[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
EXAMINING VA'S PHARMACEUTICAL PRIME VENDOR CONTRACT
=======================================================================
HEARING
before the
COMMITTEE ON VETERANS' AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
FEBRUARY 1, 2012
__________
Serial No. 112-40
__________
Printed for the use of the Committee on Veterans' Affairs
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COMMITTEE ON VETERANS' AFFAIRS
JEFF MILLER, Florida, Chairman
CLIFF STEARNS, Florida BOB FILNER, California, Ranking
DOUG LAMBORN, Colorado CORRINE BROWN, Florida
GUS M. BILIRAKIS, Florida SILVESTRE REYES, Texas
DAVID P. ROE, Tennessee MICHAEL H. MICHAUD, Maine
MARLIN A. STUTZMAN, Indiana LINDA T. SANCHEZ, California
BILL FLORES, Texas BRUCE L. BRALEY, Iowa
BILL JOHNSON, Ohio JERRY McNERNEY, California
JEFF DENHAM, California JOE DONNELLY, Indiana
JON RUNYAN, New Jersey TIMOTHY J. WALZ, Minnesota
DAN BENISHEK, Michigan JOHN BARROW, Georgia
ANN MARIE BUERKLE, New York RUSS CARNAHAN, Missouri
TIM HUELSKAMP, Kansas
MARK E. AMODEI, Nevada
ROBERT L. TURNER, New York
Helen W. Tolar, Staff Director and Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Veterans' Affairs are also
published in electronic form. The printed hearing record remains the
official version. Because electronic submissions are used to prepare
both printed and electronic versions of the hearing record, the process
of converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
February 1, 2012
Page
Examining VA's Pharmaceutical Prime Vendor Contract.............. 1
OPENING STATEMENTS
Chairman Jeff Miller............................................. 1
Prepared statement of Chairman Miller........................ 45
Hon. Michael H. Michaud, Acting Ranking Democratic Member........ 2
Prepared statement of Congressman Michaud.................... 46
WITNESSES
The Honorable W. Scott Gould, Deputy Secretary of Veterans
Affairs, U.S. Department of Veterans Affairs................... 5
Prepared statement of Hon. W. Scott Gould.................... 47
Accompanied by:
John R. Gingrich, Chief of Staff, U.S. Department of Veterans
Affairs........................................................ 5
Glenn D. Haggstrom, Executive Director, Office of Acquisitions,
Logistics, and Construction, U.S. Department of Veterans
Affairs........................................................ 5
Jan R. Frye, Deputy Assistant Secretary, Office of Acquisition
and Logistics, U.S. Department of Veterans Affairs............. 5
Philip Matkovsky, Assistant Deputy Under Secretary for Health for
Administrative Operations, Veterans Health Administration, U.S.
Department of Veterans Affairs................................. 5
Steven A. Thomas, Director, National Contracting Service,
National Acquisition Center, U.S. Department of Veterans
Affairs........................................................ 5
Michael Valentino, Chief Consultant, Pharmacy Benefits Management
Services, U.S. Department of Veterans Affairs.................. 5
Linda Halliday, Deputy Assistant Inspector General for Audits and
Evaluations, Office of Inspector General, U.S. Department of
Veterans Affairs............................................... 30
Prepared statement of Linda Halliday......................... 51
Accompanied by:
Mark Myers, Director, Healthcare Resources Division, Office of
Contract Review, Office of Inspector General, U.S. Department
of Veterans Affairs............................................ 30
Michael Grivnovics, Director, Federal Supply System Division,
Office of Contract Review, Office of Inspector General, U.S.
Department of Veterans Affairs................................. 30
Sharon Longwell, Vice President, Health Systems, National
Accounts McKesson Corporation.................................. 38
Prepared statement of Sharon Longwell........................ 53
MATERIAL SUBMITTED FOR THE RECORD
Post-Hearing Questions and Responses for the Record:
Hon. Bob Filner, Ranking Democratic Member, Committee on
Veterans' Affairs to Hon. Eric K. Shinseki, Secretary, U.S.
Department of Veterans Affairs................................. 57
Responses from Hon. Eric K. Shinseki, Secretary, U.S. Department
of Veterans Affairs to Hon. Bob Filner, Ranking Democratic
Member, Committee on Veterans' Affairs......................... 59
EXAMINING VA'S PHARMACEUTICAL PRIME VENDOR CONTRACT
----------
WEDNESDAY, FEBRUARY 1, 2012
U.S. House of Representatives,
Committee on Veterans' Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10:02 a.m., in
Room 334, Cannon House Office Building, Hon. Jeff Miller
[Chairman of the Committee] presiding.
Present: Representatives Miller, Stearns, Bilirakis, Roe,
Stutzman, Flores, Johnson, Denham, Runyan, Benishek, Buerkle,
Huelskamp, Amodei, Reyes, Michaud, McNerney, Donnelly, Walz,
and Barrow.
OPENING STATEMENT OF CHAIRMAN MILLER
The Chairman. Good morning. This hearing will come to
order. And I want to thank everybody for coming today to a
hearing entitled Examining VA's Pharmaceutical Prime Vendor
Contract.
We started investigating PPVs and the contract well before
the stories on this topic hit the press and we found enough
that questions were raised to warrant the hearing that we are
going to hold today and possibly subsequent hearings in the
future.
Now, the PPV contract when written and executed correctly
is intended to ensure VA medical facilities receive the needed
pharmaceuticals at a competitive price and in a timely fashion.
Medical facilities throughout the Nation rely on this
system to ensure that the patients get the best care, that the
Veterans get the care they need, they deserve, and they have
earned.
The Committee's investigation began when discrepancies
appeared in how VA ordering officials had been handling open
market purchases of items not available on the PPV contract.
These purchases go back much further than just the last
year or two. In fact, they span multiple administrations
showing many within VA chose to ignore rather than to fix a
problem they knew about.
While Federal acquisition regulations outline clear
procedures on how agencies can acquire items when they are not
on a contract, VA officials for years have ignored those
procedures when purchasing supplies that were either not
available at the time or not on the PPV contract.
Instead of actually performing due diligence in its open
market purchasing, VA officials took the easy route and
requested the PPV to deliver the needed pharmaceuticals or in
some cases non-pharmaceutical items.
An open market purchase requires a degree of competition.
VA's practices willfully ignored requiring competition thereby
compromising best value to the taxpayer and potentially
compromising patient safety.
In short, what VA has been doing is not mere bureaucratic
oversight, it is illegal with serious potential ramifications
for Veterans.
I am disheartened by VA's treatment of this matter. We know
that senior officials at the department have known these
practices for a long time, yet did little to address the issue
and certainly were not forthcoming about it to Congress.
In fact, VA has acknowledged open market purchases through
the PPV could be problematic as far back as December of 2010,
but only in November of 2011 did they take formal action. And
this action was little more than a restatement of current laws
that employees should already have been following and the
leadership should have been enforcing.
One thing, we will get to the bottom of this, who knew of
VA's illegal buying and did nothing about it. As has been the
case of several other problems identified by this committee,
weaknesses in contracting at VA are a major cause of the
illegal purchases we are discussing here today.
Instead of applying temporary bandages to cover up
problems, VA needs to address the recurring causes within its
own department and fix them. Whether a complete contracting
overhaul is needed or simply new leadership that can enforce
existing law, it is my sincere desire that this committee and
the department can resolve these issues and move forward.
My concern about the depth and duration of this illegal
purchasing is serious enough that I have partnered with
Chairman Issa of the Oversight and Government Reform Committee
in requesting needed documents and information from VA to fix
this problem.
I want to thank Chairman Issa for his help in investigating
this matter and I look forward to VA's full and timely
cooperation with us and his committee.
Lastly, I want to note VA's continuing habit of not
providing requested information to this committee. One request
is now a month overdue and another is 5 months overdue.
I want to work with your department to get our Veterans the
services and care they deserve and that is going to require
your congressional affairs team working with us to deliver the
appropriate solutions.
I now recognize the Ranking Member, Mr. Michaud, for an
opening statement.
[The prepared statement of Chairman Miller appears on p.
45.]
OPENING STATEMENT OF HON. MICHAEL H. MICHAUD, ACTING RANKING
MEMBER
Mr. Michaud. Thank you very much, Mr. Chairman, for having
this hearing and for your leadership dealing with the Veterans'
issues.
I also want to thank Representative Donnelly for his
leadership in this particular issue as well.
We are here because once again VA has demonstrated an
inability to properly perform its responsibilities to follow
its procedures and policies and applicable laws and
regulations.
The VA admits that it did not follow all applicable laws
and regulations for approximately $1.2 billion in what was
called open market drug purchases since 2004.
VA assures us that changes have been implemented to fix
deficiencies at hand. Frankly, Mr. Chairman, we have heard this
before.
Today I have three questions. First, what did VA officials
know and when did they know it? In December 2010, the VA
decided to not include an open market clause in the upcoming
PPV contract. What was the impetus behind this decision? Was
there an awareness in 2010 that there were serious problems
with open market purchases, yet nearly a year lapse before VA
took decisive action?
During this period, did anyone in VA leadership simply
insist that open market purchases conform with VA policy,
regulation, and law? Have these $1.2 billion in purchases that
were not in accordance with applicable laws and regulation,
have they been ratified by the VA?
In 2009, the inspector general found a litany of problems
with improper open market purchases for medical equipment and
supplies. VA management and leadership should have been put on
notice that problems might exist in other prime vendor
programs, but no proactive steps seemed to have been taken at
that time.
I find it hard to believe that as the VA states, and I
quote, ``The process that was in place since 2004 had become
routine,'' end of quote. I have to ask what is routine about
failure to follow established policies and procedures?
Title 38 requires VA to submit an annual report on the
health care procurement experience. I look forward to receiving
those reports from VA dating back to 2004.
My second question is, who should be held accountable for
this failure? Time and time again, VA comes up here and
testifies that it has wonderful policies and procedures in
place. Unfortunately, no one ever seems to follow these
policies and procedures and there seem to be no consequences
for the failure to follow these procedures.
And time and time again, the IG, the GAO testify concerning
serious problems with VA management and controls. And time and
time again, VA ignores these findings and fails to take action.
VA testimony includes an illustrative example of a GS5
pharmacy specialist confronted with the choice of ordering an
open market item or doing without. Let me offer an example of
how management responsibility for overseeing GSA making sure
that pharmacy specialists knew what VA policy and procedures
were required and ensuring that they follow them. It is
management's responsibility.
Third, how is this going to be fixed and how will this fix
process improve the care we provide to our Veterans? How will
the absence of an open market clause in the new contract, how
will that affect our Veterans? Is VA still making open market
purchases either through PPV or through other suppliers and how
can we be sure that proper procedures are in place and, more
importantly, being actively supervised by management?
I want to be sure that VA open market purchases are from
reliable suppliers and that all purchased drugs and
pharmaceuticals meet all safety requirements.
There is a saying of ignorance of the law is no excuse. I
hope that VA can help us understand today what accountability
we should expect from the failures that seem to arise from
ignorance, you know, or willful neglect of VA policy and
procedures in existing laws and regulations.
I mean, there is no excuse for VA management in this regard
and there is no need to blame a GS5 position. This is a
management failure, a failure which hopefully we will be able
to get to the bottom of this.
And it is my hope that because of this failure, that those
in management did not receive a bonus. One point two billion
dollars is a lot of money.
So with that, Mr. Chairman, I yield back and look forward
to working with you in this regard.
[The prepared statement of Hon. Michaud appears on p. 46.]
The Chairman. I thank the Ranking Member.
And following our standard practice here on the Committee,
I would ask any Member that has an opening statement if you
would hold it at this time and you may either give the
statement when your turn for questioning arises or it may be
submitted into the record here if that is your choice.
Our first panel today, a large panel, as everybody can see.
I will introduce Mr. Gould. Secretary Gould is here with us
today. He is Honorable W. Scott Gould, deputy secretary of the
Veterans Affairs.
And, Secretary, what I would like to do instead of me
introducing everybody at the table, I understand you have
modified your comments today to introduce everybody at the
table with you.
And I would ask the clerk not to begin the clock until
everybody has been introduced.
You are recognized.
STATEMENT OF HONORABLE W. SCOTT GOULD, DEPUTY SECRETARY OF
VETERANS AFFAIRS, U.S. DEPARTMENT OF VETERANS AFFAIRS
ACCOMPANIED BY JOHN R. GINGRICH, CHIEF OF STAFF, U.S.
DEPARTMENT OF VETERANS AFFAIRS; GLENN D. HAGGSTROM, EXECUTIVE
DIRECTOR, OFFICE OF ACQUISITIONS, LOGISTICS, AND CONSTRUCTION,
U.S. DEPARTMENT OF VETERANS AFFAIRS; JAN R. FRYE, DEPUTY
ASSISTANT SECRETARY, OFFICE OF ACQUISITION AND LOGISTICS, U.S.
DEPARTMENT OF VETERANS AFFAIRS; PHILIP MATKOVSKY, ASSISTANT
DEPUTY UNDER SECRETARY FOR HEALTH FOR ADMINISTRATIVE
OPERATIONS, VETERANS HEALTH ADMINISTRATION, U.S. DEPARTMENT OF
VETERANS AFFAIRS; STEVEN A. THOMAS, DIRECTOR, NATIONAL
CONTRACTING SERVICE, NATIONAL ACQUISITION CENTER, U.S.
