Mail Order Pharmacies: DOD's Use of VA's Mail Pharmacy Could Produce Savings and Other Benefits
Published: 2005-06-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: There has been long-standing congressional interest in whether the Department of Defense (DOD) could use the Department of Veterans Affairs (VA) Consolidated Mail Outpatient Pharmacy (CMOP) system as a cost-effective alternative to beneficiaries picking up outpatient refill prescriptions at DOD military treatment facilities (MTF). To evaluate this possibility, DOD and VA conducted a pilot program in fiscal year 2003 in which a VA CMOP provided outpatient pharmaceutical refill services to DOD beneficiaries served through three MTFs. GAO was asked to estimate cost savings that could be achieved if DOD used VA's CMOP instead of MTF pharmacies for outpatient refill prescriptions, and what other benefits were achieved at the three pilot sites. To estimate potential cost savings and determine what other benefits were achieved, GAO reviewed pilot and pharmacy program documentation and interviewed DOD and VA officials responsible for purchasing and dispensing drugs. GAO also compared drug and administrative costs of dispensing outpatient refills through the fiscal year 2003 pilot program with the costs of dispensing the refills at the three DOD MTFs that participated in the pilot.
section_title: What GAO Found
paragraphs: DOD could achieve savings if it used VA's CMOP to dispense its outpatient refill prescriptions by taking advantage of VA's generally lower drug prices. Based on the drugs dispensed through the pilot, GAO estimated that the three MTFs that participated in the CMOP pilot program in fiscal year 2003 could have saved about $1.39 per prescription in drug costs, or a total of about $1.5 million, if the MTFs moved all their refill prescriptions to the CMOP. However, while DOD saved money on drug costs at the pilot MTFs, these savings were offset because DOD paid administrative costs for refill operations twice--first to pay VA for the administrative costs charged by the CMOP and second to maintain outpatient pharmacy refill operations at the MTFs. Consequently, achieving savings would require closing MTF outpatient pharmacy refill operations to offset CMOP administrative expenses. In addition to demonstrating that financial savings are possible, the pilot produced nonmonetary benefits. MTF officials reported benefits such as reduced automobile traffic congestion and shorter pharmacy waiting times because many civilian beneficiaries at the pilot sites no longer came to MTFs to pick up refill prescriptions. Further, DOD beneficiaries who participated in the pilot program reported satisfaction with the CMOP's accurate and timely distribution of pharmaceuticals. There are other potential cost implications for DOD if it decides to close MTF outpatient refill pharmacies and move the workload to the VA CMOP. Because DOD beneficiaries are allowed to choose among various options for obtaining drugs, they would be able to obtain their drugs from retail pharmacies and DOD's mail order pharmacy instead of the CMOP. These options, however, are more costly for DOD than having beneficiaries obtain their drugs from the CMOP. Consequently, if DOD closes the outpatient refill pharmacies at the pilot sites with the expectation that beneficiaries would use the CMOP and they did not, DOD's costs could increase. Any cost increases will challenge DOD to find more efficient ways to manage its pharmacy benefits program, such as by encouraging beneficiaries to choose the most cost-effective options for where they obtain their drugs. We provided a draft of this report to VA and DOD for comment. VA said that it concurred with the draft report and DOD said that it was technically accurate but neither explicitly concurred nor nonconcurred.

section_title: Letter
paragraphs: In fiscal year 2004, the Department of Defense (DOD) dispensed over   100 million prescriptions to about 6 million health care beneficiaries.  These beneficiaries picked up their drugs at military treatment facilities  (MTF) or at retail pharmacies, or had them delivered through DOD’s mail  order program. About 19 million of the prescriptions were refill  prescriptions that were dispensed at MTF outpatient pharmacies. These  drugs cost DOD about $840 million. During that year, active duty military  personnel and their dependents accounted for 14 percent of MTF 30-day  outpatient refill prescriptions; 85 percent were for civilians, mainly retired  military personnel and their dependents.
While DOD dispenses most prescriptions at MTFs, the Department of  Veterans Affairs (VA) uses a different approach to dispense prescriptions  for its beneficiaries. It dispenses most of its prescriptions through a  system of seven Consolidated Mail Outpatient Pharmacies (CMOP) that  mail prescriptions to VA beneficiaries. There has been long-standing  congressional interest in whether VA’s CMOP could be a cost effective  alternative for DOD beneficiaries instead of picking up outpatient refill  prescriptions at MTFs. Due, in part, to this congressional interest, DOD  and VA conducted a pilot program during fiscal year 2003 to determine the  feasibility of using one CMOP to provide outpatient pharmacy refill  services free of charge to DOD beneficiaries who received prescriptions at  three participating MTFs. You asked us to report on the results of the pilot  program, specifically, what estimated cost savings could be achieved if  DOD used VA’s CMOP instead of MTF pharmacies for outpatient refill  prescriptions, and what other benefits were achieved at the three pilot  sites.
