VA Health Care: Pharmacy Inventory Management Could Benefit from System-Wide Oversight
Released: 2018-09-27T00:00:00

Letter

Background

General Process for Managing Pharmacy Inventories in Hospital Settings

In general, the process for managing inventories of medications at VAMCs and non-VA pharmacies in hospital settings is similar. The steps of the process are (1) procuring medications from vendors or other suppliers, (2) receiving and storing medications, (3) tracking medications to account for all items and prevent diversion, (4) dispensing medications to patients, and (5) disposing of expired or wasted medications. Hospital settings include both inpatient and outpatient pharmacies.

Procurement. Pharmacies use a procurement process to order medications for pharmacy inventory, which includes activities such as medication selection, cost analysis, purchasing procedures, and record keeping. As part of medication selection, pharmacies may use a formulary, which is a list of medications that have been approved for prescription within a hospital or health care system.

A prime vendor or wholesaler is one of the most commonly used sources to obtain medications for the pharmacy. Prime vendors order large quantities of medications from manufacturers, allowing pharmacies to purchase various products from many drug manufacturers at once. Orders for products that are not carried by the prime vendor may need to be ordered through another source, such as directly from the manufacturer.

Receipt and storage. When medications are delivered to the pharmacy, staff are to take several steps to properly receive and store the shipment. For example, to ensure there is segregation of duties, the person responsible for ordering and purchasing the medications is supposed to be different than the person receiving and stocking pharmacy inventory. Additionally, any delivered products that require special storage conditions, such as freezing or refrigeration, are to be checked in first to maintain the stability of the medication.

Tracking. Once in storage, pharmacies use a variety of tools to account for the filling, dispensing, and removal of medications in both inpatient and outpatient settings. Some pharmacies have software that allows them to track inventory in real time, an ability known as maintaining perpetual inventory. A perpetual inventory system is a method of recording the quantity of a particular medication continuously as prescriptions are filled and dispensed. After each prescription is filled and dispensed to the patient, the amount of medication used for the prescription is removed from the inventory to ensure the quantity on hand recorded by the software is always current.

Many medications have barcodes on their packaging to allow for easy identification of the medication in a computer system. The barcode generally includes the product’s National Drug Code, which indicates the name and package size of the medication. In the hospital setting, medications can be scanned out of the pharmacy and into machines for storage on hospital wards.

Dispensing. In both inpatient wards and outpatient pharmacies, automated dispensing machines and barcode technology can assist staff in maintaining and dispensing medications to patients. Automated dispensing machines generally include several drawers and cabinets that have pockets or trays that hold preset levels of a variety of common medications. They may also be used to hold controlled substances, generally in locked boxes or cubes within the machine. On hospital wards medication in automated dispensing machines is often packaged in unit doses—individually packaged medications for patient use. Barcodes can help verify a prescription before nurses give medication to a patient. Hospitals that do not have automatic dispensing machines use carts with drawers filled with each patient’s medication. Outpatient pharmacies use automated dispensing machines to assist with filling prescriptions. Depending on the type of automated dispensing machine, the capabilities can include label printing, pill counting, pouring pills into prescription bottles, and applying the label to the prescription bottle.

Return or disposal. Medication waste and expired medications are to be pulled from pharmacy inventory and either returned to a reverse distributor or manufacturer for credit or, if not eligible for return, disposed of by the pharmacy or sent to an outside company for destruction. Reverse distributors charge a fee, which is generally a percentage of the refund that is automatically deducted from the final refund amount.

Figure 1 provides an overview of the steps of the pharmacy inventory management process.

VA Organizational Structure and Pharmacy Policies

VA’s health care system is organized into entities at the headquarters, regional, and local levels. At the headquarters level, PBM is responsible for supporting VISNs and VAMCs with a broad range of pharmacy services, such as promoting appropriate drug therapy, ensuring medication safety, providing clinical guidance to pharmacists and other clinicians, and maintaining VA’s formulary of medications and supplies VAMCs use to deliver pharmacy benefits. VA’s OIT is responsible for providing technology services across the department, including the development and management of all IT assets and resources. As such, the office supports VA’s health care system in planning for and acquiring IT capabilities within VA’s health care system network of hospitals, outpatient facilities, and pharmacies. VA’s NAC is responsible for administering various health care-related acquisition and logistics programs across VA.

