Report to the Chairman, Committee on 

Veterans’ Affairs, House of 

Representatives 

United States General Accounting Office

GAO 

November 2002 VA HEALTH CARE 

Expanded Eligibility 

Has Increased 

Outpatient Pharmacy 

Use and Expenditures 

GAO-03-161 
VA spent $418 million on the outpatient pharmacy benefit for Priority 7 

veterans in fiscal year 2001. VA pharmacy expenditures for Priority 7 

veterans in this year were offset by copayments for drugs. In fiscal year 2001, 

VA collected approximately $41 million in drug copayments from Priority 7 

veterans by charging $2 for a 30-day or less supply. This reduced VA’s net 

expenditures to $377 million. 

After VA implemented eligibility reform in 1999, Priority 7 veterans’ use of 

the pharmacy benefit increased rapidly from about 11 million 30-day 

equivalents of drugs or supplies in fiscal year 1999 to about 26 million 30-day 

equivalents in fiscal year 2001. This resulted in more than a doubling of VA’s 

net pharmacy expenditures for these veterans. Yet, net pharmacy 

expenditures for Priority 7 veterans remain a relatively small share of VA’s 

total net spending for outpatient drugs and supplies. Most of VA’s increased 

pharmacy spending during this period was for all other veterans--those with 

service-connected disabilities, low incomes, or certain other recognized 

statuses such as former prisoners of war. In fiscal year 2001, 87 percent of 

VA’s net pharmacy expenditures were for these veterans. 

VA agreed with GAO’s findings regarding outpatient pharmacy use and 

expenditures. 

Net Expenditures for VA’s Outpatient Pharmacy Benefit Less Drug Copayments, 

Fiscal Years 1999-2001 

164 247

377

1,916

2,169

2,458

0

500

1,000

1,500

2,000

2,500

3,000

1999 2000 2001 1999 2000 2001

Dollars in millions

Priority 7 veterans

All other veterans

Source: GAO analysis of VA data.

VA HEALTH CARE 

Expanded Eligibility Has Increased 

Outpatient Pharmacy Use and 

Expenditures 

www.gao.gov/cgi-bin/getrpt?GAO-03-161.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Cynthia A. 

Bascetta at (202) 512-7101. 

Highlights of GAO-03-161, report to the 

Chairman, Committee on Veterans’ 

Affairs, House of Representatives. 

November 2002

The Department of Veterans Affairs 

(VA) spent about $3.0 billion on its 

outpatient pharmacy benefit in 

fiscal year 2001. After VA 

implemented the Veterans’ Health 

Care Eligibility Reform Act in 1999, 

more veterans could use VA 

outpatient care, including the 

pharmacy benefit, than before. 

Increased eligibility contributed to 

a doubling of the number of 

Priority 7 veterans using VA health 

care. Priority 7 veterans are 

primarily veterans with higher 

incomes and no service-connected 

disability. 

GAO was asked to report on 

Priority 7 veterans’ use of the 

outpatient pharmacy benefit and 

VA’s expenditures to provide this 

benefit. To do this, GAO reviewed 

VA pharmacy data on use and costs 

from fiscal years 1999 through 

2001. 
Page i GAO-03-161 VA Outpatient Pharmacy 

Letter 1

Results in Brief 2

Background 3

Priority 7 Veterans’ Use of Pharmacy Benefit Has Grown 6

VA Spent Over $400 Million on the Outpatient Pharmacy Benefit for 

Priority 7 Veterans 7

Proportion of Priority 7 Pharmacy Use Varies Substantially Across 

Networks 9

Agency Comments and Our Evaluation 11

Appendix I Scope and Methodology 13 

Appendix II Comments from the Department of Veterans 

Affairs 16 

Appendix III GAO Contact and Staff Acknowledgments 18 

Related GAO Products 19 

Tables 

Table 1: Expenditures for VA’s Outpatient Pharmacy Benefit, Fiscal 

Years 1999 through 2001 8

Table 2: Net Expenditures for VA’s Outpatient Pharmacy Benefit 

Less Drug Copayments, Fiscal Years 1999 through 2001 9

Figures 

Figure 1: Growth of Priority 7 Veterans Treated, Fiscal Years 1996 

through 2001 5

Figure 2: Growth in Priority 7 Veterans’ Use of the Pharmacy 

Benefit, Fiscal Years 1999 through 2001 6

Figure 3: Priority 7 Veterans by Network: Proportion of Patients 

Treated and Drugs and Supplies Used, Fiscal Year 2001 10

Contents 
Page ii GAO-03-161 VA Outpatient Pharmacy 

Abbreviations 

DOD Department of Defense 

PBM Pharmacy Benefits Management 

VA Department of Veterans Affairs 

VHA Veterans Health Administration 
Page 1 GAO-03-161 VA Outpatient Pharmacy 

November 8, 2002 

The Honorable Christopher H. Smith 

Chairman 

Committee on Veterans’ Affairs 

House of Representatives 

Dear Mr. Chairman: 

