VA and Defense Health Care: Potential Exists for Savings through Joint Purchasing of Medical and Surgical Supplies
Published: 2002-06-26T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Department of Veterans Affairs (VA) spent $500 million and the Department of Defense (DOD) spent $240 million for medical and surgical supplies in fiscal year 2001. Since the 1980s, To achieve greater efficiencies through improved acquisition processes and increased sharing of medical resources, VA and DOD signed a memorandum of agreement in 1999 to combine their buying power. VA and DOD saved $170 in 2001 by jointly procuring pharmaceuticals, by agreeing on particular drugs to be purchased, and contracting with the manufacturers for discounts based on their combined larger volume. VA and DOD have not awarded joint national contracts for medical and surgical supplies as envisioned by their memorandum of agreement, and it is unlikely that the two departments will have joint national contracts for supplies anytime soon. However, a few VA and DOD facilities have yielded modest savings through local joint contracting agreements. The lack of progress have made in jointly contracting for medical and surgical supplies has, in part, been the result of their different approaches to standardizing medical and surgical supplies. Other impediments to joint purchasing have been incomplete procurement data and the inability to identify similar high-volume, high-dollar purchases.

section_title: Letter
paragraphs: I am pleased to be here today to discuss an important component of the  Department of Veterans Affairs’ (VA) business practices—purchasing  medical and surgical supplies—and its efforts to jointly procure them with  the Department of Defense (DOD). In fiscal year 2001, VA spent about  $500 million and DOD spent about $240 million for these supplies. Since  the early 1980s, the Congress has urged VA and DOD to achieve greater  efficiencies through improved acquisition processes and increased sharing  of medical resources. In June 1999, VA and DOD signed a memorandum of  agreement to combine their buying power and achieve lower medical  supply costs and eliminate contracting redundancies for certain items,  including pharmaceuticals and medical and surgical supplies.
Last year we reported that VA and DOD saved over $170 million annually  by jointly procuring pharmaceuticals. VA and DOD achieved these savings  by agreeing on—or “standardizing”—particular drugs that their facilities  would purchase and then contracting with the manufacturers of these  drugs for discounts based on their combined larger volume. As a follow-up  to that study, you requested that we provide information on VA and DOD’s  progress in jointly procuring medical and surgical supplies. VA and DOD  purchase approximately 200,000 different medical and surgical supplies.  Some commonly used supplies include gloves, masks, surgical tape,  needles, and syringes. Many medical and surgical supplies are  disposable—that is, one-time use items.
My testimony today focuses on (1) the status of VA and DOD’s efforts to  jointly contract nationally for medical and surgical supplies, including  actual and potential savings from collaboration, and (2) factors that  impede their efforts for joint contracting. To examine these issues, we  conducted site visits at VA and DOD headquarters and at eight of their  medical facilities. We also reviewed studies, documents, and current  literature relating to standardization, unique identifiers for medical and  surgical supplies, and joint contracting. In addition, we compared and  analyzed data from current VA and DOD contracts for medical and  surgical supplies and conducted numerous interviews with VA and DOD  officials. Our work was conducted from January 2002 through June 2002 in  accordance with generally accepted government auditing standards.
In summary, VA and DOD have not awarded joint national contracts for  medical and surgical supplies as envisioned in their memorandum of  agreement, and it is unlikely that the two departments will have joint  national contracts for supplies anytime soon. However, a few VA and DOD  facilities have yielded modest savings through local joint contracting  agreements. VA’s and DOD’s procurement efforts have focused on  contracting separately—VA on a national basis and DOD on a regional  basis. VA’s and DOD’s current separate contracts are expected to save  about $19 million annually. Our analysis of about 100 identical medical and  surgical items that VA and DOD now contract for separately indicates that  jointly purchasing these items will yield additional savings, although we  were unable to quantify the full potential. For example, in fiscal year 2001,  if VA had collaborated with DOD and obtained a discounted price from  one of DOD’s regions for needle and syringe disposal containers, VA could  have saved tens of thousands of dollars on this one item alone. Similarly,  DOD could have realized additional savings if it had obtained VA’s lower  national contract price on one type of intravenous tubing.