To estimate potential cost savings and determine what other benefits were  achieved, we reviewed pilot and pharmacy program documentation and  interviewed DOD and VA officials responsible for purchasing and  dispensing drugs, including officials from the VA CMOP located in  Leavenworth, Kansas, and each of the three DOD MTFs involved in the  pilot—Darnall Army Community Hospital, Fort Hood, Texas (Fort Hood);  the 377th Medical Group, Kirtland Air Force Base, New Mexico (Kirtland);  and the Naval Medical Center San Diego, San Diego, California (San  Diego). (See app. I for more information on our scope and methodology.)  To assess the costs of the pilot, we considered two types of costs at each  location—the costs of the drugs themselves and the administrative costs  of dispensing them. For drug costs, we compared the costs of the drugs at  the CMOP with the costs at the three MTFs. To make this comparison, we  identified 90 of the drugs with the highest total costs out of the 1,397 drugs  dispensed by the CMOP through the pilot. The 90 drugs that we included  in our comparison accounted for 65 percent of total drug costs for the  pilot program ($15.6 million), while the remaining drugs dispensed during  the pilot accounted for 35 percent of total drug costs. To compare VA’s  costs with DOD’s costs for the 90 drugs, we obtained the prices that the  CMOP and MTFs paid for the drugs in June 2004 (see app. II) and applied  these prices to the quantity of each drug dispensed during the pilot. To  estimate costs for the remaining drugs dispensed during the pilot, we  collected information on general differences in DOD and VA pricing that  applies to all drugs. We combined estimated savings from the 90 drugs in  our analysis and the remaining drugs to determine an estimate of drug cost  savings during the pilot. During the pilot program, beneficiaries chose to  have the CMOP fill a combined 47 percent of the prescription refills that  usually would have been handled at the three pilot MTFs. To estimate the  potential for savings if all prescription refills from the pilot MTFs were  dispensed by the CMOP, we multiplied the savings per prescription  estimated from the drugs dispensed through the pilot by the total number  of refill prescriptions from the three pilot MTFs in fiscal year 2003— including those dispensed through the CMOP and those dispensed at the  MTFs. For administrative costs, we collected information on the costs of  personnel, equipment, supplies, and other aspects of dispensing outpatient  refill prescriptions at the MTFs and compared them to the administrative  cost of dispensing prescriptions through the CMOP. (See app. III.) We also  compared the costs and services of the CMOP program with DOD’s mail  order program, the TRICARE Mail Order Pharmacy. (See app. IV.) To  assess the reliability of DOD and VA data, we interviewed agency officials  and tested the data for errors. We determined that the data were  sufficiently reliable for our purposes. We conducted our work from April  2004 through May 2005 in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: DOD’s beneficiaries have four options for obtaining prescription drugs.  They can pick them up directly from MTFs, network retail pharmacies, or  nonnetwork retail pharmacies. They can also receive them in the mail  through DOD’s TRICARE Mail Order Pharmacy. DOD operates 536  pharmacies at 121 of its MTFs. Each MTF may have multiple pharmacies.  For example, San Diego maintains satellite pharmacies at several locations  in addition to its main pharmacy, which has a separate section that  dispenses outpatient refill prescriptions. Fort Hood and Kirtland each  maintain a separate pharmacy to dispense outpatient refill prescriptions,  and Fort Hood maintains several satellite pharmacies at health care  clinics. In addition to pharmacies at its MTFs, DOD contracts with Express  Scripts, Inc., a private pharmacy benefits management company, to  operate DOD’s retail pharmacy program and its TRICARE Mail Order  Pharmacy. For the retail system, Express Scripts has a network of over  54,000 retail pharmacies where DOD beneficiaries can pick up  prescriptions; beneficiaries can also utilize nonnetwork pharmacies, that  is, any retail pharmacy not in Express Scripts’ network. For the TRICARE  Mail Order Pharmacy, beneficiaries submit their prescriptions to Express  Scripts, which dispenses and mails the drugs directly to the beneficiary.  Civilian beneficiaries pay copayments for drugs obtained through the mail  or at retail pharmacies, but do not pay at MTFs. (See table 1.) Active duty  service members do not pay copayments.
For most drugs, all four options are available to DOD beneficiaries  regardless of where they obtain health care services. For example, a  beneficiary can obtain a prescription from a private or military physician  and then choose to have the prescription filled at an MTF, a network or  nonnetwork retail pharmacy, or the TRICARE Mail Order Pharmacy.  However, DOD’s cost differs considerably depending on the delivery  option the beneficiary chooses. (See table 2.)
DOD’s average cost per 30-day prescription varies among the delivery  options for a number of reasons, including differences in the price of drugs  dispensed in each system, copayments, and administrative costs of  dispensing the drugs. For example, DOD does not receive federal  discounts when beneficiaries obtain drugs through retail pharmacies, so  DOD’s costs for purchases at retail pharmacies are generally higher than at  MTFs or through the TRICARE Mail Order Pharmacy. The administrative  cost of dispensing drugs is not included in the MTF costs, but according to  DOD officials, MTFs remain the least expensive of the three systems.  However, an increasing number of DOD beneficiaries have chosen in  recent years to use retail pharmacies (see fig. 1), which is DOD’s most  expensive delivery option.