The Department of Veterans Affairs (VA) spent about $3.0 billion on drugs, 

supplies, and other associated costs to provide an outpatient pharmacy 

benefit to veterans in fiscal year 2001.1

 VA’s pharmacy benefit provides 

prescription drugs, over-the-counter drugs, and medical supplies to 

veterans receiving VA health care. VA’s cost for providing the pharmacy 

benefit includes the cost of drugs and supplies, pharmacy personnel, and 

other operational expenses. In recent years, expenditures for the 

outpatient pharmacy benefit have become a larger portion of VA’s medical 

care budget, rising from 12 percent in fiscal year 1999 to 14 percent in 

fiscal year 2001.2

 The number of veterans treated by VA has risen during 

this time from 3.1 million to 3.8 million, in part due to broadening health 

care eligibility that began in fiscal year 1999. One result of this broadened 

eligibility was an increase in the number of Priority 7 veterans treated—

those veterans primarily with higher incomes and no service-connected 

disability.3

You requested that we provide information on the overall dimensions of 

Priority 7 veterans’ use of the pharmacy benefit to better inform the 

Committee’s oversight of VA health care. To better understand the impact 

of the growing number of Priority 7 veterans treated by VA, we examined 

 1

In addition, VA spent approximately $250 million for inpatient drugs and supplies in fiscal 

year 2001. 

2

Drug expenditures are increasing in health care generally, not just in VA. Expenditures 

have risen for a number of reasons including increased use of drugs, the substitution of 

higher priced new drugs for lower priced existing ones, and more direct-to-consumer 

advertising by manufacturers. 

3

Priority 7 veterans are veterans who have either incomes or net worths above a certain 

threshold, no service-connected disability that results in monetary benefits from VA, and 

no other recognized statuses such as former prisoners of war. The income threshold was 

$23,688 for veterans without dependents in 2001. A service-connected disability is an injury 

or disease that was incurred or aggravated while on active military duty. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-03-161 VA Outpatient Pharmacy 

(1) Priority 7 veterans’ use of the VA outpatient pharmacy benefit, (2) the 

amount of VA expenditures for providing this benefit to Priority 7 

veterans, and (3) whether the proportion of Priority 7 veterans’ pharmacy 

use varies across VA’s 22 regional health care networks.4

To perform our work, we reviewed documents and analyzed data from 

fiscal years 1999 through 2001 that VA provided on the use of the 

pharmacy benefit, VA’s expenditures, and revenues VA generated from 

copayments it charges certain veterans for drugs. We defined pharmacy 

use in 30-day equivalents to standardize drug and supply volume across 

fiscal years and networks because prescriptions can be written for 

different lengths of time such as 30, 60, or 90 days. We tested the reliability 

of the data and determined they were adequate for our purposes. We also 

interviewed VA officials at headquarters, other locations, and Network 2 

(Albany) to better understand the pharmacy benefit and VA’s data on 

pharmacy use, expenditures, and revenues from drug copayments. For a 

complete description of our scope and methodology, see appendix I. Our 

work was performed from March 2002 through November 2002 in 

accordance with generally accepted government auditing standards. 

Priority 7 veterans used 26.4 million 30-day equivalents of drugs and 

supplies in fiscal year 2001, up from 10.7 million 30-day equivalents in 

fiscal year 1999. During this period, the number of Priority 7 veterans VA 

treated doubled from about 400,000 to over 800,000. This growth was the 

most important factor contributing to the rapid increase in Priority 7 

veterans’ use of the pharmacy benefit. In addition, for Priority 7 veterans 

who received at least one drug or supply, the average number of drugs and 

supplies defined in 30-day equivalents increased from 33 to 38 per year. 

VA spent $418 million on the outpatient pharmacy benefit for Priority 7 

veterans in fiscal year 2001. These expenditures were offset by Priority 7 

copayments for drugs. This offset reduced VA’s net expenditures to $377 

million in fiscal year 2001, more than double the amount VA spent for this 

purpose in fiscal year 1999. Moreover, the rate of growth for Priority 7 net 

pharmacy expenditures was more than four times that for all other 

veterans treated by VA. Even though net expenditures for Priority 7 

veterans’ use of the pharmacy benefit increased rapidly, the proportion of 

 4

VA now has 21 networks. In January 2002, VA combined Network 13 (Minneapolis) and 

Network 14 (Lincoln) to form a new network. 