DEPARTMENT OF VETERANS AFFAIRS; MICHAEL VALENTINO, CHIEF
CONSULTANT, PHARMACY BENEFITS MANAGEMENT SERVICES, U.S.
DEPARTMENT OF VETERANS AFFAIRS
Mr. Gould. Mr. Chairman, thank you for the privilege of
reporting to the Committee today.
As you asked a moment ago, I am accompanied by Mr. John
Gingrich to my right, VA's chief of staff; Mr. Glenn Haggstrom,
Principal Executive Director for the Office of Acquisitions and
Logistics and Construction; to his left Mr. Jan Frye, Deputy
Assistant Secretary for Acquisition and Logistics; to his left
Mr. Steven Thomas, Director of National Contracting Service at
the National Acquisition Center; further to my right Mr. Philip
Matkovsky, Assistant Deputy Under Secretary for Health for
Administrative Operations within Veterans Health
Administration; and, finally, Mr. Mike Valentino, Chief
Consultant for Pharmacy Benefits Management Service.
Also seated behind me are Mr. Craig Robinson, Associate
Deputy Assistant Secretary for National Healthcare Acquisitions
and Ms. Phillipa Anderson from the Office of General Counsel.
With your permission, sir, I would like to submit my
written testimony for the record.
The Chairman. Without objection.
Mr. Gould. At your request, our testimony and our questions
today will center on a VA contract for distribution of drugs
within VA called the pharmaceutical prime vendor contract or
PPV.
The PPV fits into a larger system of rules, regulations,
contracts, and management procedures designed to provide a
continuous supply of quality drugs for our Veterans.
Let me say at the outset that VA has identified several
areas where it did not follow applicable law and regulation for
some drug transactions. This flawed approach was confined to
transactions known as open market purchases under the PPV
distribution contract.
Since the current contract came into existence in 2004,
open market purchases amounted to 4 percent of the total value
of purchases through the PPV.
Now, open market purchases are purchases made through the
PPV of pharmaceuticals that are not on a VA supply contract or
from vendors with contracts who do not agree to sell through
the PPV.
These deficiencies were the responsibility of VA to
identify and correct. The deficiencies were not criminal. And
the remaining 96 percent of the transactions followed all
applicable laws and regulations.
At no time were our Veterans put at risk. The drugs
supplied were FDA approved and complied with applicable Trade
Agreement Act requirements with the exception of a portion of a
single transaction of $2,000.
We paid fair and reasonable prices for 96 percent of the
purchases. We cannot, however, verify that we did the same for
the open market purchases since we did not compete these
transactions as we should have on an individual basis.
In fact, in some cases, the ordering officers were
requesting generic equivalents to brand medication which we all
know typically costs much less.
We point out that the distributor we used provides
pharmaceutical products for such cost conscious companies as
Walmart, Target, Rite Aid, and Costco among others.
When we recognized we had a problem, we acted to correct
it. Beginning on November 8, 2011, VA mandated cessation of
this flawed process and replaced it with a new process that
conforms to all applicable regulations.
We did four things. First, we removed the ability of
ordering officers to see any drug not available through Federal
contract on the McKesson portal. The McKesson portal is the
device through which the ordering occurs.
Next, we mandated training for employees authorized to
place those orders.
Third, we placed qualified contract officer representatives
at the facility level to ensure compliance.
And, finally, on a parallel track, we continued to move
forward with a process begun in June of 2011 to issue a new RFP
for a replacement PPV contract that will not allow the mistakes
of the past to be repeated.
Mr. Chairman, we thought deeply about the issue of
accountability and after extensive internal deliberations and
analysis concluded that there is no one individual to hold
accountable for the pervasive misuse of the open market clause.
It was a team failure simply put.
The process began many years ago. It broke down to such an
extent that the wrong way became the way we have always done
it. The middle and senior level managers who made these initial
decisions have left VA.
Despite these shortcomings, timely delivery of FDA approved
medications was not interrupted further masking the discovery
of the problem.
The managers involved have learned to test their
assumptions more carefully, even those governing well-
established processes, and to increase the amount of training,
administrative review, and oversight of these contracts at
every level.
The corrective actions we have taken will preserve VA's
access to necessary drugs and complies with all applicable law
and regulation.
We will continue to provide our Veterans with high-quality
care with their unique medical needs as our first priority and
we will continue to improve our pharmaceutical acquisition
management.
Thank you for the opportunity to testify before the
Committee and I look forward to your questions.
[The prepared statement of W. Scott Gould appears on p.
47.]
The Chairman. Thank you, Mr. Secretary.
In your testimony, you make it clear that the purchase of
pharmaceuticals off contract without competition did, in fact,
occur; is that correct?
Mr. Gould. That is correct.
The Chairman. Is this a violation of the law?
Mr. Gould. Yes.
The Chairman. When did, if you would again, and I know you
mentioned some dates in your testimony, but when did senior
leadership first learn of the unlawful purchasing?
And I would like to ask each individual at the table
independently to let me know when you first heard about it and
what you specifically did when you heard about it.
Mr. Gould. Sir, to be responsive on that question then,
each of us will answer that. What you will see is a range of
dates as the problem escalated through the system.
To answer personally for the senior management team, I
first knew about this issue in September of last year,
September of 2011.
The Chairman. And we will start down here, Mr. Valentino.
Mr. Valentino. I became aware of the issue with open market
purchases in December of 2010 when the clause was removed from
the draft solicitation.
Mr. Matkovsky. I became aware in September of 2011.
Mr. Gingrich. I became aware in September of 2011.
Mr. Haggstrom. With respect to the improper use of the open
market clause, I became aware of it in March of 2011.
The Chairman. When did you hear about the illegal use?
Mr. Haggstrom. March of 2011.
The Chairman. Okay.
Mr. Frye. I became aware in March of 2011, March 29th to be
exact.
Mr. Thomas. And I became aware in January of 2009 when a
logistics manager from the CMOP identified this as an issue. At
that point, I worked with general counsel, acquisition review,
IG, others at the NAC, VHA, including PBM, and the CMOP to try
to correct the issue for the CMOP which we became responsible
for at the National Acquisition Center in December of 2008.
I tried to add items to the Federal supply schedule as much
as possible to cover that gap. I tried to have additional
things put on requirements, types of contracts that we had
limited success on. But the main thing I did was I corrected
the issue for the CMOP so the CMOP follows appropriate
procedures at that point. And that was the area of
responsibility that I had.
Mr. Gould. So, Mr. Chairman, today you have just gone down
the list to see when people knew what they knew. The people at
the table today collectively identified the problem, took
action, and we are collectively responsible for that fact.
The Chairman. Mr. Thomas, you took great pains just a
second ago to talk about all the things you tried to do. Can
you explain why you were unable to do some of the things you
wanted to do?
Mr. Thomas. Yes, sir.
The Chairman. Could you turn your mic on, too, please?
Mr. Thomas. I apologize. Yes, sir.
I think what we have in this case is a changing industry to
a certain degree. As you probably are aware, there are a lot of
drug shortages that are currently going on right now. There is
a Trade Agreements Act that we have to be responsible for to
make sure that products are coming from appropriate countries.
And a lot of the manufacturing for drugs right now are going
overseas to India and China and those two countries are not
Trade Agreement countries. So there are a number of issues
going there.
When we put our requirements contracts out for some of the
generic products, we were able to award about a third of them
as they came through. It did not stop our efforts in that, but
it made us try to figure out how we could get more products on
contracts.
In the meantime, realizing that the CMOP was the largest
purchaser of the pharmaceuticals on the prime vendor contract,
we fixed that problem. We decided to do open market
solicitations at the National Acquisition Center for products
that were open market and we have been doing that ever since.
The Chairman. A wide range of times that people knew, but I
guess the memorandum went out in November.
Mr. Gould. Yes, sir, November 8th.
The Chairman. November 8. How much was spent illegally
after the 8th of November because purchasing kept going for a
month or two afterwards. Can you tell me how much was spent?
Mr. Gould. Mr. Chairman, that, of course, is critical that
not for one day did we want the flow of drugs to be interrupted
to our Veterans. And one of the great challenges here in
evaluating options and figuring out how to go forward is to
preserve that need to deliver the drugs at the same time that
we comply with the law.
The number of transactions now that are not compliant has
dwindled to 0.4 percent. And I would like to ask Mr. Matkovsky
to amplify on that analysis and our ongoing effort having
identified the problem to correct it.
Mr. Matkovsky. Thank you, sir.
We are conducting a monthly review at this point with OALC
on all of the transactions to determine which of them are open
market. And for those that are, and the number was 0.4 percent
of all transactions for the month of December, each one of
those transactions is going through a warranted contracting
officer's determination for ratification to bring it into
conformance with the FAR.
The Chairman. I apologize, Mr. Secretary, if I did not hear
you, but did you give me a number of what was spent after the
8th?
Mr. Gould. Two numbers. The first number was for the month
of December which we are analyzing is roughly $1.4 million. The
total number of transactions which we are reviewing for
ratification is 5,733 transactions.
The Chairman. You talked about drugs and certainly can
understand your desire to keep pharmaceuticals going to the
Veterans who need them, but this was not all about
pharmaceuticals either, was it?
Mr. Gould. That is correct. There are other non-drug items
on the pharmaceutical prime vendor contract. And as you are
aware, we have other agencies participating in the PPV, so
other non-drug items are purchased on that contract.
I might ask Mr. Haggstrom to comment in more detail on that
issue.
Mr. Haggstrom. Mr. Chairman----
The Chairman. Your mic.
Mr. Haggstrom [continuing]. As part of the contract, we do,
in-fact, have certain items that would be considered medical
and surgical items on the contract that the prime vendor is
allowed to purchase and distribute to our customers. These
particular items are normally found in pharmacies and
distributed with the purpose of distribution for our pharmacy
customers. When you look at it, it is a very limited item
because we have other contracts in place to do that.
The Chairman. Like the MedSurg?
Mr. Haggstrom. That is correct, sir.
The Chairman. I just do not want the conversation today to
be solely focused on pharmaceuticals, although I do have a
great concern even with the trade agreements that are out there
in regards to how we know for sure that there were not
adulterated drugs that were being used, but that is for another
time.
And the other thing that I want to get to because I know
everybody has questions that they want to ask, but the fast pay
system, there are some issues with the auditing of the fast pay
and some of the things that were just discussed.
But I will go ahead and yield to Mr. Michaud for questions
that he may have.
Mr. Michaud. Thank you very much, Mr. Chairman.
Mr. Gould, do you have copies of the existing waiver
request under the VA handbook 7408.1 for the $1.2 billion in
open market purchases dating back to 2004?
Mr. Gould. Mr. Michaud, let me just consult with the team
here.
Mr. Frye.
Mr. Frye. Sir, I am not familiar with your question. A
waiver for what again?
Mr. Michaud. A waiver request for open market purchases
that is required under the handbook. That is 7408.1.
Mr. Haggstrom. I am not aware of any waivers. You are
correct. The proper process is if the pharmacies desire to
purchase other than through our VA national contracts or
through our Federal supply schedule holders, there was a waiver
process to be required. I am not aware of any formal waivers
that came in.
Mr. Michaud. So since 2004, no waivers?
Mr. Haggstrom. I am not aware of any, sir.
Mr. Michaud. Okay. Mr. Gould, you indicated that VA had
decided in December of 2010 to take the open market purchase
clause out of the next contract, PPV contract.
What led to that decision back in 2010?
Mr. Gould. No, sir, I did not say that the decision was
reached in December of 2010, did you say?
Mr. Michaud. 2010, between 2010, there was a determination
to not include open markets into the contract.
Mr. Gould. In June of 2011, we took action to reach out to
the private sector to issue an RFP for a new PPV contract which
will be competed and decided in March and go into place in May
of this year.
Mr. Michaud. But in 2010, it was decided at that time that
open market would not be part of that new contract.
Mr. Gould. In the new contract going forward, that is
correct. We will not have open market purchasing in that
contract.
Mr. Michaud. And in 2010, what led to that decision not to
have open market in that new contract?
Mr. Gould. Let me ask Mr. Haggstrom to comment on that.
Mr. Haggstrom. Sir, we realized, although under the current
contract, we had an open market clause which has been well
vetted with our general counsel in terms of legality and usage,
what we discovered, and this issue goes back to being raised by
the contracting officer, was do we really need this particular
clause in the contract in terms of the usage. There was much
discussion amongst our customer who is VHA and ourselves. We
vetted it with the team through an IPT process and we came to
the realization that we felt it would be better that we did
remove this particular clause from the future contract.
As a result of the solicitation that was put out to
industry in June of last year, that particular clause was
removed knowing full well that we would have to address the
issue of how to obtain those drugs that were not available to
us through either a national contract or through the supply
schedule.
Mr. Michaud. The chairman had talked about the drugs since
November 8th that were purchased on the open market.
What percentage of those drugs was actually purchased
through McKesson since November 8th?
Mr. Gould. Philip.
Mr. Matkovsky. Since November 8th, we have been acquiring
drugs in two mechanisms. One would be through a warranted
contracting officer. And I am sorry. I will take for the record
the specific amounts that have been awarded to what kinds of
firms. I do not have that today.