As part of its pharmacy system, VA operates a mail pharmacy program, the  CMOP, which uses automated equipment to dispense and mail  prescriptions to beneficiaries. VA operates seven CMOP facilities, which  dispensed about 88 million prescriptions in fiscal year 2004. In that year,  CMOP facilities dispensed 76 percent of all VA prescriptions, including  over 95 percent of refill prescriptions. Most of the remaining prescriptions  were dispensed through pharmacies at VA’s hospitals and clinics. VA  beneficiaries generally do not have the option to obtain prescriptions at  retail pharmacies.
subsections: section_title: DOD and VA Drug Procurement Practices
paragraphs: DOD and VA have a number of drug procurement options available to  them that can result in differences in drug prices. For example, DOD and  VA have access to discounted drug prices through the federal supply  schedule (FSS). The FSS is maintained by VA’s National Acquisition  Center and is available to all federal purchasers. All FSS prices, regardless  of which federal agency purchases the drug, include a fee of 0.5 percent of  the price to fund the National Acquisition Center’s activities. DOD and VA  also have access to federal ceiling prices, which are mandated by law to be  24 percent lower than nonfederal average manufacturer prices. For some  drugs, DOD and VA negotiate, through national contracts or other  agreements, prices that are even lower than FSS or federal ceiling prices.  Generally, DOD and VA negotiate these contracts and agreements jointly,  in which case they both pay the same price for the drug. However, when  VA or DOD negotiates contracts and agreements separately, the two  agencies may pay different prices for the same drug. In a few cases,  individual VA medical centers or DOD MTFs have obtained lower prices  through local purchase agreements with manufacturers than they could  have through the national contracts, FSS, or federal ceiling prices.  Differences in DOD and VA prices can also occur when the departments  order the same drug in different package sizes or from different  manufacturers.
Two other factors account for the departments paying different prices for  the same drugs. First, both DOD and VA use prime vendors, which are  drug distributors, to purchase drugs from manufacturers and deliver them  to DOD or VA facilities. As of June 2004, VA used one prime vendor, while  DOD used five prime vendors, each one servicing different geographic  areas. Both departments receive discounts from their prime vendors that  further reduce the prices that DOD and VA pay for drugs. For DOD, the  discounts vary among prime vendors and the areas they serve. As of June  2004, VA’s prime vendor discount was 5 percent, while DOD’s discounts  averaged about 2.9 percent within the United States. Discounts from the  prime vendors serving the three pilot MTFs averaged about 3 percent.  Second, the price of drugs purchased directly by DOD facilities or the  TRICARE Mail Order Pharmacy included a 1.7 percent fee to fund the  Defense Supply Center’s activities. Figure 2 shows the various  components of DOD and VA drug prices.
section_title: Pilot Program for DOD Use of VA’s CMOP
paragraphs: During fiscal year 2003, DOD and VA conducted a pilot program to assess  the feasibility of dispensing outpatient refill prescriptions for DOD  beneficiaries using a VA CMOP. Under the program, the CMOP in  Leavenworth, Kansas, dispensed prescriptions for three DOD MTFs—Fort  Hood, Kirtland, and San Diego. Using automated phone systems for  ordering prescription refills—already in place at the three pilot MTFs— beneficiaries chose whether to have each prescription refilled at the  CMOP or at the MTF. Once a beneficiary chose the option to have the  CMOP dispense a refill, the prescription was electronically transmitted  from the MTF to the CMOP. The CMOP then purchased drugs—or used  drugs already in inventory—to dispense each prescription. The CMOP  mailed each refill prescription directly to the beneficiary. After sending the  refill prescription, the CMOP sent a report of its activity back to the MTF,  which maintained responsibility for patient care.
During the pilot program, the VA CMOP distributed only prescription  refills—no original prescriptions and no controlled substances—to DOD  beneficiaries, although the CMOP routinely dispenses them for VA  beneficiaries. The TRICARE Management Activity (TMA) paid both drug  and administrative costs of the pilot program to VA during fiscal year 2003.  DOD beneficiaries did not pay a copayment or any other charge for the  drugs they received from the CMOP, the same as if they had obtained the  drugs at an MTF.
As of April 2005, two of the three MTFs, San Diego and Kirtland, continued  to have prescriptions filled through the VA CMOP. Fort Hood ended its  CMOP participation at the end of fiscal year 2003 when TMA informed the  three MTFs that it would not fund administrative or drug costs for CMOP- dispensed drugs in fiscal year 2004. TMA later decided to pay  administrative costs, so, for fiscal year 2004, San Diego and Kirtland paid  only drug costs.
In fiscal year 2003, during the pilot program, beneficiaries chose to have  the VA CMOP fill a combined 47 percent of the prescription refills that  usually would have been handled at the three pilot site MTFs. In fiscal year  2004 at San Diego and Kirtland, the two sites that continued CMOP  participation, beneficiaries chose to have the CMOP fill a combined   65 percent of the outpatient pharmacy refill prescriptions. The remaining  outpatient refill prescriptions were dispensed by MTF pharmacies.
section_title: DOD Could Realize Financial Savings and Nonmonetary Benefits by Using VA’s CMOP
paragraphs: DOD could achieve savings by taking advantage of VA’s generally lower  drug prices if it used the VA CMOP to dispense its outpatient pharmacy  refill prescriptions. Estimated savings from the 90 drugs included in our  price comparison plus estimated savings from the other drugs dispensed in  the pilot during fiscal year 2003 total $646,000, or about $1.39 per  prescription. Additional savings would also be possible if the CMOP were  made aware of and used lower prices that DOD has negotiated for some  drugs. However, achieving savings would require closing MTF outpatient  pharmacy refill operations to offset CMOP administrative expenses. In  addition to demonstrating that financial savings are possible, the pilot  produced nonmonetary benefits such as providing high-quality service as  indicated by measurements of beneficiary satisfaction and rates of  accurate and timely distribution of drugs, reducing automobile traffic  congestion and pharmacy wait times, and freeing DOD resources for its  core mission of supporting military readiness.
subsections: section_title: DOD Can Save on Drug Costs by Using the CMOP
paragraphs: Our analysis showed that June 2004 VA CMOP drug prices were generally  lower than prices at the DOD MTFs. Based on the differences in drug  prices that existed in June 2004, we estimate that for these 90 drugs the  three pilot sites produced savings during fiscal year 2003 for DOD of about  $437,000, or about 4 percent. For these drugs, the estimated savings  averaged $2.74 per prescription. We estimated these savings by comparing  the June 2004 prices that the CMOP and DOD paid for 90 of the drugs with  the highest total costs that were dispensed at Fort Hood, Kirtland, and San  Diego by the CMOP during the fiscal year 2003 pilot program. (See app. I  for the methodology we used to select these drugs.)