The lack of progress VA and DOD have made in jointly contracting for  medical and surgical supplies has, in part, been the result of their different  approaches to standardizing medical and surgical supplies. These differing  approaches—VA’s national approach of selecting specific items for all its  facilities to purchase and DOD’s regional approach that allows each of  nine geographic regions to individually standardize specific items— increase the possibility that VA and DOD regions could select and  standardize different items for purchase and thereby minimize the  opportunities for national joint procurements. Other impediments to joint  purchasing have been incomplete VA and DOD procurement data and the  lack of a means for identifying similar high-volume, high-dollar purchases.  Because of these shortcomings, it is difficult for VA and DOD to identify  items that would produce the greatest benefits from standardization  within—let alone between—their departments. The Secretary of Veterans  Affairs recently approved a procurement reform initiative to address these  impediments. If implemented, this initiative would increase the likelihood  that VA could procure medical and surgical supplies more economically  and put it in a better position to identify and enter into joint procurements  with DOD. In addition, VA and DOD are making improvements to their  automated information systems, which should enhance their ability to  identify items for standardization. However, neither VA nor DOD could  confirm that their enhanced systems will contain compatible data that will  allow the two departments to readily exchange procurement  information—a key capability for facilitating standardization and joint  procurement.
subsections: section_title: Background
paragraphs: VA operates one of the world’s largest health care systems, spending about  $21 billion a year to provide approximately 3.8 million veterans health care  through 163 VA hospitals and over 800 outpatient clinics nationwide. DOD  spends about $19 billion on health care for over 5.8 million beneficiaries,  including active duty personnel and military retirees and their dependents.  Most DOD health care is provided at the more than 500 Army, Navy, and  Air Force hospitals and other military treatment facilities worldwide.
VA and DOD have separate systems for procuring and distributing medical  and surgical supplies. VA purchases supplies through the Federal Supply  Schedule (FSS), which is maintained by VA’s National Acquisition Center  in Hines, Illinois, and is available to all federal purchasers. VA validates a  sample of FSS prices to ensure that they are no more than the prices  manufacturers charge their most-favored, nonfederal customers. Once  FSS prices are established, VA manually analyzes its procurement history  to identify like items, such as gauze bandages, for which it could  potentially standardize and negotiate blanket purchase agreements (BPA)  and national contracts directly with vendors (manufacturers or  distributors) for a larger discount based on volume purchasing. After like  items are identified, a team of clinicians—including doctors, technicians,  and nurses—assesses the products for quality and agrees on a specific  item or items that are acceptable for use by all VA hospitals. Acquisition  officials then negotiate BPAs with the vendors of the chosen products to  obtain lower prices. Once BPAs are established, VA facilities are required  to purchase the items from the selected vendors. If medical and surgical  supplies are not available through BPAs, VA medical facilities have the  option of purchasing supplies from FSS, locally, or on the open market  directly from manufacturers. Recently, VA began monitoring facility  compliance with national BPAs.
DOD purchases medical and surgical supplies through Distribution and  Pricing Agreements (DAPA), which are negotiated and maintained by the  Defense Supply Center in Philadelphia, Pennsylvania. DOD also allows its  regions to individually standardize medical and surgical items and  negotiate their own regional incentive agreements (RIA) to obtain larger  discounts on certain high-volume, high-dollar medical and surgical items.  Teams of military and contractor personnel in each region identify items  for standardization. As in VA’s process, clinicians then assess and select  items to standardize. Finally, the teams negotiate regional price discounts  with the vendors. DOD facilities are required to buy from certain vendors  to take advantage of DAPA pricing or, if a better price has been negotiated,  through RIAs. If items are not available through DAPA or RIAs, facilities  can purchase items locally or directly from manufacturers.
Over the past 2 decades, the Congress has urged VA and DOD to maximize  efficient use of federal dollars by sharing their health care resources. In  May 1982, the Congress passed the VA and DOD Health Resources Sharing  and Emergency Operations Act, which encouraged the two departments  to enter into health resources sharing agreements. After the Congressional  Commission on Servicemembers and Veterans Transition Assistance  issued its 1999 report calling for VA and DOD to combine their market  power, the Congress passed the Veterans Millennium Health Care and  Benefits Act, which required VA and DOD to report on their joint  pharmaceutical and medical supplies procurement activities.
section_title: VA and DOD Have Not Awarded Joint National Contracts; Potential Savings Exist
paragraphs: VA and DOD have not awarded national joint procurement contracts for  medical and surgical supplies, and none appear likely in the near future.  While a few VA and DOD facilities have obtained modest savings through  local joint contracting agreements, we identified some additional joint  procurement opportunities that have the potential to increase VA’s and  DOD’s savings. Since their 1999 memorandum of agreement, VA’s and  DOD’s procurement efforts have focused on separately contracting for  standardized medical and surgical supplies. Their separate national and  regional contracts are expected to save a total of about $19 million  annually.