At the regional level, VAMCs are located in one of 18 VISNs. Each VISN is responsible for overseeing VAMC pharmacies within a defined geographic region. At the local level, there are approximately 170 VAMCs. Each VAMC is responsible for implementing VA’s pharmacy policies and programming.

VA policy establishes parameters for VAMCs to follow when managing their pharmacy inventories. These policies address various aspects of pharmacy services, including inpatient and outpatient pharmacy services, general pharmacy requirements, supply chain management, controlled substances management, and the formulary management process. For example, the Supply Chain Inventory Management directive states that all VAMC pharmacies should use the prime vendor inventory management software to calculate the amount of each inventory item they need to reorder. However, the directive also states that there are additional pharmacy inventory tools available to VAMC pharmacies and that each pharmacy has the option to use its own automated inventory management systems to generate orders for its prime vendor. VA policy does not specify minimum quantities to order; instead, VAMC procurement staff is authorized to use their expertise to determine the appropriate quantity to order.

Selected VAMCs Have Generally Similar Approaches for Managing Their Pharmacy Inventories, with Some Unique Approaches

In general, all five of the selected VAMCs we reviewed take similar approaches for the various steps included in the pharmacy inventory management process—that is, procuring medications from vendors or other suppliers, receiving and storing these medications, tracking medications at the pharmacy to account for all items and prevent diversion, dispensing medications to patients, and disposing of expired medications. (See fig. 2).

We found that while the five selected VAMCs have similar approaches for receiving and storing, dispensing, and disposing of medications, some VAMCs have also taken unique approaches in implementing two steps of the pharmacy inventory management process: procurement and tracking. VA policy outlines parameters for VAMCs to manage their pharmacy inventories, and VA officials told us that VAMC pharmacy staff can use discretion to implement their own approaches for managing their pharmacy inventories.

Procurement

All five of the selected VAMC pharmacies we reviewed use several sources of information to inform future orders—including past purchase order history reports from VA’s prime vendor, manual inventory counts by pharmacy staff, and automated dispensing machine inventory information. VA officials told us that all VAMCs also track procurement spending and its impact on the VAMCs’ budget and spending. However, pharmacy officials at one of the selected VAMCs we visited told us they use VA’s health information system—Veterans Health Information Systems and Technology Architecture (VistA)—and additional prime vendor reports to identify specific information regarding 1) expiring medications that may need to be re-purchased, 2) medications that account for the top 80 percent of pharmacy costs, and 3) all medications that are purchased daily. VAMC officials told us these reports help them to better manage pharmacy inventory and track pharmacy spending.

To better anticipate and address potential medication shortages, officials at another selected VAMC pharmacy told us they established a shortage committee that meets on a weekly basis. Established in September 2017, the committee includes the Director of Pharmacy and other pharmacy staff. Our review of meeting notes shows that the committee discusses which medications could experience or are experiencing shortages and how the VAMC could adjust to these shortages by, for example, developing clinical and logistical solutions to help maintain optimal patient care. According to the officials at the selected VAMC pharmacy, the committee has been an effective resource to help manage pharmacy inventory problems should they occur.

Several VAMC officials also told us that the procurement technicians, who are responsible for ordering pharmacy inventory, are very important because they possess valuable institutional knowledge based on many years of experience and training. However, VAMC officials told us the salaries and potential career advancement opportunities for procurement technicians can be limited, and the officials expressed concern that these technicians could find better opportunities within the VAMC or with external employers. To help retain procurement technicians, two of the selected VAMC pharmacies we visited have created higher paying procurement technician positions (General Schedule level 8 positions, instead of GS-6 or GS-7).

Tracking

To better identify potential instances of diversion, two of the selected VAMC pharmacies use enhanced analytics software on the automated dispensing machines in their inpatient wards to track how frequently controlled substances and other frequently utilized medications are prescribed. For example, one of the pharmacies uses data from these reports to identify how often individual staff members are accessing automated dispensing machines. Additionally, officials at a third VAMC recently deployed automated dispensing machines that are equipped with an enhanced analytics program that can identify trends associated with diversion. The remaining two VAMCs we visited do not have enhanced analytic software that could help them to identify instances of potential diversion.

