
warrant this hearing today.
    The PPV contract, when written and executed correctly, is intended 
to ensure VA medical facilities receive needed pharmaceuticals at a 
competitive price and in a timely fashion.
    Medical facilities throughout the Nation rely on this system to 
ensure the best care for our veteran patients.
    The Committee's investigation began when discrepancies appeared in 
how VA ordering officials had been handling open market purchases of 
items not available on the PPV contract.
    These purchases go back much further than just the last year or 
two: they span multiple administrations, showing many within VA chose 
to ignore rather than fix a known problem.
    While Federal Acquisition Regulations outline clear procedures on 
how agencies can acquire items not on contract, VA officials for years 
have ignored those procedures when purchasing supplies that were either 
not available at the time or not on the PPV contract.
    Instead of actually performing due diligence in its open market 
purchasing, VA officials took the easy route and requested the PPV to 
deliver the needed pharmaceuticals, or in some cases non-pharmaceutical 
items.
    An open market purchase requires a degree of competition; VA's 
practices willfully ignored required competition, thereby compromising 
best value to taxpayers and potentially compromising patient safety.
    In short, what VA has been doing is not mere bureaucratic 
oversight; it is illegal, with serious potential ramifications for 
veterans.
    I am disheartened by VA's treatment of the matter. We know that 
senior officials at the Department have known of these practices for a 
long time, yet did little to address the issue, and certainly were not 
forthcoming about it to Congress.
    In fact, VA has acknowledged knowing open market purchases through 
the PPV could be problematic as far back as December of 2010, but only 
in November of 2011 took formal action.
    This action was little more than a re-statement of current law that 
employees should already have been following and leadership enforcing.
    One thing we will get to the bottom of is who knew of VA's illegal 
buying and did nothing about it.
    As has been the cause of several other problems identified by this 
Committee, weaknesses in contracting at VA are a major cause of the 
illegal purchases we are discussing today.
    Instead of applying temporary bandages to cover up problems, VA 
needs to address the recurring causes within its own department and fix 
them.
    Whether a complete contracting overhaul is needed or simply new 
leadership that can enforce existing law, it is my sincere desire that 
this Committee and the Department can resolve these issues and move 
forward.
    My concern about the depth and duration of this illegal purchasing 
is serious enough that I have partnered with Chairman Issa of the 
Oversight and Government Reform Committee in requesting needed 
documents and information from VA to fix this problem.
    I want to thank Chairman Issa for his help in investigating this 
matter, and look forward to VA's full and timely cooperation.
    Lastly, I want to note VA's continuing habit of not providing 
requested information to this Committee.
    One request is now a month overdue, and yet another is five months 
overdue.
    I want to work with your Department to get our veterans the 
services and care they deserve, and that is going to require your 
Congressional Affairs team working with us to deliver solutions.
    I now recognize the Ranking Member for an opening statement.

                                 
             Prepared Statement of Hon. Michael H. Michaud,
                    Acting Ranking Democratic Member
    Thank you, Mr. Chairman.
    We have before us today some of the most senior level managers 
within the Department of Veterans Affairs--managers entrusted by the 
public to run the second largest agency in the Federal Government 
efficiently and effectively. We are here because VA has once again 
demonstrated an inability to perform at the level expected in managing 
procurement processes.
    In testimony provided to the Committee, VA readily admits that 
violations took place. However, they are quick to assure us that 
changes have been implemented to fix the deficiencies at hand. Frankly, 
Mr. Chairman, I have heard it all before.
    Today I have just three questions.

First, to quote a phrase made famous during the Watergate scandal--What 
        did VA officials know, and when did they know it?

    According to VA testimony, VA ``did not follow all applicable law 
and regulation'' for approximately $1.2 billion in what are called 
``open market'' pharmaceutical purchases since 2004.'' The VA also 
states that ``once these deficiencies were elevated to senior managers 
in 2011, VA worked to develop a solution.''
    In December 2010, the VA decided to cease open market purchases in 
the future Pharmaceutical Prime Vendor (PPV) contract. What was the 
impetus behind this decision?
    Was there an awareness in 2010 that there were serious problems 
with VA open market purchases, problems so severe that a decision was 
made not to include an open market clause in the new contract?
    Yet nearly a year elapsed before VA took decisive action. At no 
time during the course of this period is there any indication that 
anyone in VA leadership simply insisted that open market purchases 
conform to VA policies, regulations and law. How much money was wasted?
    Have these $1.2 billion in purchases that were not in accordance 
with applicable laws and regulations been ratified by the VA?
    Are there assurances that only warranted contract officers will be 
responsible for purchases above $3,000 going forward?
    After the VA Inspector General in 2009 found a litany of problems 
with improper open market purchases for medical equipment and supplies, 
VA management and leadership should have been put on notice that 
problems might exist in other prime vendor programs. The VA IG 
recommended that VA needed to revise its FSS waiver process, but VA 
responded that the waiver process in VA Handbook 7408.1 ``provided 
sufficient controls and appropriate approval levels for open market 
purchases.'' There is no evidence that VA paid any attention to the 
waiver process for buying drugs and pharmaceuticals in the open market.
    I find it hard to believe that, as the VA states, ``the process 
that was in place since 2004 had become routine.'' I have to ask you, 
what is routine about the abject failure to follow established policies 
and procedures?
    38 USC Section 8125 requires VA to submit a report every year to 
the Committee on the health care procurement experience. I look forward 
to receiving those reports from VA dating back to 2004.

My second question is who should be held accountable for this failure?

    Time and time again, the VA comes to Capitol Hill and testifies 
that it has wonderful policies and procedures in place. Unfortunately, 
no one ever seems to follow these policies and procedures, and there 
seems to be no consequences for these failures. Time and time again, 
the VA OIG and GAO testify concerning serious problems with VA 
management and controls, and time and time again VA ignores these 
findings and fails to take pro-active action.
    VA testimony includes an ``illustrative example'' of a GS-5 
Pharmacy Specialist ``confronted with the choice of ordering an open 
market item or doing without.'' Let me offer a better example, how 
about the manager responsible for overseeing the GS-5 making sure the 
pharmacy specialist knew what VA policies and procedures were required 
and then ensuring they were followed?
    However, what seems to be the actual case is that there was no 
management and no accountability all the way up the line and procedures 
and policies were not followed in purchasing $1.2 billion worth of 
drugs and pharmaceuticals.

Third, how is this going to be fixed and how will these fixes improve 
        the care we provide to our veterans?

    I want to know how the absence of an open market clause in the new 
contract will affect veterans. I want to know if the VA is still making 
open market purchases of drugs and pharmaceuticals, either through the 
PPV or through other suppliers, and how can we be sure that proper 
processes are in place and, more importantly, being actively supervised 
by management. I want to be assured that VA open market purchases are 
from reliable suppliers and that all purchased drugs and 
pharmaceuticals meet all safety requirements.
    The VA, in last year's budget submission, claims $355 million in 
savings in 2012 and 2013 due to ``acquisition improvements.'' But if 
the VA cannot follow its own policies and procedures, how much faith 
can we have in claims of acquisition savings?
    I would like to see detailed documentation that VA has achieved 
savings and efficiencies while improving the procurement and 
acquisition process, a process that seems, in light of the serious 
breakdowns we are looking into today, to need much in the way of 
reform.
    There is a saying that ignorance of the law is no excuse.
    I hope that VA can help us understand today what accountability we 
should expect from failures that seem to arise not from ignorance, but 
from willful neglect of VA policies, procedures, and existing laws and 
regulations, and how this will change moving forward.

                                 
               Prepared Statement of Hon. W. Scott Gould
    Chairman Miller, Ranking Member Filner, and Members of the 
Committee: Thank you for the opportunity to appear before you today to 
discuss the Department of Veterans Affairs' (VA) Pharmaceutical Prime 
Vendor (PPV) program and how we use the currently established contract 
to obtain pharmaceuticals for our Veterans.