But in those cases, we would be competing a contract
action. We have several examples that we were reviewing that
have gone to other firms. We will prepare the specific
breakout.
Mr. Michaud. Okay. And maybe McKesson might know off the
top of their head since November 8.
Do you have any waiver requests for those drugs? Did you
have any?
Mr. Matkovsky. For the ones that are on the contract, we do
not have them. If we have a situation where there is no
availability on contract, we default to an open market. And
that is usually what we are doing, sir. So when there is none
available and you still require the medication, you have to
acquire them through other means.
Mr. Michaud. My last question actually is for Mr. Thomas.
You had mentioned following, you know, on trade deals. I guess
my concern with the drugs that are coming in from India,
particularly China, what do you do to make sure that those
drugs are safe, if anything?
Mr. Thomas. Well, first of all, we are not allowed to
purchase drugs from China or India based on the Trade
Agreements Act. So we prevent that as much as possible.
The second issue regarding that is those facilities,
although there is manufacturing being done in China or India,
there still is an FDA approval process there. So I do not think
there is really a safety issue with that. It is more of a
government issue and the fact that we do not allow products
from non-TAA countries.
Now, if you shop and go to your local pharmacy to get your
prescriptions filled, you will get product from India and
China. It is the government that cannot purchase those products
from those countries.
Mr. Michaud. And as far as trans shipment, drugs going to
China to another country that might have a trade deal, do you
focus on that as well or is that out of your purview?
Mr. Thomas. Well, there is something called substantial
transformation that comes into play to a certain degree, but
that is not something that we are responsible for. That is
actually a Customs' responsibility.
Mr. Michaud. Thank you very much, Mr. Chairman.
The Chairman. Thank you very much.
Mr. Roe.
Mr. Roe. I thank the chairman.
Let me just start by going back. And I called my local VA
yesterday and spent some time on the phone with them to find
out exactly how this process worked. And the way I understand
this is you have a formulary that is approved and most of the
time, you can fill the needs with that formulary and it works
very well.
With McKesson, you have lessened the supply chain, less
stock on the shelf, less cost to the VA. I understand that and
that has been in place for several years. The issue is with the
drugs out there that you cannot get.
Let's say there is a medicine on short supply. What does
the VA do? And to make sure that I understand exactly, let me
give you an example.
Yesterday I talked to my local VA. Versed is an injectable
drug that doctors cannot get. It is used to calm patients in
the ICU, for procedures like a colonoscopy. They cannot get
that because it is in short supply. I think chemotherapeutics
right now are also in very short supply.
So what do you do right now? In some of the testimony I
read I found that if you bought something in the open market,
it did not necessarily cost more than what was on the
formulary.
It is like someone who comes in to me and has a co-pay for
$20.00. And I said, well, why would you pay a $20.00 co-pay
when you can get a generic for $4.00 at CVS or Walmart or
wherever you shop.
So how do you do that and how do you make sure that that is
done legally? And the second question I have, are there any
penalties--it is a civil law, this law is not criminal--but are
there any penalties for the people who knowingly broke this
law?
Mr. Gould. Do you want to cover the first one?
Mr. Valentino. I can answer part of that question, sir. You
are exactly right. The issue of drug shortages is occurring
with increasing frequency at the national level and we do
struggle. Many times we have to look for alternative products.
So in the case of Midazolam and Alprazolam which are in
short supply, we have to use other benzodiazepines. For other
examples----
Mr. Roe. Why don't you give them the brand name because
nobody understood a word of what you just said.
Mr. Valentino. Versed, Ativan, Lorazepam----
Mr. Roe. Valium.
Mr. Valentino [continuing]. Valium, these are the
benzodiazepines that are similar but have different uses. And
some are substitutable in certain clinical situations and not
in other clinical situations. So we have been wrestling with
this issue for a long time.
If you go to look at the American Society of Hospital or
Health System Pharmacists Web site, at any one point in time,
you might see 200, 250 drugs that are in short supply. We
struggle with this. We have to contact physicians sometimes to
change therapy.
But to get to your other point, that often is a situation
that we confront. We will go to the prime vendor Web site and
we will see out of stock, out of stock, out of stock, out of
stock for the contract items.
What we then do is we look and see if there are non-
contract items that have availability and, if so, we choose the
lowest cost one that we will order. Did we do that
appropriately in the past? No. Are we doing that appropriately
now? Yes. Does the new contract fix that situation? We believe,
yes.
Mr. Roe. Because what happens, I can tell you if I am the
doc in the VA and I do not have medicine for my patient in the
ICU who is having problems, I am going to be beating on the
administrator that day to get me what I need to take care of
that patient. I can promise you I am going to be doing that.
Mr. Valentino. Yes, sir, that happens.
Mr. Roe. And every day it is happening.
Mr. Valentino. Yes, sir.
Mr. Roe. And I talk to folks. I had a discussion with one
of our folks at the VA and this very thing of drug shortage
happened to an OIF/OEF Veteran who had severe PTSD and they
were going to have to change his anti-anxiety medications. The
guy threatened to kill somebody because he was doing so well on
what he had. It is a real problem.
The other thing that is a real problem, Mr. Michaud, that
you hit on that is extremely important is the importation or
large amounts of generic drugs to this country. This goes
beyond the VA the safety of these drugs. With China and India,
it is a very serious problem. And it is not just the VA. It is
our whole supply chain of drugs, I think, and that is a whole
different hearing.
The violation you did not mention. Is there any penalty if
you violated this?
Mr. Gould. Sir, if I may, thank you for drawing that
distinction within the FAR, a collection of a lot of
regulations, some of them very serious with criminal
consequences, others not.
I would like to ask Ms. Phillipa Anderson from general
counsel to go at that more nuance since these are not criminal
acts, but are there any consequences on the less serious side.
Ms. Anderson. Thank you.
With regard to the unauthorized commitments, those
transactions entered into by personnel not authorized to do so
as well as the competition requirements of the FAR as well as
the VAAR, there are no penalties attached or sanctions attached
within the VAAR or the FAR itself.
Mr. Roe. Okay. Thank you. I yield back.
The Chairman. Mr. Donnelly, you are recognized.
Mr. Donnelly. Thank you, Mr. Chairman.
When allegations of potential improper pharmaceutical
purchases by the VA were brought to my attention last fall, my
first concern was the safety of our Veterans.
Could we verify that the drugs met FDA and other Federal
standards? Were any Veterans put at risk?
My next thought was about the cost to the taxpayer. Were
these open market purchases totaling in the hundreds of
millions of dollars or more wise uses of taxpayer dollars? Did
the VA pay more than they should have for these drugs?
And third, what steps are being taken to ensure that
Federal and VA rules are followed in the future, that the
continued safety of our Veterans is not compromised and that
taxpayer dollars are spent responsibly?
And so I want to follow-up on something I just heard where
you mentioned you would go and it would say out of stock, out
of stock, out of stock, out of stock and you would be forced to
go open market then.
Isn't it a requirement of the contract that the supplier
have these products in stock?
Mr. Valentino. I will actually defer to Steve for some
additional comments. But there are fill rates that are
associated with the contract. It is an overall global measure,
but certainly the expectation is that the vendor will have
these in stock. But they cannot stock what nobody has. And so
there are----
Mr. Donnelly. What does that mean?
Mr. Valentino. Well, if it is a national shortage and there
is just none being produced, none is going into the supply
chain, our wholesaler as well as other wholesalers simply have
no stock of that item.
Mr. Donnelly. So then if nobody has any stock, what do you
then do?
Mr. Valentino. Then we will look and see if there are non-
contract items available.
Mr. Donnelly. That is a similar product to the product that
you cannot obtain?
Mr. Valentino. It is a generic equivalent.
Mr. Donnelly. Well, why can't we put that on a contract
too?
Mr. Valentino. We would love to have as many of those as we
possibly can on contract. And Mr. Thomas alluded to some of the
things that he was doing. About a third of the time it is
possible and the rest of the time it is not possible for a
variety of reasons.
But you are absolutely right. In a perfect world,
everything we need we would have on contract and we would
simply order it through the prime vendor for delivery.
Mr. Donnelly. Well, I am not even talking about a perfect
world, but like a just in time supply chain. That is the whole
idea about the VA not having to stock everywhere is that
somebody else will have that for you. You can call and then it
is done.
And I would think that part of the process would be, well,
if we cannot get A, then B is available. And, you know, you
mentioned that a third of the time, B can go on contract, but
for a variety of reasons, it cannot.
Why would we not be able to contract these other products?
Mr. Thomas. I think part of that is the reasons that I
talked about earlier.
The Chairman. If you could, talk into the mic.
Mr. Thomas. This is certainly a changing industry. There
are generic manufacturers that are falling out of this business
that are moving their market share to other manufacturers who
then cannot ramp up fast enough to pick up whatever is being--
--
Mr. Donnelly. But you at some point identify here is the
other product we have to get, right? And so you know that that
product is out there.
Is there any ongoing program with the vendor to say, hey,
we need to put a contract on this product now and on this
product? I mean, it does not come up to you in one day that
this product is now out on the market. You know, what is the
process for that?
Mr. Thomas. Yes, sir. And what I would like to do is give
you a balanced perspective on two sides. One is Mr. Valentino
sort of keeping an eye on this whole process, evolving demands,
new drugs, how do we get position, and then swing over on how
we do that on a going forward basis to make sure that we
compete and get as many of these new drugs into the system.
So, Mike, if you would start there, please.
Mr. Valentino. Yeah. It is a moving target for us. And in
the situation that you described with shortages, we may have
one manufacturer that is in a situation where they cannot ship
product for one reason or another. There is an FDA action or
there is a raw material shortage, but that is not affecting
another company.
So our primary goal, as you have heard, is, and as Mr. Roe
has mentioned, is to get the product that we need for patient
care using all appropriate and available----
Mr. Donnelly. Right. First and foremost is always make sure
the vet gets what they need.
Mr. Valentino. Yes, sir.
Mr. Donnelly. And we have to do whatever we have to do to
do that. My biggest problem is I do not understand how we do
not have some type of ongoing system that these other products
are on contract as well.
Mr. Gould. We do, sir.
And, Jan, if you would address that.
Mr. Frye. Yeah. I do not think, Mr. Donnelly, that there is
anyone here at the table that does not agree with you, that if
something is not on contract, because our associates here, the
supplier, use our contract----
Mr. Donnelly. Right.
Mr. Frye [continuing]. We develop the contracts. We
negotiate the prices. But if we have a drug that is not on
contract, I do not think anyone at the table would sign up to
go rogue and not use contracts. It happened, but that is not
the way it was supposed to have happened. The way it is
supposed to happen is if something is not on contract, then you
go to a contracting officer and put an appropriate contract in
place.
Now, granted, we know there were shortages. There are
shortages across the Nation in both our hospitals and other
civilian hospitals. But in our case, we were able to get those
drugs.
So I think you have got a very pertinent point. Why didn't
we put contracts in place. And as the deputy secretary has
already stated, we did not do it right.
Mr. Donnelly. Thank you.
Thank you, Mr. Chairman.
The Chairman. Just to follow-up, Mr. Donnelly, on your line
of questioning, if you could not get a certain type of drug, to
what extent or limits did you go to to find out where the drug
could be found or did you go as it appears you did straight to
the PPV?
Mr. Gould. Sir, if I could, to start, we go through a
hierarchy and the folks were trained to do that and did it
well.
First, they started with national contracts. The number one
goal is to get the drugs that are on contract and, therefore,
have gone through the fair and reasonableness price competition
and everything is buttoned down and we are complying with the
law.
So we start with the national contracts first. Then we go
to the Federal supply schedule which, again, on contract,
already been committed and so forth. And there are other
categories of contracts that exist on the McKesson portal
before we get to the point where we would consider going to the
open market.
And I would like to ask Craig to comment on that process
where we move through all of the available contracts to a point
in time when we realize that we do not have stock available and
we need to meet Mr. Donnelly's point of continuous flow of
drugs.
Mr. Robinson. Thank you, sir. Yes.
The Chairman. If you could, state your name for the record,
too, please, sir, your name.
Mr. Robinson. Craig Robinson.
The Chairman. Okay, sir.
Mr. Robinson. There is a provision in the VA's supplement
to the FAR which was a result of the procurement reform task
force of 2002 that establishes a hierarchy of contracts within
the VA. It was put together in order for us to leverage our
spend, to be able to capitalize on the volume that the VA has.
And it starts off basically with any available stock that
we already have that is legitimate stock that is available on
hand.
The next tier is national contracts. We then go down to
Federal supply schedule contracts starting off with BPAs. They
are written at the national level. We then move down to VISN
instruments, local instruments, and the lowest tier in the
hierarchy is open market.
And I will say we have used open market here in the context
of the McKesson contract as a bad thing. And in this case, it
was in that these items were not on contract. But an open
market purchase in many cases is a legitimate purchase when the
proper processes and procedures are followed.
The Chairman. Thank you.
I am a bit confused and, Mr. Johnson, I am coming to you
next because I cannot find it, but I have seen a document from
the OGC that basically says you did not follow those steps as
they were outlined.
Are you aware of that?
