Contract Management: Further Efforts Needed to Sustain VA's Progress in Purchasing Medical Products and Services
Published: 2004-06-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Veterans Affairs (VA) provides healthcare to millions of veterans at VA's medical centers and healthcare facilities across the country. To support veterans, VA manages a Federal Supply Schedule (FSS) program and a national contract program. Both use VA's sizeable buying power to provide VA and other federal agencies discounts on medical products and services. To cover its costs in running the FSS program, VA charges its customers a user fee. Although sales through VA's FSS and national contracts totaled almost $7 billion in fiscal year 2003, concerns have been raised about the efficiency of these contract programs. GAO was asked to determine whether the FSS and national contracts have provided medical products at favorable prices and to identify opportunities to improve purchasing practices and increase savings. GAO was also asked to determine if VA's user fee is sufficient to cover program cost.
section_title: What GAO Found
paragraphs: The more than 1,200 FSS and 330 national contracts that VA has awarded have resulted in more competitive prices and have yielded substantial savings. VA has achieved these favorable prices and savings, in part, by exercising its audit rights and access to contractor data to pursue best prices aggressively for medical supplies and services. For example, pre-award audits of vendors' contract proposals and post-award audits of vendors' contract actions resulted in savings of about $240 million during fiscal years 1999 to 2003. VA has also taken steps to further leverage its buying power on widely used healthcare items--such as pharmaceuticals and high-tech medical equipment--through its national contracts. According to VA, its national pharmaceutical contracts have led to a cost avoidance of $394 million in fiscal year 2003. However, VA has not taken the same aggressive approach to negotiate more competitive prices for healthcare services, such as radiology. In fiscal year 2003, healthcare services totaled about $1.7 billion, yet VA facilities only purchased about $66 million through VA FSS contracts. Instead, most medical healthcare services are purchased through contracts that individual VA medical centers have negotiated, a process that may not provide the most favorable prices. VA could also realize additional savings through improved medical center purchasing practices. Despite increases in medical centers' FSS purchases--which more than doubled between fiscal years 1999 and 2003--medical centers have not always taken advantage of the best prices available through VA's contracts. For example, in fiscal year 2001, a VA Inspector General (IG) report stated that VA medical centers frequently purchased healthcare products from local sources, instead of from available FSS contracts. Although VA has since implemented policies and procedures that generally require its medical centers to purchase medical products and services through VA's contract programs, a more recent VA IG report found that medical centers continued to make purchases from local suppliers. The VA IG estimated that, with improved procurement practices at medical centers, VA could save about $1.4 billion over 5 years. However, ensuring VA medical centers comply with VA's purchasing policies and procedures will be a challenge for VA, in part, because its monitoring of purchases lacks adequate rigor. The user fee that VA collects on FSS purchases--0.5 percent of sales--is expected to approximate the program costs. VA, however, does not have complete information on the costs to administer the FSS program. Without this cost data, VA is unable to know whether it is charging an appropriate user fee.

section_title: Letter
paragraphs: In fiscal year 2003, the Department of Veterans Affairs (VA) spent  over $26 billion to provide healthcare to 4.5 million veterans at VA’s  medical centers and other VA healthcare facilities across the country. To  provide healthcare services for veterans, VA operates a Federal Supply  Schedule (FSS) program, which provides VA and other federal agencies  access to over 1,200 contracts for buying medical products and services  from a wide range of vendors. Vendor prices are expected to be at least as  good as those offered to the vendors’ most favored customers. To cover  the cost of operating the FSS program, VA charges its customers a user  fee. Once VA has awarded an FSS contract for a medical product, it looks  for opportunities to award a national contract that can provide even better  prices. In fiscal year 2003, VA sales through the FSS program were  $6.2 billion, and sales from national contracts were $712 million.
As one of the largest buyers of medical equipment, products, and  services, VA has the ability to realize significant savings and achieve  management efficiencies by leveraging its vast purchasing power. At your  request, we reviewed VA’s contract programs. Specifically, you asked us to  (1) determine whether VA’s FSS and national contracts provide medical  products at favorable prices and achieve savings, (2) identify opportunities  to improve purchasing practices and increase savings at VA medical  centers, and (3) determine if the FSS user fee is sufficient to cover the  program’s costs.