VA and DOD’s joint procurement efforts for medical and surgical supplies  have been limited to the local level. In May 2000, we reported that six VA  and seven DOD facilities had joint purchasing agreements for certain  medical supplies, realizing modest savings. Under one local contract,  some VA and DOD facilities in Virginia and North Carolina negotiated  discounts with a manufacturer for chemistry test slides; these VA and DOD  facilities reported savings of $358,000 and $301,000, respectively.  Subsequently, VA and DOD facilities in another region joined the contract  for additional savings of slightly over $1 million.
Currently, VA has about 150 national BPAs—most of which were awarded  in 2000—covering over 1,900 individual medical and surgical items such as  examination gloves, surgical face masks, and tongue depressors. VA  estimates that it saves about $13 million annually through these national  BPAs. DOD has 53 RIAs—most awarded in 2002—for items such as  surgical tape, needles, and syringes. The department expects to save  about $6 million annually through these agreements. The combined  savings of about $19 million are about 22 percent less than the $88 million  the two departments would have spent had the RIAs and national BPAs  not been negotiated and are indicative of the savings potential that exists.
However, additional savings can be achieved through VA and DOD  collaboration. By comparing DOD’s RIA data from one geographic region  to VA’s national BPA data, we identified about 100 identical medical and  surgical items that are procured by both VA and DOD. For most of these  items, the price difference was less than 4 percent. However, for 19 of the  items, the cost differentials range from 4 to 43 percent, with DOD  generally paying more than VA. For 14 of these items, VA negotiated lower  prices with the manufacturer than DOD (see table 1); for 5 others, DOD  negotiated lower prices (see table 2). For example, for a large bore  intravenous extension set used for quickly delivering fluids or blood,  DOD’s negotiated unit price per case is $179—43 percent more than VA’s  negotiated unit price of $102. For borderless dressings, which are used to  treat serious wounds, DOD’s negotiated case price of $90 is 36 percent  lower than VA’s negotiated case price of $141. Purchasing the items from  the vendors offering the lowest price will yield additional savings for both  departments. For example, in fiscal year 2001, VA could have saved over  $52,000 on one item alone—8-gallon sharps containers for disposing of  used syringes—if it had collaborated with DOD and obtained its regional  price. In that same year, DOD could have saved about $200,000 on  intravenous pumps and tubing accessories if it had collaborated with VA  and obtained VA’s lower national BPA prices. While the item-by-item  savings may be relatively small, the cumulative effect of joint purchasing  thousands of items can be significant.
section_title: Impediments to Joint Procurement
paragraphs: The lack of progress VA and DOD have made in jointly contracting for  medical and surgical supplies has, in part, been the result of their different  standardization approaches—national versus regional. Other impediments  to joint purchasing have been incomplete procurement data and the lack  of a means for each department to identify similar high-volume, high-dollar  purchases. Because of these shortcomings, it is not only difficult for VA  and DOD to identify items that should be standardized within their  departments but between their departments as well. VA is considering  improvements to its acquisition policies and is designing an enhanced  automated information system. These improvements are intended to  minimize local purchases, accelerate identification of items for  standardization, and create greater purchasing power, placing it in a better  position to jointly purchase with DOD. For its part, DOD is implementing a  new automated information system, which is intended to enhance its  ability to identify items for standardization. However, according to  officials from both departments, it is uncertain whether data from the new  systems will be compatible. Such capability would assist both departments  in identifying joint procurement opportunities.
subsections: section_title: Different Approaches to Standardization Limit Potential for Joint National Contracts
paragraphs: While VA and DOD have both begun to independently standardize medical  and surgical supplies for their facilities, VA has standardized nationally  and DOD has standardized regionally. According to a DOD official, DOD  has made several attempts at national standardization but has been unable  to do so. The official said that the primary reason was because DOD was  unable to gain widespread clinician acceptance across all its medical  facilities. DOD officials consider the regional approach more feasible for  standardizing medical and surgical supplies because it would be easier to  gain acceptance among smaller groups of clinicians. However, this  approach limits the prospects for jointly procuring with VA because it  increases the possibility that different medical and surgical items will be  standardized within DOD regions. For example, while eight of the nine  DOD geographic regions individually standardized and contracted for  needles and syringes from the same vendor, six of the nine geographic  regions standardized on surgical gloves from five different vendors.