Mr. Gould. Mr. Chairman, that reference from the IG comes
from reports that were written not on the PPV but on other
prime vendor contracts related to Med-Surge and subsistence. So
the observations made in those IG reports, if I am
understanding you correctly, sir, do not pertain to the PPV.
The Chairman. Yeah, this is not the IG report. This is from
the Office of General Counsel. And I will try and find the
document to allow you to have an opportunity to see it.
Mr. Gould. Thank you.
The Chairman. Mr. Johnson.
Mr. Johnson. Thank you, Mr. Chairman.
Just a brief comment before I ask my question. Secretary
Gould, I certainly respect your testimony and your opinion that
at no time were any Veterans put at risk. I take a little bit
of a different slant on that, though.
With the priorities that we have to get a single electronic
health record in place, to eliminate the backlog, to address
the homeless Veterans' issue, I submit that when we are
potentially wasting or misspending, illegally spending billions
that could be targeted elsewhere that indeed we are putting
Veterans and their benefits at risk. So I just wanted to make
that clarification.
Mr. Valentino, I think you said that you became aware of--
--
Mr. Gould. Mr. Johnson, would it be inappropriate for me to
respond to that----
Mr. Johnson. Not just yet.
Mr. Gould [continuing]. A moment ago?
Mr. Johnson. Not just yet. We may get to it.
Mr. Gould. I will have an opportunity to do so----
Mr. Johnson. We may get to it.
Mr. Gould [continuing]. In a moment. I do not think it is
the case.
Mr. Johnson. Okay. We may get to it.
Mr. Valentino, if I understood your testimony correctly,
you said that you found out about the improper purchasing of
open market pharmaceuticals through the PPV in December of
2010, correct?
Mr. Valentino. I found out that the clause was removed in
December of 2010. The issue of whether it was removed because
of improper purchases had not yet surfaced.
Mr. Johnson. Had not yet surfaced. I am a little bit
curious because I am having trouble connecting the dots.
Mr. Haggstrom, you testified that the clause in the
contract to allow the purchase of off contract items through
the open market had worked. You thought it was an acceptable
process, that indeed now you have the problem of figuring out
how to solve that problem, and there was this great discussion
in 2010 about that clause and removing it from the next
contract.
Why? I mean, if it was such a good idea and it is a big
problem to solve, what were the pros and cons discussed in 2010
that led you to the conclusion that it should not be included
in the next round?
Mr. Haggstrom. Mr. Johnson, if I could, I was not part of
those discussions. Could I ask Mr. Craig Robinson to address
that----
Mr. Johnson. Sure.
Mr. Haggstrom [continuing]. As the head of the NAC?
Mr. Robinson. I think as the issue originally arose, it
really was not directed towards the process. The fact that the
items were not being competed, the things that we looked at,
the----
Mr. Johnson. So let me make sure I understand that. So you
found out at that point or you knew in December of 2010 that
the process was not working right?
Mr. Robinson. We knew that the process was a vehicle that
allowed VA to get drugs to the Veterans. We knew that at that
point in time from an acquisition perspective the procedure was
not correct.
Mr. Johnson. Okay. It was not correct. So, in essence,
there was an acknowledgment then that there were improper
purchases of pharmaceuticals through this process, correct,
because it was not working right?
Mr. Robinson. It was working in that there were
medications, to continue to allow the delivery of medications
to Veterans. But, yes, in the contracting community, a lower
level employee did question the fact that the items were all
being bought through McKesson and were not being competed.
The issues that we looked at----
Mr. Johnson. Okay. You have answered my question.
The Chairman. Would the gentleman yield real quick?
Mr. Johnson. Absolutely.
The Chairman. Sir, before you sit down, you keep talking
about the process and that the Veterans received what they
need. If you did not follow the process or procedure, how could
it have worked? I mean, is success just the Veteran ultimately
gets what they need?
Mr. Robinson. No. I mean, this goes back to the issue of
the practice, though it was broken, it became the normal
accepted practice for getting the medications to the Veteran.
As Secretary Gould mentioned before in his testimony, that was
something that we acknowledged. We acknowledged in looking back
that that procedurally was not correct.
However, as it relates to the operational aspects here, I
think that the folks from the pharmacy community will say that
that vehicle is what allowed a continuous supply of the needed
medications to the Veteran population.
The Chairman. If you would, put a minute back on the clock
for Mr. Johnson.
Mr. Johnson. I am still a bit confused. So if it was
acknowledged in 2010 that the process was not being followed or
not sufficient, that, in essence, is an acknowledgment that
these pharmaceuticals were being purchased not in compliance
with that process, therefore, not in compliance with the law.
Who did you tell? Who else knew about your findings that
the process was broken at that time?
Mr. Robinson. I mean, I think you heard the individual
answers across the table here. As we started in----
Mr. Johnson. That was in December of 2010. So the earliest
date in 2011 that I heard was sometime in March.
So was there no discussion about this broken process and
the potential illegality of it between December of 2010 and
March of 2011?
Mr. Robinson. At different levels, there were, but the----
Mr. Johnson. And who knew?
Mr. Robinson. At the working level, the issue came up
because----
Mr. Johnson. No. But you are not at the working level.
Mr. Robinson. No. No.
Mr. Johnson. Okay. So who above you did you tell ``we have
a process problem here?''
Mr. Robinson. Through the period of time from December
until March, there were discussions at the working group level
related to how we get----
Mr. Johnson. Who did you tell? Did you tell anyone above
your level that there was a potential illegal violation of the
law as it pertained to the execution of this process?
Mr. Robinson. I mean, I would have to go back and look at
my notes.
Mr. Johnson. We would like you to go back and look at those
notes and let us know who you informed.
I have additional questions, Mr. Chairman, but I will yield
back at this point.
The Chairman. Mr. Donnelly, do you want to?
And I would remind folks at the table that we have
subpoenaed documents. You are aware of that, correct? Yes, no?
Mr. Gould. I had heard the potential for a request but have
not received any subpoenas.
Has anybody at the table received a subpoena or, general
counsel, any knowledge that we received a request for
information?
Ms. Anderson. A request for information.
Mr. Gould. Request for information only, sir, no----
The Chairman. Chairman Issa's committee on January 19 has
made that request through a subpoena.
Mr. Gould. We are only in receipt just a few days ago of a
letter requesting information. No knowledge that a subpoena has
been employed to get that. And counsel appears to be nodding
that a subpoena has been issued. That is news to us.
The Chairman. Okay. Because if it is not there, it is
coming.
Mr. Donnelly.
Mr. Gould. Mr. Chairman, in that same spirit, if I might
add, when a senior executive like the one that just spoke would
encounter a problem like that, I believe its first instinct
would be to acknowledge the problem and then start developing
options.
And so I think the paper trail that you have requested will
show hard work to develop principal options and bring those up
the chain of command.
The Chairman. All right. Before I yield to Mr. Donnelly,
the earliest date we have heard today is January of 2009. We
are February now of 2012.
What happened, Mr. Thomas, from the time you discovered it
and why has it taken so long to work its way through the
bureaucracy?
Mr. Thomas. Well, I think our responsibility for it is the
consolidated mail-out patient pharmacies. What we do is we do
specific orders for them. So when this was identified to me
back in January of 2009, we went through the process and we
said, as I think Mike has said----
The Chairman. And could you lay the process?
Mr. Thomas. Sure. I met with people who I felt were----
The Chairman. Who were those people?
Mr. Thomas. People from general counsel, people from
acquisition review, people from the IG, others at the NAC
including the Federal supply schedule, and representatives from
VHA, from the PBM and the CMOP side.
The Chairman. And what was their response?
Mr. Thomas. We need to fix this.
The Chairman. And we had not fixed it until just recently?
Mr. Thomas. As far as cutting off the open market
purchases, you are correct, except for the CMOP. On the CMOP
side, we did a separate process to make sure that we were not
ordering open markets anymore from CMOP because we were
responsible for that process.
The Chairman. Mr. Donnelly.
Mr. Donnelly. Thank you, Mr. Chairman.
Since 2001, the inspector general has been reporting and
has issued at least 49 reports since that time with concerns
about open market purchases.
How did this continue to grow and no controls were put in
place?
Mr. Gould. Mr. Donnelly, I would like to ask Mr. Frye to
respond.
Mr. Frye. We are talking about two different issues here,
Mr. Donnelly. The open market purchases, as already explained
by Mr. Robinson, are in and of themselves perfectly legal.
Mr. Donnelly. Right. Okay.
Mr. Frye. And so the open market purchases that were looked
at by the inspector general then were in the context of are we
using the proper order which was specified in this book and
codified in our VAAR in 2002.
The Secretary said that we would use a very specific order.
I will not go through them all, but he did mention national
committed use contracts first, VA Federal supply schedule,
group 65 and 66 and so on.
So the IG and my office, frankly, have always been
concerned when people use open market buys which in this
context means contracting with others than those that we
specified that we wanted them to use.
So if somebody was supposed to have used the prime vendor
contract which would utilize Federal supply schedules for those
drugs, then perhaps they were not getting that economy of scale
or that leverage that Mr. Robinson talked about earlier.
I just wanted to put that in context. It is apples and
oranges.
Mr. Donnelly. Mr. Frye, you keep talking about open market.
Explain to me the difference between open market and extra
contractual.
Mr. Frye. Certainly. The open market, as again
distinguished by Mr. Robinson here, on the pharmacy prime
vendor contract equals no contract. So the default was and
there was a clause in the contract that said that if the drugs
were not contained on the lists that were given to the
pharmacies by McKesson, then they could use this open market
provision.
What that means is they have to follow all the rules and
regulations. It is clearly stated in the clause. It does not
mean that you just default to a drug that is not on contract.
But over time, as has already been explained, starting many,
many years ago, that methodology was used.
And, unfortunately, we never caught it. We thought, I
thought that we were doing the right thing on the pharmacy
prime vendor contract and on our other Federal supply
schedules.
In fact, we hire out of the OIG about 30 auditors who help
us audit those individual contracts. And, frankly, they return
millions of dollars to us a year when they find mistakes from
pharmaceutical companies or Med-Surge companies. Because of the
price of reduction clause, we are able to recoup millions of
dollars a year.
But what we did not have, what we have never had that I
know of is a full-blown audit of the pharmacy prime vendor
financial process. So we did not have insight and I did not
test my assumptions. My assumptions since I have been there is
this thing is purring along. There are no problems. There were
no indications of any problems and it was not until I found out
about it in March, of course, that those became a real problem
to me.
Mr. Gould. There were a set of tools that have been created
in the last 3 years that dramatically changed VA's ability to
deal with the issue. And they included a new management team,
streamline authority, the introduction of a capability to
deliver micro purchases. We have reduced the number of HCAs in
VA from 30 down to six.
So a lot of the tools that we have called upon to so
quickly and clearly solve the problem when we new about it and
effective on November 8th have come in place in the last 3
years by virtue of the effort of the team that you see here. So
this is the team that is responsible for that failure.
We identified the problem at a senior level and it took us
6 weeks to solve the problem. We issued clear direction to the
field to drive a stake through the misunderstanding that we
could somehow continue this practice which was not compliant
with the FAR. And that is what we have gone at to fix and it is
fixed now.
The Chairman. Is it your testimony that the time frame
between January of 2009 and today is 6 weeks?
Mr. Gould. No, Mr. Chairman. As I said a moment ago and you
went down the list of folks here when did senior management
know and I have testified that I knew in September. And by
November 8th, the problem was solved.
The Chairman. Does it bother you that you have somebody
sitting at the table that knew of the issue in January of 2009
and you or somebody at that table did not know?
Mr. Gould. Sir, of course it does. And as I have testified,
that is a problem for which we are collectively responsible and
accountable. I am very unhappy with the escalation of this risk
up the chain of command.
All I am saying is that it did not happen and when it did,
it was absolutely solved by this team. We got together and
resolved the issues and came up with a clear course of action
to fix the problem.
Mr. Donnelly. When you find that a drug is out of stock, is
there a system that tells you here is when that was out of
stock this week, out of stock last week, out of stock a month
ago? Is there any type of system that you had that told you
here are the ones we are really struggling with and was there
any form of preplanning where you said, okay, if this is not
available, here is the backup, we do not have a contract on
that, we better put something in place?
Mr. Valentino. Yes, sir. We monitor several different
sources that collect information on drug shortages. One of them
I mentioned earlier is the American Health System Pharmacists
Web site.
Mr. Donnelly. But does your own system tell you these are
the ones we are out of stock on?
Mr. Valentino. Yes, sir. We also have close communication
with our vendor and they advise us when there are shortages or
projected shortages. So we combine a number of different
sources of information and compare that to our needs and then
we figure out what we are going to do.
Are we going to reduce the quantities that we dispense from
90-day supplies to 30-day supplies to get over the hump? Is it
going to be so severe and so prolonged that we have to
substitute drugs and contact providers and educate patients
that their drugs are going to be switched?
So, yes, sir, we do. We collect information from every
source we can. We work on that with our clinicians across the
system and develop a plan.
Mr. Donnelly. And in the goal of trying to have contracts
on these things, do you do any planning meetings where you go,
okay, if it is not this, we have B and we have C, we do not
have contracts on these, we need to get this done? I mean, is
there any type of framework instead of looking up and going,
oh, my gosh, we are out of stock, what do we do now?