To conduct our work, we reviewed VA’s policies, procedures, and internal  controls associated with awarding and administering FSS and national  contracts. We also reviewed a May 2002 report by VA’s Procurement  Reform Task Force and determined the status of VA’s implementation of  task force recommendations to improve procurement practices across  VA. We met with officials from procurement and financial management  activities at VA Headquarters and officials at the National Acquisition  Center, which is responsible for managing both the FSS program and the  national contracts program. We conducted our review from July 2003  through April 2004 in accordance with generally accepted government  auditing standards. A more detailed discussion of our scope and  methodology is at the end of the letter.
subsections: section_title: Background
paragraphs: VA operates one of the world’s largest healthcare systems. In fiscal year  2003, VA spent about $26 billion to provide healthcare to 4.5 million  veterans. More than 1,300 VA healthcare facilities, which include  160 medical centers, provide a range of medical, surgical, outpatient,  rehabilitative, and long-term care products and services. Between  fiscal years 2001 and 2003, VA experienced over a 15-percent growth in the  number of patients treated.
The General Services Administration established the FSS program in 1949  to facilitate federal agencies’ acquisition of products and services from  commercial suppliers through schedule contracts. In 1960, the General  Services Administration delegated authority to VA to manage and award  FSS contracts for all medical products and services needed throughout the  federal healthcare system. VA currently operates eight schedules that  cover a wide range of medical products and services. (See app. I for a  complete list of the schedules.) In addition, VA currently has two new  schedules under consideration. The first, laboratory tests, will be an  expansion of VA’s “clinical analyzers” schedule and will be used for off-site  tests such as cytology, pathology, and endocrinology. The second  schedule, “home infusion,” will be used for intravenous services at  nonmedical facility sites, such as patients’ homes. VA projects that these  two schedules will be available by the end of fiscal year 2004.
Currently, VA has over 1,200 FSS contracts in place for the eight  schedules. These FSS contracts are available for use by all government  agencies, including VA, the Department of Defense, Bureau of Prisons,  Indian Health Services, Public Health Services, and some state veterans  homes. All schedules are multiple award contracts with performance  periods up to 5 years, under which many vendors that meet all competition  requirements have contracts to sell products and services to the federal  government. For example, under the pharmaceutical schedule, all  manufacturers of aspirin can have a contract to sell their products to  government agencies.
Since 1993, VA has been competitively awarding national contracts  with vendors for a larger discount based on volume purchasing. As of  April 2004, VA had about 330 national contracts. National contracts are  best suited for products that are widely used and where competition is  practical, such as pharmaceuticals and basic surgical supplies, and where  clinicians are likely to agree to standardized product use across all VA  medical centers. A national contract may also include requirements of  other federal agencies such as the Department of Defense.
Since 1999, VA’s FSS and national contract sales have steadily grown  (see fig. 1).
VA medical centers account for more than half of all VA FSS sales. In  fiscal year 2003, for example, VA medical center purchases represented  $3.9 billion, or over 63 percent, of the $6.2 billion in total sales from VA’s  schedule contracts. While purchases from national contracts were much  less than those from the schedules—totaling approximately $712 million in  fiscal year 2003—VA medical centers accounted for about $591 million, or  83 percent, of the purchases from these contracts.
VA’s National Acquisition Center is responsible for awarding and  administering FSS and national contracts. The National Acquisition Center  negotiates contracts, seeking to leverage VA’s overall government buying  power by achieving pricing and terms equal to or better than those a  vendor offers its most favored customers. Vendors submit offers to the  National Acquisition Center, and contracting officers perform price  analyses to arrive at a fair and reasonable price. Once the contracts are in  place, it is then up to the purchasing offices at the VA medical centers to  buy products and services from the schedules.
In fiscal year 2001, the VA Inspector General (IG) issued a report that  expressed significant concerns about the effectiveness of VA’s acquisition  system. As a result, the Secretary of Veterans Affairs established, in  June 2001, a Procurement Reform Task Force to review VA’s healthcare  procurement system. In its May 2002 report, the task force set five major  goals that it believed would lead to improvements in VA’s acquisition  system: (1) leverage purchasing power, (2) standardize commodities in VA,  (3) obtain and improve comprehensive procurement information for  better decision making, (4) improve the effectiveness of the procurement  organization, and (5) ensure that it maintained a talented and sufficient  procurement workforce. The task force made recommendations to help  VA achieve these goals.
section_title: Many VA Contracts Offer Favorable Prices and Savings, but VA Could Further Leverage Its Buying Power When Acquiring Healthcare Services
paragraphs: The FSS and national contracts that VA has awarded have resulted in more  favorable prices and yielded substantial savings. To strengthen its  bargaining position during FSS contract negotiations, VA has relied on  pre-award audits of vendors’ contract proposals and post-award audits of  vendors’ contract actions. VA has further leveraged its buying power to  achieve discounts and savings through its national contracts—an area that  the VA Procurement Reform Task Force recognized offered significant  potential for additional cost savings and other procurement efficiencies.  However, VA could achieve additional savings through FSS and national  contracts for healthcare services.
