Reflecting national trends, VA and DOD prescription drug expenditures have increased substantially in recent years and at a much higher rate than their overall health care expenditures. (See figure 1.) In fiscal year 2000, VA purchased about $2.1 billion in pharmaceuticals—$256 million more than in fiscal year 1999—to provide 86 million prescriptions for veterans. In the same year, DOD purchased about $1.14 billion in pharmaceuticals— an increase of $174 million from fiscal year 1999—to provide 54 million military pharmacy and mail-order prescriptions for active duty and retired military service members and their families. Similarly, DOD’s TRICARE retail pharmacy program costs have skyrocketed—averaging 34 percent increases each year since 1995. A number of factors are likely to further drive up pharmaceutical spending, such as a decrease in private insurance pharmaceutical coverage for individuals eligible for VA or DOD benefits. This is particularly so for DOD—as of April 1, 2001, approximately 1.4 million retirees and their dependents received new retail and mail-order pharmacy benefits at an additional cost of about $800 million annually. Since 1997, VA and DOD have each adopted centralized formularies to help ensure that certain drugs are available at all veterans’ and military health care facilities as well as to control pharmacy benefit costs. VA’s national formulary currently lists about 1,100 drugs representing 254 classes, while DOD’s basic core formulary lists 175 drugs in 71 classes.Most of the drug classes in both VA national and DOD core formularies are open—that is, there are no restrictions on provider’s choice of which drug to prescribe for a patient. However, a few drug classes are closed or preferred, meaning that VA and DOD have varying restrictions on providers’ choice of drugs after determining that certain brand name drugs are therapeutic alternatives—that is, interchangeable in terms of efficacy, safety, and outcomes. Having closed or preferred classes allows VA and DOD to competitively award requirements contracts for the lowest-priced drugs. In closed classes, VA and DOD providers must prescribe and pharmacies must dispense the contract drug, instead of therapeutic alternatives, to meet the terms of the contract and guarantee drug companies a high market share. Case-by-case exceptions are allowed, such as those for medical necessity. In preferred classes, VA and DOD providers and pharmacies are encouraged to use the preferred drug but may prescribe or dispense other drugs in the same class without obtaining an exception. Due to the complexity of the care issues and the need to garner clinical acceptance and support, VA and DOD can take as long as a year between the date their respective class reviews establish therapeutic interchangeability of competing brand name drugs and the date a contract is awarded. Generic drug contracts do not require drug class reviews—since competing products are already known to be chemically and therapeutically alike— and, therefore, take less effort and time—about 120 days. VA and military pharmacies use a number of purchasing vehicles to buy prescription drugs at substantial discounts from market prices. (See table 1.) For example, in 1999, about 81 percent of VA and DOD’s combined $2.4 billion in drug expenditures was for drugs bought through the federal supply schedule (FSS) for pharmaceuticals. The remaining expenditures were for purchases associated with the different requirements contracts VA and DOD have with drug manufacturers—each using leverage with manufacturers to achieve the lowest-priced product on its formulary. For nearly 2 decades, the Congress has urged VA and DOD to maximize federal dollars by sharing their health care resources. In May 1982, the Congress enacted the VA and DOD Health Resources Sharing and Emergency Operations Act (P.L. 97-174), which generally encouraged the two departments to enter into agreements to share health care services in existing or newly built health care facilities. In 1996, the Congress began to specifically target cooperation in the purchasing and distributing of pharmaceuticals for the departments’ respective beneficiaries. A 1999 report by a congressional commission concluded that DOD and VA should combine their market power to get better pharmaceutical prices through joint contracts. More recently, the Veterans Millennium Health Care and Benefits Act (P.L. 106-117) required VA and DOD to submit a report on how joint pharmaceutical procurement can be enhanced and cost reductions realized by fiscal year 2004. In January 2001, VA and DOD submitted this report on efforts under way to maximize efficiencies in health care systems. Finally, the Veterans Benefits and Health Care Improvement Act of 2000 (P.L. 106-419) included a provision encouraging VA and DOD to increase to the maximum extent consistent with their respective missions their level of cooperation in the procurement and management of prescription drugs. VA and DOD have made important progress, especially this past year, to increase their joint pharmaceutical procurement activities. By May 2001, the departments expect to have more than doubled the number of joint procurement contracts entered into since our May 2000 testimony. And the departments estimate substantial cost avoidance from current and planned joint procurements—about $170 million per year. VA and DOD’s improved communication and collaboration on these efforts should further enhance their future performance. From October 1998 through April 2000, VA and DOD awarded joint contracts for 18 products, which accounted for about $62 million in combined drug expenditures in fiscal year 2000. (See table 4 in appendix I.) Although these drugs account for just 1.9 percent of the departments’ combined $3.2 billion drug spending in 2000, VA and DOD estimate these joint procurement discounts achieved sizeable cost avoidance—about $40 million in 2000. This is in addition to the significant cost avoidance the departments are already experiencing from their separate