Results in Brief 
Page 3 GAO-03-161 VA Outpatient Pharmacy 

VA expenditures for this purpose was only 13 percent of total net 

pharmacy expenditures in fiscal year 2001. By comparison, 22 percent of 

VA’s patients were Priority 7 veterans in that year. The remaining 87 

percent of net expenditures were for other veterans. Most of VA’s 

increased pharmacy spending from fiscal year 1999 to fiscal year 2001 was 

for these veterans. 

The proportion of pharmacy use accounted for by Priority 7 veterans 

varies substantially across the networks. Priority 7 veterans’ use of the 

pharmacy benefit ranged from 9 percent of all drugs and supplies 

dispensed in Network 20 (Portland) to 29 percent of all drugs and supplies 

dispensed in Network 3 (Bronx) in fiscal year 2001. This unevenness in 

patient use results in disproportionately higher costs to treat Priority 7 

veterans as a group in networks that have larger proportions of Priority 7 

veterans. VA does not take this unevenness into account when providing 

financial resources to its networks each year. 

In commenting on the draft report, VA agreed with our findings regarding 

outpatient pharmacy use and expenditures. 

The Veterans’ Health Care Eligibility Reform Act of 1996 simplified 

eligibility standards for veterans in need of hospital and outpatient care.5

Among other things, the act authorized VA to provide medical care 

services not previously available to veterans without service-connected 

disabilities or low incomes. As required by the act, VA established seven 

priority categories for enrollment to manage access in relation to available 

resources. A higher priority for enrollment is given to veterans who have 

service-connected disabilities, lower incomes, or other recognized statuses 

such as former prisoners of war. These higher priority enrollees are 

ranked in priority order from 1 through 6. The lowest enrollment priority is 

given to veterans not included in priorities 1 through 6, referred to as 

Priority 7 veterans. The act requires VA to restrict enrollment consistent 

with these enrollment priorities if sufficient resources are not available to 

provide care that is timely and acceptable in quality for all priority groups. 

The new enrollment system, implemented in fiscal year 1999, resulted in 

the expansion of medical benefits to some priority groups, including 

Priority 7 veterans. Before eligibility reform, most veterans now classified 

 5

Pub. L. No. 104-262 §§ 101, 104. 

Background 
Page 4 GAO-03-161 VA Outpatient Pharmacy 

as Priority 7 veterans could only receive VA outpatient services, including 

prescription drugs, if these services were related to hospital care received 

at the VA. Priority 7 veterans can now receive prescription drugs, over-thecounter drugs (e.g., aspirin, cough syrup, vitamins) and medical and 

surgical supplies (e.g., syringes, alcohol wipes) on an outpatient basis. To 

obtain these drugs or supplies, veterans must be enrolled in and receiving 

health care at VA. If a veteran has a prescription from a non-VA provider, 

the VA pharmacy will only provide the drug or supply if the prescription is 

rewritten first by a VA provider except in certain circumstances such as 

when VA has a sharing agreement with the Department of Defense (DOD). 

Some veterans, including Priority 7 veterans, are charged a copayment for 

drugs, which VA increased in February 2002 from $2 to $7 for a 30-day or 

less supply of drugs. There is no copayment for supplies. 

The number of Priority 7 veterans treated has increased significantly and 

represents the most rapidly growing share of the veterans VA treats. From 

fiscal year 1996 through fiscal year 2001, the number of Priority 7 veterans 

treated has increased by almost eightfold (see fig. 1). Priority 7 veterans 

represented 22 percent of VA’s workload in fiscal year 2001. According to 

VA projections, growth in Priority 7 workload is expected to continue to 

increase at least through fiscal year 2010. 
Page 5 GAO-03-161 VA Outpatient Pharmacy 

Figure 1: Growth of Priority 7 Veterans Treated, Fiscal Years 1996 through 2001 

Priority 7 veterans over the age of 65 have contributed the most to this 

growth in VA patient workload. Between fiscal years 1999 and 2001, the 

proportion of Priority 7 users age 65 or over grew from 52 percent to 65 

percent. In contrast, the proportion of veterans age 65 or over among 

other veteran users grew from 45 percent to 47 percent during this period. 