subsections: section_title: Audits Have Helped VA Obtain Most Favored Customer Prices and Savings
paragraphs: To help ensure VA obtains most favored customer prices on FSS contracts  for medical products and services, VA’s Office of Inspector General  entered into a memorandum of understanding with VA’s Office of  Acquisition and Materiel Management to conduct pre-award and post- award audits of FSS contracts. These audits provide VA’s contracting  officers with detailed information about vendors’ commercial sales and  marketing practices. With this information, VA is able to strengthen the  government’s bargaining position during negotiations and achieve savings  through cost avoidance and recoveries.
VA policy requires that pre-award audits be conducted before awarding  pharmaceutical contracts of $25 million or more, and other contracts of  $15 million or more. By performing a pre-award audit on a vendor’s  proposal, VA can determine whether the pricing information is current,  accurate, and complete. Pre-award audits help VA avoid unnecessary  costs by obtaining the most favored customer price during negotiations.  Post-award audits also help VA protect against overcharging by vendors.  They often result in recovery of money from vendors who overcharged VA.  Most post-award audits are prompted by vendors’ voluntary disclosures  that prices charged to the government were too high.
The financial benefits attributed to these audit efforts have been  significant. During fiscal years 1999 to 2003, VA audits identified  $151 million in cost avoidances from pre-award audits and $90 million in  recoveries from post-award audits (see table 1).
section_title: National Contracts Have Resulted in Additional Savings
paragraphs: VA has also taken steps when possible to consolidate its requirements for  medical supplies and equipment and pharmaceutical products it purchases  by using national contracts. Through these contracts, VA has been able to  further leverage its buying power and obtain even better prices than are  available on FSS contracts. VA uses three methods to consolidate  requirements into national contracts.
First, VA consolidates contracts through “standardization”—that is, it  agrees on particular items that VA facilities purchase and then contracts  with manufacturers of these items for discounts based on a larger volume.  By leveraging its large purchasing power, VA can achieve significant cost  savings and other procurement efficiencies. VA’s standardization efforts  cover a variety of medical products, such as medical and surgical supplies  and prosthetic equipment, but most of VA’s standardization has involved  buying pharmaceutical products at large discounts. Since VA issued a  policy in June 1999 requiring medical facilities to use standardized  products, VA increased its use of national contracts. According to VA  officials, VA’s pharmaceutical standardization program led to savings of  $394 million for 84 categories of drugs in fiscal year 2003. VA continues to  look for opportunities for more national contracts. For example, in fiscal  year 2003, the National Acquisition Center awarded 73 contracts for  standardized medical products valued at $34 million and 12 additional  national pharmaceuticals contracts valued at $227 million.
Second, VA consolidates its purchases of high-tech medical equipment to  achieve additional savings. For example, the National Acquisition Center  has negotiated national contracts with major equipment manufacturers for  ordering X-ray, magnetic resonance imaging, diagnostic ultrasound, and  other high-tech medical equipment for VA medical centers and other  federal customers to obtain discount prices. Besides achieving savings  through volume purchasing, consolidating purchases expedites ordering,  reduces costs of administering contracts and placing orders, and provides  needed technical assistance to users in designing a system and resolving  any equipment issues. As a result, VA officials identified savings of  $9 million in fiscal year 2003.
VA’s prime vendor distribution contracts—-the third contract  consolidation method VA uses—have also helped VA to achieve savings.  These contracts provide customers significant flexibility and choice. Using  these contracts, VA medical centers can place orders through the prime  vendor, which arranges for timely deliveries from manufacturers. VA has  two prime vendor distribution contracts—one for pharmaceuticals and  one for medical and surgical products.
VA’s prime vendor distribution contract for pharmaceuticals—which has  been in effect since 1991—accounts for the distribution of nearly all  pharmaceuticals used at VA medical centers. The contract provides that  the prime vendor reimburse VA about 3-percent of pharmaceutical sales to  medical centers. Because this contract represented over $3.4 billion in  sales in fiscal year 2003, VA estimates it saved about $100 million.