Mr. Valentino. Yes, sir. That is a great question. And they
are really not linked. A drug shortage does not trigger us to
say, oh, we have to get a contract on that. We know our
utilization. We are always trying to get the contracts on as
many drugs as we can.
So the shortage situation amplifies that we do not have a
contract in place for a particular drug.
Mr. Donnelly. What would be the problem in getting that
contract on these other things? Is it just that you did not
think about that particular one or is it that in working with
the vendor, you were not able to come to terms or----
Mr. Valentino. Sir, we develop our requirements. We know
what we need. We hand that information off to our colleagues at
the National Acquisition Center and they turn that into a
tender or a solicitation.
At that point, it is really up to the manufacturers to
decide whether they want to bid or not. Those bids are reviewed
if we get them and then the contracting officer determines
whether they can make an award.
Steve may have some things to add to that, but that is the
macro view of how we deal with that.
Mr. Donnelly. And how long does that process take?
Mr. Thomas. A couple of things I would like to comment on.
First of all is we do look at the National Acquisition Center
on a weekly basis at shortages and we publish a newsletter on a
weekly basis to the field facilities, all the medical centers,
and also our other government agencies that participate in our
contract. And we inform them about issues that we know about,
here is a shortage, here is a contract change, here is a new
contract in place, et cetera, to minimize this as much as
possible.
The other thing I want to stress that I do not think we
have talked about yet regarding the McKesson contract is that
the McKesson contract has a fill rate of 97 percent. I see a
report on a monthly basis. We are always there.
So granted there are some exclusions from that calculation
in that if they cannot get the product from a manufacturer, we
cannot count that against them. But McKesson has consistently
delivered.
Mr. Donnelly. I am not worried about the contract and, you
know, whoever it is is honestly of no interest to me at all.
All I am trying to figure out is on the parts that are not
filled, how do we get a program in place that works quickly,
that works accurately, that provides safe products to our
Veterans, and that we know what we are getting at a
predetermined price?
Mr. Thomas. So let me follow-up on Mike's feedback. One of
the issues that we do, he is right, we get a requisition here
at the National Acquisition Center for a national contract, a
requirements type of contract. Generally that process, our goal
is 120 days.
Mr. Gould. Mr. Donnelly, if I might, I think you have asked
a salient question which is how do we prevent, how does----
Mr. Donnelly. My concern is, okay, we are out, now it is
120 days until we can get a contract on the backup product.
Mr. Frye. Let me add that while a normal contracting action
might take 120 days, it does not take 120 days to put a
contract in place. If there is an emergency, a contract can be
put in place within hours. You have to have the money, you have
to know what you want, and you have to have a supplier. And a
contracting officer can put a legitimate contract in place, a
letter contract. That can be a phone call followed by a fax
outlining the terms and conditions in very short order.
So while normal procedures might take that long, I think
those procedures probably atrophied over the years as well
since we did not go through that model. And so maybe it takes a
little longer than it should. But there are procedures to put
contracts in place very, very quickly.
Mr. Donnelly. Thank you.
Thank you, Mr. Chairman.
The Chairman. Mr. Roe.
Mr. Roe. Just a very quick comment. There are two issues
that have been brought up. One is that the VA knowingly did not
follow their procedures and two is why were the procedures not
being followed? And I guess three is that there is a broader
problem in the country of drug shortages. It is a huge problem.
There is an entire industry out there.
Let me give you all an example of what Mr. Donnelly brought
up, Tamiflu. Let's say there is a flu epidemic and all of a
sudden, all the Tamiflu on the shelves is gone. Well, there is
another source out there that people go to and that is called
compounding.
You can go to a pharmacist, and some can do sterile
compounding, some cannot do sterile compounding, to get these
products that are not available on the short-term basis.
Happens all the time. There is a whole industry across this
country to help to supply the shortages.
As you pointed out, you can go to a Web site every Monday,
look at it and see what the FDA says about a certain drug.
There are shortages around the country right now that are going
to create problems. Currently their drugs are being filled sort
of in an open market in the private sector. It is a little
harder in a government situation to fill them this way.
I am glad to hear that you can do it within hours because
sometimes these needs are that quickly. And if there are two
issues you have very clearly brought, it is how do we get safe
drugs into this country because many of the generics are made
outside and, secondly, how do we get them to our patients,
either a Veteran or just to a patient I might see in the
office.
It is a real problem. There are two issues here, but there
is a way to get around it and these community pharmacies and
others are compounding drugs that you cannot get.
I yield back.
The Chairman. Mr. McNerney.
Mr. McNerney. Thank you, Mr. Chairman.
Mr. Gould, I was here for your testimony and it struck me
that the gentleman on your right side did not know about the
problem until September of 2011 whereas the gentlemen on your
left all seemed to have knowledge before that.
But what really strikes me is that you seem to think that
there are systems in place now that are reliable. And how could
you get something in place that is reliable in that short of
time between September, say, and November of 2011? Have you
ratified any purchase since then and what gives you confidence
that we are on the right track at this point?
Mr. Gould. Thank you, sir, for the opportunity to reiterate
again in my oral the corrective steps that we took and that
will answer your question about why I am confident that we have
addressed this problem and that the system will work going
forward.
The first thing is very, very practical. We just removed
the ability of ordering officers to see any drug not available
through a Federal contract from the McKesson portal. They just
do not see it anymore. It is not there for a VA ordering
officer. So that is a simple, practical thing we worked with
McKesson to do. They were very responsive and it happened.
The second thing is we mandated training for our employees.
What we are discussing today is clearly a failure of management
and supervisory level individuals to tell our folks what to do
and to do it in the right way. That is why I was so concerned
that this conversation could turn to the point where we are
trying to hold GS5 ordering officers responsible for a system
that we as managers created. That is why I put that in my
testimony.
Mr. McNerney. So the VA can put people through training,
schedule it, put them through training, and put them back in
the job in a 2-month period?
Mr. Gould. We have mandated training for our employees
authorized to place orders. That will be completed by, I
believe, the 28th of February, correct, right, right, to
retrain, excuse me, but train them on this----
Mr. McNerney. So if training is not finished, then you
cannot be completely confident then?
Mr. Gould. We have also placed qualified contracting
officers in position to now manage this process. And, finally,
we have continued to move forward on the new RFP which will
correct the problem from May afterwards.
So in a large organization of this size, it takes some time
to do those things, train, put new people in place.
We have also dramatically improved oversight. As we
testified earlier, we are down to 0.4 percent of the purchases
in December that use this clause and we are examining every
single one of those 5,000 transactions to be sure that we
followed procedures and got value.
Mr. McNerney. And this has all happened, everything since
November 8th following this guideline and you are highly
confident at that point?
Mr. Gould. Since November 8th, yes, sir, November,
December, January, here we are first day of February. We are a
large organization. We sometimes do not move as quickly as we
should. But let me tell you the senior management team is
focused on making sure that implementation occurs.
Mr. McNerney. Another thing you said is that the people who
were perpetuating the problem have left the organization. Did
they leave voluntarily or involuntarily?
Mr. Gould. Retirements, you know. If you are asking was
someone fired or removed for this behavior, the answer is we
did not know about it. Those individuals are simply not in the
mix right now.
What you see is new managers and leaders encountering a
problem that we were not aware about. We finally were made
aware about it. You have heard that time table and we took
action. We learned in September at a senior management level
that there were problems. We brought the team together. By
November 8th, we had a solution in place and we are committed
to implementing it.
Mr. McNerney. And my last question, Mr. Gould, is, and you
are perfectly confident that McKesson has been a good player in
all this?
Mr. Gould. I am. I think they have fulfilled their
contractual obligations. When we went through the process, we
could only conclude that we ourselves were the source of the
problem. The contract requires us to follow the FAR and we did
not.
Mr. McNerney. Thank you. I yield back.
The Chairman. Mr. Johnson.
Mr. Johnson. Mr. Haggstrom, remind me again. When did you
say you found out about----
Mr. Haggstrom. The latter part of March of 2011.
Mr. Johnson. Okay. Is it safe to say that this PPV contract
is maybe because of the cost, the volume, or whatever, that
that is one that you would be paying particularly close
attention to?
Mr. Haggstrom. It is now, sir.
Mr. Johnson. Okay. Were you involved in the discussions in
2010 when the decision was made to omit the clause for open
market purchases from the follow-on compete contract? Were you
involved----
Mr. Haggstrom. I do not believe I was, sir.
Mr. Johnson. Were you informed of the decision at that
point?
Mr. Haggstrom. I do not believe.
Mr. Johnson. Well, you said earlier that you knew about it.
So what did you know about those discussions?
Mr. Haggstrom. There was a discussion over whether----
Mr. Johnson. What was the rationale for dropping that
clause that was presented to you?
Mr. Haggstrom. There was discussion concerning the next
prime vendor contract, whether we should retain that clause in
it or not. The discussion at that time, to my recollection, did
not go into the issue of whether the clause was being used
properly under the existing contract.
Mr. Johnson. Well, the documentation that the secretary
sent recently and the enclosures that accompanied his letter in
response to Representative Donnelly's letter said that in 2010,
it was determined to omit that clause. So a decision point was
reached.
Who would make that decision?
Mr. Haggstrom. That was made at the working level through
the stakeholders of the contract at that time in which the NAC
and Pharmacies Benefit Management were working jointly
together.
Mr. Johnson. And who is the contracting officer?
Mr. Haggstrom. The contracting officer is part of the NAC
and Mr. Herman Archibald.
Mr. Johnson. Okay. All right. Mr. Frye, you said you found
out in March, March 29th, I think you said----
Mr. Frye. March 29th.
Mr. Johnson [continuing]. To be exact?
Mr. Frye. Yes, sir.
Mr. Johnson. What did you do once you found out? Who did
you tell and what did you tell them?
Mr. Frye. We were in a meeting, myself, Glenn Haggstrom,
the Chief Acquisition Officer, and a number of us to include
Mike Valentino, the chief procurement officer from VHA, Mr.
Fred Downs at that time. Mr. Craig Robinson was also in the
meeting.
And the way I discovered this was Mike Valentino came to
the meeting. The purpose of the meeting was to discuss why we
were eliminating the clause from this follow-on contract. And I
did not know what the open market meant in the context of this
contract. So I asked Mike Valentino to explain it. And he said
we are buying drugs without a contract.
And I was aghast and immediately said this has got to stop
today and the Chief Procurement Officer for VHA agreed with me.
Now, did he ever take any steps down that road, I do not know.
Mr. Johnson. I saw a letter and I have so much
documentation here, I should have had it out. There was a
letter that directed that the purchase of open market drugs
through the PPV cease immediately. There was a big time span
between March to the issuance of that letter.
Who did you tell up your chain when you became concerned
that the law was being broken on these purchases?
Mr. Frye. Well, I talked to a number of people over the
course of time.
Mr. Johnson. By name, who did you talk to?
Mr. Frye. Within several days, I talked to Maureen Regan
from the Office of the Inspector General and relayed my
concerns to her.
Later on in the process, in the August, September time
frame, I sent some very pointed letters to Mr. Haggstrom, to
Bill Schoenhard in VHA. I included Mr. Todd Grams, the chief
financial officer. I included the deputy chief financial
officer, Ed Murray, who also included Mr. Paul Kearns, the
chief financial officer from VHA.
And my concern was that since this was extra contractual
that this was also a finance issue. And Glenn and I eventually
met with Mr. Murray because, you know, I thought it might rise
to the level of a--what is that term--material weakness. Glenn
and I were both concerned about that. So we brought him into
the office.
Mr. Johnson. I appreciate that. Going to the issue of
financial management, Secretary Gould, what do you think the
impact of this failure, do you think the impact is on VA's lack
of an integrated financial and logistics system that ties all
of this together?
Mr. Gould. Sir, I think the failure here has to do with
training, with process and procedure, and with having properly
warranted contracting officers in place. Our largest concern
here is the people factor in the system and that is what we
have moved to address.
A moment ago, you raised an issue that I wanted Mr.
Matkovsky to address and I think you will find it helpful and
providing a fuller answer to your question.
Mr. Matkovsky. Sir, relative the September meeting with Mr.
Frye, it is correct that he brought this issue to Mr.
Schoenhard and myself. We are on the health care operations and
management segment of VHA.
What we had done with that information, we were concerned,
our first reaction was we heard the word illegal. We sought
advice of counsel. Upon receipt from counsel's opinion, we
recognized that this was not a criminal issue, but we did see
that it was a problematic issue, sir.
We requested that we form an IPT, integrated product team.
And I will tell you candidly that my preference was to fix the
current contract, try to----
Mr. Johnson. I understand. You said, though, that it was
not a criminal issue but a what?
Mr. Matkovsky. Problematic issue.
Mr. Johnson. Violation of the law is far beyond
problematic, wouldn't you say?
Mr. Matkovsky. Right. So it was a violation of the FAR and
we thought it was problematic.
Mr. Johnson. Okay.
Mr. Matkovsky. We knew we had to fix it. We fielded a team
of folks including the contracting officers, folks from
contracting, folks from PBM, and we went through a set of
alternatives that we tried to tick off first, modify the
current contract, award a national contract in scope for
something of this complexity that allows us to acquire this 4
percent of dollar volume in a FAR compliant mechanism, and then
lastly focus on the future contract.