Summary of Problem and Corrective Action:

    VA acquires the majority of pharmaceutical products required 
through companies represented on the Federal Supply Schedule (FSS) and 
certified. Purchase and delivery of these pharmaceuticals is 
accomplished through a separate vehicle called the Pharmaceutical Prime 
Vendor or PPV contract. This two-tiered approach is an industry best 
practice--gaining economies of scale to set prices for drugs and then 
contracting for logistics services to deliver them at point and time of 
need. PPV provides a critical link in the supply chain among drug 
manufacturers, VA hospitals, and Veterans who need treatment. The PPV 
contract was awarded competitively to McKesson Company in 2003. VA's 
first order under this contract was placed in May of 2004 and VA has 
used the contract continuously for the last 8 years.
    VA has policies and procedures that govern how purchases are made 
from the PPV contract. Since 2004, approximately 96 percent of the $30 
billion has complied with all applicable law and regulation. However, 
approximately 4 percent occurred using an ``open market'' clause in the 
PPV contract, which was allowed under the contract, but which was to be 
used in accordance with all applicable procurement law and regulation. 
VA did not follow all applicable law and regulation for these 
transactions. These deficiencies were the responsibility of VA to 
identify and correct.
    Once these deficiencies were elevated to senior managers in 2011, 
VA worked to develop a solution that would correct flaws in our 
internal processes and conform to regulation without preventing our 
Veterans from receiving necessary medications. On November 8, 2011, VA 
ordered its employees to end purchases being made through this flawed 
process and replaced it with a process that conforms to applicable 
regulations. Additionally, VA mandated training for employees 
authorized to place orders, placed qualified contracting officer 
representatives at the facility level to ensure compliance, and moved 
forward with a new Request For Proposal (RFP) for a replacement PPV 
contract that will not allow the mistakes of the past to be repeated.
    At no time were our Veterans put at risk. The pharmaceuticals 
purchased through PPV were FDA approved medications provided by 
McKesson Corporation, a distributor that provides these same 
pharmaceutical products to Wal-Mart, Target, RiteAid, Costco, CVS/
Caremark, DukeHealth, Tenet, Omnicare, Aetna, and Cigna, among others. 
The result of these corrective actions preserves VA's access to 
necessary drugs and complies with all applicable law and regulation. In 
this way, we will continue to provide our Veterans with high quality 
care, with their unique medical needs as our first priority.

Acquisition Reform at VA

    VA has improved the quality and cost of its acquisition system over 
the past 3 years. In October 2008, VA established the Office of 
Acquisition, Logistics and Construction (OALC) to better address the 
many challenges in acquisition identified through internal studies, as 
well as recommendations from VA's Office of Inspector General and the 
Government Accountability Office. This new Office, reporting to the 
Deputy Secretary, resulted in the appointment of an Acting Chief 
Acquisitions Officer (CAO) whose main focus is to improve acquisition 
in the Department as specified in the Services Acquisition Reform Act 
(SARA). Previously, the Department's Chief Financial Officer was 
responsible for both business lines, which was contrary to the SARA 
requirements.
    The Secretary charged OALC to lead the Department's acquisition 
transformation efforts by focusing on management information, improving 
management of the acquisition life cycle, improving the acquisition 
workforce, and leveraging technology to improve contracting outcomes. 
VA has established the Senior Procurement Council and implemented 
metrics to measure critical contracting requirements, implemented an 
enterprise spend analysis process, established a risk management office 
to oversee the A-123 process, established a Supplier Relationship 
Management initiative to work with our suppliers to improve our 
contracting processes, provided training to ensure a professional 
acquisition workforce, and developed information technology (IT) 
systems to simplify and standardize how we implement contracting 
throughout the Department.
    Additionally, the National Acquisition Center (NAC), a major 
component of the VA Acquisition landscape, has an extensive program of 
instruction for ordering officers on what their responsibilities are 
and the limits of their authority. The NAC provides this training to 
all ordering officers across VA and will provide refresher training to 
all personnel filling this role, since 2011.
    VA is working to ensure that all its contracting officers meet 
Federal Acquisition Certification standards by the end of Fiscal year 
2012. We are also focusing on institutionalizing program management 
practices across the Department. A new Acquisition Executive Council 
serves as the advisory body for developing VA's Acquisition Corps and 
will identify positions throughout the Department requiring program or 
project management certification.
    Within VHA, procurement staffs were reorganized under a new 
management line that provides management and oversight dedicated to 
improving procurement operations. VHA completed its reorganization at 
the end of fiscal year (FY) 2011. VHA, in partnership with OALC, 
recently appointed a seasoned ``Federal Acquisition Certification in 
Contracting'' (FAC-C) Level III procurement executive to serve as the 
leader for VHA's procurement organization. VHA has additionally 
recruited and hired experienced senior executives within the 
procurement organization. Since February 2011, VHA has hired over 330 
procurement professionals across the system, reducing the vacancy rate 
of 25 percent to 8 percent for trained and qualified procurement 
specialists. In FY 2011 these changes helped VA avoid $1.1 billion in 
acquisition costs.
    But despite these reforms, VA did not detect the problems with the 
PPV open market clause, in part because the process that was in place 
since 2004 had become routine. Moreover, when properly applied, the PPV 
program provided a reliable, cost-effective and safe source of 
pharmaceuticals. In the next section, we describe in greater detail how 
this happened.

Decision to Use PPV to Distribute Drugs More Efficiently and 
        Effectively

    In 1994, VA replaced its old ``depot'' distribution program with a 
new commercial distribution strategy to eliminate its warehousing 
system for storing and distributing drugs and supplies. Under the old 
VA drug distribution system, drugs were ordered in bulk from 
centralized depots. Orders could take up to 6 weeks for delivery, 
inventory management was difficult and time consuming, and many needed 
medications were nearing their expiration dates by the time they were 
actually in the hands of VA pharmacy personnel. In addition, there was 
as much as a 12 percent internal VA ``up charge'' for ordering and 
distributing these products. VA facilities also purchased from other 
supply sources to supplement their requirements for items not available 
from the depots.
    The health care industry moved away from this model of supply for 
pharmaceuticals, medical, environmental, and virtually all other items 
used in patient care to distribution contracts that provided just-in-
time acquisition and inventory processes and efficient online systems 
for placing orders. VA decided to do the same and entered into its 
first Pharmaceutical Prime Vendor contract in 1994.
    This model has been adopted by virtually every other major health 
care provider in both the private and public sectors and is regarded as 
a best commercial practice. Other entities that use VA's prime vendor 
contract include the Indian Health Service, the Bureau of Prisons, the 
U.S. State Department (Peace Corps), the U.S. Public Health Service, 
the Department of Homeland Security, and Howard University Hospital. 
Authorized State Veterans Homes that have sharing agreements with VA 
facilities also are eligible to use the contract.
    The usual path a Federal agency uses to purchase supplies is to 
establish a contract that sets a fixed price for a particular good. The 
Federal Acquisition Regulation (FAR) implementing the Competition in 
Contracting Act (CICA) defines the process for awarding and 
administering the contract, including the establishment of a fair and 
reasonable price for goods purchased. VA is also required to comply 
with various other statutes, such as the Trade Agreements Act (TAA) and 
the Buy American Act (BAA). These required terms and conditions are 
outlined in applicable clauses in the contract. VA is required to 
follow these laws and regulations and did so in awarding the current 
PPV contract.
    The PPV program remains the most cost-effective solution to 
providing timely, cost-efficient, high quality health care products 
across the country. It enables VA to get the medications VA provider's 
need, when they need them. The pharmaceutical prime vendor is required 
to follow FDA standards for product quality and patient safety.

The Current PPV Contract

    The current contract was competitively awarded to the McKesson 
Corporation on December 31, 2003, following the laws and regulations in 
the previous section. The initial period of performance for this 
contract was May 10, 2004, through May 9, 2006. The contract is 
currently in its last option period, and expires in May 2012.
    The contract provides drugs and supplies to VA and other government 
customers via 750-plus 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 offers VA a discount on all purchases. Pricing for the 
majority of the pharmaceutical products distributed through the PPV is 
established through contracts (e.g., the Federal Supply Schedule (FSS), 
or national contracts) awarded by OALC as previously discussed.
    The contract statement of work (SOW) requires the PPV to supply and 
distribute drugs, pharmaceuticals, and certain other items that are 
dispensed through pharmacies. The source of these items are labeled in 
a web portal provided by McKesson to denote the various contract 
vehicles under which the pharmaceuticals are offered including, for 
example, FSS, VA national contracts, Basic Ordering Agreements, and 
various other Federal contracts.
    The current contract also enables VA to order, through the PPV 
distributor, supplies that are not identified on any Federal contract 
in order to avoid a disruption where a needed drug cannot be obtained 
for a Veteran. This is referred to as the ``open market clause.'' The 
current PPV contract states ``. . . the PPV may be requested by the 
customer to supply and distribute open market drug/pharmaceutical 
products/items/units on their behalf.'' The contract also stipulates 
that the appropriate user will have followed applicable procurement 
laws and regulations when using this clause. This enabled VA to 
establish additional contracts for drugs not currently under a Federal 
contact available through the PPV. These contracts were to be put in 
place by warranted contracting officers using Federal and Department 
regulations. The term ``open market'' means that the drug was not 
purchased under any existing Federal contracts currently available to 
the PPV. While the open market items that were acquired through the PPV 
were ordered through the same commercial online ordering system as 
contracted items and were sourced by the PPV contractor, these FDA-
approved medications were not available on a VA contract. This does not 
mean the medications purchased were unsafe or were purchased from 
unreliable sources; it means only that it was purchased without a valid 
contract in place. This is where the improper use of the PPV contract 
occurred and the ordering process broke down.