Older Priority 7 veterans could be attracted to VA because many persons 

in this age group lack or have limited prescription drug coverage from 

other sources. Medicare, the federal health financing program and the 

primary health insurer for persons over the age of 65, has a restricted 

outpatient prescription drug benefit.6

 Over one-third of Medicare 

beneficiaries have no prescription drug coverage, and those beneficiaries 

 6

Medicare’s benefit largely covers those drugs that cannot be self-administered or require 

certain medical equipment to be administered. Medicare part B (which covers physician 

and other outpatient services) covers roughly 450 drugs that amounted to almost $4 billion 

including beneficiary copayments in 1999. See U.S. General Accounting Office, Medicare: 

Payments for Covered Outpatient Drugs Exceed Providers’ Cost, GAO-01-1118

(Washington D.C.: Sept. 21, 2001). 

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

135,378

235,523

397,230

574,516

827,722

107,520

1996 1997 1998 1999 2000 2001

Fiscal year

Veterans

Source: VA.

Note: Because the Priority 7 classification was not developed until fiscal year 1999, we used VA’s 

previous classification that most closely represents this priority group, Category C. The Category C 

data we used for fiscal years 1996 through 1998 slightly underestimate the number of Priority 7 

veterans for those years.
Page 6 GAO-03-161 VA Outpatient Pharmacy 

with coverage are sometimes exposed to gaps in coverage and high out-ofpocket costs.7

Priority 7 veterans’ use of the pharmacy benefit has more than doubled 

from fiscal year 1999 to fiscal year 2001 (see fig. 2). Their use included 

prescription drugs, over-the-counter drugs, and supplies each defined in 

30-day equivalents. In fiscal year 2001, 82 percent of the items were 

prescription drugs.8

Figure 2: Growth in Priority 7 Veterans’ Use of the Pharmacy Benefit, Fiscal Years 

1999 through 2001 

 7

See Mary A. Laschober, Michelle Kitchman, Patricia Neuman, Allison A. Strabic, Trends in 

Medicare Supplemental Insurance and Prescription Drug Coverage, 1996-1999, Health 

Affairs (Feb. 27, 2002) and U.S. General Accounting Office, Medigap: Current Policies 

Contain Coverage Gaps, Undermine Cost Control Incentives, GAO-02-533T (Washington, 

D.C.: Mar. 14, 2002). 

8

In addition to prescription drugs, 14 percent of the prescriptions were for over-the-counter 

drugs, 4 percent for supplies, and less than 1 percent for other drugs such as medicines 

used in research studies, and drugs whose classification was not listed in VA’s pharmacy 

database. 

Priority 7 Veterans’ 

Use of Pharmacy 

Benefit Has Grown 

10,738,762

16,408,037

26,397,456

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

1999 2000 2001

Fiscal year

Number of 30-day equivalents

Note: Drugs and supplies are measured in 30-day equivalents.

Source: GAO analysis of VA data.
Page 7 GAO-03-161 VA Outpatient Pharmacy 

The most important factor contributing to Priority 7 veterans’ increased 

use of the pharmacy benefit was the increase in the number of Priority 7 

patients treated between fiscal years 1999 and 2001. We estimate that 

about 74 percent of the increase in Priority 7 veterans’ use of the 

pharmacy benefit resulted from the increase in Priority 7 veterans treated. 

This estimate held constant the number of drugs and supplies provided per 

veteran and the proportion of veterans using the pharmacy benefit. 

Two other factors contributed to the growth in Priority 7 veterans’ use of 

the pharmacy benefit. The most important of the two was an increase in 

the number of drugs and supplies used per Priority 7 veteran. During this 

period, for Priority 7 veterans who received at least one drug or supply, 

the average number of drugs and supplies defined in 30-day equivalents 

increased from 33 to 38 per year. The other factor was an increase in the 

proportion of Priority 7 veterans using the pharmacy benefit from 81 to 83 

percent. 

For similar reasons, other veterans’ use of the pharmacy benefit also 

increased during this period. An increase in the number of these veterans 

accounted for about 53 percent of the increased use of the pharmacy 

benefit. Another contributing factor was the increase in the average 

number of 30-day equivalents per year provided to these veterans, which 

rose from 49 to 53. Finally, the proportion of these veterans using the 

pharmacy benefit increased from 87 to 89 percent. 