When we could not negotiate the current contract, when we
could not put in place a national scope contract to address
this 4 percent, that left us with a curtailment of the process.
Mr. Johnson. Okay.
Mr. Matkovsky. We learned in late October that we could not
change it and then we issued the instruction. I also wanted to
emphasize it is not just an issue of a cease and desist. It was
also the issue of making sure we had sufficient instruction for
how to acquire what you needed medically necessary and enough
contracting officers available over weekends or whatever to
acquire the medications we had. And as soon as we had that in
place, we felt confident to issue the instruction.
Mr. Johnson. Okay. Well, thank you for that clarification.
Mr. Chairman, the clock is not running. I do not know how
much time I have left.
I would like to know, are there penalties associated with
violation of the FAR?
I know in my experience, I retired in 1999, worked a lot of
contracting work, the contracting officers I worked with were
very, very fearful of illegal operations and violations of the
FAR because it could cost them their jobs and their careers.
That is in the DoD.
Are there penalties associated with knowingly violating
Federal acquisition regulations?
Mr. Gould. There are and Ms. Anderson----
Mr. Johnson. And have any of those penalties been pursued?
Ms. Anderson. I am happy to answer that question. Thank
you.
There are no penalties, sanctions attached to those
specific violations of the FAR that we are speaking of today.
And that is again the unauthorized commitments and the failure
to comply with the FAR sections related to competition.
There are other penalties, failure to comply with the Trade
Secrets Act which is also part of the codification of the FAR,
Procurement Integrity Act. But with regard to the violations
that we are speaking of today, the answer is no, not with the
FAR or the VAAR.
Mr. Johnson. Okay. Mr. Chairman, I yield back.
The Chairman. Thank you very much.
One further question, and I appreciate your patience in
answering the questions. And I know that all Members, I would
request, that we through the Committee do one document to VA
asking further questions for the record.
Mr. Matkovsky, is the PPV the largest contract within VA?
Mr. Frye. I think it may be the largest. It is over $30
billion. It is an 8-year contract. It is certainly one of the
largest if not the largest.
The Chairman. We talked about contracting officers, but is
there a contracting officer technical representative that
provides oversight for this huge contract?
Mr. Frye. There are no contracting officer representatives.
We no longer use the term COTR, so that is just a technical
issue. And it was never designed to have contracting officer
representatives.
When this contract was designed many, many years ago, as
far back as 17 years ago, apparently it was designed so that we
could have very rapid delivery of these drugs. And the system
was designed with a fast pay system and paperless. And I am not
sure it was designed immediately that way, but later on down
the line, those were the designs.
So the CORs were never part of the contract. Instead in
pharmacy, there were representatives who receipted for the
drugs, ordered, receipted, and stored the drugs and dispensed
them in the pharmacies, in the particular hospitals, or in the
respective hospitals.
The Chairman. So who is responsible for making sure that
the contract is adhered to and is managed properly?
Mr. Frye. Well, that is the structural problem that was
alluded to by the deputy secretary. In my opinion, of course,
looking in the rearview mirror, we should have really taken a
look at this fast pay system years ago because while it is
designed for velocity, perhaps it was not designed with all of
the internal controls in place.
In other words, if you bring things in quickly, if you pay
the supplier within 24 hours, are you taking all the necessary
steps that are required to make a positive ID of the products
that you ordered and put on the shelf in the hospital?
I cannot answer that at this point. We are going to have to
do some more research. There has been some preliminary research
done by the auditors and the Chief Financial Office in VA. And
it appears that we have some problems, but I cannot go into
those now because it is preliminary.
Mr. Matkovsky. Mr. Chairman, sir, I would simply add to Mr.
Frye's comments that effective the end of January, I believe it
was January 27th, we have appointed in addition to the
contracting officers, Mr. Frye alludes, we have appointed three
administrative contracting officers who serve as an extension
of the contracting officer as well as nominated well over 200
contracting officer representatives throughout VHA.
Those folks, the ACOs and the CORs, will be formally
trained by the end of February. And they will be compliant with
the expected part of the FAR.
The Chairman. Who at the table is the closest to the
contract in regards to oversight?
Mr. Gould. Mr. Chairman, if I could just tee that up.
That----
The Chairman. No. I teed it up.
Mr. Gould [continuing]. Chain of command on policy side and
on the customer side, very important distinction. I think you
are asking the policy and oversight side and so we will go down
this side of the table. And you asked closest to the front
line; is that correct?
The Chairman. Well, actually, I want to know who is the
most senior person who knew this was going on and chose not to
do anything about it.
Mr. Gingrich. Mr. Chairman, I will take a risk on answering
that question. I am not sure people did not choose to not do
something about it. I think that March to September is a long
time, but I believe that people were searching through to find
the answer.
Like Philip said, they were saying can we go modify the
current contract with McKesson to give us the pricing vehicle
that we would need to become compliant. Researched that. That
did not work. It worked through the staff section. It worked
between the acquisition folks and VHA.
And in September, I am the person that they came to and
said we have an impasse. We need to figure out how to get at
this. So I asked three questions.
The first question I asked is, are we putting any Veterans
at risk? I was assured by everybody that we have not put any
Veterans at risk for drugs and we are delivering the drugs that
we need on time.
The second question I asked, do we have any criminal
activity here? Do we have any fraud or do we have any activity
like that? And the answer I got back was, no, it is not
criminal, but it is a violation of the FAR and regulations and
we need to fix it.
The third I asked is, how do we fix it not just for the
short term but for the long term? And if we do fix it, how do
we do it without breaking number one and that is the care to
Veterans?
So that process which the Member asked us, how can you go
from September to November so quickly is we already had people
working each one of these pieces and trying to figure out how
to make it work.
They came in. We had the meetings. We talked about it. I
briefed the deputy and the secretary at a high level saying we
are working through this problem and we have what we think is a
solution. The solution was to implement a stop.
I cautioned them repeatedly as before you issue the stop of
using any method other than the credit card or the purchase
card which we had to get McKesson to agree to accept and before
you implemented the contracting process, how do we do it as we
have been cautioned repeatedly by the Members without putting a
single Veteran in harm's way?
They came back, said we have that process in place. We
said, okay, we are going to implement it. We started in October
crafting the instructions, getting the word out to the field,
briefing the right people, and the order was cut on 8 November
directing that it cease.
In fact, we had a conference of 600 plus contracting
officials including from VHA which are about one-tenth of the
contracting people that were trained in 2011. And it was
announced on that date prior to 8 November that we were going
to put this in place and it got a round of applause that we
were actually putting out this.
I said it. We are going to stop the process. We have
already got the directive coming. And the contracting people in
that room were a round of applause that they knew that we had
made the right step. And I asked them when I said that, are you
ready to implement and the answer was yes.
So when it did come up, the questions were people were
working around it, but the fear, concern, maybe over concern on
my part as I briefed the secretary and the deputy was we could
not allow a single Veteran to be put in harm's way or have a
surgery late or have his chemotherapy late or any of those
things that Mr. Roe has pointed out. And we had those
procedures in place. It took us longer than we expected, but we
did implement, Mr. Chairman.
The Chairman. I thank you for your comments.
I have to wonder if the applause was for the new policies
and procedures that were put in place or the fact that they
were no longer breaking the law.
Mr. Gingrich. I think the answer was, to answer your
question, that we were able to stand up and make the procedures
and outline exactly what we were going to do.
The Chairman. Thank you very much. You are excused.
Thank you for your patience. On the next panel, we will
hear from Linda Halliday, deputy assistant inspector general
for Audits and Evaluations at the VA Office of Inspector
General.
She is accompanied today by Mark Myers, director of the
Healthcare Resource Division in the Inspector General's Office
of Contract Review, and Michael Grivnovics, director of the
Federal Supply Service System Division also in the Office of
Contract Review.
Ms. Halliday, your complete written statement will be made
a part of the record and you are recognized for five minutes.
STATEMENT OF LINDA HALLIDAY, DEPUTY ASSISTANT INSPECTOR GENERAL
FOR AUDITS AND EVALUATIONS, OFFICE OF INSPECTOR GENERAL, U.S.
DEPARTMENT OF VETERANS AFFAIRS ACCOMPANIED BY MARK MYERS,
DIRECTOR, HEALTHCARE RESOURCES DIVISION, OFFICE OF CONTRACT
REVIEW, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF
VETERANS AFFAIRS; MICHAEL GRIVNOVICS, DIRECTOR, FEDERAL SUPPLY
SERVICE SYSTEM DIVISION, OFFICE OF CONTRACT REVIEW, OFFICE OF
INSPECTOR GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS
Ms. Halliday. Chairman Miller and Members of the Committee,
thank you for the opportunity to testify on the OIG's ongoing
reviews of VA's administration of the pharmaceutical prime
vendor contract and to provide a perspective on contracting
issues and open market purchases. OIG reviews provide unique
insight into how VA purchases pharmaceuticals and health care
services.
Maureen Regan, the Inspector General's Legal Counsel, who
provides oversight to our Office of Contract Review is unable
to participate in today's hearing. She had a conflict with
scheduled court proceedings.
Thus, I am accompanied by Michael Grivnovics and Mark
Myers, the Directors of the OIG Office of Contract Review, both
in the Federal Supply Service Division and Health Resources
Division respectively.
These directors report to Maureen Regan and are directly
responsible for the majority of the OIG work on the
pharmaceutical prime vendor contract.
Open market purchasing is not a new issue and OIG has
issued numerous public reports that have identified concerns
with open market purchases. The term open market describes the
purchase of goods that are not on contract.
We have consistently identified concerns that a vendor's
ability to sell open market in significant volumes effectively
reduces VA's ability to leverage prices using aggregate buying
power.
OIG has shared their insights with VA officials to help the
department develop short-term and long-term solutions to
improve the current pharmaceutical prime vendor solicitation.
Short-term solutions implemented by VA have resulted in
amendments to the current pharmaceutical prime vendor
solicitation and included efforts to establish negotiated
prices for items not on national contracts and ensure the
requirements that products purchased comply with the Trade
Agreement Act.
However, identifying long-term solutions will not be an
easy task because the causes, which are numerous and complex,
have never been quantified.
At this time, we are conducting a review of the
pharmaceutical prime vendor purchases for fiscal year 2011 to
quantify the extent and causes of the problems. This work
includes quantifying the actual dollars spent on open market
sales and identifying the patterns and trends of open market
purchases of pharmaceuticals.
Further, we are assessing whether purchases have violated
existing procurement laws and regulations and to what extent
open market purchases have violated the Trade Agreement Act.
We are also reviewing the internal controls of the VA's
fast pay system to identify the risks and vulnerabilities
associated with the reliance on related payment and processing
activities.
Specifically, we are assessing whether items ordered via
the pharmaceutical prime vendor contract are received and
correctly priced, that payment errors are corrected in a timely
manner, that the contract terms are met, and we are looking to
see whether an adequate separation of duties exists in the
processing activities, over ordering, receipt, and payment of
items.
Our auditors are reviewing orders placed at VA health care
systems, orders processed through the VA consolidated mail-out
pharmacies, along with the payment processing activities at the
VA's Finance Service Center.
We will provide the Committee the results of our ongoing
work when the reviews are complete.
Chairman Miller, this concludes my statement and my
colleagues and I would be pleased to answer any questions you
may have.
[The prepared statement of Linda Halliday appears on p.
51.]
The Chairman. Thank you for your testimony.
To finish up on your last comment, when do you suspect that
you will finish the review?
Ms. Halliday. There are two reviews going on right now. One
is in the Office of Contract Review and the other is with the
Office of Audit and Evaluations. We are thinking mid summer,
hopefully a little bit earlier.
The Chairman. Have you received everything you have asked
for from VA at this point?
Mr. Grivnovics. Yes, we have.
The Chairman. Is there anything that they have not provided
that you need?
Mr. Grivnovics. We have not identified any additional
information needed at this point.
The Chairman. When did they ask you to become involved in
this matter?
Mr. Grivnovics. December, late December, we were asked to
begin the review of the pharmaceutical prime vendor program.
The Chairman. Do you know at this point how long VA knew
about it before you were notified or is that going to be part
of the outcome of your investigation?
Mr. Grivnovics. That is going to be part of the review, but
we do not know at this point.
The Chairman. Mr. Donnelly.
Mr. Donnelly. Thank you, Ms. Halliday.
One question that I am wondering about is there is another
contract coming up and it is coming up in a few months. Have
you seen any indication that these problems are solved in the
contract that is to be let?
Mr. Grivnovics. There was an amendment, I believe it was
amendment number six to the current solicitation, and one of
the areas that was put in is that there will be, if I remember
this correctly, for generics, a wholesale acquisition cost
price base generic program.
My understanding is this would help potentially cure the
problem where items are not currently on an FSS contract but
are out there and available for sale in the pharmaceutical
business. They would be priced at some percentage over or under
WAC and they now would be considered a contract purchase.
Mr. Donnelly. The reason I ask, Ms. Halliday, is in your
statement, you talk about for 12 years you have been doing
this. And I would love to not have you do this for a 13th. And
so it seems to me that with a new contract, we ought to have in
place a way to end us having to struggle with this.
Ms. Halliday. Congressman Donnelly, I believe we will still
have to follow-up on the effectiveness of VA's actions.
