Prescription Drugs: Comparison of DOD and VA Direct Purchase Prices
Published: 2013-04-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2012, DOD and VA spent a combined $11.8 billion to purchase drugs on behalf of about 18.5 million beneficiaries. Both agencies purchase drugs directly from manufacturers via prime vendors--intermediaries that provide the drugs at a discount off the lowest price that would otherwise be available. The agencies dispense these drugs to beneficiaries through their medical facilities and pharmacies, including their mail order pharmacies.
GAO was asked to compare prices paid for prescription drugs across federal programs. This report describes direct purchase prices paid by DOD and VA for a sample of prescription drugs. GAO will compare drug prices paid using other approaches and by other federal programs in future work. Using prime vendor data provided by these agencies for the first quarter of 2012, GAO selected a sample of high-utilization and high-expenditure drugs important to both DOD and VA and compared average unit prices paid by these agencies for those drugs. The sample contained 43 brand-name and 40 generic drugs and accounted for 37 percent of DOD utilization, 32 percent of DOD expenditures, 28 percent of VA utilization, and 35 percent of VA expenditures for directly purchased drugs in that quarter. GAO calculated average unit prices by dividing total expenditures by total utilization for each drug, the entire sample, and the subsets of brand-name and generic drugs. GAO also compared DOD and VA average unit prices to the FSS and Big Four prices for each drug. GAO interviewed DOD and VA officials about their drug purchasing approaches and factors affecting the prices they are able to obtain.
section_title: What GAO Found
paragraphs: When GAO compared prices paid by the Department of Defense (DOD) and the Department of Veterans Affairs (VA) for a sample of 83 drugs purchased in the first calendar quarter of 2012, DOD's average unit price for the entire sample was 31.8 percent ($0.11 per unit) higher than VA's average price, and DOD's average unit price for the subset of 40 generic drugs was 66.6 percent ($0.04 per unit) higher than VA's average price. However, VA's average unit price for the subset of 43 brand-name drugs was 136.9 percent ($1.01 per unit) higher than DOD's average price. These results were consistent with each agency obtaining better prices on the type of drugs that made up the majority of its utilization: generic drugs accounted for 83 percent of VA's utilization of the sample drugs and brand-name drugs accounted for 54 percent of DOD's utilization of the sample drugs. DOD officials told GAO that in certain circumstances they are able to obtain competitive prices for brand-name drugs--even below the prices for generic equivalents--and therefore will often preferentially purchase brand-name drugs.
At the individual drug level, DOD paid higher average unit prices than VA for 32 of the 40 generic drugs and for 23 of the 43 brand-name drugs in the sample, while VA paid higher average unit prices for the remaining 8 generic drugs and 20 brand-name drugs. In nearly every case, substantially higher prices paid by one agency were correlated with substantially lower utilization by that agency. Specifically, for 10 of the 11 drugs for which one agency paid more than 100 percent above the price paid by the other agency, the agency that paid a substantially higher price also had substantially lower utilization. However, even when one agency paid a substantially higher price than the other, in all 11 cases both agencies paid less than the highest of the Federal Supply Schedule (FSS) prices available to all direct federal purchasers or the Big Four prices available to the four largest government purchasers. Additionally, in most cases (9 out of 11 drugs) both agencies paid less than the lowest of these prices. The lower prices obtained by one agency may be due to factors such as differences in the agencies' formulary design and prescription practices, price and rebate negotiations with manufacturers that may not be available more broadly to the other agency, and differences in utilization practices between the agencies based on differences in their beneficiary populations.
DOD and VA face continued challenges in controlling drug costs. While the prescription drug market is complex and there are many factors affecting the prices DOD and VA are able to obtain for directly purchased drugs, differences in prices paid for specific drugs may provide insights into opportunities for each agency to obtain additional savings on at least some of the drugs they purchase.
In commenting on a draft of this report, DOD generally agreed with GAO's findings and described additional factors that may contribute to differences in prices paid by DOD and VA. VA expressed concerns with the content of the report. VA suggested additional analyses and highlighted the impact of program design on each agency's use of prescription drugs. GAO maintains that its analyses have value in identifying opportunities for savings and the report acknowledges the limitations involved with estimating potential cost savings in this complex area. DOD and VA also provided technical comments that GAO incorporated as appropriate.