section_title: Incomplete Procurement Data and Lack of a Means for Identifying Similar Items Complicate Standardization
paragraphs: VA and DOD acknowledge that standardizing medical and surgical  supplies is a critical step toward achieving joint procurement. However,  identifying and standardizing like items has been a cumbersome and time- consuming process for VA and DOD because they lack complete data on  their medical and surgical supply procurements. In addition, they lack  unique item identifiers that would make recognizing similar items easier.
Complete data on all medical and surgical supplies purchased by their  facilities would enable VA and DOD to more readily identify prospective  items for standardization and joint purchasing opportunities. While VA has  multiple information systems and databases that provide procurement  information, the systems do not have the capability to provide a  systemwide list of its top high-volume, high-dollar medical and surgical  items purchased by all VA facilities. Instead, VA only has quantity and  price information on items purchased from its national BPAs. DOD also  does not have information on the top medical and surgical items  purchased by its facilities because its systems do not capture information  on purchases that individual facilities make locally or directly from  manufacturers.
In addition to lacking complete data, VA and DOD face a difficult task in  identifying like items because not all medical and surgical supplies have  universal product numbers (UPN) or similar coding. Industry estimates  show that from 40 to 80 percent of medical and surgical supplies have  UPNs depending on the unit of packaging—individual items, cases, or  pallets. A product’s UPN and associated bar code identify characteristics  such as the manufacturer, product type, size, and unit of packaging (for  example, 10 per carton). As such, UPNs not only facilitate standardization  but also enable purchasers of medical and surgical supplies to develop  standard product groups, track prices, and employ prudent purchasing  methods—paying for medical and surgical supplies that meet quality  standards at competitive prices.
Without UPNs or another identification system, VA and DOD must pull  information from various sources—including ad hoc acquisition reports  and multiple databases—to identify like items. For example, to identify the  types of surgical gloves used at VA facilities, staff working on the  procurement reform initiative had to manually look at item descriptions in  various databases. For this one item, VA identified more than 12 different  product names, including sterile gloves, surgeon’s gloves, and orthopedic  gloves. Stock number identifiers were also inconsistent because each  facility has the option of using the manufacturers’ stock numbers or  various distributors’ stock numbers. With a dozen product names and a  proliferation of stock numbers, this one item—surgical gloves—could  appear in VA’s acquisition system as numerous separate items.
The manufacturing and distribution industry has been reluctant to adopt  more UPNs for medical and surgical supplies. The industry contends it is  too costly and there is a lack of demand from purchasers. To address the  cost concerns, VA is in the process of performing an economic analysis to  determine the cost and benefits of requiring vendors to include UPNs and  associated bar codes for all medical and surgical supplies on FSS.  Concerning demand, however, purchasers have presented a different  perspective from that held by the manufacturing and distribution industry.  For example, the Healthcare EDI Coalition—which represents 20 major  health care buying groups, including VA and DOD—endorsed the use of  UPNs for medical and surgical items in February 1998. At that time, this  group represented over 90 percent of all health care group contract  purchases in the nation. In June 2000, a group of four health care  purchasing groups, with annual purchases of over $38 billion and whose  membership includes more than 5,800 health care facilities, teamed with  three e-commerce companies to endorse UPNs for medical supplies.  According to a VA official, one of the largest group purchasing  organizations (GPO) for health care products, which represents over  1,800 nonprofit hospitals and health systems and about $14 billion in  annual purchases, recently began an effort to require UPNs for all medical  and surgical items purchased through its organization—an initiative we  believe is consistent with best business practices. In 1998, we  recommended that the Administrator of the Health Care Financing  Administration, now the Centers for Medicare and Medicaid Services,  require suppliers to identify the specific medical equipment, supplies, and  devices they bill to Medicare by including UPNs on their Medicare claims.
section_title: Some Impediments Beginning to Be Addressed, but Impact on Joint Procurement Unclear
paragraphs: VA is considering how to implement improvements to its acquisition  policies. These improvements are intended to minimize local purchases,  accelerate standardization, and create greater purchasing power. If  implemented, the improvements will place the department in a better  position to jointly purchase with DOD. VA and DOD are also making  improvements to their automated information systems. However, it is  uncertain whether data from the new systems will be compatible. Such  capability would assist both departments in identifying joint procurement  opportunities.
