In fiscal year 2012, VA provided prescription drug coverage to about 8.8 million eligible veterans primarily through its medical centers and Consolidated Mail Outpatient Pharmacy (CMOP).direct purchase approach to acquire drugs directly from manufacturers for distribution through its facilities. These purchases are usually made under contract with a prime vendor that provides the drugs at a fixed percentage discount off the lowest price otherwise available for each drug. VA’s drug prices are generally below wholesale prices provided to commercial buyers and do not include costs for storage, overhead, or dispensing. VA also has access to federal pricing arrangements and other discounts to help control drug spending, including the following: Federal Supply Schedule (FSS) prices: These prices are available to all direct federal purchasers and are intended to be no more than the prices manufacturers charge their most-favored nonfederal customers under comparable terms and conditions. Big Four prices: These prices are available to DOD, VA, the Public Health Service, and the U.S. Coast Guard. By law, these prices are 24 percent lower than nonfederal average manufacturer prices. VA national contracts: These contracts provide additional pricing concessions in return for commitment to potential vendors, resulting in pricing lower than FSS. The VA national contracts program is a separate contract vehicle from the FSS contract program. In fiscal year 2012, VA’s prescription drug spending totaled about $4.2 billion, according to VA officials. In fiscal year 2012, DOD provided prescription drug coverage to about 9.7 million active-duty and retired military personnel, their dependents, and others through its military treatment facilities (MTF), the TRICARE Mail Order Pharmacy (TMOP), and retail pharmacies. As with VA, DOD has access to FSS and Big Four prices and uses the direct purchase approach to buy drugs at a discount through a prime vendor for distribution through its MTFs and TMOP. Therefore, DOD’s direct purchase drug prices are also generally below wholesale prices provided to commercial buyers and do not include costs for storage, overhead, or dispensing. In fiscal year 2012, DOD’s prescription drug spending totaled about $7.6 billion, according to DOD officials. Both DOD and VA use prescription drug formularies to help control prescription drug costs. In our November 2012 report on DOD and VA health care, agency officials told us that some of the differences in the agencies’ formularies are due to differences in the structure of their health care systems. For example, DOD covers prescriptions written by both military and civilian providers, and DOD officials previously reported that, as a result, the department needs to have a broad formulary to account for differences in prescribing practices among different providers. In contrast, VA primarily covers medications for eligible beneficiaries through prescriptions written by its own providers. As VA officials reported, this allows VA to have more direct control over the medications that are prescribed to its patient population. Both agencies provide access to nonformulary medications determined by a physician to be clinically necessary. DOD paid a higher average unit price than VA across the entire sample of 83 drugs and for the subset of generic drugs, but paid a lower average price than VA for the subset of brand-name drugs. Specifically, DOD’s average unit price for the entire sample was 31.8 percent higher than VA’s average price, and DOD’s average unit price for the subset of 40 generic drugs was 66.6 percent higher than VA’s average price. However, VA’s average unit price for the subset of 43 brand-name drugs was 136.9 percent higher than DOD’s average price. (See fig. 1.) DOD paid an average of $0.11 per unit more than VA across the entire sample of 83 drugs and an average of $0.04 per unit more than VA for the generic drugs in our sample, while VA paid an average of $1.01 per unit more than DOD for the brand-name drugs in our sample. These results were consistent with each agency obtaining better prices on the type of drugs that made up the majority of its utilization: generic drugs accounted for the majority (83 percent) of VA’s utilization of drugs in the sample for the first quarter of 2012, and brand-name drugs accounted for the majority (54 percent) of DOD’s utilization of the sample drugs during the same period. DOD officials told us that in certain circumstances they are able to obtain competitive prices for brand-name drugs—even below the prices for generic equivalents—and therefore will often preferentially purchase brand-name drugs. When we examined the prices paid for the individual brand-name drugs in our sample, DOD paid higher average unit prices than VA for 23 of the 43 drugs (see fig. 2).remaining 20 brand-name drugs. DOD also paid a higher average price than VA for a majority of the generic drugs in our sample. Specifically, DOD paid a higher price for 32 of the 40 generic drugs in our sample, while VA paid a higher average price for the remaining 8 generic drugs. (See app. II for details on the relative prices paid by DOD and VA for the 83 individual drugs in our sample.) DOD and VA face continued challenges in controlling drug costs. Our findings suggest that there may be opportunities for savings with directly purchased drugs. DOD and VA paid different prices for the drugs in our sample; for 11 of the 83 drugs, one agency paid