VA physicians prescribed OTC products for veterans more than 7 million times in fiscal year 1995, accounting for almost one-fifth of all prescriptions. VA pharmacies filled these OTC prescriptions over 15 million times, about one-fourth of all prescriptions filled. VA physicians prescribed more than 2,000 unique OTC products. VA pharmacies classify these products into three groups: medications such as antacids, medical supplies such as insulin syringes, and dietary supplements such as Ensure. Medications account for about 73 percent of the 15 million OTC prescriptions filled, medical supplies for 26 percent, and dietary supplements for less than 1 percent. VA’s network and facility directors have considerable freedom in developing operating policies, procedures, and practices for VA physicians and pharmacies. They and the pharmacies have taken a number of different actions to limit the number of OTC products available through the pharmacies and the quantity of products veterans can receive. However, little uniformity in the application of limits is evident. In general, each facility has a Pharmacy and Therapeutics Committee that decides which OTC products to provide based on product safety, efficacy, and cost effectiveness. These products are listed on a formulary and VA physicians are generally to prescribe only these products. Of the 2,000 unique OTC products dispensed systemwide, individual pharmacies generally handled fewer than 480, with the number of OTC products ranging between 160 and 940 products. Medical supplies account for the majority of unique products, with pharmacies generally dispensing fewer than 10 types of dietary supplements. However, three facilities’ formularies excluded dietary supplements. The volume of OTC products dispensed also varied among facilities. Overall, OTC products accounted for about 25 percent of all prescriptions filled systemwide. But OTC products represented between 7 percent and 47 percent of all prescriptions dispensed at individual facilities. Of note, fewer than 100 products were involved in more than 80 percent of the 15 million times that OTC products were dispensed. The most frequently dispensed OTC products include (1) medications such as aspirin, acetaminophen, insulin, and stool softener; (2) dietary supplements including Sustacal and Ensure; and (3) supplies such as alcohol prep pads, lancets, and chemical test strips. Facilities have sometimes restricted physicians’ prescriptions of OTC products to veterans with certain conditions or within certain eligibility categories. For example, 115 facilities restricted dietary supplements to veterans who required tube feedings or received approval for the supplement from dieticians. For medical supplies, a facility provided certain supplies only to patients who received them when hospitalized and another provided diapers only to veterans with service-connected conditions. One facility provided OTC medications only to veterans with service-connected disabilities. Facilities have sometimes restricted the quantities of OTC products that pharmacies may dispense. Twenty-eight facilities had restrictions, including limits on the quantity of OTC products dispensed within prescribed time periods or the number of times a prescription could be refilled. For example, one facility restricted cough syrup prescriptions to an 8-ounce bottle with one refill. It had similar quantity restrictions for 15 other OTC medications. Another facility had a no-refill policy for certain medical supplies, such as diapers, underpads, and bandages. The Department of Defense operates a health care system for military beneficiaries, including active duty members, retired members, and dependents. This system provides a more restricted number of OTC products than most VA facilities. In 1992, Defense eliminated all OTC products except for insulin from its formularies to control costs. However, more expensive prescription medications were being substituted for some OTC medications that were no longer available. Subsequently, Defense reinstated a few products to its formularies to alleviate such substitution. All beneficiaries are eligible for OTC products without a copayment. OTC medications for its beneficiaries. Like VA, Medicaid, at the option of the states, can cover OTC products for its low-income beneficiaries. The availability of OTC products varies by state, ranging from very few to a substantial array of products. The Federal Employees Health Benefits program offers a range of health insurance plans to federal employees and their dependents. The program requires plans to meet certain minimal standards, which include prescription medications but no OTC products, except for insulin and related supplies. Blue Cross and Blue Shield and Kaiser Permanente are two of the larger plans and they cover no OTC products, other than insulin and related supplies. Both plans require beneficiary payments, with Kaiser charging $7 for each prescription provided in its pharmacy and Blue Cross and Blue Shield requiring a $50 deductible and 15 to 20 percent of individual prescription costs, depending on whether the beneficiary has a high- or low-option plan. Finally, most private health insurers generally exclude