These drugs comprised 65 percent of total drug costs in the pilot. We did  not obtain individual prices for the drugs that comprised the remaining   35 percent of pilot drug expenditures. Therefore, we do not know what, if  any, specific differences exist in DOD’s and VA’s prices for these drugs.  However, general differences in DOD and VA drug purchasing apply to all  the drugs. As of June 2004, VA received a 5 percent price discount from its  prime vendor, and the three pilot MTFs received price discounts averaging  3 percent from their prime vendors. In addition, DOD’s Defense Supply  Center charged a fee of 1.7 percent for MTF drug purchases. These  differences amount to VA’s drug prices being about 3.7 percent lower than  DOD’s. Applying a 3.7 percent reduction to the remaining 35 percent of  drug expenditures yields overall estimated savings of about $209,000,  which amounts to $0.69 per prescription for the drugs in the pilot that  were not included in our analysis.
We estimate that the combined savings from the 90 drugs and the other  drugs dispensed through the pilot in fiscal year 2003 total $646,000, making  VA’s total drug costs during the pilot approximately 3.9 percent less than  DOD costs, or approximately $1.39 less per prescription. If the three MTFs  had been able to achieve the same savings per prescription and had fully  utilized the pilot for all their outpatient refill prescriptions in fiscal year  2003—including those dispensed through the CMOP and those dispensed  at the MTFs—drug cost savings during fiscal year 2003 could have been  about $1.5 million.
DOD could have realized even greater savings if the VA CMOP were made  aware of and used DOD’s lower negotiated price for some drugs. About   15 percent of the prices for the 90 drugs in our price comparison were  more expensive for DOD MTFs when purchased through the VA than if  they had been acquired through DOD purchase agreements. For example,  MTFs involved in the pilot paid an average of $0.64 in June 2004 for each  30 mg capsule of lansoprazole, a drug that stops production of stomach  acid and is prescribed for conditions such as gastroesophageal reflux  disease, based on an agreement with the drug’s manufacturer. When  ordering through the CMOP, however, the pilot sites paid a higher price  for lansoprazole—$1.77 per capsule in June 2004—which was based on the  FSS price. DOD could obtain the lower prices it has negotiated, according  to CMOP officials, if the MTFs ordered these drugs through their prime  vendors at DOD prices and had them delivered to the CMOP for  distribution to DOD patients. Another way to achieve lower drug prices,  they said, would be for MTFs to obtain rebates from drug manufacturers  for the difference between the CMOP price and the lower DOD price. For  example, San Diego began to use this process in fiscal year 2004. Officials  at the MTF expect to receive rebates from drug manufacturers of over  $300,000 for drugs purchased during the first quarter of fiscal year 2005.  Based on our comparison of June 2004 drug prices for the 90 drugs in our  analysis, we estimate that if DOD’s lower prices had applied to the   15 percent of those drugs with lower prices at the MTFs than at the  CMOP—either by MTFs having the drugs delivered to the CMOP through  their prime vendors or obtaining rebates from drug manufacturers—DOD  would have saved an additional $500,000 in drug costs during fiscal year  2003.
section_title: Cost Savings Depend on Closing MTF Outpatient Refill Operations
paragraphs: Since DOD beneficiaries chose to use the VA CMOP for 47 percent of their  outpatient refill prescriptions in fiscal year 2003, the MTFs’ refill workload  was not eliminated. For example, the three MTFs dispensed about 79,000  refill prescriptions in September 2002, the month before the pilot began,  and dispensed about 37,000 prescriptions in September 2003, during the  pilot. The outpatient refill workload that remained at the MTFs required  that the MTF outpatient pharmacy refill operations remain open and  maintain personnel and equipment to dispense refills. Because most of the  MTFs’ costs of dispensing refills are for personnel and equipment,  according to officials at the three MTFs, the decreased workload did not  lead to a proportional decrease in costs.