section_title: Letter
paragraphs: The Department of Defense (DOD) and Department of Veterans Affairs  (VA) are major federal purchasers of prescription drugs. In fiscal year  2012, the departments spent a combined $11.8 billion to purchase drugs  on behalf of approximately 18.5 million beneficiaries. In fiscal year 2011,  the departments’ expenditures—totaling about $11.3 billion—amounted to  about 13 percent of all federal drug expenditures. As we previously  reported, DOD and VA face continued challenges in controlling drug costs  and need to make drug savings a priority.
One method used by DOD and VA to pay for prescription drugs on behalf  of their beneficiaries is the direct purchase approach. In this approach,  the program purchases drugs directly from manufacturers—through  intermediaries known as prime vendors—and dispenses them to beneficiaries through their own medical facilities and pharmacies. DOD  and VA have access to certain federal pricing arrangements for these  direct purchases, including Federal Supply Schedule (FSS) prices— prices available to all direct federal purchasers—and Big Four prices— prices available to the four largest federal purchasers. In addition, the  prime vendors used by DOD and VA for these purchases provide a fixed  percentage discount off the lowest price (e.g., the FSS or Big Four price)  otherwise available for each drug. Direct purchase drug prices are  generally not subject to intermediary markups from a wholesaler or other  distributor.
You requested that we compare prices paid for prescription drugs across  federal programs. In this report, we describe direct purchase prices paid  by DOD and VA for a sample of prescription drugs. We will compare drug  prices paid using other approaches and by other federal programs  including Medicare and Medicaid in future work.
In order to compare direct purchase prices paid by DOD and VA for a  sample of prescription drugs, we selected a sample of drugs important to  both agencies and compared unit prices paid by each agency for those  drugs. The sample included the top 50 brand-name and top 50 generic  drugs based on combined utilization ranks and combined expenditure  ranks for DOD and VA in the first calendar quarter of 2012. After  accounting for overlap between the high-utilization and high-expenditure  drugs, the final sample contained 43 brand-name drugs and 40 generic  drugs and included 37.0 percent of DOD utilization, 31.7 percent of DOD  expenditures, 27.7 percent of VA utilization, and 34.8 percent of VA  expenditures for directly purchased prescription drugs. We calculated  average unit prices paid by DOD and VA by dividing total expenditures by  total utilization for: each drug; the entire sample; the subset of brand- name drugs; and the subset of generic drugs. In order to maintain the  confidentiality of prices for individual drugs, in each case we converted  from absolute prices to relative prices by assigning 100.0 to the lowest  price and determining the higher price as a percentage above the lowest  price. We compared the average unit prices paid by DOD and VA to the  FSS and Big Four prices available to these agencies. Finally, we  determined the maximum potential savings that might have been  obtained if each agency had been able to obtain the lower of the DOD  and VA average unit prices for each of the 83 drugs in the sample. The  results of our analyses are limited to the 83 high-utilization and high- expenditure drugs in our sample for the first calendar quarter of 2012 and  are not necessarily applicable across all drugs. We also interviewed DOD  and VA officials about drug purchasing approaches they use and factors  affecting the prices they are able to obtain. See appendix I for additional  details on our methodology and a list of the drugs in the sample. See the  Related GAO Products list for other GAO work on DOD and VA drug  programs.
Data were received from DOD in June 2012 and from VA in July 2012.  We reviewed agency data for reasonableness and consistency, including  screening for outlier prices and examining possible reasons for  inconsistencies between the data sources. We also reviewed  documentation and talked to data providers about steps they take to  ensure data reliability, but did not confirm the accuracy of the underlying  data. We conducted this performance audit from April 2012 through April  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: In fiscal year 2012, VA provided prescription drug coverage to about   8.8 million eligible veterans primarily through its medical centers and  Consolidated Mail Outpatient Pharmacy (CMOP).direct purchase approach to acquire drugs directly from manufacturers for  distribution through its facilities. These purchases are usually made under  contract with a prime vendor that provides the drugs at a fixed percentage  discount off the lowest price otherwise available for each drug. VA’s drug  prices are generally below wholesale prices provided to commercial  buyers and do not include costs for storage, overhead, or dispensing. VA  also has access to federal pricing arrangements and other discounts to  help control drug spending, including the following:
Federal Supply Schedule (FSS) prices: These prices are available to  all direct federal purchasers and are intended to be no more than the  prices manufacturers charge their most-favored nonfederal customers  under comparable terms and conditions.
Big Four prices: These prices are available to DOD, VA, the Public  Health Service, and the U.S. Coast Guard. By law, these prices are  24 percent lower than nonfederal average manufacturer prices.
