In fiscal year 2000, VA’s Veterans Health Administration (VHA) provided primary and specialty medical care to approximately 3.2 million veterans at a cost of about $18 billion. VA’s pharmacy benefit cost approximately $2 billion—about 12 percent of the total VHA budget—and provided approximately 86 million prescriptions. In contrast, 10 years ago VA’s pharmacy benefit represented about 6 percent of VA’s total health care budget. Health care organizations’ efforts to control pharmacy costs and improve quality of care include (1) implementing formularies that limit the number of drug choices available; (2) establishing financial incentives, such as variable copayments, to encourage the use of formulary drugs; (3) using compliance programs, such as prior authorization, that encourage or require physicians to prescribe formulary drugs; and (4) developing clinical guidelines for prescribing drugs. VA does not have authority to use financial incentives to encourage compliance with its formulary. VA provides outpatient pharmacy services free to veterans receiving medications for treatment of service-connected conditions and to low-income veterans whose incomes do not exceed a threshold amount. Other veterans who have prescriptions filled by VA may be charged $2 for each 30-day supply of medication. In 1995, VA began transforming its delivery and management of health care to expand access to care and increase efficiency. As part of this transformation, VA decentralized decision-making and budgeting authority to 22 VISNs, which became responsible for managing all VA health care. VISNs were given substantial operational autonomy. Although VISN and medical center directors are held accountable in annual performance agreements for meeting certain national and local goals, attaining formulary goals has not been part of their performance standards. VA medical centers began using formularies as early as 1955 to manage their pharmacy inventories. Because of the geographic mobility of VA patients, VA officials believed that a national formulary would improve veterans’ continuity of care. In September 1995, VA established a centralized group to manage its pharmacy benefit on a nationwide basis. In November 1995, VISNs were established, and the Under Secretary for Health directed each VISN to develop and implement a VISN-wide formulary. To develop their formularies, the VISNs generally combined existing medical center formularies and eliminated rarely prescribed drugs. VISN formularies became effective on April 30, 1996. Also in 1996, the Congress required VA to improve veterans’ access to care regardless of the region of the United States in which they live. As part of its response, VA implemented a national drug formulary on June 1, 1997, by combining the core set of drugs common to the newly developed VISN formularies. In addition to the national and VISN formularies, a few medical centers retained their own formularies. VA’s Pharmacy Benefits Management Strategic Healthcare Group (PBM) is responsible for managing the national formulary list, maintaining databases that reflect drug use, and monitoring the use of certain drugs. VISN directors are responsible for implementing and monitoring compliance with the national formulary, ensuring that VISN restrictions placed on national formulary products are appropriate, and ensuring that a nonformulary drug approval process is functioning in all of their medical centers. As all formularies do, VA’s national formulary limits the number of drug choices available to health care providers. VA’s formulary lists more than 1,100 unique drugs that are assigned to 1 of 254 drug classes—groups of drugs similar in chemistry, method of action, or purpose of use. After performing reviews of drug classes representing the highest costs and volume of prescriptions, VA decided that some drugs in 4 of its 254 drug classes were therapeutically interchangeable—that is, essentially equivalent in terms of efficacy, safety, and outcomes—and therefore had the same therapeutic effect. This determination allowed VA to select one or more of these drugs for its formulary to seek better prices through competitively bid committed-use contracts. Other therapeutically equivalent drugs in these classes were then excluded from the formulary. These four classes are known as “closed” classes. VA has not made clinical decisions regarding therapeutic interchange in the remaining 250 drug classes, and it does not limit the number of drugs that can be added to these classes. These are known as “open” classes. In some cases, drugs listed on the national formulary may be restricted. Restrictions are generally placed on the use of drugs if they have the potential to be used inappropriately. For example, restrictions are placed on drugs with potentially serious side effects, such as interferon, which is used to treat such conditions as hepatitis C. VA has also adopted guidelines to assist practitioners in making decisions about the diagnosis, treatment, and management of specific clinical conditions, such as congestive heart failure. In addition, VA has adopted criteria to help standardize treatment, improve