Illustrative Example

    In an effort to explain how non-contract items were ordered in the 
past, the following exhibit provides a view of what the ordering 
officer sees on the McKesson ordering system. In this screenshot, a 
user has searched for Cisplatin, a chemotherapy drug used to treat 
carcinomas, sarcomas, lymphomas, and germ cell tumors. Cisplatin is 
administered intravenously and is considered a critical drug for cancer 
treatment. In the scenario shown below, the PPV ordering system 
returned all matching items in a list. This list displays whether stock 
is available for the item in the column called ``DC_Qty.'' The search 
return also displays the unit cost for the item in the column called 
``Unit_Price.'' The column identified as ``Cust_Cntrct_Type'' 
identifies whether an item is on contract. In the search results, the 
system shows that none of the contract quotes for Cisplatin that are 
available on an FSS contract have stock available to order. However, 
the item is clearly available from another source. It is understandable 
that for many years, a GS-5 pharmacy specialist, motivated by a desire 
to maintain a continuous supply of drugs for patients and when 
confronted with the choice of ordering an open market item or doing 
without, would have chosen the open market item.
    Exhibit not available at time of print.
    What is not readily apparent from the information presented in the 
PPV portal or adequately explained in the training that VA ordering 
officers received, is that in order for these orders to be fulfilled, 
they would have to by purchased off-contract. This expedient choice 
would have conformed with the FAR had the ordering officer held a valid 
warrant and established a contract using appropriate procurement and 
payment methods. The correct approach for performing the order above 
would have been to engage a warranted contracting officer to acquire 
the needed items under a contract and use the appropriate procurement 
methods.

Corrective Action

    VA has implemented a process to make open market procurements in 
accordance with the FAR. 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. There 
will be no option for ordering officers to obtain non-contract 
supplies. In addition, improved training will be provided for ordering 
officers.
    The new contract will preserve the ability to get needed drugs that 
the PPV has provided VA since its inception and the health and safety 
of Veterans will not be at risk. But it will be provided through a FAR-
compliant mechanism to obtain medications not on a Federal contract.
    We expect to have this new contract awarded by the end of March 
2012. Because this contract has not yet been awarded, we are limited in 
the information we may discuss at this time. But we assure you, the new 
contract will address VA's requirements while conforming to the FAR. We 
will inform Congress of the details once we have awarded a new PPV 
contract.

Conclusion

    The failure to properly use and oversee the administration of the 
open market clause of this contract represents a breakdown in our 
system of management and accountability. We emphasize that this was a 
procedural breakdown, that it in no way compromised Veterans safety and 
affected not more than 4 percent of total pharmaceutical purchases 
since 2004. We have taken steps to eliminate this possibility now, and 
we are working to reduce the potential for other errors in the future 
by more closely managing orders under the PPV contract, while still 
ensuring our Veterans and their families receive the medications they 
need.
    Mr. Chairman, thank you for the opportunity to discuss this issue 
on the record. 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.

                                 
                Prepared Statement of Linda A. Halliday
    Mr. Chairman and Members of the Committee, thank you for this 
opportunity to testify on the scope and methodology of the Office of 
Inspector General's (OIG) ongoing reviews of VA's administration of the 
Pharmaceutical Prime Vendor (PPV) contract and to also give a 
historical background on the OIG's work in contracting and open market 
purchases. I am accompanied by Michael Grivnovics, Director, Federal 
Supply Service Division, and Mark Myers, Director, Health care 
Resources Division, in the OIG's Office of Contract Review.

HISTORY

    The OIG's Office of Contract Review (OCR) has conducted pre-award 
and post-award contract reviews and other pricing reviews of Federal 
Supply Schedule (FSS) and construction contracts since 1993. These 
reviews provide both the OIG and VA with unique insight into the 
commercial marketplace for pharmaceuticals; medical and surgical 
supplies and equipment; and health care services. In addition, the 
OIG's Office of Audits and Evaluations has conducted numerous audits 
addressing purchasing practices at VA medical facilities, with emphasis 
on open market, or non-contract, purchases. Based on this work, we have 
advised VA, Congress, and other Government entities on vulnerabilities 
in the Government's procurement practices and recommended changes 
needed to protect patients treated at VA and other Government medical 
facilities as well as the taxpayer.
    Open market purchasing is not a new issue; over the past 12 years, 
the OIG has issued 49 public reports that identified concerns with open 
market purchases. In May 2001, we issued a report, Evaluation of the 
Department of Veterans Affairs Purchasing Practices, in which we 
reported that the ``effectiveness and integrity of the Federal Supply 
Schedule (FSS) program has deteriorated.'' We noted that due to 
legislative changes requiring acquisition streamlining and reform, the 
FSS was no longer a mandatory source and there was an increase in open 
market sales. As a result, a growing number of vendors had cancelled 
existing contracts, decided not to submit proposals, removed high-
dollar sales items from the contract, or simply refused to offer Most 
Favored Customer pricing. We noted that a ``vendor's ability to sell 
open market in significant volumes effectively eliminates the 
Government's ability to leverage prices using its aggregate buying 
power.'' In response to the report, VA initiated a Procurement Reform 
Task Force to address the issues. One of the outcomes of the Task Force 
was to create a purchasing hierarchy that required VA to purchase 
pharmaceuticals and medical/surgical supplies and equipment from 
national contracts first before using alternative buying mechanisms 
such as local contracts or buying open market.
    In the 1990s and since 2008, we have worked with VA, the Department 
of Justice, the Office of Management and Budget, the General Services 
Administration (GSA), and the GSA OIG to identify shortcomings in the 
FSS program that affect the Government's ability to leverage its 
aggregate buying power and to receive prices that are fair and 
reasonable at the time of award and remain so during the entire term of 
the contract.

Reporting to Congress

    From 2002-2004 and again from 2008-2010, the OIG worked with staff 
from this Committee on two legislative initiatives focused on reforming 
VA's procurement practices. Our recommendations during this process 
addressed legislative initiatives that would improve VA's ability to 
get items on contract and thus reduce open market procurements.
    In December 2009, in testimony before this Committee's Subcommittee 
on Oversight and Investigations, we testified about acquisition 
deficiencies including open market purchasing. At that hearing, we 
discussed reports issued in 2004, 2007, and 2009, that showed VA 
facilities were not complying with the purchasing hierarchy and were 
instead purchasing products open market.
    In March 2011, in response to questions during a hearing before the 
House Committee on Appropriations' Subcommittee on Military 
Construction, Veterans Affairs, and Related Agencies, we testified 
about issues facing VA and other Government purchasers on leveraging 
the Government's buying power when contracting for pharmaceuticals. We 
recognized that open market purchases were a problem and stated that 
the causes included the fact that there was no requirement that 
manufacturers offer generic drugs on contract and that the Trade 
Agreements Act precluded some vendors from offering their products on 
contract. As a result VA and other Government entities were buying open 
market and possibly not complying with acquisition laws and 
regulations.

Contract Process

    In 2007, OCR found that VA was purchasing covered or branded 
pharmaceuticals open market through the PPV even though the products 
were on FSS contracts at a Federal Ceiling Price (FCP) as mandated by 
statute. We determined that this occurred because of a loophole that 
allowed purchasers to buy products through the PPV even though the 
manufacturer declined to sell their products through the PPV. Because 
the items were purchased open market, the prices exceeded the 
contract's FCP. We reported the problem to VA's Pharmacy Benefits 
Management (PBM) Services, the National Acquisition Center (NAC), and 
VA's Office of General Counsel. As a result of our discussions, the PPV 
electronic ordering system was modified to block purchases of items 
from manufacturers who declined to sell through the PPV. However, in 
2011, we found that the modification was ineffective because purchasers 
were still buying contract items at open market prices through the PPV. 
We determined that although the PPV's ordering system did block the 
purchase, the purchaser had the ability to override the system and make 
the purchase. We found no controls were in place to hold purchasers 
accountable. For one vendor's product line, we found $5.7 million in 
open market purchases of which $2.3 million represented overpayments 
because VA paid more than the FCP. In addition to issuing three letters 
to the NAC addressing our finding on open market purchases of products 
from three separate manufacturers, we discussed the issue with PBM, the 
NAC, and OGC.
    Through pre-award and post-award reviews, which include extensive 
discussions with manufacturers, in 2011 OCR identified a growing number 
of issues relating to generic drugs including the inability and/or 
unwillingness of vendors to put these items on contract, sell through 
the PPV, or offer most favored customer pricing. This work also 
provided us with insight into contracting and buying practices of 
private health care providers and institutions. This information was 
shared with the Office of Acquisitions and Logistics and PBM for the 
purpose of finding solutions to this growing problem. In May 2011, OCR 
was invited to participate in a 2-day meeting with PBM, the NAC, and 
other VA officials to discuss open market purchasing through the PPV 
and possible solutions. This was the first indication we had that VA 
had concerns about the level of open market purchasing through the PPV. 
We attended the meeting, provided our insight, and have been working 
since October with VA's Integrated Product Team (IPT) to address 
immediate, short-term, and long-term solutions. Some short-term 
solutions proposed by the IPT resulted in amendments to the current PPV 
solicitation to establish negotiated prices for items not on national 
contracts and a requirement that these products comply with the Trade 
Agreement Act.