Mr. Donnelly. We want you to continue to follow-up. We just
do not want you to find any problems.
Ms. Halliday. We would hope that we see positive
improvements.
Mr. Donnelly. Okay. Do you have any other suggestions as to
things that the new contract should include so that we can look
and see, oh, okay, the next alternative there is a contracted
price because from reviewing your statements, too, I mean, we
are talking about millions of dollars lost to taxpayers who
every day work their tails off, you know, to raise their family
and a few extra bucks left over but also pay taxes every year?
Any suggestions as to what else needs to be in that contract?
Mr. Myers. I think as Mike has already alluded to that,
part of the solution is the WAC-based pricing. For any generic
drug that is not on a Federal Supply Schedule contract to have
it part of the PPV contract and put it in there at an agreed
upon percentage, either markup or discount, whatever the
proposals are going to be in the ultimate awarded contract.
We do have concerns with that. Potentially it could
undermine the Federal supply schedule program. As vendors and
manufacturers of generic products, it may no longer be an
incentive for them to come and negotiate the contract and
expend the effort needed to comply with the Federal Supply
Schedule contract when now they can sell their products simply
through the PPV contract and VA can purchase their drugs at a
WAC price rather than a deeply discounted price that typically
you find on Federal Supply Schedule contracts.
It is a solution, I think, at least in the short term, that
is going to fix the procedural and process question, are you
compliant with the FAR because now you are going to have a
legitimate contract purchase rather than an open market
purchase.
But I think one of the things that definitely needs to be
done is that for certain open market purchases, for certain
drugs, we have talked a lot about the generic market, but there
are covered drugs.
There is sort of two divisions of drugs, generics and name
brand covered drugs. The name brand drugs, those drugs are
required to be in Federal supply schedule contracts and they
are required to be on the FSS contract at a statutory ceiling
price.
And one of the biggest concerns that we have seen as early
as 2007 is that when a manufacturer who has a covered drug on a
Federal supply schedule contract at the statutory ceiling price
and the manufacturer does not participate with McKesson and,
yet, we have seen specific instances, numerous manufacturers
where those covered drugs were purchased at open market prices
from McKesson when they were actually on a Federal Supply
Schedule contract.
And so that gave us a lot of concern. And those types of
products should be simply blocked out and blocked from purchase
through the PPV system.
Mr. Donnelly. Thank you, Mr. Chairman.
The Chairman. Mr. Stearns.
Mr. Roe.
Mr. Roe. One of the things I would like you to look at when
you are reviewing this is are you finding any of the
medications on the PPV, companies leaving them off because the
margins are so thin, knowing that they will go around the
contract into the open market system and do that?
Have you had a chance to look at that?
For instance, one of the big issues now are
chemotherapeutic agents, as you know, which is really tragic
because you have got a patient out there with cancer that knows
the best treatment is X and they cannot get it if they are a
Veteran unless they go around that.
Have you noticed that at all or found that?
Mr. Grivnovics. It is early in our review but one of the
things we are going to cover is looking at what was purchased
open market and if there was a comparable product that was on
contract, and why we did not buy that product that was on
contract?
Mr. Roe. I do not know for sure, but what could be
happening forcing you to the open market would be if the
vendors and or manufacturers just said we cannot make any money
selling this product, so we just will not provide it. We will
not bid on that and, yet, it is a needed product.
Mr. Myers. Yes, that is a potential risk. And I think that
typically VA is trying to establish long-term contracts. And
when the profit margins are thin, as you have alluded to, and
the generic market can fluctuate wildly, I think there might be
some hesitation out there because of that, but we have not
validated that in a review.
Mr. Roe. That will be something you will look at, though?
Mr. Myers. Yes.
Mr. Grivnovics. I would like to add one more thing to
Mark's comments. Some of the generic drugs on the market have
competition from McKesson themselves. Many times when we are
going to do a Federal supply schedule contract or the National
Acquisition Center is, sometimes it is hard to get a fair and
reasonable price because the manufacturer does not want the
distributor to see what prices customers are getting. They
would prefer that we go direct to them and purchase. But our
system, the prime vendor system is set up to go through
McKesson to buy those drugs.
Mr. Roe. Okay. I have no further questions. I yield back.
The Chairman. Mr. Reyes.
Mr. Reyes. Thank you, Mr. Chairman.
My first question is, in your preliminary work, have you
come across any offices that have been in compliance or is it
across the board noncompliant?
Mr. Grivnovics. We do not have that information at this
point.
Mr. Reyes. Is that something you are going to look for?
Mr. Grivnovics. Yes, we are. We are going to do a sample to
see if any violations occurred of the FAR and based on that
sample, depending on the error rate that we find, we will
expand the review to see how pervasive the problem was.
Mr. Reyes. Will your report give the Committee an idea, in
terms of total cost how many potential millions of dollars of
taxpayer money was used unnecessarily in this manner? Will we
get that?
Mr. Grivnovics. Yes. We will define the amount of open
market purchases. We are going for those open market purchases,
see if we can find a comparable item on contract, we will
quantify the differences in price.
Mr. Reyes. The other concern that I have is will you be
able to tell if there were instances where Veterans did not get
either the correct medication or the medication in proportion
to their issue because of the noncompliance with the Federal
regulation?
Mr. Grivnovics. I do not believe we will be able to tell
that.
Mr. Reyes. You will not be able to----
Mr. Grivnovics. From the one discussion I had so far is
that when products are ordered, if they are not available, they
are just basically replaced on the PPV ordering screen. You do
not know what was not ordered except if there was a national
shortage. VA does reports on that and you can look at that. But
from an item that was substituted, you are not going to see the
original product that was ordered.
Mr. Reyes. But you are satisfied that you will have in the
system, in every system the ability to determine and audit the
impact of this noncompliance?
Mr. Grivnovics. Yes, we should be able to do that.
Mr. Reyes. Okay. That is all for me, Mr. Chairman. Thank
you.
The Chairman. Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman.
And thank you to the panel for being here.
Apparently this has been a problem before in other
purchasing. In 2009, there was an audit done on open market
medical equipment and supply purchases. And I was reading
through that review and that report.
And my question is, are you seeing any parallels to your
review now to what you found and concluded in this report and
also did the VA follow-up on your recommendations and make any
changes to the report in 2009?
Mr. Grivnovics. Do you have the title or specifics about
that 2009 report?
Mr. Stutzman. Yes. It is the audit of VHA open market
medical equipment and supply purchases.
Ms. Halliday. Yes, we made several recommendations in that
report and VHA moved forward to implement those
recommendations. I believe all of the recommendations are
closed and we would have expected that that would result in
some corrective actions.
Mr. Stutzman. So you do not know or there has been no
follow-up necessarily to----
Ms. Halliday. We have not done follow-up on that report at
this point. We do program follow-up reviews in, but we give the
department a period of time to put the corrective actions in
place so then when we go in, we can assess the true
effectiveness of those actions.
Mr. Stutzman. Okay. I am new to this process. And I guess
to me, the follow-up would take place. At some point, will you
follow-up on this report that happened in 2009 as well?
Ms. Halliday. We will certainly put that in our plan and
look at the performance risks. And I would expect that would go
into a future review.
Mr. Stutzman. Okay. And then typically how far back would
you look at this issue in your review?
Ms. Halliday. We like to keep our look as a current
snapshot in time because I think that is where you really want
to focus on what corrective actions are needed now. So we would
probably take the most recent fiscal year or some portion of
that time period to look at the conditions.
Mr. Stutzman. Okay. Well, I would be interested in not only
this review but also any follow-up that would have taken place
on a 2009 report or any others as well because there is no
point in you doing reviews and recommendations and the VA is
not doing anything about it.
Thank you. I yield back.
Mr. Roe. If the gentleman would yield for just a minute.
Let me put a human face on this for you. Let's say you have a
shortage of methadone and you have a substance abuse patient.
You have a 10 milligram and a 20 milligram and a 40 milligram
and an 80 milligram. If you do not get those right, that person
can die. They can overdose and die.
So this really happens out in the real world. Our VA folks
are very concerned about this being done. And so this is
critical. It is not just violating a statute or a law. It is
about patients' lives and we have to get this right.
I yield back.
The Chairman. Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman.
I regret I was not here earlier to hear all the first
panel, but I guess you had indicated, Ms. Halliday, that your
study is going to take six and half or mid summer which would
appear about six and a half months.
Is it possible to get an early summary or some information
back to the chairman and to the Committee some of your
tentative findings in 90 days? Is that a possibility?
Ms. Halliday. I think that we probably could provide an
interim briefing. It is going to take us a while because we do
have teams at medical centers. We have them at the consolidated
mail-out pharmacies. And the work that the Office of Contract
Review is doing is very data intensive.
Mr. Stearns. Okay. You might think about it.
Ms. Halliday. We will try and do that if we can.
Mr. Stearns. Now, you heard the first panel. Is there
anything about the first panel and what they said that concerns
you, that would affect your study?
I think one of the things that I have been told by talking
to the staff here is that the people who are responsible are no
longer there. Is that the way you understand it, too?
Ms. Halliday. That is still under review.
Mr. Stearns. Okay.
Ms. Halliday. We cannot answer that completely.
Mr. Stearns. And the number of people that were involved,
do you have any idea how many people were involved that they
supposedly said has left?
Ms. Halliday. No.
Mr. Stearns. Do you have a ballpark? Are we talking about
100, 200, 1,000?
Ms. Halliday. No. We do not have information on that at
this time.
Mr. Stearns. Uh-huh. And your normal procedures when you do
these studies, will you be able to identify people that did
this that perhaps are still there?
Ms. Halliday. I think we will be able to identify through
the interviews what people understood the problems to be and
the corrective actions they took and how they reported it up
the chain.
Mr. Stearns. That does not quite answer my question. So the
question would be, if you find that they did something illegal,
will you determine whether those people are still there that
did the illegal operations? Will that be a fair question that
you will be able to determine for the Committee?
Mr. Grivnovics. If we do get down to the actual purchase
order level and we look at the individual transactions if we
have a need to do that, then we could go back to that
individual facility and find out who placed that order.
Mr. Stearns. I am just trying to understand. The final
report, will it say these illegal operations occurred and it
amounted at least to $206 million and those individuals are
still there? Would that be something that we would be told or
they are not there?
Ms. Halliday. If the individuals are still in their
positions, we would have a recommendation for VA to hold them
accountable and take appropriate action.
Mr. Stearns. When you say hold them accountable, as I
understand, the first panel saying that what they did was
illegal, but there is no enforcement, there is no civil, there
is no penalty. Is that your understanding?
Ms. Halliday. Generally, yes. For the violations of the FAR
such as not meeting the competition requirements, there are
some administrative actions you can also invoke.
Mr. Stearns. Do you mind just sharing with us what those
administrative actions would be under normal situations?
Ms. Halliday. Most of the buying agents will have either an
ordering delegation or a contracting warrant to make the
purchases on behalf of the government. You can pull those
warrants and that essentially is going to make it very
difficult for that person to do their job.
Mr. Stearns. So you stop them from doing the job, but you
cannot fire them?
Ms. Halliday. Depending upon the seriousness of the
individual's actions, it would be up to the department to
determine the disciplinary action that is appropriate.
Mr. Stearns. Okay. Thank you, Mr. Chairman.
The Chairman. Any other questions?
[No response.]
The Chairman. Thank you very much for your testimony and
your patience.
Ms. Halliday. Thank you.
Mr. Grivnovics. Thank you.
The Chairman. Invite the third panel to the table. On this
panel, we are going to hear from Sharon Longwell, the vice
president for Health Systems, National Accounts for McKesson
Corporation.
Ms. Longwell, your complete statement will be entered into
the record.
Ms. Longwell. Okay.
The Chairman. And you are recognized for five minutes.
STATEMENT OF SHARON LONGWELL, VICE PRESIDENT, HEALTH SYSTEMS,
NATIONAL ACCOUNTS, MCKESSON CORPORATION
Ms. Longwell. Thank you, Mr. Chairman and committee.
Before I get started, I would like to say on behalf of
myself and McKesson and all our employees, thank you for
everything you do Veterans.
On behalf of my brother, Jim, who served two terms in
Vietnam and whom we lost this last summer, thank you he would
want me to say.
The Chairman. Thank you for his service.
Ms. Longwell. My name is Sharon Longwell and I am vice
president for Health Systems, National Accounts with McKesson
Corporation.
I appreciate the opportunity to speak with you today to
discuss the Department of Veterans Affairs' pharmaceutical
prime vendor contract.
McKesson has delivered excellent quality and service to the
VA as the pharmaceutical prime vendor. Through the deep
negative distribution fee in our contract with the VA, we have
provided the department with $526 million in savings over the
term of the prior PPV contract.
When McKesson was awarded the PPV contract in 2004 after a
highly competitive bidding process, the negative distribution
fee that we offered the VA in our contract was publicly
criticized within the industry. Allegations were made that we
could not service the contract with such unprecedented and deep
discounts in our distribution fee.
I am here today to report that in the 8 years that we have
proudly served the VA, we have delivered both significant
savings and exceptional service.
For 179 years, McKesson has had an unwavering commitment to
the safe, rapid, and cost-effective delivery of FDA approved
pharmaceuticals to all of our customers from the largest
hospital system and chain drugstores to the small mom and pop
pharmacies and all of our government contracts.