VA’s medical and surgical prime vendor distribution contract has been in  effect since 2002. Total VA sales through the medical and surgical prime  vendor contract were $48.7 million in fiscal year 2003. According to VA  officials, this resulted in savings of $2 million. Currently, only about one  third of VA’s medical centers opt to purchase products through the prime  vendor. To achieve even greater savings and efficiencies, VA has made a  policy that would require its medical centers to purchase all medical and  surgical products from a prime vendor. According to VA officials, VA’s  policy should be in full effect in fiscal year 2005.
section_title: VA Has Potential for Additional Savings When Contracting for Healthcare Services
paragraphs: While the National Acquisition Center has actively looked for ways to  reduce the cost of pharmaceuticals and medical supplies and equipment, it  has not taken the same aggressive approach to negotiate more favorable  prices for healthcare services. In fiscal year 2003, VA medical centers  purchased $1.65 billion in healthcare services (see table 2). Only  $66 million of these services were purchased from FSS contracts. In most  cases, the healthcare services that the medical centers purchased were for  procedures or medical tests that could not be provided at a VA medical  center. For example, one VA medical center we visited contracted out  radiation therapy services to a local hospital because the center did not  have the equipment or staff to provide such services. In other instances,  healthcare services cover additional fee-based doctor, nursing, and dental  services provided inside and outside the VA medical centers.
Nearly all of VA’s existing healthcare services contracts are awarded and  administered by VA’s medical centers. Typically, these contracts are with  local healthcare providers. As a result, there is generally no coordination  with the National Acquisition Center as to the type of contract  arrangements being negotiated, and no assurance that contracts represent  the best available prices. VA officials acknowledged that the area of  healthcare services has not been reviewed to determine the potential for  requirement consolidation and leveraging its buying power. These  officials, however, also explained that VA needs a database that captures  the specific types of healthcare services used by its medical centers to  determine which healthcare services could be consolidated to achieve  additional savings. We believe the National Acquisition Center is in the  best position to negotiate contracts that would help ensure more favorable  prices for healthcare services—as it does for pharmaceuticals, medical  supplies, and equipment—and could take steps to do this.
section_title: Opportunities Exist to Obtain Additional Savings at the Medical Centers
paragraphs: Over the past several years, VA medical center purchases from contracts  with more favorable prices have increased significantly, and VA has  achieved substantial savings. However, these savings could have been  even greater, as medical centers have not used these contracts as much as  they could have. Although VA has taken several actions to address this  weakness—including implementing new policies that establish purchasing  requirements and developing systems to capture data needed to make  informed acquisition decisions—it has yet to provide sufficient oversight  to ensure its new policies are adhered to.
Between fiscal years 1999 and 2003, total medical-center FSS purchases  more than doubled (see table 3). The most frequently used schedule was  pharmaceuticals.
Although medical centers’ FSS purchases showed an increase between  fiscal year 1999 and 2001, the VA IG reported in May 2001 that medical  centers were often not using the VA contracts to purchase medical  products because medical centers were not required to buy from FSS and  national contracts. In response, the Procurement Reform Task Force  recommended that VA establish a contract hierarchy to guide its  purchasing practices. In November 2002, VA implemented a new policy  requiring VA medical centers to purchase medical products first from a  national contract, second from a blanket purchase agreement (BPA), and  third from an FSS contract. Only when items are not available from these  sources should VA medical centers enter into local agreements or  purchase items directly from local vendors—the least desirable option.
Despite these efforts, the VA IG again reported in March 2004 that medical  center purchases were not made from the best sources. For example, the  VA IG analyzed a sample of purchases made in fiscal year 2002 valued at  $23.4 million. Although all of the products were available through VA  contracts, the medical centers purchased only $14.2 million, or about  60 percent, of the products off the national contracts. The remaining  $9.2 million, or about 40 percent, was spent on generally higher priced  locally purchased products. The VA IG estimated that over five years (the  typical life of national contracts) VA could save about $1.4 billion if  medical centers purchased medical products from FSS and national  contracts.
There are two primary reasons why VA medical centers have not  purchased medical products from the best sources. First, as pointed out by  the VA task force, VA does not have a readily accessible database that  medical center personnel could use to determine the availability of  medical products. VA is developing a web-based searchable database to  provide catalog information from vendors holding FSS and national  contracts. The new system, which was partially implemented in July 2003,  is being designed to allow medical center personnel to search for medical  surgical products available under FSS contracts and some national  contracts. According to VA officials, the new system is expected to  provide access to national contracts by October 2004. Second, according  to the VA IG, VA has yet to provide adequate oversight to ensure that its  recently implemented policy to use the contract hierarchy is being  followed. For example, although two purchasing activities within VA had  established procedures to monitor compliance with the new policy, the  procedures only covered compliance with the use of national contracts  and BPAs and did not cover FSS contracts. Consequently, VA cannot fully  determine whether medical centers comply with the new contract  hierarchy.