the quality of patient care, and promote cost-effective drug prescriptions. Finally, VA limits prescribing privileges for some drugs to specially trained physicians and requires consultation with a specialist before certain drugs can be prescribed. VA has made significant progress in establishing a national formulary, with most drugs being prescribed from the formulary list. Nevertheless, VA’s oversight has not been sufficient to ensure that it is fully achieving its national formulary goal of standardizing its drug benefit nationwide. We found that some facilities have omitted required national formulary drugs. In addition, the extent to which VISNs add drugs to supplement the national formulary has the potential for conflicting with VA’s ability to achieve standardization if not closely managed. Also, we found that some facilities, contrary to policy, have modified the list of drugs available in closed classes. Almost 3 years after VA facilities were directed to make available locally all national formulary drugs, two of the three medical centers we visited did not list all national formulary drugs in the formularies used by their prescribers. VHA’s national formulary policy directive states that items listed on the national formulary shall be made available throughout the VA health care system and must be available in all VA facilities. While a physical supply of all national formulary drugs is not required to be maintained at all facilities, if a clinical need for a particular formulary drug arises in the course of treating a patient, it must be made available to the patient. Many drugs listed on the national formulary were not available as formulary choices in two of the three medical centers we visited. In the first, about 25 percent (286 drugs) of the national formulary drugs were not available as formulary choices. These included drugs used to treat high blood pressure and mental disorders, as well as drugs used to treat the unique medical needs of women. At the second medical center, about 13 percent (147 drugs) of the national formulary drugs were omitted, including drugs used to treat certain types of cancer and others used to treat stomach conditions. Health care providers at these two medical centers were required to seek nonformulary drug approvals for over 22,000 prescriptions of national formulary drugs from October 1999 through March 2000. If the national formulary had been properly implemented at these medical centers, prescribers would not have had to use extra time to request and obtain nonformulary drug approvals for these drugs, and patients could have started treatment earlier. Our analysis showed that over 14,000 prescriptions were filled as nonformulary drugs for 91 of the 286 drugs at the first center. No prescriptions were filled for the remaining 195 drugs. At the other medical center, over 8,000 prescriptions for 23 of the 147 drugs were filled as nonformulary drugs. No prescriptions were filled for the remaining 124 drugs. VA’s policy allowing VISNs to supplement the national formulary locally has the potential for conflicting with VA’s ability to achieve standardization if not closely managed. From June 1997 through March 2000, VISNs added 244 unique drugs to supplement the list of drugs on the national formulary. The number of drugs added by each VISN varies widely, ranging from as many as 63 by VISN 20 (Portland) to as few as 5 by VISN 8 (Bay Pines). (Fig. 1 shows the number of drugs added by each VISN.) Adding drugs to supplement the national formulary is intended to allow VISNs to be responsive to the unique needs of their patients and to allow quicker formulary designation of new FDA-approved drugs. However, the wide variation in the number of drugs added by the VISNs to supplement the national formulary raises concern that this practice, if not appropriately monitored, could result in unacceptable decreases in formulary standardization. VA officials have acknowledged that this variation affects standardization and told us they plan to address it. For example, the PBM plans to review new drugs when approved by the FDA to determine if they will be added to the national formulary or if VISNs may continue to add them to their formularies to supplement the national formulary. The medical centers we visited also inappropriately modified the national formulary list of drugs in the closed classes. Contrary to VA formulary policy, two of three medical centers added two different drugs to two of the four closed classes, and one facility did not make a drug available (see fig. 2). While our analysis was performed at the medical center level, the IOM found similar nonconformity at the VISN level. Specifically, IOM reported that 16 of the 22 VISNs modified the list of national formulary drugs for the closed classes. From October 1999 through March 2000, 90 percent of VA outpatient prescriptions were written for national formulary drugs. The percentage of national formulary drug prescriptions filled by individual VISNs varied slightly, from 89 percent to 92 percent. We found wider variation among medical centers within VISNs—84 percent to 96 percent (see table 1).