contracts. Last year, the departments began developing plans to merge these contracts as they expire and undertook other collaborative actions that will increase the number of joint procurements in the future. In May 2000, we testified that VA and DOD could significantly increase savings with expanded use of joint pharmaceutical procurement, especially for products in high-expenditure drug classes—a number of which we identified. Since that time, the departments have moved to more than double their joint pharmaceutical procurements and the expected financial benefits from these joint activities. As of January 2001, for example, VA and DOD have awarded an additional 12 joint contracts for commonly used generic drugs and are in the process of awarding another 14 joint contracts—including one for a brand name nonsedating antihistamine drug. (See tables 5 and 6 in appendix I.) In 1999, these drugs accounted for about $123 million of combined VA and DOD purchases. The departments estimate substantial discounts from these new joint procurements—an additional $30 million in drug purchasing cost avoidance each year for the 12 contracts already under way—and millions more should stem from the 14 solicitations that are under way. As of December 2000, VA and DOD had preliminarily reviewed the high- expenditure classes that we suggested could provide opportunities for additional joint procurements. As a result, they plan over the next few years to target for joint procurement 112 drugs—which accounted for about $400 million of their combined expenditures in 1999. (See table 2 for the major therapeutic areas and appendix II for details.) Further, VA and DOD plan to propose more joint procurements after they complete their analysis of the suggested classes. Most of these planned procurements are for generic drugs, but some are for brand name drugs. For example, VA and DOD also recently completed class reviews on the therapeutic interchangeability of several brand name drugs used to treat sinus congestion and have found sufficient clinical basis to pursue one or two joint procurements. The departments estimate that discounts from joint procurements in the targeted classes will yield about $100 million in additional annual cost avoidance although they have not yet estimated cost avoidance for some later year procurements. Also, DOD and VA agreed to merge 52 existing VA-only and DOD-only contracts as these contracts expire. (See table 7 in appendix I.) For example, the departments plan to merge their eight separate contracts for brand name drugs used to lower cholesterol, treat gastrointestinal problems, and control high blood pressure. These contracts yielded cost avoidance in excess of $184 million in fiscal year 2000, which will likely increase as the contracts are consolidated. But, the departments have not yet estimated the consequent potential additional cost avoidance. While potential cost avoidance is difficult to estimate— especially given the high variability in drug market competition—it is likely that the more joint procurements VA and DOD enter into, the greater the financial benefits they will realize. Prior to May 2000, VA and DOD had primarily used interagency sharing agreements and work groups to collaborate on joint procurement activities. In 1998, for example, the DOD/VA Federal Pharmacy Executive Steering Committee was established to increase the uniformity and cost effectiveness of drug therapy in their separate health systems, including overseeing joint contracts for high-dollar and high-volume drugs. But the geographical separation of the departments’ key pharmacy policy and acquisition staffs continued to hamper their day-to-day communications on joint drug activities and complicate their working relationships. Since May 2000, however, the departments have sought to remedy this. As a result, their key pharmacy officials now meet regularly at hub locations to discuss and further their joint procurement activities, and have developed a continually updated interagency report on their joint procurement activities. In August 2000, the DOD/VA Federal Pharmacy Executive Steering Committee began meeting regularly in San Antonio, Texas; Falls Church, Virginia; or Chicago, Illinois, to identify drugs or classes for joint contracting and discuss strategies based on ongoing clinical and formulary decisions. VA and DOD pharmacy policy and acquisition center staff also started holding frequent subcommittee meetings to focus on joint procurement issues. Similarly, in July 2000 VA and DOD acquisition center executives and managers began meeting regularly in Philadelphia or Chicago to review progress under a memorandum of agreement (MOA) to combine their buying power, reduce medical materiel costs, and eliminate contracting redundancies. In addition to implementing joint contracting decisions, the MOA provided that the departments also work together to cancel DOD’s distribution and pricing agreements (DAPA) with drug companies by converting them to VA’s FSS prices. Since the May 2000 hearing, a number of issues impeding progress on converting DAPA to FSS prices have been resolved. For example, a needed computer interface was established between the acquisition centers to expedite uploading FSS prices into DOD’s pharmaceutical ordering and purchasing system, and VA agreed to offset its normal surcharge on all FSS sales to military pharmacies. By January 2001, DOD was able to convert its DAPAs and now both agencies use the same FSS prices. As a result of last year’s progress on the MOA, DOD’s acquisition officials expect to reassign some of their employees to work on additional joint pharmaceutical contracting with VA. Finally, VA and DOD’s new Joint Contract Status report, which is maintained by VA’s pharmacy policy staff, details every drug and drug class with combined purchase potential. VA and DOD pharmacy policy and procurement staff use the report to monitor joint procurement progress and track results. The report is continually updated to list all current joint and separate (VA-only