For dispensing drugs through the VA CMOP during the pilot, DOD agreed  to pay the CMOP’s average administrative cost, which includes the cost to  mail prescriptions to beneficiaries. Because of a change in the way the  CMOP computed administrative costs in fiscal year 2003, DOD paid VA  $2.36 prior to July 2003 and $2.27 from July 2003 to the end of the fiscal  year, on average per prescription to cover these costs. These costs  include VA’s average administrative costs to fill each prescription of $1.34  prior to July 2003 and $1.24 from July 2003 to the end of the fiscal year,  plus mailing costs of $1.02 and $1.03, respectively. We estimate that DOD’s  administrative costs at the three MTFs were about $2.31 per refill  prescription—roughly equal to the administrative costs of obtaining refill  prescriptions through the CMOP and mailing them to beneficiaries.  Consequently, closing MTF outpatient pharmacy refill operations would  offset CMOP administrative expenses and yield drug cost savings for DOD  from its use of the CMOP. (See app. III for a calculation of DOD’s and  VA’s administrative cost.)
section_title: Use of CMOP Provided Nonmonetary Benefits to DOD
paragraphs: The pilot also produced nonmonetary benefits. Based on VA’s  measurements of beneficiary satisfaction and rates of prescription  accuracy and timeliness, the VA CMOP provided high-quality service to  DOD beneficiaries. However, because the pilot MTFs and the CMOP used  different methods for measuring accuracy and because DOD did not  conduct satisfaction and timeliness surveys for the three pilot MTFs, we  could not make a meaningful comparison between the two dispensing  options.
Regarding the VA CMOP’s performance for fiscal year 2003, 97 percent of  DOD beneficiaries surveyed by VA rated their overall satisfaction with the  services it provided as excellent or very good. This rate is even higher than  the 91 percent of surveyed VA patients who rated the CMOP’s  performance as excellent or very good in that year. In addition, for fiscal  year 2003, the CMOP reported that more than 99.9 percent of its  prescriptions were accurately dispensed, meaning that beneficiaries  received the correct medications in the correct amounts, with no damage  or labeling problems. Finally, the CMOP was able to deliver drugs to DOD  beneficiaries on average in 3.5 days from the time the prescription was  requested to the time it was received by the patient. To put VA’s delivery  time in some perspective, a company that has one of the country’s largest  private mail order pharmacy operations estimates that its customers  typically receive their mail order refill prescriptions in 3 to 5 days.
Another benefit, reported by DOD officials, was that use of the VA CMOP  helped reduce the number of civilians coming to military installations.  Because most prescriptions dispensed at MTFs were for civilian retirees  and their dependents (see table 3), using the CMOP to dispense some of  the prescriptions helped reduce facility overcrowding. For example, San  Diego and Fort Hood officials reported less crowding and shorter waiting  times at their MTF pharmacies during the pilot, and San Diego officials  reported less automobile traffic congestion and fewer parking shortages.  In addition, a Fort Hood official reported that after the CMOP pilot was  terminated, lines at the main pharmacy got very long and beneficiaries had  to wait 2 or more hours to have prescriptions dispensed. Moreover, these  officials told us that using the CMOP could fill a critical need during times  of heightened security because civilian beneficiaries might have difficulty  getting onto military installations to pick up their prescriptions at MTF  pharmacies.
According to DOD officials, using the VA CMOP could allow DOD  pharmacy staff to focus on DOD’s core mission of supporting military  readiness by serving the pharmacy needs of active duty members and their  dependents. They said that the pilot, to the extent that it moved civilian  workload away from MTFs, was consistent with DOD’s emphasis on  having military personnel support military readiness. If a greater  percentage of MTFs’ workload was moved to the CMOP, then MTFs could  have additional flexibility to focus on military readiness needs. In addition,  DOD officials told us that transferring the outpatient refill pharmacy  workload to the CMOP could help in other ways, such as allowing the  department more flexibility to redeploy pharmacy staff to clinical services.
section_title: Concluding Observations
paragraphs: The pilot demonstrated that DOD could achieve cost savings at very high  levels of beneficiary satisfaction by delivering drugs to beneficiaries using  the CMOP rather than MTF outpatient refill operations. Additional cost  savings could be realized if the CMOP were made aware of and used lower  prices that DOD had negotiated for some drugs. However, DOD savings  are dependent on closing the refill portion of its MTF pharmacy operations  to avoid paying MTF administrative costs for refills in addition to  administrative costs charged by the VA CMOP. While DOD’s use of the  CMOP is a significant opportunity for DOD to achieve savings and expand  its sharing of resources with VA, there are other cost implications that  could become important if MTF refill operations were closed with the  expectation that beneficiaries would use the CMOP. Specifically, rather  than obtaining drugs from the CMOP, beneficiaries might choose instead  to obtain their drugs from a more costly option for DOD, such as retail  pharmacies. Any cost increases will challenge DOD to find more efficient  ways to manage its pharmacy benefits program, such as by encouraging  beneficiaries to choose the most cost-effective options for where they  obtain their drugs.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments from DOD and VA on a draft of this report.  VA concurred with our draft report. VA stated that our report would  benefit from a discussion of market pressures that control the cost of  generic drugs. However, these pressures were reflected in our work that  focused on the lowest prices VA and DOD could secure, which included  purchasing generic drugs. VA’s written comments are reprinted in  appendix V.
DOD made an overall comment that our report was technically accurate. It  made additional comments that we address below.
One comment concerned our characterization of refunds from drug  manufacturers. During our audit work DOD pharmacy officials told us that  they expect that manufacturer refunds will cover only a small portion of  the difference in cost between retail and MTF prices, and we included this  information in our draft report. However, in its letter providing the  agency’s comments, DOD commented that this statement is inaccurate and  misleading, so we removed it from the report.
DOD also commented that the 1.7 percent fee charged on DOD drug  purchases should be considered in the context that it supports DOD’s  readiness mission. Specifically, DOD stated that reducing the amount of  drugs upon which the fee is paid would cost DOD “somewhere else” to  support the mission. We disagree, and based on our findings, we believe  that more money would be available for DOD’s use by using VA’s CMOP.  For example, drugs purchased during the pilot by VA’s CMOP were about  3.9 percent less than if they had been purchased by the MTFs.