VA spent $418 million on the outpatient pharmacy benefit for Priority 7 

veterans in fiscal year 2001 (see table 1),9

 more than double the amount VA 

spent for these veterans’ drugs and supplies in fiscal year 1999. Moreover, 

the rate of growth for Priority 7 pharmacy expenditures was more than 

four times that for other veterans. The primary factor responsible for this 

growth in spending for Priority 7 veterans is the increase in the number of 

Priority 7 veterans using the pharmacy benefit. Growth in pharmacy 

expenditures would have been higher if VA had not been able to keep the 

 9

VA’s Office of Inspector General estimated that VA’s direct cost of pharmaceuticals was 

$200 million in fiscal year 1999, based on projections using Network 8 (Bay Pines) 

experiences. For a description of its methodology, see Office of Inspector General, 

Department of Veterans Affairs, Audit of Veterans Health Administration (VHA) 

Pharmacy Copayment Levels and Restrictions on Filling Privately Written Prescriptions 

for Priority Group 7 Veterans, Report Number 99-00057-4 (Washington D.C.: Dec. 20, 

2000). We were able to develop a more precise estimate by using pharmacy data from all of 

VA’s networks. 

VA Spent Over $400 

Million on the 

Outpatient Pharmacy 

Benefit for Priority 7 

Veterans 
Page 8 GAO-03-161 VA Outpatient Pharmacy 

average expenditure for a 30-day supply of drugs and supplies relatively 

constant between fiscal years 1999 and 2001.10 During this period, VA spent 

on average about $17 each year for a 30-day supply of drugs and supplies 

for Priority 7 veterans. Excluding pharmacy personnel and other 

operational expenses, VA spent about $12 to $13 on average for a 30-day 

supply of drugs and supplies for these veterans between fiscal years 1999 

and 2001. 

Table 1: Expenditures for VA’s Outpatient Pharmacy Benefit, Fiscal Years 1999 

through 2001 

Dollars in millions 

Outpatient pharmacy expenditures 1999 2000 2001

Priority 7 veterans $178 $271 $418

All other veterans $1,977 $2,245 $2,554

Total $2,155 $2,516 $2,972

Note: The categories include expenditures for drugs and supplies, pharmacy personnel, and other 

operational expenses. The expenditures do not include offsets from drug copayments. 

Source: GAO analysis of VA data. 

VA’s expenditures for the pharmacy benefit are offset by Priority 7 

veterans’ copayments for drugs. This offset reduced VA’s net expenditures 

to $377 million for providing drugs and supplies to Priority 7 veterans in 

fiscal year 2001 (see table 2). VA collected approximately $41 million in 

drug copayments from Priority 7 veterans in fiscal year 2001 by charging 

$2 for a 30-day or less supply.11 VA copayment collections will offset net 

pharmacy expenditures even more for Priority 7 veterans in the future 

because the copayment amount increased to $7 in February 2002. If the 

copayment had been $7 in fiscal year 2001, VA could have collected about 

$100 million more from these veterans. 

 10VA has taken a number of actions to reduce pharmacy spending. These actions include 

the establishment of formularies, use of different contract arrangements to purchase drugs, 

use of mail-order pharmacies, and use of joint procurement with DOD. See U.S. General 

Accounting Office, VA and DOD Health Care: Factors Contributing to Reduced Pharmacy 

Costs and Continuing Challenges, GAO-02-969T (Washington, D.C.: July 22, 2002). 

11VA collected about 90 percent of what it billed from drug copayments in fiscal year 2001. 
Page 9 GAO-03-161 VA Outpatient Pharmacy 

Table 2: Net Expenditures for VA’s Outpatient Pharmacy Benefit Less Drug 

Copayments, Fiscal Years 1999 through 2001 

Dollars in millions 

Net outpatient pharmacy expenditures 1999 2000 2001

Priority 7 veterans $164 $247 $377

All other veteransa $1,916 $2,169 $2,458

Total $2,080 $2,417 $2,835

Note: Numbers in table may not add to total outpatient pharmacy expenditures because of rounding.

a

Veterans with service-connected disabilities rated greater than 50 percent, receiving drugs for 

service-connected conditions, or with incomes lower than the VA pension level are exempt from 

paying drug copayments. 

Source: GAO analysis of VA data. 

Even though net expenditures for Priority 7 veterans’ use of the pharmacy 

benefit have more than doubled from fiscal year 1999 to 2001, the 

proportion of VA expenditures for this purpose was only 13 percent of 

total net pharmacy expenditures in fiscal year 2001. By comparison, 22 

percent of VA’s patients were Priority 7 veterans in that year. The 

remaining 87 percent of VA’s net spending for the pharmacy benefit was 

for other veterans. This amounted to about $2.5 billion. The rate of growth 

in net pharmacy benefit expenditures for Priority 7 veterans was more 

than four times that for other veterans from fiscal year 1999 to fiscal year 

2001, but the net increase in spending for Priority 7 veterans represented 

only 28 percent of all increased spending during that period. 

