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.