VA national contracts: These contracts provide additional pricing  concessions in return for commitment to potential vendors, resulting in  pricing lower than FSS. The VA national contracts program is a  separate contract vehicle from the FSS contract program.
In fiscal year 2012, VA’s prescription drug spending totaled about   $4.2 billion, according to VA officials.
In fiscal year 2012, DOD provided prescription drug coverage to about   9.7 million active-duty and retired military personnel, their dependents,  and others through its military treatment facilities (MTF), the TRICARE  Mail Order Pharmacy (TMOP), and retail pharmacies. As with VA, DOD  has access to FSS and Big Four prices and uses the direct purchase  approach to buy drugs at a discount through a prime vendor for  distribution through its MTFs and TMOP. Therefore, DOD’s direct  purchase drug prices are also generally below wholesale prices provided  to commercial buyers and do not include costs for storage, overhead, or  dispensing. In fiscal year 2012, DOD’s prescription drug spending  totaled about $7.6 billion, according to DOD officials.
Both DOD and VA use prescription drug formularies to help control  prescription drug costs. In our November 2012 report on DOD and VA  health care, agency officials told us that some of the differences in the  agencies’ formularies are due to differences in the structure of their health  care systems. For example, DOD covers prescriptions written by both  military and civilian providers, and DOD officials previously reported that,  as a result, the department needs to have a broad formulary to account  for differences in prescribing practices among different providers. In  contrast, VA primarily covers medications for eligible beneficiaries  through prescriptions written by its own providers. As VA officials  reported, this allows VA to have more direct control over the medications  that are prescribed to its patient population. Both agencies provide  access to nonformulary medications determined by a physician to be  clinically necessary.
section_title: DOD Paid a Higher Average Direct Purchase Price Than VA across the Entire Sample but Paid Less Than VA for Brand- Name Drugs
paragraphs: DOD paid a higher average unit price than VA across the entire sample of  83 drugs and for the subset of generic drugs, but paid a lower average  price than VA for the subset of brand-name drugs. Specifically, DOD’s  average unit price for the entire sample was 31.8 percent higher than  VA’s average price, and DOD’s average unit price for the subset of 40  generic drugs was 66.6 percent higher than VA’s average price. However,  VA’s average unit price for the subset of 43 brand-name drugs was   136.9 percent higher than DOD’s average price. (See fig. 1.) DOD paid  an average of $0.11 per unit more than VA across the entire sample of   83 drugs and an average of $0.04 per unit more than VA for the generic  drugs in our sample, while VA paid an average of $1.01 per unit more  than DOD for the brand-name drugs in our sample. These results were  consistent with each agency obtaining better prices on the type of drugs  that made up the majority of its utilization: generic drugs accounted for  the majority (83 percent) of VA’s utilization of drugs in the sample for the  first quarter of 2012, and brand-name drugs accounted for the majority  (54 percent) of DOD’s utilization of the sample drugs during the same  period. DOD officials told us that in certain circumstances they are able to  obtain competitive prices for brand-name drugs—even below the prices  for generic equivalents—and therefore will often preferentially purchase  brand-name drugs.
When we examined the prices paid for the individual brand-name drugs in  our sample, DOD paid higher average unit prices than VA for 23 of the   43 drugs (see fig. 2).remaining 20 brand-name drugs. DOD also paid a higher average price  than VA for a majority of the generic drugs in our sample. Specifically,  DOD paid a higher price for 32 of the 40 generic drugs in our sample,  while VA paid a higher average price for the remaining 8 generic drugs.  (See app. II for details on the relative prices paid by DOD and VA for the  83 individual drugs in our sample.)
section_title: Concluding Observations
paragraphs: DOD and VA face continued challenges in controlling drug costs. Our  findings suggest that there may be opportunities for savings with directly  purchased drugs. DOD and VA paid different prices for the drugs in our  sample; for 11 of the 83 drugs, one agency paid at least 100 percent  more than the other agency. DOD paid a lower average price for the  brand-name drugs in our sample while VA paid less, on average, for the  generic drugs and across the entire sample. Our past reports highlight the  importance of DOD and VA controlling drug costs. While the prescription  drug market is complex and there are many factors affecting the prices  DOD and VA are able to obtain for directly purchased drugs, differences  in prices paid for specific drugs may provide insights into opportunities for  each agency to obtain additional savings on at least some of the drugs  they purchase.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD and VA reviewed a draft of this report and provided written  comments, which are reprinted in appendixes III and IV, respectively.