The proportion of pharmacy use accounted for by Priority 7 veterans 

varies substantially across the networks. Priority 7 veterans’ use of the 

pharmacy benefit ranged from 9 percent of all drugs and supplies 

dispensed in Network 20 (Portland) to 29 percent of all drugs and supplies 

dispensed in Network 3 (Bronx) in fiscal year 2001. The unevenness 

among networks in Priority 7 veterans’ use of drugs and supplies tracks 

closely with the unevenness among networks in Priority 7 patients treated 

(see fig. 3). 

Proportion of Priority 

7 Pharmacy Use 

Varies Substantially 

Across Networks 
Page 10 GAO-03-161 VA Outpatient Pharmacy 

Figure 3: Priority 7 Veterans by Network: Proportion of Patients Treated and Drugs and Supplies Used, Fiscal Year 2001 

0 5 10 15 20 25 30 35 40

1 (Boston)

2 (Albany)

3 (Bronx)

4 (Pittsburgh)

5 (Baltimore)

6 (Durham)

7 (Atlanta)

8 (Bay Pines)

9 (Nashville)

10 (Cincinnati)

11 (Ann Arbor)

12 (Chicago)

13 (Minneapolis)

14 (Lincoln)

15 (Kansas City)

16 (Jackson)

17 (Dallas)

18 (Phoenix)

19 (Denver)

20 (Portland)

21 (San Francisco)

22 (Long Beach)

Priority 7 veterans as a percentage of patients treated and drugs and supplies used

Patients treated

Drugs and supplies used

Note: Drugs and supplies are measured in 30-day equivalents.

Source: GAO analysis of VA data.

Percentage
Page 11 GAO-03-161 VA Outpatient Pharmacy 

This unevenness in patient use results in disproportionately higher costs 

to treat Priority 7 veterans as a group in networks that have larger 

proportions of Priority 7 veterans. As we discussed in a prior report,12 VA 

does not take this unevenness into account when providing financial 

resources each year to its networks. VA provides financial resources to its 

networks based primarily on the number of patients the networks treat, 

but VA excludes most Priority 7 veterans in determining the number of 

patients treated. Initially, VA excluded most Priority 7 veterans in this 

process because of their small numbers and the expectation that 

collections from these veterans for drug copayments and from third-party 

payments from their health care insurance plans, where applicable, would 

cover the majority of Priority 7 veterans’ costs. However, collections 

covered only 24 percent of Priority 7 veterans’ costs in fiscal year 2000. We 

recommended that VA include all patients that it serves in its network 

resource allocation model. Although VA concurred, it has not implemented 

this recommendation. 

In commenting on the draft report, VA agreed with our findings regarding 

outpatient pharmacy use and expenditures. VA noted that the key factor in 

increased outlays for pharmaceuticals from fiscal year 1999 to 2001 was 

the increased number of veterans treated, rather than other factors such as 

medication inflation or intensity of therapy. 

VA also commented on the policy implications of filling privately written 

prescriptions, which was recommended in a VA Office of Inspector 

General (OIG) report we cited. However, we included the OIG report for 

the sole purpose of citing its estimates of the direct cost of 

pharmaceuticals based on work in Network 8 (Bay Pines). We did not 

address other issues in the OIG report that VA discussed in its comments. 

VA agreed that Priority 7 veterans’ use of the pharmacy benefit varies 

across networks and that most of these veterans are not included in its 

workload calculation when allocating financial resources to its networks. 

Although VA concurred with the recommendation in our February 2002 

report to better align measures of workload with actual workload served, 

regardless of veteran priority group, it said it is considering how best to 

address this recommendation. VA continues to be concerned that 

 12See U.S. General Accounting Office, VA Health Care: Allocation Changes Would Better 

Align Resources with Workload, GAO-02-338 (Washington D.C.: Feb. 28, 2002). 

Agency Comments 

and Our Evaluation 
Page 12 GAO-03-161 VA Outpatient Pharmacy 

inclusion of Priority 7 veterans in the workload calculation would create 

financial incentives for networks to seek out more Priority 7 veterans and 

come at the expense of service-connected and low-income veterans. As we 

noted in the prior report, networks with a disproportionate number of 

Priority 7 veterans already have fewer resources to treat serviceconnected and low-income veterans on a per-patient basis. Including 

Priority 7 workload in fiscal year 2003 allocations to networks would 

provide more comparable resources for treating service-connected and 

low-income veterans in all networks. VA’s comments are in appendix II. 