Long-Term Solutions

    Identifying viable long-term solutions is a not an easy task 
because the causes, which are numerous and often complex, have never 
been quantified. For example, some products are not available on 
contract because vendors have chosen not to offer them on contract or 
cannot offer the products on contract because the products do not 
comply with the Trade Agreements Act. In other cases a non-contract 
item may be purchased because contract items are unavailable due to 
shortages. We also know that purchasers will buy open market when the 
contract price exceeds the price offered by non-contract vendors. This 
is particularly true when the brand name drug is on contract but the 
generic equivalents are not. In addition, patient care and safety 
concerns must be considered. Some solutions can be addressed through 
contract provisions and internal policies and processes but others may 
require legislation.

OIG'S CURRENT REVIEWS

    At this time, we are conducting a review of PPV purchases for 
fiscal year 2011 to quantify the extent and cause of the problems. This 
includes quantifying the actual dollars spent on open market sales; 
what percentage of these purchases were pharmaceutical items versus 
medical/surgical items; and identifying patterns and trends of open 
market purchases of pharmaceuticals. We also will determine and 
quantify whether the pharmaceutical item purchased open market was on 
contract and, if so, why the sale was listed as open market. If the 
item purchased was not on contract, we will determine whether there was 
a comparable item on contract. If comparable items were available, we 
will try to determine why the contract item was not purchased. We also 
will select a sample to ascertain the extent that purchases may have 
violated existing procurement laws and regulations. We are attempting 
to determine whether open market purchases of pharmaceuticals violated 
the Trade Agreements Act. In addition, we are reviewing whether changes 
made by VA in November 2011 to prevent or limit open market purchasing 
through the PPV were effective.
    We are also conducting a review of the internal controls of VA's 
Fast Pay System, a system that expedites payments for goods received 
under contract and makes payments generally within 24 to 48 hours. This 
internal controls review will identify the risks and vulnerabilities 
associated with reliance on related payment and processing activities 
including whether items are received and correctly priced; payment 
errors are corrected in a timely manner; contract terms are met; and 
there is a segregation of duties to prevent fraud. The Fast Pay System 
is unique to the PPV. Under the PPV contract, VA facilities are 
required to use the Fast Pay process for PPV purchases.
    We are conducting tests of sample invoices tracking from time of 
ordering, payment through the Fast Pay System, and receipt of goods 
from the ordering location. Further, we are examining the effectiveness 
of the VA's Financial Services Center's financial controls by comparing 
the payments made to the invoices at VA facilities. In addition, we are 
assessing whether VA received correct and timely reimbursements for 
purchases made on behalf of other Government agencies.
    A longer-term review to be conducted by OCR is to review the prices 
charged for items that were not purchased open market in comparison to 
the contract price at the time of purchase to ensure that customers 
were not charged more than the contract price. If this review 
identifies overcharges, we will recommend that the contracting officer 
issue a bill of collection and that VA take other action if 
appropriate. If the current review shows that procurement laws and 
regulations were violated, the longer term review will determine the 
frequency and dollar value of such violations and make recommendations 
for appropriate corrective action.

CONCLUSION

    Over the last 12 years, the OIG has continually reported on the 
issue of open market purchases and our concerns that the Government was 
not sufficiently aggregating its buying power to obtain fair and 
reasonable prices comparable to those paid by similar commercial 
customers for the purchase of pharmaceuticals, medical and surgical 
supplies, and health care resources. We will provide the Committee the 
results of our ongoing reviews when they are completed. We will 
continue to advise VA and Congress on issues related to VA procurement 
and contracting issues.
    Mr. Chairman and other Members of the Committee, this concludes my 
statement and my colleagues and I would be pleased to answer any 
questions that you may have.

                                 
                 Prepared Statement of Sharon Longwell
    Good morning, Chairman Miller, Ranking Member Filner and Members of 
the Committee. My name is Sharon Longwell and I am the Vice President 
of Health Systems, National Accounts, for McKesson Corporation. I 
appreciate the opportunity to appear before you today to discuss the 
Department of Veterans Affairs' Pharmaceutical Prime Vendor (PPV) 
contract.
    I would like to begin by emphasizing four points:

    (1)  McKesson has delivered excellent quality and service to the VA 
as the pharmaceutical prime vendor. Through the deep negative 
distribution fee in our contract with the VA, we have provided the 
Department with $526 million in savings over the terms of the prior PPV 
contract.
    (2)  McKesson has consistently exceeded the requirements of the 
contract and is providing state of the art technology and unparalleled 
quality and value to the Department, including 99.9 percent accuracy in 
fulfilling orders.
    (3)  For 179 years, McKesson has had an unwavering commitment to 
the safe, rapid and cost effective delivery of FDA-approved 
pharmaceuticals to all of our customers, from the largest hospital 
system and chain drug store to the smallest neighborhood pharmacy and 
all government contracts. All pharmaceutical products purchased from 
McKesson by the VA, whether under VA ``contract'' or an ``open market'' 
item, have the required FDA approvals. McKesson complies with all 
Federal and state laws and regulations governing sourcing, pedigree, 
chain of custody and drug integrity.
    (4)  We are a proud member of the Department's mentor-protege 
program as we offer partnership opportunities to veteran-owned and 
disabled veteran-owned small businesses, and we continue to actively 
recruit, hire and retain veterans as a vital part of our workforce.

    For 179 years, McKesson has led the industry in the delivery of 
medicines and health care products to drug stores. Today, a Fortune 15 
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 system, McKesson delivers medicines to a significant 
number of 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.

The Role of the Pharmaceutical Prime Vendor: Service, Savings, Safety

    Service

    In our role 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), providing the highest quality service to 
more than five million veterans. We have invested an additional nine 
million dollars in dedicated software, hardware, facilities and staff 
for the PPV contract to improve service and drive down costs for the 
VA. As the prime vendor, McKesson is responsible for providing 
thousands of products at prices set under a Federal supply contract 
which the VA has secured through negotiations with 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 contract item. If the authorized buyer 
attempts to purchase product that is not on a VA negotiated contract 
with the manufacturer, our system directs them to the lowest priced 
contract item. If a product is out of stock, the system suggests the 
lowest priced generic equivalent product that is on contract. 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.
    There are circumstances, however, when contracted pharmaceuticals 
are in short supply or where the VA may not have contracted with 
manufacturers for critical medicines, even though they are needed to 
treat patients in a timely manner. Among the very specific and detailed 
requirements of the Department's Statement of Work (SOW) for the 
pharmaceutical prime vendor, it states that, in addition to supplying 
the VA with products that the VA has secured with a Federal supply 
contract, ``the PPV may be requested by the customer to supply and 
distribute open market drug/pharmaceutical products/items/units on 
their behalf.'' Under that provision, purchases of open market products 
from McKesson are permitted by this contract. It is important to note 
that, when the VA decided to purchase open market products from 
McKesson, it paid the same or less than our private sector hospital and 
institutional customers paid for the same products. Purchases of open 
market products are a standard practice in the private sector. Based on 
our experience, the VA's purchases of open market products, which are 
less than 5 percent of their total, are quite low. In the private 
sector, for instance, 30-40 percent of the purchases of hospital and 
institutional customers are of open market products.
    McKesson has a dedicated ``VA-only'' customer service department. 
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. Our 
accuracy in fulfilling orders is 99.9 percent. At any time, the VA can 
access a full listing of McKesson's current inventory for any one of 
our 31 distribution centers nationwide, many of which are strategically 
located near VA facilities in order to provide maximum coverage in 
instances of immediate need. 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 not only met the 
requirements of our contract, but we have, in fact, consistently 
exceeded its requirements for service and quality.

    Savings

    When McKesson was awarded the Pharmaceutical Prime Vendor contract 
for the Department of Veterans Affairs in 2004 after a highly 
competitive bidding process, the negative distribution fee that we 
offered the VA in our contract was so aggressive that we were publicly 
criticized within the industry. In fact, allegations were made that we 
could not service the contract with such unprecedented and deep cuts in 
our distribution fee.
    McKesson offered the best proposal on price and technology to win 
the award. The VA has had an opportunity to review the prime vendor 
relationship every 2 years, and has chosen to renew our contract at 
each option period as an endorsement of our continued savings and high 
level of performance. McKesson's performance with the VA has resulted 
in a Federal `budget multiplier', saving the Department over half a 
billion in taxpayer dollars.