and DOD-only) contracts and those potential procurements that are dependent on clinical and formulary decisions. A November 2000 update to the report details about 140 unique drugs and drug classes providing the contracting status for existing joint and separate contracts and, for many of these, estimates of award values and annual cost avoidance. The report also lists proposed and pending joint contracts—including several we had identified earlier as potential candidates—and the time frames for the various procurement stages. Projected time frames for when the departments’ separate national contracts can be merged are also included. Most VA and DOD joint procurements have been for low-cost generic drugs. While these drugs make up a larger share of the departments’ combined drug volume than brand name drugs, brand name drugs make up a far higher share of expenditures. For example, VA’s brand name drug purchases are 36 percent of volume but 91 percent of expenditures.Although in jointly procuring brand name drugs it can be more complex and time-consuming to garner clinical support and provider acceptance on therapeutic interchangeability, the cumulative financial benefit potential is far greater. Along with such inherent difficulties, VA and DOD cite such challenges as differences in their beneficiary populations and formularies that make it difficult for them to jointly procure brand name drugs. However, some of these differences are diminishing, and the departments have already demonstrated in two cases that they can jointly procure brand name drugs and still meet their unique clinical and administrative needs. Also, the departments can take such actions as periodically seeking input from experts and providing annual reports to the Congress on their joint procurement activities to help enhance their efforts to address these challenges. According to VA and DOD officials, several aspects of their health care systems create challenges that limit their opportunities to jointly procure brand name drugs: VA and DOD officials cite differences in their patient populations—VA serves mostly older men, while DOD also serves younger men and women and children—as shown in figure 2. They said that the different populations result in dissimilar patterns of drug use and demand among their respective beneficiaries, resulting in fewer opportunities to combine drug requirements and solicit joint contracts. VA and DOD officials told us that differences in the scope of their national formularies also limit opportunities for joint drug procurements. VA’s national formulary currently lists about 1,100 drugs for inpatient and outpatient care representing 254 classes, while DOD’s basic core formulary lists 175 drugs for outpatient care in only 71 classes. Also, DOD’s military pharmacy formularies currently limit the drugs available to beneficiaries seeking them whereas its TRICARE retail formularies are unrestricted such that virtually any drug can be obtained. DOD officials are concerned that joint contracts for particular brand name drugs would further restrict drug choice at military pharmacies, which, in turn, could cause beneficiaries to use the retail pharmacies for their drugs. This could drive up DOD’s overall pharmacy costs because its contractors’ drug costs are greater than its discounted military pharmacy drugs. VA and DOD officials are also concerned that closing some classes would be clinically unacceptable for certain populations or individuals with certain conditions. For example, VA and DOD have been reluctant to seek joint contracts for orally inhaled corticosteroids (to treat asthma) because some DOD clinicians would not accept limiting drug choices in the oral inhaler class for clinical reasons, such as the special needs of children. Similarly, VA and DOD clinicians said they would not accept closing the selective serotonin reuptake inhibitor (SSRI) antidepressant class because they already have many patients maintained on one SSRI, and switching their SSRI drug therapy could have adverse treatment effects. Finally, DOD is concerned that its limited control of private provider prescribing practices could result in significant costs to educate and persuade these providers to prescribe drugs contracted under joint procurements. Unlike VA beneficiary prescriptions, which are all written by VA providers and dispensed by VA pharmacies, DOD beneficiary prescriptions are written by both military and private providers and dispensed by both military and retail pharmacies. In fiscal year 2000, about half of the 52 million prescriptions filled by military pharmacies were written by private providers and TRICARE retail pharmacies filled 12 million prescriptions for DOD beneficiaries. Over the past decade, DOD’s patient profile and drug demands have become more similar to VA’s. DOD retirees now make up over 50 percent of DOD’s beneficiary population—a trend that is projected to continue— and account for most of DOD’s drug costs. In fiscal year 2000, close to 70 percent of military pharmacies’ drug costs was for retirees’ prescriptions. (See figure 3.) Further, DOD’s pharmacy benefits for 1.4 million retirees 65 and older expanded in April 2001, which will add an estimated $800 million dollars per year to DOD’s pharmacy expenditures. A significant portion of VA and DOD’s combined drug expenditures is already spent on drugs in classes used primarily to treat older patients. For example, in 1999, 8 of the top 10 high-dollar drug classes in each department were the same. (See table 3.) Most of the matching therapeutic classes are widely used to treat health conditions common to the elderly: high blood pressure, depression, ulcers, diabetes, and high cholesterol. As DOD’s older beneficiary population continues to increase, the use of drugs in these and similar classes and their related expenditures will increase as well. DOD and VA are expected to revise their formularies, which could increase the number of closed and preferred drug classes used in their health care systems. The larger their