section_title: VA Does Not Have Complete Information on the FSS Program Costs
paragraphs: To operate the FSS program, VA is supposed to identify all program costs  and charge a fee to its customers based on these costs.  Currently, VA  charges FSS users a fee of 0.5 percent of sales to cover the cost of  operating the schedules program.  VA maintains data on some FSS  program costs, such as employee salaries and benefits.  However, VA has  not identified the costs associated with other activities, such as audit and  legal services.  Without knowing the full cost of administering the  program, VA has no assurance that the user fee accurately covers program  costs.
section_title: Conclusions
paragraphs: VA’s aggressive efforts to ensure most favorable pricing in awarding FSS  and national contacts for medical products and services have saved  taxpayers hundreds of millions of dollars. Despite this accomplishment,  VA could achieve significantly more savings—through leveraging its  purchasing power to negotiate FSS and national contracts for healthcare  services used at VA’s 160 medical centers and through improved oversight  of medical center purchases. Without such actions, VA risks losing  opportunities to realize additional savings. At the same time, the costs of  operating VA’s contracting programs need to be better understood to  ensure that the user fees VA collects from its customers are not excessive.
section_title: Recommendations for Executive Action
paragraphs: We are making three recommendations aimed at helping VA achieve  maximum savings through its contract programs. Specifically, we  recommend that the Secretary of the Department of Veterans Affairs    explore opportunities to use its buying power to obtain more favorable  prices for healthcare services,    strengthen oversight to ensure medical centers use FSS and national  contracts to get the best prices available, and  identify the complete cost of the FSS program and reassess its user fee to  determine if it needs to be adjusted.
section_title: Agency Comments
paragraphs: In commenting on a draft of this report, the Secretary of Veterans Affairs  agreed with GAO’s conclusions and concurred with its recommendations.    VA’s written comments are included in appendix II.
section_title: Scope and Methodology
paragraphs: To identify the steps taken by the VA to ensure that schedule contracts  provide medical products at favorable prices, we reviewed VA’s policies,  procedures, and internal controls associated with awarding and  administering FSS contracts, as well as for national contracts that are  structured to achieve even better prices for VA’s customers. We discussed  implementation of VA policies, procedures and internal controls with  agency officials at VA’s National Acquisition Center in Hines, Illinois;  VA Headquarters in Washington, D.C.; and the VA’s Office of Inspector  General in Washington, D.C. We also visited six VA medical centers to help  determine how VA procurement practices were being implemented. We  collected data on FSS and national contracts purchases from the National  Acquisition Center and the Financial Services Center, Austin, Texas.  Further, we reviewed and analyzed VA’s cost avoidance estimates related  to the purchase of pharmaceuticals from national contracts.
To identify opportunities to improve purchasing practices and increase  savings, we met with VA medical center procurement officials. We  reviewed the VA’s Procurement Reform Task Force (May 2002) report that  recommended ways to better leverage VA’s purchasing power and  determined the status of VA’s implementation of task force  recommendations to improve procurement practices across VA.  Additionally, we reviewed VA IG reports and analyzed VA data on medical  center procurement practices.
To determine how much the VA spends annually administering the  schedules program and the extent user fees cover program costs, we  interviewed and obtained information from officials in the program and  financial officers at VA headquarters and its National Acquisition Center.
We asked VA officials to identify the costs incurred to operate the  schedules program. Further, we reviewed the legislative authority that  allows VA to use excess fees to cover other program costs. We discussed  this information with the VA program officials and VA General Counsel  staff located in Washington, D.C.
As agreed, unless you publicly announce its contents earlier, we plan no  further distribution of this report until 30 days from its issue date. At that  time, we will send copies of this report to the Honorable Anthony J.  Principi, Secretary of Veterans Affairs; appropriate congressional  committees; and other interested parties. We will also provide copies to  others on request. In addition, the report will be available at no charge on  the GAO Web site at http://www.gao.gov.
If you or your staff has questions concerning this report, please contact me  at (202) 512-4841 or by e-mail at cooperd@gao.gov, or James Fuquay at  (937) 258-7963. Key contributors to this report were William Bricking,  Myra Watts Butler, Jean Lee, Fred Naas, Sylvia Schatz, and Karen Sloan.
section_title: Appendix I: Description of Products and Services Included in FSS Schedules
section_title: Appendix II: Comments From the Department of Veterans Affairs