at least 100 percent more than the other agency. DOD paid a lower average price for the brand-name drugs in our sample while VA paid less, on average, for the generic drugs and across the entire sample. Our past reports highlight the importance of DOD and VA controlling drug costs. While the prescription drug market is complex and there are many factors affecting the prices DOD and VA are able to obtain for directly purchased drugs, differences in prices paid for specific drugs may provide insights into opportunities for each agency to obtain additional savings on at least some of the drugs they purchase. DOD and VA reviewed a draft of this report and provided written comments, which are reprinted in appendixes III and IV, respectively. DOD generally agreed with our methodology and findings. In addition, DOD noted that expressing differences between DOD and VA prices for the sample as percentages rather than actual dollar amounts may give the impression that significant dollar values are involved rather than a few cents or less per unit. While we clarified in the report the dollar amount of price differences, our findings indicated that small per-unit price differences may result in significant additional expenditures when accounting for the quantities purchased by the agencies. DOD also described additional factors beyond those mentioned in our findings that may contribute to differences in prices paid by DOD and VA. VA expressed concerns with the content of the report and suggested additional analyses. For example, VA suggested that analyses accounting for per-beneficiary costs, formulary design, utilization management, and the mix of drugs used for a particular disease state would have provided more appropriate comparisons. While we agree that such analyses could be useful, the scope of our work was targeted to a comparison of prices paid by each agency for a sample of high-utilization and high-expenditure drugs and was not intended to capture all factors that can affect pharmaceutical spending. We noted the limitations of our results in the report, including that our results cannot be applied to all drugs purchased by the agencies. Further, our report acknowledges the limitations involved with estimating potential cost savings in this complex area. Nonetheless, we maintain that comparing unit prices paid for selected generic and brand-name drugs by different federal agencies has value in identifying specific drugs with price differences that may warrant further consideration for potential savings. VA also noted that most of its drug purchases are made through contracts with a prime vendor that provides a negative distribution fee (i.e., discount), resulting in savings to VA. We revised the introduction to make this information more prominent earlier in the report. VA agreed with our conclusion that the maximum potential savings provided in our findings are unlikely to be achieved and noted that obtaining lower prices on brand-name drugs would require shifting utilization away from generic drugs, potentially increasing overall drug costs. VA also stated that our list of factors affecting the prices each agency is able to obtain did not specifically include the ability of VA to direct utilization toward a limited number of drugs within a therapeutic class to achieve savings. We revised the report to clarify this point. VA also stated that, under an applicable Federal Acquisition Regulation (48 C.F.R. § 8.002), it was required to purchase more expensive versions of generic minocycline through the FSS contract rather than versions otherwise available. VA therefore requested that GAO remove the potential savings related to the purchase of this drug from the total projected savings in the report. However, our report generally reflects a number of factors (including differences in purchasing authority) that may limit each agency’s ability to achieve the maximum potential savings we calculated, and it was beyond the scope of our report to apply these factors to each individual drug. DOD and VA also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to relevant congressional committees and other interested members. The report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7114 or dickenj@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 members who made key contributions to this report are listed in appendix V. In order to compare direct purchase prices paid by the Department of Defense (DOD) and Department of Veterans Affairs (VA) for prescription drugs, we chose a sample of drugs important to both agencies. We obtained prime vendor data for the first calendar quarter of 2012 for drugs dispensed to DOD and VA beneficiaries through the agencies’ own medical facilities and mail order pharmacies. We excluded physician- administered outpatient prescription drugs and over-the-counter drugs from our sample; we also excluded items that are not traditionally considered drugs such as bandages, syringes, needles, diabetes test strips, saline, and water for irrigation. We used data from Red Book to determine the brand-name or generic status of each drug. Utilization was determined using the National Council for Prescription Drug Programs (NCPDP) Billing Unit Standard. When calculating expenditures, we used the agencies’ costs to purchase each drug without accounting for any future offsets from beneficiary copayments for those drugs. We aggregated the utilization and expenditure data at the drug level (drug name, strength, and dosage form) separately for DOD and VA. For example, all national drug codes (NDC) corresponding to 10 mg tablets of Lipitor purchased by VA were aggregated and the associated utilization and expenditures were summed and compared to other brand-name drugs, while NDCs corresponding to 10 mg tablets of atorvastatin (the generic equivalent of Lipitor) purchased by VA were aggregated separately and compared to other generic drugs. We ranked the top 100 brand-name and top 100 generic drugs separately for each agency on the basis of utilization and expenditures and then combined these rankings to determine the top brand-name and generic drugs that were purchased by both agencies. We excluded drugs that were in the top 100 for one agency but not for the other agency in order to focus our analysis on drugs that were important for both DOD and VA. For example, if a drug was 10th highest in utilization for VA but was not in the top 100 for DOD, that drug would not be included in our sample. Some drugs that were excluded from the sample appeared to be more appropriate for the beneficiary population of one agency than the other. For example, primaquine phosphate—a drug used to treat malaria—was the fourth-highest-expenditure generic drug for DOD but was not in the top 100 for VA. Some other excluded drugs were additional strengths of drugs that did appear in our sample. For example, simvastatin (80 mg tablet) was the sixth-highest-expenditure generic drug for VA but was not in the top 100 for DOD and thus was excluded from the sample. However, the 20 mg and 40 mg strengths of simvastatin were included in the sample. The drug sample was selected to include the top 50 brand-name and top 50 generic drugs; 25 of the brand-name drugs and 25 of the generic drugs were selected on the basis of the combined DOD and VA utilization ranks, and the other 25 brand-name and 25 generic drugs were selected on the basis of the combined DOD and VA expenditure ranks. After accounting for drugs that were in both the high-expenditure group and the high-utilization group, the final sample contained 43 brand-name drugs and 40 generic drugs and accounted for 37.0 percent of DOD utilization, 31.7 percent of DOD expenditures, 27.7 percent of VA utilization, and 34.8 percent of VA expenditures for directly purchased prescription drugs in the first calendar quarter of 2012. (See table I for a list of the drugs in the sample.) After selecting the sample, we calculated average unit prices paid by DOD and VA for all individual drugs by dividing total expenditures by total utilization for each drug. We also calculated average unit prices for the entire sample, the subset of brand-name drugs, and the subset of generic drugs by dividing the total expenditures for all relevant drugs by the total utilization of those drugs. In order to maintain the confidentiality of drug prices, in each case we converted from absolute prices to relative prices by assigning 100.0 to the lowest price and determining the higher price as a percentage above the lowest price. We compared the average unit prices obtained by DOD and VA for each drug to the Federal Supply Schedule (FSS) and Big Four prices available to these agencies. We interviewed DOD and VA officials about drug purchasing approaches they use and factors affecting the prices they are able to obtain. Finally, we determined the maximum potential savings that might have been obtained if each agency had been able to obtain the lower of the DOD and VA average unit prices for each of the 83 drugs in the sample. The results of our analyses are limited to the 83 high-utilization and high- expenditure drugs in our sample for the first calendar quarter of 2012 and are not necessarily applicable across all drugs. Figure 3 shows the 55 drugs (out of 83 drugs in our sample) for which the Department of Defense (DOD) paid a higher average unit price than the Department of Veterans Affairs (VA) and the percentage by which the DOD price exceeded the VA price. Figure 4 shows the 28 drugs (out of 83) for which VA paid a higher average unit price than DOD and the percentage by which the VA price exceeded the DOD price. In addition to the contact named above, key contributors to this report were Robert Copeland, Assistant Director; Zhi Boon; Karen Howard; Laurie Pachter; and Carmen Rivera-Lowitt. DOD and VA Health Care: Medication Needs during Transitions May Not Be Managed for All Service Members. GAO-13-26. Washington, D.C.: November 2, 2012. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.: February 28, 2012. Follow-Up on 2011 Report: Status of Actions Taken to Reduce Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. VA Drug Formulary: Drug Review Process Is Standardized at the National Level, but Actions Are Needed to Ensure Timely Adjudication of Nonformulary Drug Requests. GAO-10-776. Washington, D.C.: August 31, 2010. Prescription Drugs: Overview of Approaches to Control Prescription Drug Spending in Federal Programs. GAO-09-819T. Washington, D.C.: June 24, 2009. Military Health Care: TRICARE Cost-Sharing Proposals Would Help Offset Increasing Health Care Spending, but Projected Savings Are Likely Overestimated. GAO-07-647. Washington, D.C.: May 31, 2007. Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices Used by Other Countries and U.S. Private Payers and Federal Programs. GAO-07-358T. Washington, D.C.: January 11, 2007.

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