formularies, the greater the chance they will overlap and provide the two departments more opportunities to jointly procure brand name drugs. Recent legislation has prompted DOD to make plans to increase the number of drugs on its basic core formulary. In 1999, the Congress enacted legislation requiring DOD to establish a preferred drug formulary by October 2000, applicable to both military pharmacies and TRICARE retail and mail-order pharmacies. DOD missed this deadline and is developing regulations to implement this requirement later this year. The legislation also allows DOD to develop and implement a tiered retail and mail-order pharmacy copayment system that creates financial incentives for beneficiaries to use less costly formulary brand name and generic drugs. Once implemented, DOD beneficiaries would have full access to nonformulary brand name drugs but would be financially encouraged to choose less costly formulary brand name drugs available for free at military pharmacies or at lower out-of-pocket costs through mail-order or retail pharmacies. TRICARE contractor representatives told us that a uniform formulary—one that applies to both military and TRICARE pharmacies—and adequately tiered retail and mail-order pharmacy copayments are critically needed to help them and DOD better manage pharmacy benefit costs by steering use to less costly drugs. In addition, the Congress enacted legislation in 2000 requiring DOD to allow beneficiaries age 65 and older access to its retail and mail-order pharmacy benefits—in addition to their continued eligibility to use military pharmacies to obtain free medications. For the first time starting in April 2001, all beneficiaries are eligible for DOD’s comprehensive pharmacy benefits at the same copayment rates. However, DOD’s retail and mail- order pharmacies are comparatively more costly sources for the same drugs than its military pharmacies. (See figure 4.) An expanded basic core formulary would encourage all beneficiaries to obtain more of their prescriptions at the military pharmacies. VA is also revising its formulary management processes and will continue to change its formulary based, in part, on our earlier reviews and a study by the Institute of Medicine (IOM). The IOM study was done in response to congressional concerns that VA’s formulary may have been overly restrictive, with potentially negative effects on health care cost and quality. IOM’s study dispelled such concerns, concluding that VA was justified in creating its formulary and that well-managed formularies are a key part of modern health systems having positive effects on cost and quality. IOM recommended in part that VA continue to prudently establish closed and preferred classes on its formulary and to use more contracts to carefully limit drug choices in more classes, based on quality and cost considerations. As VA’s and DOD’s formularies continue to evolve, the number of overlapping classes should increase, providing more candidates for joint brand name drug contracts. VA and DOD have recently demonstrated in a few cases that, with flexible arrangements, they can procure brand name drugs at maximum discounts, while still allowing one or both departments to preserve drug choice. In August 2000, VA and DOD solicited bids for a joint procurement for one of two nonsedating antihistamines (NSA)—loratadine (Claritin) and fexofenadine (Allegra). To address a DOD concern and ensure that DOD beneficiaries would not have to change their current medications, the solicitation specifies that DOD beneficiaries already using an NSA would not have to switch if the departments jointly contracted for the other drug. Military pharmacies will only have to dispense the contracted drug for new patient prescriptions. For the nicotine patch class (for smoking cessation), VA and DOD have awarded a joint contract that requires only those VA and DOD facilities offering smoking cessation programs to use the contracted drug. Simply adding the contracted product to their formularies would have required VA and DOD facilities without such programs to stock the patches. The joint procurement allowed VA and DOD to realize an estimated $2.4 million in annual cost avoidance. For the angiotensin converting enzyme inhibitor (ACEI) and calcium channel blocker classes, DOD and VA have awarded contracts for preferred formulary drugs without closing the classes. While these contracts encourage providers to prescribe less costly contracted drugs for their patients, providers are free to prescribe noncontracted drugs without having to justify medical necessity. These contracts have resulted in an estimated $13 million in annual cost avoidance. For the leutinizing hormone-releasing hormone (LHRH) class of anticancer drugs, DOD negotiated a blanket purchase agreement (BPA) to receive the same price as VA’s contract price for Zoladex—a 33 percent discount off old prices. In return, DOD has agreed to the preferential use of Zoladex to treat a subset of DOD’s population—adult prostate cancer patients. However, the BPA does not limit providers’ choice in prescribing LHRH drugs for women and children—a clinical concern that had caused DOD to avoid closing this class. DOD’s preferential use of Zoladex should achieve substantial cost avoidance. VA’s separate national contract on Zoladex—which closed the class on VA’s formulary—is achieving an estimated $22 million in annual cost avoidance. In addition, if VA and DOD determine that joint contracting for certain classes is not advantageous, they can use joint BPAs to achieve greater discounts without the more stringent use and time commitments required under a contract. For example, drugs under a joint BPA could be assigned preferential status on the departments’ formularies to encourage—but not require—providers to use the drugs. Competing drugs could also have equal status under multiple joint BPAs rather than closing a class. For example, VA negotiated discounts for SSRI antidepressants with three drug companies under individual BPAs. These BPAs were subsequently extended