OTC products as a benefit for participants, with a few exceptions such as insulin and insulin syringes. For example, the Group Health Cooperative of Puget Sound, in Seattle, provides insulin with a $5 copayment but no other OTC products. Before 1995, the Group Health Cooperative of Puget Sound did provide an OTC drug benefit. However, it dropped the OTC medication benefit because it found no other similar health plan that provided this benefit. Nationwide, VA pharmacies spent an estimated $117 million to purchase OTC products and $48 million to dispense them to veterans in fiscal year 1995. Pharmacies spent about $85 million on medications, with purchasing cost representing about two-thirds of total costs. By contrast, they spent about $74 million for medical supplies and $6 million on dietary supplements, with purchasing costs accounting for most of these costs, as shown in figure 1. Purchasing and dispensing costs differ among the product categories for two reasons. First, VA physicians generally provide veterans more prescriptions for medications than supplies, thereby causing pharmacies to handle medications more often. Second, ingredient costs of medications are generally significantly lower than the cost of medical supplies. VA recovered an estimated $7 million of these costs through veterans’ copayments. By law, unless they meet statutory exemption criteria, veterans are to pay $2 for each 30-day supply of OTC medications and dietary supplements that VA provides. Veterans’ copayments are not required for OTC products used to treat service-connected conditions. Also, veterans are exempt from the copayment requirement if they have low incomes. Our analysis of veterans’ copayments and pharmacy costs at VA’s Baltimore facility shows that copayments offset no more than 12 percent of costs for medications, dietary supplements, and medical supplies, as shown in table 1. Federal funds financed most of Baltimore’s OTC product costs. Copayments collected cover a relatively small portion of these costs, for several reasons. First, the $2 copayment collected for a 30-day supply represents only a portion of the ingredient, dispensing, and collection costs of most OTC medications and dietary supplements. Second, copayments are not required for medical supplies. Third, most veterans receiving medications and dietary supplements are exempted, and some nonexempt veterans do not pay copayments owed. For individual OTC products, veterans’ medication copayments ranged between 4 percent to more than 100 percent of VA’s costs, depending on the type of OTC product and the quantities dispensed. For example, a veteran’s medication copayment of $6 for a 90-day supply of an expensive product, such as the dietary supplement Ensure, may cover less than 5 percent of VA’s costs ($400). By contrast, a veteran’s copayment of $6 for a 90-day supply of an inexpensive medication, such as aspirin, may cover more than VA’s total cost. There is a variety of actions available that could help reduce the level of federal resources devoted to the provision of OTC products. First, if VA eligibility rules were more strictly enforced, VA pharmacies could dispense considerably fewer OTC products. Also, savings could be achieved through more efficient OTC dispensing and copayment collection processes. Finally, the Congress could expand the copayment requirements to generate additional revenues. The Congress has limited VA’s authority to provide outpatient medical care to veterans. Only veterans with service-connected conditions rated at 50 percent or higher are eligible for comprehensive outpatient care. All veterans with service-connected conditions are eligible for treatments related to those conditions; they are also eligible for hospital-related care of nonservice-connected conditions. This includes only outpatient services needed to (1) prepare for a hospital admission, (2) obviate the need for a hospital admission, or (3) complete treatment begun during a hospital stay. Most veterans with no service-connected conditions are eligible only for hospital-related outpatient care. VA is required to assess a veteran’s eligibility for care based on the merits of his or her unique situation each time that the veteran seeks care for a new condition. We have identified many instances in which OTC products are used for pre- and posthospitalization care. For example, veterans received OTC products, such as phosphate enemas, magnesium citrate, and prep kits needed for barium enemas in preparation for colonoscopies and other diagnostic tests. Following hospital stays, veterans received ostomy supplies after some surgeries, wound-care supplies, aspirin for heart surgery or angioplasties, and decongestants after sinus surgery. “. . . shall be based on the physician’s judgment that the medical services to be provided are necessary to evaluate or treat a disability that would normally require hospital admission, or which, if untreated, would reasonably be expected to require hospital care in the immediate future” In other words, VA physicians must determine that a veteran would likely need to be hospitalized soon if OTC products are not used. Some OTC products may be used to obviate the need for hospital care.