    Safety

    All pharmaceuticals purchased for the VA through McKesson, whether 
they are under VA negotiated contracts or open market products, have 
the required U.S. Food and Drug Administration (FDA) approvals. 
McKesson complies with Federal and state laws and regulations governing 
sourcing, pedigree, chain of custody and drug integrity. McKesson 
purchases pharmaceuticals directly from the manufacturer. 
Manufacturers, whether domestic or foreign, have facilities that are 
registered with and subject to inspection by the FDA. While 
manufacturers are ultimately responsible for the safety and efficacy of 
the prescription drugs they manufacture, the FDA enforces the 
applicable statutes and regulations to ensure that prescription drugs 
marketed in the United States are safe and effective, regardless of the 
point of manufacture.
    McKesson's quality and safety standards are equally rigorous 
regardless of customer, contract, or any other factor. In fact, all of 
the products bought by the VA from McKesson, including open market 
products, come through the same secure supply chain that serves your 
local hospital, chain or neighborhood pharmacy. McKesson leads the 
industry in innovative solutions to make the Nation's pharmaceutical 
supply chain, already the best in the world, stronger and more secure.
    In summary, McKesson has delivered significant, measurable value 
under the Pharmaceutical Prime Vendor contract.

    (1)  McKesson has delivered excellent quality and service to the VA 
as the pharmaceutical prime vendor. Through the deep negative 
distribution fee in our contract with the VA, we have provided the 
Department with $526 million in savings over the prior PPV contract.
    (2)  McKesson has consistently exceeded the requirements of the 
contract and is providing state of the art technology and unparalleled 
quality and value to the Department, including 99.9 percent accuracy in 
fulfilling orders.
    (3)  For 179 years, McKesson has had an unwavering commitment to 
the safe, rapid and cost effective delivery of FDA-approved 
pharmaceuticals to all of our customers, from the largest hospital 
system and chain drug store to the smallest neighborhood pharmacy and 
all government contracts. All pharmaceutical products purchased from 
McKesson by the VA, whether under VA ``contract'' or an ``open market'' 
item, have the required FDA approvals. McKesson complies with all 
Federal and state laws and regulations governing sourcing, pedigree, 
chain of custody and drug integrity.
    (4)  We are a proud member of the Department's mentor-protege 
program as we offer partnership opportunities to veteran-owned and 
disabled veteran-owned small businesses, and we continue to actively 
recruit, hire and retain veterans as a vital part of our workforce. 
Specifically:

      McKesson has advanced veteran-owned small business goals. 
We currently contract with over 100 veteran-owned business suppliers 
and 2,800 small, veteran and minority-owned businesses overall.
      McKesson is one of 20 prime vendors and the only health 
care company chosen to participate in the prestigious Department of 
Veterans Affairs mentor-protege program.
      RelayHealth, McKesson's connectivity business, won the 
Department of Veterans Affairs ``Blue Button for All Americans'' 
contest in 2011 by making a Blue Button personal health record system 
available to all patients, including veterans. We donated the $50,000 
award to the Wounded Warrior Project.
      Missouri presented McKesson with a ``Flag of Freedom'' 
award in 2011 for our commitment to hiring veterans in the state.
      The McKesson Military Resource Group, comprised of 
employees who are military veterans and military family members, 
advocate McKesson's efforts to respect, honor and partner with the 
military community. They are also engaged in supporting the company's 
focus on hiring and retaining veterans.
      McKesson sponsors events focused on the veteran 
community, including San Francisco's Fleet Week, the National Veteran 
Small Business Conference, and the California Disabled Veteran Business 
Alliance's annual Keeping the Promise Exposition.
      Our annual ``Community Days'' have brought together over 
15,000 McKesson employees across the country in 2011 to assemble tens 
of thousands of care packages for active duty troops deployed around 
the world and wounded warriors recuperating stateside.

    At McKesson, we take enormous pride in driving efficiencies that 
improve the quality and delivery of health care for our Nation's 
veterans. We have been and will always be committed to providing the 
highest levels of service as we safely and rapidly deliver cost-
effective medications to the VA and the veterans they serve.
                                 
                   MATERIAL SUBMITTED FOR THE RECORD
    Post-hearing Questions from Hon. Bob Filner, Ranking Democratic
         Member, Committee on Veterans' Affairs to Hon. Eric K.
        Shinseki, Secretary, U.S. Department of Veterans Affairs
February 27, 2012

The Honorable Eric K. Shinseki
Secretary
U.S. Department of Veterans Affairs
810 Vermont Avenue, NW
Washington, DC 20420

Dear Mr. Secretary:

    In reference to our Full Committee hearing entitled, ``Examining 
VA's Pharmaceutical Prime Vendor Contract'' that took place on February 
1, 2012, I would appreciate it if you could answer the enclosed hearing 
questions by the close of business on April 3, 2012.
    In an effort to reduce printing costs, the Committee on Veterans' 
Affairs, in cooperation with the Joint Committee on Printing, is 
implementing some formatting changes for materials for all Full 
Committee and Subcommittee hearings. Therefore, it would be appreciated 
if you could provide your answers consecutively and single-spaced. In 
addition, please restate the question in its entirety before the 
answer.
    Due to the delay in receiving mail, please provide your response to 
Carol Murray at [email protected], and fax your responses to 
Carol at 202-225-2034. If you have any questions, please call 202-225-
9756.
            Sincerely,

                                                         BOB FILNER
                                          Ranking Democratic Member
    DMT:cm

                               __________

                        Questions for the Record
          Examining VA's Pharmaceutical Prime Vendor Contract
                            February 1, 2012
                    Department of Veterans' Affairs
     1.  Concerning the VA's open market drug and pharmaceutical 
purchases over the period of January 1, 2006 through December 31, 2011:

     a.  Please list the top 5 most purchased drugs in terms of volume, 
number of purchases, and dollar value.
     b.  What policies and procedures were in place to flag or identify 
items frequently purchased and then to seek to place these items on 
contract?
     c.  What percentage of overall open market purchases were made 
through the Prime Pharmaceutical Vendor (PPV)?

     2.  Since the November 8, 2011 memorandum prohibiting ``improper 
purchase of all open market items through the PPV'' how many open 
market purchases has VA made?

     a.  Of these purchases, how many have been made through the PPV?
     b.  Of these purchases, how many have required ratification after 
the purchase?
     c.  Of these purchases, how many have followed the waiver 
procedures found in VA Handbook 7408.1?
     d.  Of these purchases, what has VA done to ensure that prices 
paid were reasonable and that drugs and that all drugs and 
pharmaceuticals met all safety rules, regulations and laws?
     e.  Of these purchases, how many of these purchases involved so-
called ``gray market'' drugs or suppliers?

     3.  Your November 8, 2011 memorandum states that ``[s]pecial 
procedures have been developed to quickly purchase open-market 
pharmaceuticals to reduce the lead times for these procurements 
(attached).''

    Attachment not available at time of print.

     a.  Please provide a copy of these ``special procedures.''
     b.  Do these ``special procedures'' deviate from the waiver 
procedures found in VA Handbook 7408.1? If so, please provide a 
detailed rationale for these deviations.
     c.  What safeguards are currently in effect to eliminate purchases 
made by non-warranted contract officers for amounts greater than 
$3,000?
     d.  What safeguards are in effect to ensure that purchases made 
involving less than $3,000 are made properly?
     e.  What policies and procedures are in place to ensure that fair 
prices are paid for open market purchases?

     4.  The OIG's testimony indicated that there are no controls in 
place to hold purchasers accountable who ``override the system'' when 
purchases were blocked by the PPV's ordering system.

     a.  Please explain to the Committee, in detail, what it takes for 
a purchaser to override the system and who is the person who has that 
authority, both prior to, and after November 8, 2011?
     b.  Is there a report that is required that would indicate how 
many times the override authority is used and why there is a need to 
override the system? If there is such a report, to whom is it forwarded 
and who receives copies?

     5.  For 12 years the OIG has been reporting on the FSS and has 
issued no less than 49 reports that include concerns about open market 
purchases. That amounts to about 4 reports a year or one every 3 
months.

     a.  How is it that this issue continues to grow seemingly 
unchecked with no effective controls or oversight in place?

     6.  In testimony VA claims to have avoided $1.1 billion in 
acquisition costs due to changes in FY 2011 such as hiring 330 
procurement professionals. Can you please point to other specific 
changes where VA can demonstrate cost avoidance?
     7.  As of February 8, 2012, in terms of open market purchases, is 
the VA in violation of the Federal Acquisition Regulations (FAR) or the 
Veterans Affairs Acquisition Regulations (VAAR)?

     a.  In your view, do all purchases, including those made in 
amounts greater than $3,000 require a warranted contract official?

     8.  With the admitted loss of control of the open market 
purchases, has there been any action taken to discipline and hold 
accountable the management who allowed this to happen?

     a.  What lessons has VA senior management learned from this 
failure and what steps has it taken to ensure that systemic problems 
and failures are identified at the earliest possible time and corrected 
in a speedy and timely fashion?

     9.  In testimony you give an example of how a GS-5 pharmacy tech 
could choose the open market purchase and get the needed drug as 
opposed to going without.

     a.  Please give a detailed response on the purchasing hierarchy 
involved in open market purchases at the VA Medical Center level. 
Please include titles and timelines at each level of authority.