DOD generally agreed with our methodology and findings. In addition,  DOD noted that expressing differences between DOD and VA prices for  the sample as percentages rather than actual dollar amounts may give  the impression that significant dollar values are involved rather than a few  cents or less per unit. While we clarified in the report the dollar amount of  price differences, our findings indicated that small per-unit price  differences may result in significant additional expenditures when  accounting for the quantities purchased by the agencies. DOD also  described additional factors beyond those mentioned in our findings that  may contribute to differences in prices paid by DOD and VA.
VA expressed concerns with the content of the report and suggested  additional analyses. For example, VA suggested that analyses accounting  for per-beneficiary costs, formulary design, utilization management, and  the mix of drugs used for a particular disease state would have provided  more appropriate comparisons. While we agree that such analyses could  be useful, the scope of our work was targeted to a comparison of prices  paid by each agency for a sample of high-utilization and high-expenditure  drugs and was not intended to capture all factors that can affect  pharmaceutical spending. We noted the limitations of our results in the  report, including that our results cannot be applied to all drugs purchased  by the agencies. Further, our report acknowledges the limitations involved  with estimating potential cost savings in this complex area. Nonetheless,  we maintain that comparing unit prices paid for selected generic and  brand-name drugs by different federal agencies has value in identifying  specific drugs with price differences that may warrant further  consideration for potential savings.
VA also noted that most of its drug purchases are made through contracts  with a prime vendor that provides a negative distribution fee (i.e.,  discount), resulting in savings to VA. We revised the introduction to make  this information more prominent earlier in the report. VA agreed with our  conclusion that the maximum potential savings provided in our findings  are unlikely to be achieved and noted that obtaining lower prices on  brand-name drugs would require shifting utilization away from generic  drugs, potentially increasing overall drug costs. VA also stated that our list  of factors affecting the prices each agency is able to obtain did not  specifically include the ability of VA to direct utilization toward a limited  number of drugs within a therapeutic class to achieve savings. We  revised the report to clarify this point.
VA also stated that, under an applicable Federal Acquisition Regulation  (48 C.F.R. § 8.002), it was required to purchase more expensive versions  of generic minocycline through the FSS contract rather than versions  otherwise available. VA therefore requested that GAO remove the  potential savings related to the purchase of this drug from the total  projected savings in the report. However, our report generally reflects a  number of factors (including differences in purchasing authority) that may  limit each agency’s ability to achieve the maximum potential savings we  calculated, and it was beyond the scope of our report to apply these  factors to each individual drug.
DOD and VA also provided technical comments, which we incorporated  as appropriate.
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section_title: Appendix I: Scope and Methodology
paragraphs: In order to compare direct purchase prices paid by the Department of  Defense (DOD) and Department of Veterans Affairs (VA) for prescription  drugs, we chose a sample of drugs important to both agencies. We  obtained prime vendor data for the first calendar quarter of 2012 for drugs  dispensed to DOD and VA beneficiaries through the agencies’ own  medical facilities and mail order pharmacies. We excluded physician- administered outpatient prescription drugs and over-the-counter drugs  from our sample; we also excluded items that are not traditionally  considered drugs such as bandages, syringes, needles, diabetes test  strips, saline, and water for irrigation. We used data from Red Book to  determine the brand-name or generic status of each drug. Utilization was  determined using the National Council for Prescription Drug Programs  (NCPDP) Billing Unit Standard. When calculating expenditures, we used  the agencies’ costs to purchase each drug without accounting for any  future offsets from beneficiary copayments for those drugs. We  aggregated the utilization and expenditure data at the drug level (drug  name, strength, and dosage form) separately for DOD and VA. For  example, all national drug codes (NDC) corresponding to 10 mg tablets of  Lipitor purchased by VA were aggregated and the associated utilization  and expenditures were summed and compared to other brand-name  drugs, while NDCs corresponding to 10 mg tablets of atorvastatin (the  generic equivalent of Lipitor) purchased by VA were aggregated  separately and compared to other generic drugs.
