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.