    10.  Time and again the Government Accountability Office (GAO) and 
the VAOIG have reported lack of sufficient knowledge of policies and 
procedures by staff, confusion in the field and the need for more 
training.

     a.  What are you doing to ensure that the proper staff is trained 
and that follow-up measures are taken to ensure that the staff remains 
trained if and when there is a procedural change to the acquisition and 
procurement process?

    11.  In testimony you state that senior management was first made 
aware of the open market purchase problem in 2011 VA developed a 
solution to correct the flaws in ``our internal processes and conform 
to regulation.'' Please provide a specific timeline of:

     a.  Who was first aware of the deficiencies, how did they become 
aware and when did they notify the next management level?
     b.  What specific actions were taken and when by each level of 
management?
     c.  If there were delays in informing the next level of 
management, what was the reason for the delay?

    12.  You indicated that VA had decided in December 2010 to take the 
``open market purchase'' clause out of the next iteration of the PPV 
contract.

     a.  What led to that decision?
     b.  If the VA will no longer be making open market purchases 
through the PPV, how will the field be affected as far as obtaining a 
needed drug that is not on contract?
     c.  What safeguards are currently in place, or will be put in 
place, to ensure that drugs and pharmaceuticals purchased through 
suppliers other than the PPV meet all safety requirements and are 
purchased at a fair price?

    13.  Looking forward, what steps will VA take to ensure the open 
market drug and pharmaceutical purchases involve items for which there 
is a confirmed chain of custody between the manufacturer and supplier?

     a.  What steps will VA take under the new PPV contract to ensure 
that suppliers from which open market items are purchased are not 
charging exorbitant prices for items in short supply?
     b.  What steps will the VA take to govern its dealing with gray 
market suppliers?

    14.  Of the approximately $1.2 billion in open market purchases:

     a.  How many of the purchases were made by warranted contract 
officials?
     b.  What steps is VA taking to ratify the improper purchases, or 
those that were made without a warranted contract official approval?

    15.  Do you have copies of existing waiver requests under VA 
Handbook 7408.1 for the $1.2 billion in open market purchases dating 
back to 2004?

     a.  If you do not have the waiver requests, please explain why 
there are no waiver requests and when going forward, what enforcement 
measures are in place to ensure that appropriate employees are in 
compliance with VA Handbook 7408.1.

    16.  Please provide the Committee with the detailed steps, from 
initial prescription to purchase and delivery, needed to make open 
market purchases in compliance with your November 8, 2011 memorandum.
    17.  In last year's budget submission, VA claimed $355 million in 
savings in 2012 and 2013 due to ``acquisition improvements.'' Please 
provide the Committee with an accounting of exactly where the $355 
million was saved and what improvements were made. Please include a 
timeline with this as well.

                                 
            Responses from Hon. Eric K. Shinseki, Secretary,
        U.S. Department of Veterans Affairs to Hon. Bob Filner,
       Ranking Democratic Member, Committee on Veterans' Affairs
    Department of Veterans' Affairs

    1.  Concerning the VA's open market drug and pharmaceutical 
purchases over the period of January 1, 2006 through December 31, 2011:

    a.  Please list the top 5 most purchased drugs in terms of volume, 
number of purchases, and dollar value.

    Response:

    Top 5 most purchased drugs in terms of volume (National Drug Code 
units):

    (1)  Magnesium Citrate Liquid, Oral
    (2)  Dextromethorphan 10mg/Guaifenesin 100mg/5ml Syrup
    (3)  Lidocaine 5%Oint, Top
    (4)  Oxycodone HCL 5mg Tab
    (5)  OMEGA-3 (N-3) Polyunsaturated Fatty Acids 1gm Cap

    Top 5 most purchased drugs in terms of number of purchases:

    (1)  Magnesium Citrate Liquid, Oral
    (2)  Lidocaine 5 percent Oint Top
    (3)  Dextromethorphan 10mg/Guaifenesin 100mg/5ml Syrup
    (4)  Bacitracin Zinc 500Unt/Polymyxin B S04 10000Unt/GM Oint,Top
    (5)  Bacitracin 500Unt/gm Oint Top

    Top 5 most purchased drugs in terms of dollar value:

    (1)  Chondroitin NA 40mg/Hyaluronate NA 30mg/ml 
Inj,Oph.Syringe,0.5ml
    (2)  Venlafaxine HCL 75mg Tab
    (3)  Duovisc,Kit 0.5ML/0.55ML Inj,Oph
    (4)  Nafcillin NA 2gm/VIL Inj
    (5)  Nafcillin NA 10gm/VIL Inj

    b.  What policies and procedures were in place to flag or identify 
items frequently purchased and then to seek to place these items on 
contract?

    Response: The majority of VA pharmaceutical expenditures (95%) are 
for branded pharmaceutical items that are under contract; either a 
Federal Supply Schedule Contract or a VA National Contract. While it is 
VA's desire to have the remaining, mostly generic, 5 percent of 
pharmaceutical expenditures made under contract, it is not always 
possible to do so.
    The procedure VA uses to identify drugs that are frequently 
purchased but not under contract is simply to review the PPV purchasing 
data for items designated as non-contract. However, it is not uncommon 
for VA to review its purchasing data to identify a generic 
pharmaceutical item which is not available under contract, aggregate 
purchasing requirements and conduct a solicitation, but not receive any 
bids/offers. In these cases, VA's only alternative is to purchase these 
drugs via the streamlined acquisition procedures allowed by the Federal 
Acquisition Regulation or via a formal procurement request to a 
warranted contracting officer.

    c.  What percentage of overall open market purchases were made 
through the Prime Pharmaceutical Vendor (PPV)?

    Response: For the period of November 8, 2011 through February 8, 
2012, our data indicates that approximately 79 percent of VHA's open-
market purchases in support of our pharmacy departments were purchased 
through the PPV vendor, but not through VA's PPV contract.

    2.  Since the November 8, 2011 memorandum prohibiting ``improper 
purchase of all open market items through the PPV'' how many open 
market purchases has VA made?

    Response: From November 8, 2011 through February 8, 2012, there 
were approximately 73,000 open market line items purchased in support 
of Veterans' medication needs.

    a.  Of these purchases, how many have been made through the PPV?

    Response: Of the approximately 73,000 open-market line items that 
were purchased from November 8, 2011 through February 8, 2012, 
approximately 57,760 (79 percent) were purchased from the VA's Pharmacy 
Prime Vendor, but not under the PPV contract.

    b.  Of these purchases, how many have required ratification after 
the purchase?

    Response: Analysis of procurement data for the month of January 
2012 is underway to determine what number of actions will require 
ratification. Data analysis has been completed for the period of 
November 8, 2011 through December 31, 2011, which resulted in 5,733 
orders being ratified.

    c.  Of these purchases, how many have followed the waiver 
procedures found in VA Handbook 7408.1?

    Response: None of the open-market purchases cited for the period of 
November 8, 2011 through December 31, 2011, followed the waiver 
procedures found in VA Handbook 7408.1. A waiver is not required for 
purchase of items that are not on contract.

    d.  Of these purchases, what has VA done to ensure that prices paid 
were reasonable and that all drugs and pharmaceuticals met all safety 
rules, regulations and laws?

    Response: After November 8, 2011, all open market purchases at or 
above $3,000 are being made by warranted contracting officers to ensure 
the prices paid were fair. For items less than $3,000, VA uses 
streamlined acquisition procedures to ensure fair prices.

    e.  Of these purchases, how many of these purchases involved so-
called ``gray market'' drugs or suppliers?

    Response: As per McKesson's testimony at the February 1, 2012 
hearing, McKesson assures VA that it does not purchase any drugs and 
pharmaceuticals from secondary or ``gray'' markets.

    3.  Your November 8, 2011 memorandum states that special procedures 
have been developed to quickly purchase open-market pharmaceuticals to 
reduce the lead times for these procurements (attached).

    a.  Please provide a copy of these ``special procedures.''

    Response: Please see Attachment VHA SOP 160-010-01, Attachment 13 
for Pharm Procurements.

    b.  Do these ``special procedures'' deviate from the waiver 
procedures found in VA Handbook 7408.1? If so, please provide a 
detailed rationale for these deviations.

    Response: No, the special procedures do not alter the requirements 
to obtain a waiver if the needed product is available on a Federal 
Supply Schedule (FSS) contract.

    c.  What safeguards are currently in effect to eliminate purchases 
made by non- warranted contract officers for amounts greater than 
$3,000?

    Response: A combination of training, data analysis, and progressive 
discipline is being used to address this issue. Procurements are being 
analyzed and letters of counseling issued to individuals that have made 
improper purchases. Currently letters have been issued for improper 
purchases made between November 8, 2011 and December 31, 2011. January 
data is currently being evaluated and appropriate action, where 
warranted.
    Also, Pharmacy Ordering Officers have been directed that for all 
purchases above $3,000, it must be directed to and made by a warranted 
contracting officer.

    d.  What safeguards are in effect to ensure that purchases made 
involving less than $3,000 are made properly?