Across all 5 selected VAMCs, we observed several different IT systems used to help manage non-controlled inpatient inventory. One of the selected VAMC pharmacies uses a modular automated dispensing machine together with inventory management software that maintains a perpetual inventory for most non-controlled substances stored in its inpatient pharmacy. (See fig. 3). According to officials, this software has allowed the pharmacy to reduce waste and improve staff workflow, as staff do not have to spend time tracking down inventory. None of the other VAMC pharmacies we visited have the capability to track non- controlled substances in real time.

Additionally, to more efficiently identify medication lot numbers during recalls, one VAMC pharmacy we visited was in the process of implementing a technology that allows pharmacy staff to scan a case of medication with the same national drug code, lot number, and expiration date and then print and attach a radio frequency identification tag to each medication bottle. The tag allows for quick electronic identification of the medication for disposal. Other selected VAMC pharmacies manually identify recalled medications from inventory based on the name of the medication and lot number.

Oversight of Pharmacy Inventory Management Is Limited, as VA Lacks a Comprehensive Inventory Management System or a Focal Point for System-Wide Oversight

VA does not yet have a VA-wide pharmacy inventory management system in place that would allow it to monitor VAMC pharmacy inventory in real time and provide better oversight of how VAMC pharmacies manage their inventories. We found that VACO and the five VISNs we reviewed provide some oversight related to VAMC pharmacy inventory management. However, that oversight is limited, as no entity has been assigned responsibility for overseeing system-wide performance of VAMC pharmacies in managing their inventories.

VA’s Oversight of VAMCs’ Pharmacy Inventory Management Is Limited, in Part Because VA Has Not Yet Implemented a Comprehensive Inventory Management System

VA’s oversight of VAMC pharmacy inventory management is limited in part because VA currently lacks a comprehensive system that would allow the department and its VAMCs to monitor pharmacy inventory in real time. According to PBM officials, the lack of a VA-wide system makes it difficult to oversee VAMC pharmacy inventory management, and PBM has recognized the lack of such a system as a material weakness for several years. PBM officials said that implementation of a VA-wide pharmacy inventory management system would allow them to monitor each VAMC’s pharmacy inventory in real time, which would, in turn, allow them to better manage inventory and help alleviate shortages at the national level by facilitating transfers of inventory between VAMCs as needed. Additionally, officials said that such a system would lead to better planning and projections for purchasing decisions, allow PBM to track medication expiration dates and lot numbers more effectively, and improve VAMC staff response to medication recalls.

Although VA has acknowledged the need for a VA-wide pharmacy inventory management system, such a system may not be available for the foreseeable future. PBM officials told us they have requested this system since the early 2000s. However, despite the documented technological challenges VA faces in overseeing its VAMC pharmacies, changing IT priorities, funding challenges, and the narrowing of the scope of a Pharmacy Re-engineering Project have prevented the system’s development. In 2017, we reported that VA’s pharmacy systems could not maintain a real-time inventory across the VAMCs, and we recommended that VA assess the priority for establishing an inventory management system capable of monitoring medication inventory levels and indicating when medications needed to be reordered. VA concurred with our recommendation. In June 2017, VA announced its intention to replace VistA— VA’s health information system—with an off-the-shelf electronic health record system. VA officials told us that the new system will have the capability to monitor pharmacy inventory in real time across VA. VA signed the contract for this new system in May 2018; however, full implementation is expected to take up to 10 years. In the interim, VA officials told us that while they will maintain current pharmacy systems, they do not plan to build any new systems—including a VA-wide pharmacy inventory management system—so they can efficiently manage resources in preparation for the transition to the new system.

VACO and VISNs Provide Some Limited Oversight, but VA Lacks a Focal Point for System-Wide Oversight of Pharmacy Inventory Management

VACO and the five VISNs we spoke with provide some limited oversight related to VAMC pharmacy inventory management, but no entity has system-wide responsibility for overseeing the performance of VAMC pharmacies in managing their inventories. Instead, responsibility for overseeing pharmacy inventory management is largely delegated to each VAMC’s leadership. (See fig. 4 for a description of VACO headquarters, VISN, and VAMCs’ roles and responsibilities in managing pharmacy inventory.)