We ranked the top 100 brand-name and top 100 generic drugs separately  for each agency on the basis of utilization and expenditures and then  combined these rankings to determine the top brand-name and generic  drugs that were purchased by both agencies. We excluded drugs that  were in the top 100 for one agency but not for the other agency in order to  focus our analysis on drugs that were important for both DOD and VA.  For example, if a drug was 10th highest in utilization for VA but was not in  the top 100 for DOD, that drug would not be included in our sample.  Some drugs that were excluded from the sample appeared to be more  appropriate for the beneficiary population of one agency than the other.  For example, primaquine phosphate—a drug used to treat malaria—was  the fourth-highest-expenditure generic drug for DOD but was not in the  top 100 for VA. Some other excluded drugs were additional strengths of  drugs that did appear in our sample. For example, simvastatin (80 mg  tablet) was the sixth-highest-expenditure generic drug for VA but was not  in the top 100 for DOD and thus was excluded from the sample. However,  the 20 mg and 40 mg strengths of simvastatin were included in the  sample.
The drug sample was selected to include the top 50 brand-name and top  50 generic drugs; 25 of the brand-name drugs and 25 of the generic  drugs were selected on the basis of the combined DOD and VA utilization  ranks, and the other 25 brand-name and 25 generic drugs were selected  on the basis of the combined DOD and VA expenditure ranks. After  accounting for drugs that were in both the high-expenditure group and the  high-utilization group, the final sample contained 43 brand-name drugs  and 40 generic drugs and accounted for 37.0 percent of DOD utilization,  31.7 percent of DOD expenditures, 27.7 percent of VA utilization, and  34.8 percent of VA expenditures for directly purchased prescription drugs  in the first calendar quarter of 2012. (See table I for a list of the drugs in  the sample.)
After selecting the sample, we calculated average unit prices paid by  DOD and VA for all individual drugs by dividing total expenditures by total  utilization for each drug. We also calculated average unit prices for the  entire sample, the subset of brand-name drugs, and the subset of generic  drugs by dividing the total expenditures for all relevant drugs by the total  utilization of those drugs. In order to maintain the confidentiality of drug  prices, in each case we converted from absolute prices to relative prices  by assigning 100.0 to the lowest price and determining the higher price as  a percentage above the lowest price. We compared the average unit  prices obtained by DOD and VA for each drug to the Federal Supply  Schedule (FSS) and Big Four prices available to these agencies. We  interviewed DOD and VA officials about drug purchasing approaches they  use and factors affecting the prices they are able to obtain. Finally, we  determined the maximum potential savings that might have been  obtained if each agency had been able to obtain the lower of the DOD  and VA average unit prices for each of the 83 drugs in the sample. The  results of our analyses are limited to the 83 high-utilization and high- expenditure drugs in our sample for the first calendar quarter of 2012 and  are not necessarily applicable across all drugs.
section_title: Appendix II: Relative Prices Paid by DOD and VA for the 83 Drugs in the Direct Purchase Sample
paragraphs: Figure 3 shows the 55 drugs (out of 83 drugs in our sample) for which the  Department of Defense (DOD) paid a higher average unit price than the  Department of Veterans Affairs (VA) and the percentage by which the  DOD price exceeded the VA price. Figure 4 shows the 28 drugs (out of  83) for which VA paid a higher average unit price than DOD and the  percentage by which the VA price exceeded the DOD price.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: Comments from the Department of Veterans Affairs
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, key contributors to this report  were Robert Copeland, Assistant Director; Zhi Boon; Karen Howard;  Laurie Pachter; and Carmen Rivera-Lowitt.
section_title: Related GAO Products
paragraphs: DOD and VA Health Care: Medication Needs during Transitions May Not  Be Managed for All Service Members. GAO-13-26. Washington, D.C.:  November 2, 2012.  2012 Annual Report: Opportunities to Reduce Duplication, Overlap   and Fragmentation, Achieve Savings, and Enhance Revenue.   GAO-12-342SP. Washington, D.C.: February 28, 2012.
Follow-Up on 2011 Report: Status of Actions Taken to Reduce  Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance  Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012.
Opportunities to Reduce Potential Duplication in Government Programs,  Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington,  D.C.: March 1, 2011.
VA Drug Formulary: Drug Review Process Is Standardized at the National  Level, but Actions Are Needed to Ensure Timely Adjudication of  Nonformulary Drug Requests. GAO-10-776. Washington, D.C.:   August 31, 2010.
Prescription Drugs: Overview of Approaches to Control Prescription Drug  Spending in Federal Programs. GAO-09-819T. Washington, D.C.:   June 24, 2009.
Military Health Care: TRICARE Cost-Sharing Proposals Would Help  Offset Increasing Health Care Spending, but Projected Savings Are Likely  Overestimated. GAO-07-647. Washington, D.C.: May 31, 2007.
Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices  Used by Other Countries and U.S. Private Payers and Federal Programs.  GAO-07-358T. Washington, D.C.: January 11, 2007.