    Response: Open-market purchases valued under $3,000 fall under the 
Government Purchase Card Program. VHA's Network Contracting Office 
Purchase Card Managers and Purchase Card coordinators are assuring that 
pharmacy staff have the required training and support to be purchase 
card holders. Purchases made through the purchase card program are 
subject to monthly, quarterly and random audits and reviews performed 
by oversight staff and finance office.

    e.  What policies and procedures are in place to ensure that fair 
prices are paid for open market purchases?

    Response: After November 8, 2012, all open market purchases at or 
above $3,000 are being made by warranted contracting officers to ensure 
the prices paid were fair in accordance with applicable laws and 
regulations. For items less than $3,000, VA uses streamlined 
acquisition procedures to ensure fair prices in accordance with 
applicable laws and regulations.

    4.  The OIG's testimony indicated that there are no controls in 
place to hold purchasers accountable who ``override the system'' when 
purchases were blocked by the PPV's ordering system.

    a.  Please explain to the Committee, in detail, what it takes for a 
purchaser to override the system and who is the person who has that 
authority, both prior to, and after November 8, 2011?

    Response: When a VA Pharmaceutical Prime Vendor ordering activity 
places an order for an item that is restricted or blocked, the 
Pharmaceutical Prime Vendor contractor-owned ordering system generates 
a message stating that the item is ``restricted.'' The ordering 
activity then can reorder the item and override the restriction or 
block by checking the ``Do Not Substitute'' button on the ordering 
system screen. No authorization is needed by ordering activities to 
override the system. The decision to order a restricted or blocked item 
is made at the VHA Field activity level and has been in effect prior 
to, and after November 8, 2011. What has changed since November 8, 
2011, is that the Pharmaceutical Prime Vendor contractor was requested 
to, and has, separated open market items from the PPV contract items. 
The open market items were placed under a separate account making them 
no longer visible to VA Pharmaceutical Prime Vendor customers under 
their regular account or screen. Open market items are now only visible 
under a facility's open market account and screen.

    b.  Is there a report that is required that would indicate how many 
times the override authority is used and why there is a need to 
override the system? If there is such as report, to whom is it 
forwarded and who receives copies?

    Response: There is no such report that identifies ``overrides.'' 
However, there is a monthly ``Do Not Sub Activity Report'', which 
details all the orders placed by facilities where the ``Do Not 
Substitute'' button was checked. The report is sent to VHA's PBM Group 
located in Hines, Illinois, and to the National Acquisition Center's 
Contracting Officer for review and analysis.

    5.  For 12 years the OIG has been reporting on the FSS and has 
issued no less than 49 reports that include concerns about open market 
purchases. That amounts to about 4 reports a year or one every 3 
months.

    a.  How is it that this issue continues to grow seemingly unchecked 
with no effective controls or oversight in place?

    Response: VA addressed these concerns at the time of each report, 
and each recommendation was addressed, corrective action identified 
with milestones, and eventually closed. In an effort to provide 
effective controls and oversight, VA developed a set of tools, over the 
last 3 years, which dramatically changed its ability to deal with these 
issues. These tools include a new management team; streamline 
authority; and the introduction of a new capability to deliver micro-
purchases. VA has reduced the number of its Head of Contracting 
Activity (HCA) from 30 to six. VA also issued clear direction to the 
field to fortify its position regarding open market purchases.

    6.  In testimony VA claims to have avoided $1.1 billion in 
acquisition costs due to changes in FY 2011 such as hiring 330 
procurement professionals. Can you please point to other specific 
changes where VA can demonstrate cost avoidance?

    Response: In FY 2011, VA pursued a variety of acquisition savings 
efforts across the Department, including improved market analysis, 
enhanced focus on competition, and pursuit of various strategic 
sourcing and other requirements consolidation initiatives. For example, 
the Department aggressively participated in the Federal Strategic 
Sourcing Initiatives (FSSI) program. In FY 2011, VA accounted for more 
than 44 percent of all usage related to the FSSI Domestic Delivery 
Services (DDS2) program. DDS2 savings in FY 2011 were $149.6 million. 
Also in FY 2011, VA was a Federal leader in leveraging the FSSI Office 
Supplies Second Generation (FSSI OS2) program, resulting in $11.8 
million in office supply savings.

    7.  As of February 8, 2012, in terms of open market purchases, is 
the VA in violation of the Federal Acquisition Regulations (FAR) or the 
Veterans Affairs Acquisition Regulations (VAAR)?

    Response: To the best of our knowledge, open market purchases are 
processed in accordance with the FAR, VAAR and acquisition policies.

    a.  In your view, do all purchases, including those made in amounts 
greater than $3,000 require a warranted contract official?

    Response: Yes. Only a warranted contracting officer may legally 
bind the government contractually in obligations above the micro-
purchase level (>$3,000). Ordering officers may be appointed by 
cognizant warranted contracting officers to place orders against 
existing contracts, but these ordering officers must be supervised by 
the contracting officer, who appointed them and limit their duties to 
placing orders against a specific contract.

    8.  With the admitted loss of control of the open market purchases, 
has there been any action taken to discipline and hold accountable the 
management who allowed this to happen?

    Response: The failure to properly use and oversee the 
administration of the open market clause of the PPV contract represents 
a breakdown in our system of management and accountability. This was a 
common practice that dominated for 17 years. The situation evolved over 
time and the managers and leaders associated with that environment are 
no longer with the Department. As stated in testimony, VA has thought 
deeply about the issue of accountability and after extensive internal 
deliberations and analysis concluded that there is no one individual to 
hold accountable for the pervasive misuse of the open market clause.
    We emphasize that this was a procedural breakdown, that it in no 
way compromised Veterans safety and affected not more than 4 percent of 
total pharmaceutical purchases. We have taken steps to eliminate this 
possibility now, and we are working to reduce the potential for other 
errors in the future by more closely managing orders under the VA's PPV 
contract, while still ensuring our Veterans and their families receive 
the medications they need.

     a.  What lessons has VA senior management learned from this 
failure and what steps has it taken to ensure that systemic problems 
and failures are identified at the earliest possible time and corrected 
in a speedy and timely fashion?

    Response: In November 2011, VA implemented a process to make open 
market procurements in accordance with the FAR. VA will further improve 
the structure of the follow-on PPV contract to ensure upon full 
transition to the new contract that only medications available under 
Federal contract are viewable on the electronic catalogue from which 
ordering officers place their requirements. There will be no option for 
ordering officers to obtain non-contract supplies. However, there will 
be an option for ordering officers to purchase generic pharmaceuticals 
under the new VA PPV contract based upon a discount from the Wholesale 
Acquisition Cost (WAC) which has been competed among the offerors; thus 
making these generics now part of the PPV contract. The awarded PPV 
shall be required to provide FDA approved and Trade Agreement Act (TAA) 
products which are also WAC Based Priced Generics (WBPG); have National 
Drug Codes (NDC); and have a published WAC through the PPV contract. 
Order placement of WBPG through the PPV contract is optional and 
subject to periodic review by the Government.

     9. In testimony you give an example of how a GS-5 pharmacy tech 
could choose the open market purchase and get the needed drug as 
opposed to going without.

     a.  Please give a detailed response on the purchasing hierarchy 
involved in open market purchases at the VA Medical Center level. 
Please include titles and timelines at each level of authority.

    Response: Open-market pharmaceutical procurements at the medical 
center level follow the following hierarchy----

    (1)  Open-market procurements valued at $3,000 or below are ordered 
by trained Government Purchase Card holders that work within the 
Pharmacy Department. This could be a GS-5 pharmacy tech or other 
departmental staff. Purchases valued less than $3,000 are typically 
ordered the same day the requirement is identified.
    (2)  Open-market procurements valued above $3,000 are procured by 
warranted contracting officers in the supporting Network Contracting 
Office. Using the expedited procedures identified in Attachment 13 of 
VHA SOP 160-010-01, awards are typically made within 5 to 7 business 
days if the value of the order is less than $25,000. It does take 
longer for orders valued above $25,000 due to the advertising 
requirements of FAR Part 5. However, the vast majority of orders are 
valued less than $25,000.

    10.  Time and again the Government Accountability Office (GAO) and 
the VA OIG have reported lack of sufficient knowledge of policies and 
procedures by staff, confusion in the field and the need for more 
training.

     a.  What are you doing to ensure that the proper staff is trained 
and that follow-up measures are taken to ensure that the staff remains 
trained if and when there is a procedural change to the acquisition and 
procurement process?