We are sending copies of this report to the Secretary of Veterans Affairs, 

interested congressional committees, and other interested parties. This 

report is also available at no charge on GAO’s Web site at 

http://www.gao.gov. In addition, we will make copies of the report 

available to others upon request. 

If you or your staff have any questions about this report, please call me at 

(202) 512-7101. Another contact and key contributors are listed in 

appendix III. 

Sincerely yours, 

Cynthia A. Bascetta 

Director, Health CareVeterans’ 

 Health and Benefits Issues 
Appendix I: Scope and Methodology 

Page 13 GAO-03-161 VA Outpatient Pharmacy 

We reviewed the Department of Veterans Affairs (VA) outpatient 

pharmacy benefit for fiscal years 1999 through 2001 and focused on 

Priority 7 veterans treated by VA to examine (1) Priority 7 veterans’ use of 

the VA outpatient pharmacy benefit, (2) the amount of VA expenditures 

for providing this benefit to Priority 7 veterans, and (3) whether the 

proportion of Priority 7 veterans’ pharmacy use varies across VA’s 22 

regional health care networks. 

To address these objectives, we obtained documents and data on the use 

of the VA pharmacy benefit and expenditures from fiscal years 1999 

through 2001 primarily from four VA offices. From the Veterans Health 

Administration’s (VHA) Office of Policy and Planning we obtained the 

numbers of enrollees and veterans treated by network and priority group. 

Based on our request, this office also provided data on veterans’ 

enrollment status to VA’s Pharmacy Benefits Management (PBM) Strategic 

Healthcare Group to match with its pharmacy data. VA’s PBM Strategic 

Healthcare Group provided a summary dataset that detailed pharmacy use 

and expenditures for drugs and supplies by veterans’ enrollment status 

from fiscal years 1999 through 2001. VHA’s Revenue Office in the newly 

created Chief Business Office provided data on the amount of collections 

VA obtained from veterans’ copayments for drugs. This office also 

provided information on the costs of pharmacy personnel and other 

operational expenses. VA’s Decision Support System program office in 

Bedford, Massachusetts verified these numbers. 

To do our analysis, we used the number of 30-day equivalents instead of 

the number of unique prescriptions to measure pharmacy use based on 

guidance provided by officials from VA’s PBM Strategic Healthcare Group. 

The 30-day equivalent measure standardizes drug and supply volume, 

which is necessary because veterans can receive prescriptions in various 

days of supply including quantities sufficient for 30, 60, or 90 days. 

To determine the total cost of VA’s outpatient pharmacy benefit we added 

the cost of drugs and supplies obtained from VA’s PBM Strategic 

Healthcare Group with personnel and other operations costs that we 

obtained from VHA’s Revenue Office. To calculate VA’s personnel and 

operations costs, we multiplied the number of unique prescriptions 

dispensed times $7.28 for fiscal years 1999, 2000, and 2001. VA calculated 

the $7.28 figure using fiscal year 2000 data to estimate expenditures based 

on factors including: (1) salary costs of pharmacy personnel who dispense 

the prescription, consult with veterans about their prescription, and 

support the pharmacy operations, (2) materials needed to fill the 

prescription including bottles and drug labels, (3) a share of the facilities’ 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 14 GAO-03-161 VA Outpatient Pharmacy 

overhead, often allocated based on square footage, including electricity 

and maintenance, and (4) a share of headquarters’ overhead and expenses. 

To reduce rounding error in our estimates of VA’s personnel and 

operations costs, we recalculated the $7.28 estimate with information 

provided by VA and used the precise number in our calculations. 

We tested VA computer-based data used in our analysis and concluded 

that they were adequate for our purposes. To do this, we assessed the 

reliability of data that we obtained from VA that were used in our analyses. 

When we identified inconsistencies between databases, we tried to resolve 

them by interviewing officials responsible for creating or maintaining the 

databases, updating the databases with additional information VA 

provided, and requesting special data runs with parameters that we 

specified. 

We interviewed officials in VHA’s Office of Policy and Planning who were 

knowledgeable about VA’s enrollment database to assess its reliability. 