In May 2002, VA’s Procurement Reform Task Force issued its report on  improving the efficiency and effectiveness of VA’s acquisition system,  which included 65 recommendations. Recognizing that standardizing  medical and surgical supplies is critical to achieving cost savings, the task  force recommended that VA establish a contract purchasing hierarchy that  would require its facilities to purchase supplies first from national BPAs;  then multiregional, regional, or local BPAs; and then from FSS. Only when  items are not available from these sources can facilities enter into local  agreements or purchase them directly from the manufacturers. This  recommendation is timely because VA recently estimated that from 30 to  35 percent of facilities’ purchases are not from BPA contracts. To further  enhance VA national standardization, the task force also recommended  that VA continue standardizing medical and surgical products to obtain  maximum benefits by focusing on high-volume, high-dollar medical and  surgical items.
Regarding UPNs, the task force recommended that VA take a leadership  position in advocating their use as a way to improve quality, increase  safety, and enhance cost-effectiveness of medical and surgical supply  purchases. Currently, VA is in the process of preparing a cost-benefit  analysis for the Office of Management and Budget (OMB) to support a  regulation that would require vendors to include UPNs and associated bar  codes on all items sold on FSS. DOD officials stated that DOD has been a  long-time supporter of the requirement that vendors include UPNs and  plans to participate with VA in discussing the rulemaking initiative with  OMB. Until UPNs are established, the task force recommended that VA  assign a unique identifier to each medical and surgical product purchased.
Finally, the task force recommended that VA intensify its ongoing  initiatives to identify and create opportunities for joint VA and DOD  purchasing to achieve lower medical material costs by combining the  purchasing power of the two departments and eliminating contracting  redundancies. The task force report did not specify how to achieve this,  given VA’s and DOD’s different approaches to standardization. However,  joint purchasing could partially be achieved by the task force’s  recommendation that VA include in its national BPAs a clause allowing  DOD facilities or regions to purchase medical and surgical supplies from  VA’s BPAs and create tiered pricing to provide additional discounts as  more items are purchased. A DOD official stated that the department  would not require but would support any initiative by its nine geographic  regions to take advantage of lower medical and surgical supply item  pricing that may be available through VA’s national BPAs.
In addition to considering implementation of the task force’s  recommendations, VA is in the process of designing an enhanced  automated information system—the CORE Financial Logistics System.  Similarly, DOD is implementing its enhanced automated information  system—the Defense Medical Logistics Supply System. VA and DOD  officials stated that their improved systems will provide information on all  medical and surgical items purchased, including local and high-dollar,  high-volume purchases. However, because each department is developing  its system independently, neither could assure us that the enhanced  systems will contain compatible information that could be compared  between the two departments. Without such a capability, it will be more  difficult for VA and DOD to routinely exchange information on medical  and surgical standardization efforts and identify additional opportunities  for joint procurement.
section_title: Concluding Observations
paragraphs: While it is difficult to quantify the potential savings joint contracting could  yield, these savings could be meaningful given that VA’s and DOD’s  separate approaches to procuring surgical and medical supplies have  yielded an estimated $19 million annually in savings. However, much  needs to be done to take advantage of additional savings opportunities. At  this point, neither department has accurate, reliable, and comprehensive  procurement information—a basic requirement for identifying potential  medical and surgical items to standardize. Furthermore, because DOD has  opted to follow a regional rather than a national approach to  standardization, opportunities for national joint procurement will be more  difficult to achieve. Within VA, its Procurement Reform Task Force  highlighted many department procurement shortcomings and potential  solutions. Continued management attention and commitment to  implementing the task force’s recommendations is a positive step to  improving the efficiency and effectiveness of VA’s acquisition system.  DOD is currently implementing a new procurement system and has been a  long time supporter of efforts to establish UPNs for medical and surgical  supplies. However, the future of joint VA and DOD procurement initiatives  depends on the progress and success each department has in improving its  acquisition system and, ultimately, each department’s commitment to joint  procurement.
Mr. Chairman, this concludes my prepared statement. I will be happy to  answer any questions you or other members of the subcommittee may  have.