to DOD. Unlike contracts, BPAs do not require long-term commitments. VA, DOD, or the manufacturer can terminate BPAs with 30 days’ notice. While joint BPAs may not always realize the deep discounts provided under joint contracts, they could reduce costs nonetheless. DOD can work with its TRICARE managed care support contractors to encourage nonmilitary providers to prescribe the contracted drugs included in DOD’s developing uniform formulary as well as inform beneficiaries about the cost benefit to them. About half of the 52 million prescriptions dispensed by military pharmacies in fiscal year 2000 were written by nonmilitary providers treating DOD beneficiaries. DOD’s TRICARE contractors have large, nationwide networks of providers; they also administer benefits and pay claims to non-network providers caring for DOD beneficiaries. Contractor representatives told us that they could disseminate key information about DOD’s uniform formulary, once it is developed and implemented, on their provider Web sites and provide beneficiaries with formulary pocket cards to take along on their medical appointments. Patients would also be motivated to use drugs on the formulary because such use reduces their out-of-pocket costs. Other managed care pharmacy experts told us that these types of outreach efforts are a necessary and routine part of pharmacy benefit management. According to these experts, the additional administrative effort and cost to reach out to providers and beneficiaries will be more than offset by the financial benefits of less costly drug procurement and utilization. In our view, periodic expert input and congressional review could help sustain the important progress VA and DOD have made to address the challenges they face in jointly procuring drugs. While various experts in managed care pharmacy—including several responsible for the IOM study—agreed that the differences in VA’s and DOD’s demographics and health systems are not insurmountable obstacles to joint procurements, they were generally sympathetic to the clinical and operating challenges ahead as the departments continue to expand their efforts. Also, several experts told us that the departments’ efforts might be enhanced by periodically conferring with private managed care pharmacy experts in order to exchange information, experiences, and lessons learned that are relevant to the departments’ joint procurement plans and efforts. External reporting could also help bolster VA and DOD’s efforts to enhance their joint procurement activities—a general finding we reported to the Congress in May 2000. At that time, we recommended that the departments provide information to the Congress on their resource sharing activities—including initiatives such as joint purchasing of pharmaceuticals—to help the Congress and the departments weigh the advantages of such joint activities from a federal perspective rather than from each agency’s standpoint. Moreover, as part of this reporting, VA and DOD could provide details on their ongoing and planned joint procurements relative to the departments’ top-ranking drug classes by volume and expenditures. Also, they could report on the proportion that joint procurements represent of the departments’ combined pharmaceutical expenditures and volume, including the annual cost avoidance due to joint procurements. Such reporting would help facilitate congressional oversight of the departments’ efforts to increase their cooperation in the procurement and management of prescription drugs, which has been legislatively encouraged. VA and DOD have also made important progress in their efforts to conduct a DOD CMOP pilot for evaluating the merits and feasibility of using CMOP centers systemwide. In our May 2000 testimony, we suggested that DOD consider using VA’s highly efficient CMOPs to reduce its dispensing costs. In January 2001, DOD determined that it is feasible to develop the necessary computer interface between military pharmacies and CMOP centers, but other pilot details—including time frames for its implementation—have not yet been developed. If funded and done promptly, the pilot would provide VA needed lead time to plan for and begin building new CMOP facilities to accommodate DOD’s workload in the event that DOD decides to use CMOPs systemwide. In recent years, pharmacy officials have considered various options for moving DOD’s 23 million per year refill prescription workload out of military pharmacies, including using VA’s CMOP centers. VA has realized significant financial and operating benefits by using its seven CMOP centers to handle its refill prescription workload instead of using VA hospitals. (See appendix III for a description of VA’s CMOP operations.) In May 2000, we testified that DOD’s use of VA’s CMOP centers likewise could reduce drug dispensing costs and provide other operating benefits. DOD generally agreed with this proposition and with the proposed pilot test to use CMOPs to develop information on such matters for potential cost avoidance. Also by using CMOPs, DOD would likely achieve operating benefits similar to those realized by VA. For example, CMOP automated technologies have enabled each full-time CMOP employee to dispense between 50,000 and 100,000 prescriptions annually compared to about 15,000 prescriptions dispensed by VA’s pharmacy employees. Using CMOP centers to boost the efficiency of DOD’s refill process might help offset the shortages of qualified pharmacists and other staff at its military pharmacies. DOD also expects that by freeing up its military pharmacists from the labor-intensive task of dispensing prescriptions, they would have more time to work with medical staff and patients toward safer, more effective drug use. CMOP centers also have the benefit of ensuring quality—with their bar-code technology, they have achieved a near error-free dispensing rate. Other potential benefits from using VA’s CMOP centers include customer service. By reducing military pharmacies’ refill workload, pharmacists would have more time to fill initial prescriptions