    Response: In order to ensure that the proper staff is trained and 
that follow-up measures are taken to ensure that the staff remains 
trained, VA has taken several important steps. VA has identified a 
Contracting Officer Representative (COR) for each PPV ordering 
location. The CORs have a separation of duties, in that they are not 
the same individual that places orders against the PPV contract. The 
CORs were officially appointed in writing by the Administrative 
Contracting Officers (ACO) and completed Federal Acquisition 
Certification (FAC-COR) Level I training. The Office of Acquisition and 
Logistics (OAL) also has developed supplemental specialized COR 
training specific to the PPV contract. The PPV specific training will 
help ensure that the PPV CORs conduct their duties under the direction 
of the Procurement Contracting Officer (PCO) at the National 
Acquisition Center. ACOs were identified as prescribed under Federal 
Acquisition Regulations (FAR) Part 43.302 and in concert with policy. 
The ACOs will perform contract administration functions in support of 
the contracts under which the COR has been specified, will support 
program reviews, and provide ongoing status and performance reports to 
the PCO.

    11.  In testimony you state that senior management was first made 
aware of the open market purchase problem in 2011. VA developed a 
solution to correct the flaws in ``our internal processes and conform 
to regulation.'' Please provide a specific timeline of:

     a.  Who was first aware of the deficiencies, how did they become 
aware and when did they notify the next management level?
     b.  What specific actions were taken and when by each level of 
management?
     c.  If there were delays in informing the next level of 
management, what was the reason for the delay?

    Response: As stated in testimony, the first known recognition that 
open market purchases were not being executed appropriately was in 
January 2009. At that time, NAC officials worked with general counsel, 
acquisition review, IG and VHA to correct issues related to the CMOP. 
Recognition of more pervasive problems at the facility level was not 
collectively recognized by acquisition, general counsel and pharmacy 
management until March 2011. The goal at that time was to correct the 
open market deficiency in the next PPV contract while deliberations 
occurred to find an alternate mechanism to procure pharmaceutical 
products that comported with applicable laws and regulations. In 
September 2011, the issue was brought to the attention of VA's Chief of 
Staff and by November action was taken to stop all purchases that did 
not comply with applicable laws and regulations.

    12.  You indicated that VA had decided in December 2010 to take the 
``open market purchase'' clause out of the next iteration of the PPV 
contract.

     a.  What led to that decision?

    Response: The National Acquisition Center National Contract Service 
Pharmaceuticals Chief discovered the open market clause was 
inconsistent with procurement regulations. The PPV workgroup (a 
workgroup comprised of VHA PBM, General Counsel, technical, other 
Federal Agencies, and contracting representatives) agreed to the 
exclusion of open market items in the new PPV solicitation.
    The existence of the clause and recognition that it was 
inconsistent with procurement regulations was not an indication that 
open market purchases were not being executed in accordance with 
applicable laws and regulations. As stated in the previous response, 
recognition of more pervasive problems at the facility level was not 
collectively recognized by acquisition, general counsel and pharmacy 
management until March 2011. The goal at that time was to correct the 
open market deficiency in the next PPV contract while deliberations 
occurred to find an alternate mechanism to procure pharmaceutical 
products that comported with all applicable laws and regulations. In 
September 2011, the issue was brought to the attention of VA's Chief of 
Staff and by November action was taken to stop all purchases that did 
not comply with applicable laws and regulations.

     b.  If the VA will no longer be making open market purchases 
through the PPV, how will the field be affected as far as obtaining a 
needed drug that is not on contract?

    Response: The drugs VA previously purchased as open market through 
the Prime Vendor Fast Pay arrangement will now be part of the new 
ensuing VA PPV contract to ensure availability.

     c.  What safeguards are currently in place, or will be put in 
place, to ensure that drugs and pharmaceuticals purchased through 
suppliers other than the PPV meet all safety requirements and are 
purchased at a fair price?

    Response: All open market purchases at or above $3,000 are being 
made by warranted contracting officers to ensure any item procured 
meets all safety requirements and that prices paid are fair. For items 
less than $3,000, VA purchase card holders use the streamlined 
acquisition procedures and adhere to policy to determine a fair price.

    13.  Looking forward, what steps will VA take to ensure the open 
market drug and pharmaceutical purchases involve items for which there 
is a confirmed chain of custody between the manufacturer and supplier?

    Response: In addition to drugs purchased through the PPV that are 
under contract, the follow-on PPV contract also includes items 
previously considered open market PPV items. Bringing all of these 
products under a single PPV contract umbrella will ensure there is a 
confirmed chain of custody or pedigree for all drugs purchased. As 
stated by VA's PPV in its testimony, it only purchases drugs either 
directly from the manufacturer or from the manufacturer's authorized 
distributor. In addition to this assurance, drug pedigree information 
is available to VA from McKesson whenever it is needed.

     a.  What steps will VA take under the new PPV contract to ensure 
that suppliers from which open market items are purchased are not 
charging exorbitant prices for items in short supply?

    Response: Under the new PPV contract, items previously considered 
open market are now considered contract items. All items purchased 
under the new contract will be made: (1) at prices VA negotiates with 
the manufacturer of the drug, minus the PPV discount, or (2) at the 
Wholesale Acquisition Cost or WAC, again, minus the PPV discount. 
Adherence to the terms and conditions of the contract, which will be 
monitored by the VA contracting officer will ensure that fair and 
reasonable prices are being charged.

     b.  What steps will the VA take to govern its dealing with gray 
market suppliers?

    Response: As per McKesson's testimony at the February 1, 2012 
hearing, McKesson assures VA that it does not purchase any drugs and 
pharmaceuticals from secondary or ``gray'' markets.''

    14.  Of the approximately $1.2 billion in open market purchases:

     a.  How many of the purchases were made by warranted contract 
officials?

    Response: Of the approximately $1.2 billion in open market 
purchases, it is not possible to determine which individuals made which 
purchases for the purpose of calculating how many of the purchases were 
made by warranted contracting officers. VA is aware that there was a 
potential for improper purchasing through VA's PPV; however, as 
explained in 14(b), VHA has evaluated improper open-market purchases 
made between November 8, 2011 and December 31, 2011 and processed the 
paperwork to ratify those actions. The same process will continue to be 
used going forward. VA will continue to closely monitor and oversee 
open-market purchases to ensure that improper purchases have ceased.

     b.  What steps is VA taking to ratify the improper purchases, or 
those that were made without a warranted contract official approval?

    Response: VHA has evaluated improper open-market purchases made 
between November 8, 2011 and December 31, 2011, and processed the 
paperwork to ratify those actions. January data is still being 
evaluated, but the same process will continue to be used. VA will 
continue to closely monitor and oversee open-market purchases to ensure 
that improper purchases have ceased.

    15.  Do you have copies of existing waiver requests under VA 
Handbook 7408.1 for the $1.2 billion in open market purchases dating 
back to 2004?

     a.  If you do not have the waiver requests, please explain why 
there are no waiver requests and when going forward, what enforcement 
measures are in place to ensure that appropriate employees are in 
compliance with VA Handbook 7408.1.

    Response: A waiver request is only required when an item is not 
available under any existing VA Federal Supply Schedule, national 
contract or national blanket purchase agreement. Thus a waiver request 
was not warranted as the open market items procured where not covered 
by any of the above contracts. VHA Procurement and Logistics Office and 
VHA PBM will provide oversight and ensure compliance with the waiver 
process as outlined in VA Handbook 7408.1.

    16.  Please provide the Committee with the detailed steps, from 
initial prescription to purchase and delivery, needed to make open 
market purchases in compliance with your November 8, 2011 memorandum.

    Response: Please see attached PPV Ordering Procedures, Ordering 
Process; PPV Ordering Procedures Memo; SOP 160-030-01.

    17.  In last year's budget submission, VA claimed $355 million in 
savings in 2012 and 2013 due to ``acquisition improvements.'' Please 
provide the Committee with an accounting of exactly where the $355 
million was saved and what improvements were made. Please include a 
timeline with this as well.

    Response: In its FY 2012 budget submission, VHA identified $1.2 
billion in operational improvements, of which $355 million was 
identified as savings resulting from acquisition improvements. To 
address concerns raised by OIG and GAO, VHA convened an 
interdisciplinary team late in the first quarter of FY 2012 to review 
and revise the VHA-specific acquisition savings initiatives. This team 
consisted of staff from VHA procurement and logistics at both the 
Central Office and field levels, as well as representatives from the 
Office of Management (OM), the Office of the VHA Chief Financial 
Officer (CFO), the VA Office of Acquisition and Logistics (OAL). 
Representatives from the Veterans Benefit Administration (VBA) were 
also invited in an observational capacity to ensure that any best 
practices learned were shared among the administrations.
    The team was chartered with the following objectives: (1) identify 
areas of opportunity for increased rigor and stricter criteria for 
defining cost savings (specific areas of focus included validation of 
savings calculation methodologies; documentation requirements; 
establishment of an ongoing audit process to ensure reporting is 
accurate; and additional savings initiatives not identified in previous 
program iterations. (2) Review external best practices and audit 
findings to inform the above issues and to identify additional areas of 
opportunity in VA acquisition savings practices.
    In its recommendations, the interdisciplinary review team provided 
a list of new, retained, or revised initiatives from which VISNs and 
program offices can identify savings towards FY 2012 goals. These 
recommended initiatives, as well as the requested timeline, have been 
provided as a separate attachment.

                                 
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