They told us that when they analyze data in which some veterans do not 

have an enrollment priority indicated in the database, for analytical 

purposes they assign a priority to these veterans using a computer 

algorithm. This algorithm assigns a priority to veterans who do not have 

one in the database. In most cases, the algorithm assigns the priority the 

veteran had in the previous year. VA officials told us that it is necessary to 

use such an algorithm because a veteran’s priority could change, for 

example, because of a change in income. When the information is not 

updated soon enough in a database, no priority status is indicated. In such 

cases, we relied on data provided to us by VA that used its algorithm to 

identify the number of Priority 7 veterans using the pharmacy benefit. 

We took several steps to validate that the pharmacy data provided by VA’s 

PBM Strategic Healthcare Group accurately portrayed the use of the 

pharmacy benefit and its expenditures. We interviewed officials from VA’s 

PBM Strategic Healthcare Group and a pharmacy official from Network 2 

(Albany) to determine if price data for drugs and supplies are 

automatically updated. We found that VA does not have a mechanism to 

automatically update prices in the PBM pharmacy database. Because we 

used these price data to develop our estimate of expenditures, we tested 

the reliability of this field in the PBM pharmacy database. To do this, we 

took a random sample of 20 prescription records from a random sample of 

33 VA drugs or supplies. For each prescription record in the sample, we 

compared the price in the PBM pharmacy database with the lowest price 

that VA would have been able to purchase the drug or supply for on that 

date. We determined the lowest price for the date it was dispensed by 
Appendix I: Scope and Methodology 

Page 15 GAO-03-161 VA Outpatient Pharmacy 

using VA’s database of contract prices for drugs and supplies. We then 

calculated the total expenditure for each drug or supply to determine 

whether the expenditures for these drugs or supplies were over- or 

understated. We determined that VA’s numbers for total drug and supply 

expenditures for Priority 7 veterans were accurate for our purposes. 

We also conducted a literature review of works published within the last 3 

years. The literature search included the MEDLINE and AGELINE 

databases and relied on publications from other federal agencies. The 

search focused on finding information regarding prescription drug prices, 

current clinical practice regarding the use of prescription drugs, and 

insurance coverage for prescription drugs, particularly for persons over 

the age of 65. 

We performed our review from March 2002 to November 2002 in 

accordance with generally accepted government auditing standards. 
Appendix II: Comments from the Department of Veterans Affairs 

Page 16 GAO-03-161 VA Outpatient Pharmacy 

Appendix II: Comments from the Department 

of Veterans Affairs 
Appendix II: Comments from the Department of Veterans Affairs 

Page 17 GAO-03-161 VA Outpatient Pharmacy 
Appendix III: GAO Contact and Staff 

Acknowledgments 

Page 18 GAO-03-161 VA Outpatient Pharmacy 

James C. Musselwhite, (202) 512-7259 

In addition to the contact named above, Thomas A. Walke, Matthew L. 

Puglisi, Kristin M. Wilson, and Vanessa R. Taylor made key contributions 

to this report. 

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 
Related GAO Products 

Page 19 GAO-03-161 VA Outpatient Pharmacy 

VA and DOD Health Care: Factors Contributing to Reduced Pharmacy 

Costs and Continuing Challenges. GAO-02-969T. Washington, D.C.: July 

22, 2002. 

Medicare: Financial Outlook Poses Challenges for Sustaining Program 

and Adding Drug Coverage. GAO-02-643T. Washington, D.C.: April 17, 

2002. 

Medicare Outpatient Drugs: Program Payments Should Better Reflect 

Market Prices. GAO-02-531T. Washington, D.C.: March 14, 2002. 

Medigap: Current Policies Contain Coverage Gaps, Undermine Cost 

Control Incentives. GAO-02-533T. Washington, D.C.: March 14, 2002. 

VA Health Care: Allocation Changes Would Better Align Resources with 

Workload. GAO-02-338. Washington, D.C.: February 28, 2002. 

VA Health Care: Continuing Oversight Needed to Achieve Formulary 

Goals. GAO-01-998T. Washington, D.C.: July 24, 2001. 

DOD and VA Pharmacy: Progress and Remaining Challenges in Jointly 

Buying and Mailing Out Drugs. GAO-01-588. Washington, D.C.: May 25, 

2001. 

VA Drug Formulary: Better Oversight Is Required, but Veterans Are 

Getting Needed Drugs. GAO-01-183. Washington, D.C.: January 29, 2001. 

DOD and VA Health Care: Jointly Buying and Mailing Out 

Pharmaceuticals Could Save Millions of Dollars. GAO/T-HEHS-00-121. 

Washington, D.C.: May 25, 2000. 

Related GAO Products 

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