and thus reduce customer waiting times. Beneficiaries have the convenience of receiving refills by mail rather than picking them up at military pharmacies. After conducting an assessment of the costs and time required to develop a computer interface between DOD’s military pharmacies and VA’s CMOP centers, DOD plans to seek funding for the project. However, DOD and VA have not developed plans for how or when to address other significant operational and financial issues that must be worked through to ensure a successful pilot program. DOD had several concerns in deciding whether to conduct a CMOP pilot with VA. Primary among these concerns was determining the costs and time needed to develop an interface that would allow DOD to electronically transfer millions of refill prescriptions from its military pharmacies to the CMOP centers and allow the centers to confirm the status of each refill. In January 2001, DOD, in consultation with VA, completed a preliminary review of the information technology requirements and determined that this effort should take about 9 months of work by pharmacy information technology specialists and cost roughly $640,000. DOD’s pharmacy programs director told us that, considering the reasonableness of the cost and time estimates, establishing a DOD-CMOP interface is no longer considered a major obstacle and that he is seeking internal funding for the interface. According to VA and DOD, other significant operational and financial issues will need to be worked through if DOD decides to adopt CMOP use systemwide. For example, VA would have to plan for and build the equivalent of two new CMOP centers to accommodate DOD’s estimated refill mail-out workload of more than 20 million prescriptions. According to VA officials, the two new CMOP centers for DOD would require 2 to 3 years to build and cost about $27 million. Yet both DOD and VA officials agree that such costs could be significantly reduced if existing VA- or DOD-owned building space could be retrofitted for CMOP’s high- technology equipment and production lines. Unused warehouses and aircraft hangars, for example, might have the 75,000 square feet of open floor space VA’s CMOP design requires. Another DOD concern is that adopting CMOP use could adversely affect military medical readiness. If, for example, DOD’s prime vendors’ drug sales to military pharmacies are reduced with CMOP use, then surcharge revenues generated by such sales and used for medical logistics and readiness planning would likewise be reduced. As we testified in May 2000, this concern could be addressed if DOD’s prime vendors directly supply the CMOPs with drugs needed to fill DOD beneficiaries’ prescriptions—but the departments need to decide on a mutually acceptable course of action. VA and DOD officials told us that an interagency memorandum of understanding or sharing agreement would need to be established to do the pilot program and address these and other joint operational and financial concerns. Such an agreement would cover the various details governing DOD’s use of VA’s CMOPs for processing and mailing-out military pharmacy refill prescriptions to DOD beneficiaries. For example, officials anticipate that an agreement will include provisions to accommodate DOD’s medical readiness concerns. However, DOD and VA have not established time frames for addressing the remaining issues in order to finish planning so that the pilot can begin. VA and DOD’s existing sharing agreement governing their joint pharmaceutical and related medical procurement activities could be used for the CMOP pilot. Signed in 1999, the MOA provided for such future joint department activities by executing and adding appendixes to spell out mutual commitments and responsibilities. Alternatively, a new agreement could be drawn up for the CMOP activity. VA and DOD have made important progress, particularly this past year, in their collaborative efforts to jointly procure drugs to help control spiraling prescription drug costs. Their awarded joint contracts and planned joint procurements are expected to reduce the departments’ total drug costs by almost $170 million a year. This is in addition to significant cost avoidance under the departments’ separate contracts—cost avoidance that will likely increase as the contracts are combined in the future. While their joint procurement efforts have been impressive, to date the departments have largely targeted generic drugs, which make up less than 10 percent of their combined expenditures. More dramatic cost reductions could be realized through procurements of high-cost brand name drugs, although in doing so, it may be more complex and time-consuming to garner the necessary clinical support and provider acceptance on therapeutic interchangeability. Nonetheless, DOD’s greatly expanded retiree drug benefit, and both departments’ developing formularies should provide added joint procurement opportunities for such drugs. In particular, DOD needs to complete development of a uniform formulary of preferred drugs among its health system’s pharmacy sources to better manage and control drug use. Also, the departments’ have demonstrated that flexible approaches to developing joint solicitations can take into account differences in their health systems while still maximizing drug discounts. And DOD can work with the TRICARE contractors to help influence nonmilitary providers and their patients to use contracted drugs. This will become particularly important once DOD develops its uniform formulary of preferred drugs. In our view, their joint activities could be further enhanced by periodically conferring with private managed care pharmacy experts and reporting to the Congress on their joint procurement activities. DOD and VA need to ensure that high-level attention remains focused on their joint drug procurement and distribution activities as leadership changes under the new administration occur at the departments. In the same regard, VA and DOD have also made progress in their efforts to conduct a CMOP pilot. DOD’s use of VA’s