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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 

DOUG LAMBORN, Colorado 

GUS M. BILIRAKIS, Florida 

DAVID P. ROE, Tennessee 

MARLIN A. STUTZMAN, Indiana 

BILL FLORES, Texas 

BILL JOHNSON, Ohio 

JEFF DENHAM, California 

JON RUNYAN, New Jersey 

DAN BENISHEK, Michigan 

ANN MARIE BUERKLE, New York 

TIM HUELSKAMP, Kansas 

MARK E. AMODEI, Nevada 

ROBERT L. TURNER, New York 

BOB FILNER, California, Ranking 

CORRINE BROWN, Florida 

SILVESTRE REYES, Texas 

MICHAEL H. MICHAUD, Maine 

LINDA T. SA ́ NCHEZ, California 

BRUCE L. BRALEY, Iowa 

JERRY MCNERNEY, California 

JOE DONNELLY, Indiana 

TIMOTHY J. WALZ, Minnesota 

JOHN BARROW, Georgia 

RUSS CARNAHAN, Missouri 

HELEN W. TOLAR, Staff Director and Chief Counsel 

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

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

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

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

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

is further refined. 


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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 


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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. 


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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. 


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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 reg- ulations 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? 


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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. 


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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 


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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. 


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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. 


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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 


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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, infact, 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. 


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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 


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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 


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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 


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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? 


ccoleman on DSK8P6SHH1PROD with HEARING
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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. 


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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. 


ccoleman on DSK8P6SHH1PROD with HEARING
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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. 


ccoleman on DSK8P6SHH1PROD with HEARING
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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. 


ccoleman on DSK8P6SHH1PROD with HEARING
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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. 


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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. 


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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. 


ccoleman on DSK8P6SHH1PROD with HEARING
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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. 


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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. 


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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 


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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 


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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? 


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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 


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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 


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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. 


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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 


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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 


ccoleman on DSK8P6SHH1PROD with HEARING
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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. 


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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. 


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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? 


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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 


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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 followup 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 followup 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 


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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. 


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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. 


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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. 


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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? 


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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 


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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, 


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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. 


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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 


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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.] 


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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. 


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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. 

f 

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. 


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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. 

f 

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) 


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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 delivVerDate Mar 15 2010 23:21 Apr 10, 2013 Jkt 073285 PO 00000 Frm 00052 Fmt 6604 Sfmt 6621 I:\WAYS\OUT\73285.XXX GPO1 PsN: 73285

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ery, 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. 


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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 ‘‘DClQty.’’ The search return also displays the unit cost for 

the item in the column called ‘‘UnitlPrice.’’ The column identified as 

‘‘CustlCntrctlType’’ 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. 

f 


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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 postaward 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. 


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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 


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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. 

f 

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-prote ́ge ́ program as we 

offer partnership opportunities to veteran-owned and disabled veteran-owned 


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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 


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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-prote ́ge ́ 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-prote ́ge ́

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 


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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. 

f 


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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 singlespaced. 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 Carol.Murray@mail.house.gov, 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.’’ 


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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 nonwarranted 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 followup 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? 


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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. 

f 

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 


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(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. 


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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 nonwarranted 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? 


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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. 


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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 followup 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? 


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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? 


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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 


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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. 

Æ 


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