In absence of a VA-wide inventory management system, PBM officials told us that they have employed manual workaround mechanisms to oversee pharmacy management processes. Specifically, PBM requires VAMC pharmacies to conduct an annual inventory of all medications and a quarterly inventory of 5 selected high-value non-controlled medications at risk of diversion. PBM officials told us they remind VAMCs of the requirement to conduct these inventories, collect and aggregate the data from these inventories, and make summary reports from these data available as a resource to the VPEs and VAMC Chiefs of Pharmacy. PBM officials acknowledged that these manual workarounds are inefficient, increase labor costs, and leave the agency with an inability to see on- hand inventory across the system in real time. Additionally, the manual workarounds may be implemented differently at each VAMC, resulting in varying degrees of data reliability and limited opportunities for high-level oversight and data consolidation. PBM officials said that they do not independently analyze these data to identify trends, and they acknowledged that both the quarterly and annual inventories have limited usefulness for overseeing inventory management system-wide. Additionally, officials at some of the selected VAMCs told us they found the quarterly and annual inventories to have limited usefulness for managing their pharmacy inventories.

PBM officials told us they also hold regular meetings with VPEs and VAMCs, which provide the opportunity for discussion of pharmacy inventory management issues. However, our review of the minutes of the meetings between PBM and VPEs found that, over the past 3 years, pharmacy inventory management was rarely a topic of discussion. PBM officials noted that there is always an opportunity for open discussion at these meetings for VPEs to raise any issues, including issues related to pharmacy inventory management, but these discussions may or may not be captured in the meeting minutes. PBM officials said they also regularly discuss various topics with the VAMC Chiefs of Pharmacy and other staff, but none of these calls are directly related to pharmacy inventory management.

Officials from VACO’s NAC and OIT told us that they provide some assistance related to pharmacy inventory management but do not take part in the day-to-day management at the VAMC level and also do not have any oversight responsibilities. For example, a NAC official said the office coordinates with PBM on medication shortage issues and establishes national contracts for medications. NAC also sends out a weekly shortages report to various pharmacy groups as a tool to help them with known or expected shortages. Additionally, NAC’s Pharmaceutical Prime Vendor team is responsible for administering the contract with the prime vendor through daily monitoring of issues and quarterly reviews with the prime vendor and PBM. OIT develops pharmacy-related applications for VistA based on requirements from PBM, and officials said that the majority of OIT’s support to VAMCs consists of assisting them with issues related to VistA.

At the VISN level, VPEs we interviewed also said they conduct some pharmacy inventory management oversight activities for the VAMCs within their network. While in general VA policy does not outline any specific roles for VPEs related to oversight of pharmacy inventory management, all five VPEs told us that they review the results of their VAMCs’ annual inventories and discuss any issues that arise from this exercise with VAMCs as needed. VPEs told us that they also review the results of the quarterly inventory of five selected high-value, non- controlled substances and may follow-up with the VAMCs if their actual inventory of the medications is inconsistent with expected levels. Additionally, some VPEs reported that they have undertaken additional oversight activities apart from reviewing results of the mandatory inventories. For example, one VPE told us he has developed a dashboard with 53 measures that, while focused on formulary management, also have inventory management implications. Additionally, this VPE said that a VISN-wide procurement work group meets on a monthly basis and serves as a venue for procurement technicians to share inventory management best practices. Such additional activities may be helpful, but since VPEs only have responsibility for VAMC pharmacies within their network, they may not be aware of pharmacy inventory management approaches being used at other VAMCs across VA.

Although VA offices at the headquarters and regional levels provide some assistance and oversight of how VAMCs manage pharmacy inventory at the local level, VA has not designated a focal point with defined responsibilities for system-wide oversight; instead they rely on local leadership to oversee pharmacy inventory management at the VAMCs. As a result, VA cannot assess the overall performance of VAMCs’ management of their pharmacy inventories. The lack of a focal point with defined oversight responsibilities is inconsistent with federal internal control standards for establishing structure and authority to achieve the entity’s objectives and internal controls related to monitoring. Specifically, internal controls state that management should establish an organizational structure, assign responsibility, and delegate authority to achieve the entity’s objectives. Also, internal controls state that management should establish and operate monitoring activities to monitor the internal control system and evaluate the results. VA’s actions are also inconsistent with the Office of Management and Budget’s guidance for enterprise risk management and internal control in managing an agency. Enterprise risk management is intended to yield an “enterprise- wide,” strategically aligned portfolio view of organizational challenges that provides better insight about how to most effectively prioritize resource allocations to ensure successful mission delivery. Without a focal point for system-wide oversight of VAMC pharmacy inventory management, VA has limited awareness of the unique approaches that VAMCs use to manage their inventories and is missing an opportunity to evaluate these approaches. Additionally, VA cannot effectively share and standardize pharmacy inventory management best practices as appropriate. Having a focal point for system-wide oversight could allow VA to identify potential best practices that could be disseminated more widely across its facilities.