CMOPs to handle its large prescription refill workload would result in drug dispensing cost reductions and better use of limited resources. To accelerate the pilot, however, VA and DOD need to develop an action plan with formal commitments. The sooner the pilot proves feasible, the sooner DOD can begin to realize the financial and quality of care benefits associated with the transfer of its refill workload. In view of the leadership changes under way at DOD and VA, we recommend that the departments sustain the momentum made this past year by jointly procuring all brand name and generic drugs for which such procurement is clinically appropriate and cost effective. Also, to help build on the departments’ progress with joint drug procurement and distribution activities, we recommend that the Secretaries of Defense and Veterans Affairs ensure that the Acting Assistant Secretary of Defense (Health Affairs) and VA’s Under Secretary for Health take the following actions: as part of the departments’ annual reporting to the Congress on resource sharing activities, provide information on ongoing and planned joint procurements—including the volume and expenditures relative to the departments’ top-ranking drug classes and total drug expenditures and the consequent annual cost avoidance—as well as on progress toward implementing a CMOP pilot; consider the benefits of periodically conferring with private, managed care pharmacy experts to exchange information, experiences, and lessons learned that could be relevant to the departments’ joint drug procurement activities; and work together to move ahead promptly on the CMOP pilot and develop an interagency agreement governing the pilot’s operation, including actions needed to provide added CMOP capacity should DOD decide to use the CMOPs systemwide. To further mitigate the remaining challenges to joint drug procurement that are unique to the military health care system, we recommend that the Secretary of Defense ensure that the Acting Assistant Secretary of Defense (Health Affairs) take the following actions: complete the development and implementation of a uniform formulary of preferred brand name drugs applicable to military hospital, TRICARE retail, and mail-order pharmacy programs, including the use of tiered retail and mail-order pharmacy copayments to encourage providers and beneficiaries to use formulary drugs; and work with TRICARE contractors to better inform DOD nonmilitary providers and their patients about the uniform formulary in order to encourage providers to prescribe and beneficiaries to use less costly formulary drugs throughout the military health care system. DOD and VA reviewed and separately commented on a draft of this report. Each concurred with the report and its recommendations. The departments stated their commitment to sustaining and building on the progress already made in jointly procuring drugs whenever clinically feasible and cost effective and in their drug distribution activities. The departments agreed, moreover, to annually report to the Congress on the status of their joint drug procurements and the CMOP pilot and to periodically confer with private, managed care pharmacy experts to exchange information and lessons learned relevant to their joint procurement activities. In particular, VA stated that a DOD/VA meeting with private managed care pharmacy representatives and buying groups will take place by November 2001 to discuss strategies for procuring pharmaceuticals. The departments also stated their intention to move ahead promptly on the CMOP pilot and finalize an interagency agreement. VA anticipates this would be completed by July 2001. According to the departments, the agreement will outline plans and actions needed should DOD decide to use VA’s CMOPs nationwide. Also, DOD has funded and expects to complete by March 2002 its work to establish a computer interface between a military pharmacy and a CMOP. Once the interface is developed, a pilot between a yet-to-be-designated military pharmacy and a VA CMOP is targeted to begin in March 2002, according to VA. Lastly, DOD agreed to complete the development of a uniform formulary of drugs applicable to its military hospital, TRICARE retail, and mail order pharmacies. DOD also agreed to work with the TRICARE contractors to encourage DOD’s nonmilitary providers and their patients to use the preferred, less costly formulary drugs. The full texts of the departments’ comments are reprinted as appendixes IV and V. We are sending this report to the Honorable Donald H. Rumsfeld, Secretary of Defense; the Honorable Anthony J. Principi, Secretary of Veterans Affairs; appropriate congressional committees; and other interested parties. We will also make copies available to others upon request. Should you have any questions on matters discussed in this report, please contact me at (202) 512-7101. Other contacts and staff acknowledgments are listed in appendix VI. As reported in May 2000 testimony, from October 1998 through April 2000, VA and DOD awarded 18 joint contracts—mostly for generic drugs. If not for these contracts, VA and DOD estimate that these purchases could have cost $102 million in fiscal year 2000. Instead, actual costs were $62 million—about 1.9 percent of the departments’ combined $3.2 billion drug spending in fiscal year 2000—an overall cost avoidance of 39 percent. Table 4 presents information on the 18 contracts. Since our May 2000 testimony, VA and DOD have more than doubled the number of joint procurements. That is, from May 2000 through April 2001, VA and DOD awarded or were soliciting 26 joint contracts. This includes joint procurements for 25 generic drugs and one brand name antihistamine drug. Based on our analysis of VA/DOD 1999 pharmaceutical purchase data, these 26 drugs amounted to about $123 million in combined drug expenditures. Tables 5 and 6 present information on the 26 joint contracts and solicitations. Over the last several years, DOD and VA have awarded separate contracts for many different pharmaceuticals and related supplies. The