In addition, DOD stated that it is not correct that DOD would always  realize a savings on the acquisition cost of a drug by using the VA CMOP.  We noted in the draft report that we found VA’s prices to be generally, but  not always, lower than DOD’s. We noted that in some cases drugs were  more expensive for DOD MTFs when purchased through the VA than if  they had been acquired through DOD purchase agreements, and that  additional cost savings could be realized if the CMOP used these lower  prices that DOD had negotiated for some drugs.
DOD stated that it is unlikely that it could move all refill prescriptions to  the CMOP, and asserted that GAO recommended closing all MTF refill  services and providing them only to active duty members. However, our  report makes no such recommendation. Although cost savings through the  CMOP are dependent on closing MTF outpatient pharmacy refill  operations, we noted in the draft report that MTFs could continue to  dispense outpatient refill prescriptions at MTF main pharmacies. As noted  in the draft report, in fiscal year 2003, during the pilot program, 47 percent  of the prescription refills that usually would be handled at the three pilot  MTFs were dispensed at the CMOP. In fiscal year 2004 at San Diego and  Kirtland, the two sites that continued CMOP participation, program  participation increased as the CMOP filled 65 percent of the outpatient  pharmacy refill prescriptions. Determining whether to encourage  beneficiaries to use the most cost-effective dispensing method, which  would assure that savings are achieved while continuing to provide high- quality pharmacy service to beneficiaries, is part of DOD’s responsibility to  manage its pharmacy program in a fiscally sound manner.
DOD agreed that the pilot produced other benefits, such as reducing  facility traffic congestion, but further stated that our reference to “civilian  beneficiaries” could be misinterpreted to include beneficiaries not  currently covered, and should be defined as “retiree beneficiaries.” We  believe that our use of the term “civilian beneficiaries” is appropriate  because, as DOD’s data show, 85 percent of MTF 30-day outpatient refill  prescriptions in both fiscal years 2003 and 2004 were for retirees and their  dependents, and other civilians and their dependents.
DOD also commented that patient choice as a DOD pharmacy benefit is a  lawful entitlement. According to DOD, it cannot mandate DOD  beneficiaries to utilize one option over another, and such a restriction  would require legislative action. We note, however, that DOD has taken  action to influence beneficiary behavior to choose one option over another  option, for example, by increasing copayment amounts to help it manage  the pharmacy benefit and control costs. DOD’s pharmacy benefit  regulations state that “the higher cost-share paid for prescriptions  dispensed by a non-network retail pharmacy is established to encourage  the use of the most economical venue to the government.” This type of  action demonstrates fiscal responsibility on DOD’s part while it strives to  provide cost-effective pharmacy services to its beneficiaries.
Finally, DOD stated that we assumed that current options are more costly  for DOD than having beneficiaries obtain their drugs from the CMOP, and  that this was a subjective conclusion. We based our conclusion on our  finding that the CMOP’s drug costs during the pilot were approximately   3.9 percent lower than the costs for the same drugs at the three pilot  MTFs. In addition, we found that the administrative costs for dispensing  refill prescriptions were about the same at the MTFs and at the CMOP.  And, as noted in the draft report, the CMOP’s drug costs and  administrative costs were lower than the drug and administrative costs for  DOD’s TRICARE Mail Order Pharmacy.
DOD also included technical comments that we incorporated where  appropriate. DOD’s written comments are reprinted in appendix VI.
As we agreed with your office, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days  from the date of this letter. We will then send copies to the Secretaries of  Veterans Affairs and Defense, and relevant congressional committees. We  will also make copies available upon request. In addition, the report will  be available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  on (202) 512-7101 or Michael T. Blair, Jr. on (404) 679-1944. William Simerl  and Richard Wade made key contributions to this report.
section_title: Appendix I: Scope and Methodology
paragraphs: To address our objective, we compiled information on the operations of  the Department of Defense (DOD) and the Department of Veterans Affairs  (VA) Consolidated Mail Outpatient Pharmacy (CMOP) pilot program, and  we compared the costs of purchasing and dispensing drugs at the CMOP  that dispensed drugs for the pilot with the costs at the pilot military  treatment facilities (MTF).
To compile information on the pilot program and on related aspects of  DOD’s and VA’s pharmacy programs, we conducted site visits, reviewed  program documentation, and interviewed DOD and VA officials  responsible for purchasing and dispensing drugs. We interviewed or  collected documentation from    officials at the VA CMOP involved in the pilot located in Leavenworth,  Kansas, including the national CMOP director;    officials at each of the three DOD MTFs involved in the pilot—Darnall  Army Community Hospital, Fort Hood, Texas (Fort Hood); the 377th  Medical Group, Kirtland Air Force Base, New Mexico (Kirtland); and the  Naval Medical Center San Diego, San Diego, California (San Diego);    DOD pharmacy officials, including the director of DOD pharmacy  programs and pharmacy officials for the Air Force, Army, and Navy;    officials at DOD’s Pharmacoeconomic Center; and    officials at VA’s National Acquisition Center and DOD’s Defense Supply  Center, responsible for procurement of drugs.