Conclusions

Due to the decentralized nature of VA’s organization, VA policy gives VAMC pharmacies latitude in managing their pharmacy inventories. Several of the VAMCs we visited have taken unique approaches to procuring or tracking their inventory. However, because VA does not have a focal point to systematically oversee VAMCs’ pharmacy management efforts, VA is missing opportunities to evaluate the effectiveness of these efforts, as well as share best practices and standardize them across VA as appropriate. PBM officials told us that the lack of a VA-wide pharmacy inventory management system limits their ability to oversee VAMC pharmacy inventory management. However, our review shows that even without this system there are existing mechanisms that a focal point could leverage to more systematically oversee how VAMC pharmacies manage their inventories. For example, a focal point could ensure that PBM officials, the VPEs, and VAMC pharmacy staff devote time to discussing pharmacy inventory management approaches and related issues during regularly scheduled telephone meetings. Leveraging these existing mechanisms is especially important given that VAMCs have historically had challenges in managing their inventories, and also because a VA- wide pharmacy inventory management system may not be available for the foreseeable future.

Recommendation for Executive Action

We are making the following recommendation to the Department of Veterans Affairs: The Secretary of the VA should direct the Undersecretary for Health to designate a focal point for overseeing VAMCs’ pharmacy inventory management system-wide and define the focal point’s responsibilities. (Recommendation 1)

Agency Comments and Our Evaluation

We provided a draft of this report to VA for review and comment. In its written comments, reproduced in appendix I, VA stated that it concurred in principle with our recommendation. VA also provided technical comments, which we incorporated as appropriate.

In response to our recommendation, VA stated it plans to establish by December 31, 2018, a committee of internal stakeholders and subject matter experts to provide options for overseeing VAMCs’ pharmacy inventory management. However, it was unclear from VA’s response whether the planned committee will recommend or designate an entity or focal point with system-wide oversight responsibilities. VA noted in its general comments that it does have entities or individuals—referred to as focal points by VA—responsible for specific functions. However, these entities do not provide system-wide oversight that could allow the department to better understand VAMCs’ approaches to pharmacy inventory management. As we noted in our report, without a focal point for system-wide oversight, VA has limited awareness of the unique approaches that VAMCs use to manage their inventories and is missing an opportunity to evaluate these approaches and standardize them across VA as appropriate.

Additionally, in its general comments, VA raised concerns regarding our characterization in the draft report of medication shortages and the use of automated dispensing units in the context of controlled substances. In response, we updated the report to include more information about one VAMC’s use of a committee to address medication shortages. We also clarified that three VAMCs are using (or will soon have the capability to use) enhanced analytic software to better leverage data generated through their automated dispensing machines, which allows them to more easily identify potential diversion. Finally, VA noted that we did not discuss PBM’s multiple requests for an enterprise-management system since the early 2000s; however, this information was included as part of the draft report sent to VA for review and remains in our final report on page 14 as part of our finding on the lack of a VA-wide pharmacy inventory management system.

We are sending copies of this report to the Secretary of the Department of Veterans Affairs and appropriate congressional committees. The report is also available at no charge on GAO’s website at http://www.gao.gov.

If you or your staff has any questions regarding this report, please contact Sharon M. Silas at (202) 512-7114 or silass@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II.

Appendix I: Comments from the Department of Veterans Affairs

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Rashmi Agarwal, Assistant Director; Nick Bartine, Analyst-in-Charge; Muriel Brown; Kaitlin Farquharson; Krister Friday; Sandra George; Courtney Liesener; Diona Martyn; and Michelle Paluga made key contributions to this report.