following table provides information on the separate contracts that the departments are planning to merge or combine as they expire. In December 2000, DOD and VA pharmacy officials completed their preliminary review of drugs in the high-expenditure classes we had suggested as future candidates for joint procurement. Table 8 is a list of the drugs for which the departments told us they plan to pursue joint procurements in the near future, as well as their data on expenditures and estimates of annual cost avoidance that would stem from the procurements. VA and DOD pharmacy officials told us that they may identify additional drugs and classes for joint procurement once they complete their reviews. VA was the first organization in the United States to deliver prescription medications to patients on a large scale by mail. After World War II, this service was started as a convenience to disabled, homebound veterans. By 1992, nearly all of VA’s outpatient pharmacies provided mail service, but consolidation of mail prescription workloads from multiple VA hospitals into centralized operations had only been initiated on a limited basis. In 1994, the first CMOP at Leavenworth, Kansas, began processing high volume mail prescription workloads using an integrated, automated dispensing system. Since that time, VA has expanded the program to include a total of seven CMOPs located in Leavenworth, Kansas; Los Angeles, California; Bedford, Massachusetts; Dallas, Texas; Murfreesboro, Tennessee; Hines, Illinois; and Charleston, South Carolina. In fiscal year 2000, those facilities processed about 50 million prescriptions. Patients are provided care by VA hospitals or clinics with new prescriptions being dispensed directly from those hospitals or clinics. Patients’ refill prescription requests are received by telephone or in person and processed at the individual VA sites daily. Once processed, the refill prescription orders are sent electronically from multiple VA medical facilities to a CMOP for processing. The CMOP dispenses the pharmaceuticals as specified by the participating medical facility, delivers the completed prescriptions directly to the patient by mail, and returns the dispensing data to the participating hospital or clinic electronically. A patient contacts the hospital or clinic directly if there are any questions or problems. According to VA, the CMOP model takes advantage of economies of scale for mail prescription processing and distribution while at the same time preserving the patient-provider relationship. VA data show that productivity at the CMOP is at levels between 50,000 and 100,000 prescriptions per year per full-time employee. According to VA, such productivity rates are several times greater than traditional hospital and clinic systems. Patients generally receive their medications by mail within 4 days of their orders going from the VA medical facility to a CMOP. CMOPs charge VA medical facilities to recover direct operating costs to purchase pharmaceuticals and related supplies as well as to dispense, package, and mail prescriptions to patients. According to VA documents, in fiscal year 2000, the nondrug CMOP cost charged to VA medical facilities averaged $2.00 per prescription and the CMOP drug cost charged averaged $20.33 per prescription. For each prescription, the nondrug cost charged included $0.77 in personnel costs, $0.40 in operating costs, and $0.83 in mailing costs. For fiscal year 2000, the CMOP workload was about 50 million prescriptions of about $1 billion in drug products and $100 million in nondrug expenses. VA’s business plan for the CMOPs includes performance improvement measures for prompt delivery, accurate dispensing, properly packaged prescriptions, safe work environments, reliable and appropriate equipment, right supplies of drugs on hand, and customer satisfaction. Also, using barcode technology in the automated dispensing process and other quality steps, the CMOP program has achieved an overall accuracy rate of 99.99 percent—which means getting the right drug—in the correct dosage, with the correct instructions—to the right people. In addition, the CMOPs are fully accredited by the Joint Commission on the Accreditation of Health Care Organizations. In addition to those named above, the following staff made key contributions to this report: William Lew, Allan Richardson, Karen Sloan, and Richard Wade.

Summary: The Department of Veterans Affairs (VA) and the Department of Defense (DOD) have made important progress, particularly during the past year, in their efforts to jointly procure drugs to help control spiraling prescription drug costs. Although their collaborative efforts have been impressive, the two agencies have largely targeted generic drugs, which comprise less than 10 percent of their combined expenditures. More dramatic cost reductions could be achieved through procurements of high-cost brand-name drugs, although doing so can be more complex and time consuming to garner the necessary clinical support and provider acceptance on therapeutic interchangeability. Nonetheless, DOD's greatly expanded retiree drug benefit and the formularies being developed by both agencies should provide added joint procurement opportunities for such drugs. Also, VA and DOD have shown that flexible approaches to developing joint solicitations can take into account differences in their health systems while still maximizing drug discounts. In GAO's view, their joint activities could be further enhanced by periodically conferring with private managed care pharmacy experts and reporting to Congress on their joint procurement activities. Top management at DOD and VA need to stay focused on their joint procurement and distribution activities as leadership changes continue at the two agencies. VA and DOD have also made progress in their efforts to conduct a consolidated mail outpatient pharmacy pilot. The sooner the pilot proves feasible, the sooner DOD can begin to realize the financial and quality of care benefits associated with the transfer of its refill workload.