To compare the drug costs at the VA CMOP and the participating MTFs,  we selected 90 of the drugs with the highest total expenditures dispensed  through the pilot during fiscal year 2003. These 90 drugs, due to high  volume, high unit cost, or both, comprised about 65 percent of total drug  costs for the pilot. To select drugs for our analysis, we first identified the  100 drugs with the highest total expenditures dispensed through the pilot  in fiscal year 2003. We then obtained available price information for June  2004 purchases of these drugs at the CMOP in Leavenworth, Kansas and  the three MTFs that participated in the pilot. We used June 2004 prices for  each drug because DOD and VA officials told us that June 2004 data were  the most reliable data available. According to the officials, because drugs  can have many different prices throughout the year, obtaining DOD prices  that can be accurately compared to the full range of prices that VA paid for  drugs throughout fiscal year 2003 was not feasible.
We evaluated the quality of the drug pricing data by checking for missing  and inconsistent values and interviewing agency officials, including those  from VA’s CMOP, VA’s National Acquisition Center, DOD’s  Pharmacoeconomic Center, and DOD’s Defense Supply Center. Based on  these interviews and on documentation obtained from the officials, we  considered differences between DOD and VA drug prices caused by  separate pricing agreements, differences in prime vendor discounts,  differences in fees to fund drug procurement, differences in drug package  sizes, and, for some drugs, differences in manufacturers.
We eliminated drugs from our analysis in cases where differences in the  prices for them at the various locations could not be explained by these  factors, in cases where DOD officials believed the drug pricing to be  erroneous, or in cases where June 2004 drug pricing was unavailable. After  eliminating these drugs, 90 of our original 100 drugs remained. We also  adjusted for differences in DOD and VA unit measurements to ensure that  the unit prices were comparable to each other.
We estimated VA CMOP drug costs during fiscal year 2003 for each of the  90 drugs by multiplying the CMOP’s June 2004 unit price by the number of  units dispensed by the CMOP for each MTF during fiscal year 2003. Using  the same method for costs at the three MTFs—multiplying MTF June 2004  unit prices by the number of units dispensed by the CMOP for each MTF  during fiscal year 2003—we estimated the amount that the three DOD  MTFs would have spent on the same drugs. The difference between VA’s  and DOD’s total estimated costs for the 90 drugs during fiscal year 2003 is  our estimate of savings for these drugs during the pilot. In cases where no  units of a drug were ordered through the pilot by an MTF during fiscal  year 2003, the price of that drug at that location was not included in our  comparison.
We did not obtain individual prices for the drugs that comprise the  remaining 35 percent of pilot drug expenditures. Therefore, we do not  know what, if any, differences exist in the VA’s and DOD’s prices for these  drugs. For these drugs, we estimated differences in drug prices as of June  2004 based on differences in prime vendor discounts and the fee charged  by DOD’s Defense Supply Center, which are general differences in DOD  and VA drug pricing that apply to all drugs.
To compare the administrative costs of dispensing refill prescriptions at  the CMOP with the costs at MTFs participating in the pilot, we collected  cost information from program officials and evaluated it to ensure that it  was comparable to the costs from the other sites. Although DOD generally  does not separate information on MTF administrative costs, we were able  to obtain this information for refill prescriptions at the three MTFs. Our  cost comparison included the costs of personnel, equipment, supplies,  space, utilities, and other aspects of refill operations. Although precise  cost information was not always available, we reviewed the information  and interviewed officials at each site to determine that it was sufficiently  reliable for the purposes of our cost comparison.
Because moving refill workload to the CMOP without decreasing fixed  costs could inflate the average MTF administrative cost per prescription,  we used the best available information to estimate the per prescription  administrative costs for dispensing refill prescriptions at the three DOD  MTFs as if the CMOP pilot did not exist. For Fort Hood, we obtained  information on administrative costs for calendar year 2004 after officials  had discontinued use of the CMOP and reorganized the outpatient refill  pharmacy to separate it from the main pharmacy in January 2004. For  Kirtland, we obtained cost information for fiscal year 2003. Although the  pilot was operating during this time, Kirtland officials indicated that they  had not changed any fixed costs, such as personnel or equipment, due to  the pilot. To estimate the number of refill prescriptions that the Kirtland  pharmacy would have filled if the CMOP pilot had not been operating, we  added the number of outpatient refill prescriptions filled through the  CMOP for Kirtland beneficiaries to the number of outpatient refill  prescriptions dispensed at the Kirtland pharmacy. Because the operating  costs for Kirtland were incurred while the number of MTF prescriptions  was lower due to the CMOP operation, we had to adjust the variable costs  to correspond with the higher number of prescriptions that the MTF would  have dispensed without the CMOP. Therefore, we used the total number of  outpatient refill prescriptions that the Kirtland pharmacy would have filled  if the CMOP pilot had not been operating to estimate variable costs, such  as bottles, labels, and other supplies. We also used this total number of  prescriptions when determining the overall average cost of dispensing  refill prescriptions at the MTFs. San Diego has been participating in the  CMOP program since the start of fiscal year 2003, and has made changes  to its pharmacy operations, such as changes to staffing, due to CMOP use.  To estimate the cost of refill prescriptions without influence from the  CMOP pilot, San Diego officials provided us with information on costs and  the number of refill prescriptions from fiscal year 2002, before the pilot  began operation. Appendix III contains the information we obtained from  the pilot sites and VA to estimate MTF and CMOP administrative costs.
To compare the VA CMOP with DOD’s TRICARE Mail Order Pharmacy, we  interviewed or obtained documentation from officials at VA’s CMOP; VA’s  National Acquisition Center; DOD’s Defense Supply Center; DOD’s  Pharmacoeconomic Center; and the TRICARE Mail Order Pharmacy  contractor, Express Scripts, Inc. To compare drug costs between the  CMOP and the TRICARE Mail Order Pharmacy, we selected the 100 drugs  with the highest total costs dispensed during the first year of the TRICARE  Mail Order Pharmacy program (March 2003-February 2004). Next, we  obtained June 2004 prices for these drugs for the CMOP and the TRICARE  Mail Order Pharmacy. We used June 2004 prices for each drug to ensure  comparability since drug prices can vary significantly over time, and  because DOD and VA officials told us that June 2004 data were the most  reliable data available. We eliminated 11 drugs from our comparison  because prices were unavailable or due to inconsistencies in the data that  we could not explain. We compared prices for each of the remaining 89  drugs, adjusting for differences in VA’s and DOD’s drug data, such as unit  measurement differences. To estimate annual cost differences for the  drugs in our comparison, we multiplied the June 2004 DOD and VA unit  prices by the number of units ordered for each drug during the first year of  the TRICARE Mail Order Pharmacy program, from March 2003 to  February 2004.
We conducted our work from April 2004 through May 2005 in accordance  with generally accepted government auditing standards.
section_title: Appendix II: Average Drug Prices Included in Cost Comparison, June 2004
section_title: Appendix III: Components of Administrative Costs
section_title: Appendix IV: Services and Costs of VA’s CMOP and DOD’s TRICARE Mail Order Pharmacy
paragraphs: DOD TRICARE Mail Order Pharmacy  Express Scripts, Inc.
Under VA’s system, the CMOP shares  responsibility for pharmacy services with VA  medical centers.
Under DOD’s system, the TRICARE Mail Order  Pharmacy handles the entire prescription-filling  process, separate from pharmacies in DOD’s  military treatment facilities.
The CMOP dispenses and mails prescriptions.  VA medical centers provide other services, such  as verifying patients’ eligibility, providing  customer service, or contacting providers and  patients when necessary.
In addition to dispensing and mailing  prescriptions, the TRICARE Mail Order  Pharmacy conducts activities such as verifying  patients’ eligibility in DOD’s computer system,  providing customer service, contacting providers  or patients for additional information when  necessary, and converting paper prescriptions to  electronic format.
77,876,597 (fiscal year 2003)
5,472,583 (March 2003 through February 2004)
87,968,560 (fiscal year 2004)  $2.24 per prescription (fiscal year 2003)  $2.35 per prescription (fiscal year 2004) $10.66 which included $10.20 per prescription  and an average of $0.46 per prescription for  customer service incentives (March 2003 through  February 2004).
For VA patients, $7 for up to 30 day supply. $3 generic; $9 brand for up to 90 day supply.
DOD beneficiaries did not pay a copayment or  any other charge for the drugs they received  from the CMOP, the same as if they had  obtained the drugs at an MTF.
Active duty service members do not pay  copayments. DOD has established a new  copayment of $22 per prescription for drugs  designated “non-formulary.” As of April 27, 2005,  DOD had designated three non-formulary drugs  that are subject to the copayment.
VA does not charge copayments for medications  to treat service-connected conditions, nor does it  assign copayments to veterans with service- connected conditions rated 50 percent disabling  or greater.
VA’s fiscal year 2003 customer satisfaction  surveys indicated that 92 percent of all  beneficiaries who responded rated the CMOP’s  services as excellent or very good.
In the same surveys, 97 percent of DOD  beneficiaries who responded rated the CMOP’s  services as excellent or very good.
DOD conducted four surveys of TRICARE Mail  Order Pharmacy beneficiaries for the period of  March 2003 through February 2004. TRICARE  Mail Order Pharmacy program satisfaction rates  for beneficiaries who responded ranged from   87 percent in the first of the surveys to   97 percent in the most recent of the four surveys.
VA reports that the CMOP accuracy rate  exceeded 99.9 percent for fiscal year 2003.
Express Scripts reports that the TRICARE Mail  Order Pharmacy accuracy rate exceeded 99.9  percent for the period from March 2003 through  February 2004.
To estimate drug prices for the two programs, we selected the 100 drugs with the highest total costs  dispensed during the first year of the TRICARE Mail Order Pharmacy (March 2003-February 2004).  Next, we obtained June 2004 prices for these drugs for the CMOP and the TRICARE Mail Order  Pharmacy. We eliminated 11 drugs from our comparison because prices were unavailable or due to  inconsistencies in the data that we could not explain. For each of the remaining 89 drugs, we  adjusted for differences in DOD’s and VA’s drug data, such as unit measurement differences. To  estimate annual costs for the drugs in our comparison, we multiplied the June 2004 DOD and VA unit  prices by the number of units ordered for each drug during the first year of the TRICARE Mail Order  Pharmacy, from March 2003 to February 2004. For more information on our scope and methodology,  see app. I. CMOP and TRICARE Mail Order Pharmacy drug prices can differ for a number of  reasons, including separate contracts or other agreements with manufacturers, different prime vendor  discounts negotiated by DOD and VA, and different DOD and VA fees for procuring drugs.
section_title: Appendix V: Comments from the Department of Veterans Affairs
section_title: Appendix VI: Comments from the Department of Defense