McKesson purchases pharmaceuticals directly from the
manufacturer. All pharmaceutical purchases from McKesson by the
VA, whether under a VA negotiated contract or an open market
item, have the required FDA approvals.
McKesson complies with all state and Federal laws and
regulations governing sourcing, pedigree, chain of custody, and
drug integrity.
In our role as the PPV, McKesson delivers pharmaceutical
products to more than 700 VA affiliated locations which include
the VA facilities, CMOP, Indian Health Services, Bureaus of
Prisons, and other government agencies.
As the prime vendor, McKesson is responsible for providing
thousands of products at a price set under the Federal supply
contract which the VA has secured through negotiations with
manufacturers.
We have invested an additional $9 million in dedicated
software, hardware, facilities, and staff for the PPV contract
to improve the service and drive down VA cost.
McKesson's state-of-the-art technology allows authorized VA
buyers to purchase products through our electronic order entry
system which drives them to the lowest price contract item.
If the authorized buyer attempts to purchase a product that
is not on a VA negotiated contract with the manufacturer, our
system directs them to the lowest price contract item.
If the product is out of stock, the system suggests the
lowest price generic equivalent product that is on contract.
Through the transparency afforded by our electronic
ordering and inventory management systems, the VA can manage
and track their inventory and have real-time access to invoice
and ordering data.
There are circumstances, however, when contracted
pharmaceuticals are in short supply or where the VA may not
have contracted with the manufacturer for critical medications
even though they are needed to treat patients in a timely
manner.
The department's statement of work for the PPV states the
PPV may be requested by the customer to supply and distribute
open market pharmaceutical products on their behalf. Under this
provision, purchases of open market products from McKesson are
permitted by the PPV contract.
It is important to note that when the VA decided to
purchase open market products from McKesson, it paid the same
or less than our private sector hospital and institutional
customers paid for the same products.
Purchases of open market product are a standard practice in
the private sector. Based on our experience, the VA purchases
of open market products, which are less than 5 percent of their
total, is quite low.
In the private sector, for instance, 30 to 40 percent of
purchases from hospital and institutional customers can be on
open market.
In summary, at McKesson, we take enormous pride in driving
efficiencies that improve the quality and delivery of health
care to our Nation's Veterans. We have been and will always be
committed to providing the highest level of service as we
safely and rapidly deliver cost-effective medications to the VA
and the Veterans they serve.
I am now prepared to answer any questions you may have.
[The prepared statement of Sharon Longwell appears on p.
53.]
The Chairman. Thank you for your testimony again. Thank you
for your comments about your brother. That is what this
committee is all about is taking care of those who have served
this Nation. And I know from your comments he is still very
close to you.
Ms. Longwell. Yes, sir.
The Chairman. Did VA approach McKesson about modifying the
contract?
Ms. Longwell. McKesson never received a formal request to
modify the contract. There were discussions to modify the
contract, I believe in the October time frame.
The Chairman. Do you know what the modifications were and
why it was modified?
Ms. Longwell. I believe they wanted to have McKesson put
all open market items on contract and then, therefore, comply
with all TAA requirements.
The Chairman. Can you give rationale behind their desire to
do that?
Ms. Longwell. Their desire to do it, I think, was to no
longer have any open market items, to have them all on
contract.
The Chairman. Are similar pharmaceutical contracts in the
private sector typically for the same length?
Ms. Longwell. Pardon me?
The Chairman. Are similar contracts like this out in the
private sector typically for the same length of time as the PPV
contract with VA?
Ms. Longwell. I would say in the private sector, sometimes
they are shorter. However, you do have a base of 2 years and
then three 2-year options. So in that case, they are very
aligned with what the private sector does because you do have
an option to cancel those and not take another option period.
The Chairman. Mr. Donnelly.
Mr. Donnelly. Thank you, Mr. Chairman.
And your brother, Jim is a hero to us.
Ms. Longwell. Me, too.
Mr. Donnelly. And we appreciate his service. And I just
want to let you know that for Vietnam vets, at least back home
in Indiana, every parade I am at, they get a standing ovation
wherever they go. So they are held in extraordinary esteem by
all of us.
What happens to cause the shortages and stock outs and, you
know, what processes are you using to try to identify where the
problems are so that the items will always be in stock?
Ms. Longwell. There are really two types of outages. There
is ``manufacturer unable to supply'' and then what in our world
we call ``temporary outs.'' And that is where we did not buy
enough of the product.
We are measured on our ``temp out'' and how much of that is
caused by McKesson not ordering the right amount. And we have
complied with the contract and have always exceeded the
contract requirements.
The ``manufacturer unable to supply'' is where the
manufacturer for whatever reason is not able to make enough of
the product, had facility issues, have decided to get out of
that market.
And we help provide on our Web site every week, we update
any issues we are having with manufacturers and we try to put
in there an estimated day when they will be released.
So that is really where the two types fall.
Mr. Donnelly. For instance, with the manufacturer piece, do
you have a way to detect here are the problem items that are
out of stock all the time and, if so, here are the recommended
backups or these are the products we really struggle getting?
Is there a way for you to determine what are the problem
products?
Ms. Longwell. Yes. In our purchasing facility, they work
with manufacturers every day to try to obtain product. And when
they find that one of the manufacturers has run into an issue
on a product, we post this information and keep it posted
weekly on our Web site or our portal that the customers go
through. That allows the customers to see when there is an
issue.
We also ask the manufacturers can you please tell us when
you think this item will be available. Is it, you know, April
the 1st, April the 12th? And we are updating that every week.
Mr. Donnelly. Okay. And when a product is not available and
they have to purchase off of open contract, how do you
determine the pricing for that?
Ms. Longwell. When they are not on contract in the private
sector, sometimes they will have negotiated other contracts,
maybe individual contracts. But at McKesson, our pricing
department decides what we are going to price the product if it
is on the open market.
I do not know how they price those, but it is going to be
based on if there a shortage of the product. You heard them
talk about WAC. That is a basis for it. But I cannot tell you
specifically how they determine the price.
Mr. Donnelly. Okay. Thank you, Mr. Chairman.
The Chairman. Mr. Stearns, any questions?
Mr. Stearns. No, sir.
The Chairman. Mr. Roe.
Mr. Roe. First of all, welcome home to your brother.
Ms. Longwell. Thank you.
Mr. Roe. I am a Vietnam era Veteran myself.
So, anyway, I would like to know how big of a problem these
shortages are for McKesson and other providers like you, are
because we are hearing more and more about whether it is
immunizations or chemotherapeutic agents.
Ms. Longwell. Uh-huh. I mean, shortages are a problem not
only for McKesson but for myself, my family, your family. We
all want to be able to get the right product when we can.
McKesson only will buy from FDA approved manufacturers of
product, but we do try to make sure that we have a wide breadth
of product we can offer, especially in the generic world. If
one generic vendor is having a problem with it, we will have
backup generic equivalents.
Mr. Roe. Let me give you the old if it ain't broke don't
fix it.
Ms. Longwell. Okay.
Mr. Roe. When you are out there as a doctor seeing a
patient and you have taken months or a year to get them
stabilized, you have no idea how disconcerting it is for that
patient and that doctor when they cannot get the medication
that they have finally gotten to work.
So these shortages are creating real problems in the real
world out here for us and the health care system to provide the
kind of care for our patients, especially a lot of folks that
have had anxiety or mental problems, to finally get what works
and then find out what works is not available anymore.
So I just wondered what kind of an issue it was for you all
in providing and are you getting any blow back from your
providers that this is a problem?
Ms. Longwell. I mean, we always hear from our customers if
we are not able to provide something. We always try to make
sure that any product that we cannot supply, we have gone back
to the manufacturer time and time again, is there anything they
can do, please tell us what the expected date is, because I do
not want to post on our portal that we expect release by Friday
and then only to be able to tell them on Friday, no, that is
not going to happen, it is not going to be until Monday.
Mr. Roe. Okay. Thank you. I yield back.
The Chairman. Mr. Stutzman, any comments?
Mr. Stutzman. I have just got one question. Thank you, Mr.
Chairman. I just have one question.
Could you describe to us a little bit how you purchase from
your manufacturers? I mean, there are so many pharmaceuticals
out there and you obviously know what consumers or what your
customers are needing. How fast can you react to that? Is that
something that is within a computer system where you know the
need and then do you--you talked a little bit about when you
communicate to the manufacturers. How fast can they respond?
What kind of flexibility do you have and do they have to
provide the products? And then if you answer that question,
that will kind of answer my second question, I believe.
Ms. Longwell. We have our standard product that our system
is smart enough that it looks at demand that has been going on
and helps build demand. When we bring on a new customer, we
also will build in demand. So we never like to bring on a large
customer more than 45 days before the start date because we
want to be able to get that product, that demand built.
When we bring on new customers, we will go to the
manufacturer and let everyone know we just got this new
customer, please make that part of the allocation that you are
giving us. And so we make sure that we are building up when we
do bring on a new customer.
When we do find out there is an issue, if we still have
product available, but we know we are not going to be able to
get a lot of additional product, we will put customers on
allocation. And what that does is that limits hoarding, if you
will. We do not want anyone to grab all the market. We want to
be able to provide it to everyone. So we will put allocations
in our system to prevent them from doing that.
But our system goes in and it looks. Every week, it is
doing updates of what our inventory should be. So we also look
at when there are items that go off of patent. If we have a
generic item come on and we know that generic item is going to
be a big buy, we will buy up on that so that we will be able to
have it.
Unfortunately, where we run into problems and where
doctors' offices and hospitals run into a problem is where a
facility shuts down or where they have a problem where they
have shut down their facility. We are caught off guard and we
are all having to struggle.
That is the time we go to the second manufacturer who may
have the generic equivalent and say can you help us, how ramped
up are you?
Where we run into problems are where the manufacturer that
was shut down was doing 75 percent of the overall volume. The
backup manufacturer was only doing, you know, 10. Now he has
got to do all, you know, 80 percent. And so they have trouble
gearing up as well.
We work with them as much as we can trying to make sure
that we are getting the product we can get for our customers.
Mr. Stutzman. All right. Thank you. I will yield back.
The Chairman. Mr. McNerney, do you have any questions? You
are recognized.
Mr. McNerney. Thank you, Mr. Chairman.
Do you feel that there are safety and quality concerns when
drugs are purchased on the open market?
Ms. Longwell. No, not from McKesson. I can only talk for
McKesson. We only buy FDA approved drugs. We only buy them from
their manufacturers. So we do not buy anything on what is
called the secondary market. McKesson just does not buy from
that.
Mr. McNerney. Would you feel that pharmaceuticals purchased
on the secondary market would be questionable or have safety
concerns?
Ms. Longwell. I do not know if they would or would not. And
since I do not know, we do not buy them.
Mr. McNerney. All right. Thank you. I yield back.
The Chairman. Mr. Flores, you have any questions?
Mr. Flores. Mr. Chairman, I have no questions or comments.
Thank you.
The Chairman. Mr. Johnson, a question?
Mr. Johnson. I do, Mr. Chairman, and I thank you.
Before I ask my question, though, I would like to commend
McKesson for contracting with over 100 Veteran-owned small
businesses, suppliers, Veteran or minority-owned business
overall.
There are 2,800 of those that you guys contract with and I
appreciate that. And also in addition to sponsoring events
focused on the Veteran community--Veteran-owned small business
conferences you participate in. Those kinds of things. And I as
a Veteran myself and all the Veterans really appreciate that.
I also understand that McKesson has rebid for the PPV
contract that is coming up with the VA. And I certainly hope
that this hearing will not negatively affect the VA's decision
where McKesson is concerned because I am convinced that
McKesson has delivered exactly what the VA asked them to do in
compliance with the contract.
And we appreciate that. And we are going to be watching
closely and asking the VA to do a cost benefit analysis of that
contract award so that we can see the best option is pursued.
Ms. Longwell, can you explain to the Committee what happens
when the VA attempts to purchase items off contract through
your electronic system?
Ms. Longwell. In our electronic system, when you go to look
for aspirin, I will use aspirin as the example, you can put in
aspirin and it is going to pull up all the aspirin that we
have. And it is going to show you what is on contract.
So in the VA system, it is going to show not only if it is
in the FSS contract, it will show FSS in a column and it will
show the contract number. It also is going to show the
quantity, the DC quantity we have and it is going to show if it
is zero, is that a ``manufacturer unable to supply'' or an MUS
issue, that button will be checked. It will show all items that
are on contract. So if they have generic equivalents for that
same item, it will be listed as well.
If the customer goes to place an order and they just put in
aspirin, the system is going to show them all of those so they
can drive to the right contract. And it will sort it so the
lowest price contract item is sorted to the top.
It will, however, show if they do not have any on contract
that is available, it will also show the open market
equivalents of that same item.
Mr. Johnson. Okay. Thank you. Mr. Chairman, I have no
further questions.
The Chairman. Mr. Denham, any questions?
Mr. Denham. No.
The Chairman. Mr. Runyan.
Mr. Runyan. No, sir.
The Chairman. Mr. Benishek.
Mr. Benishek. No.
The Chairman. Mr. Huelskamp.
Mr. Huelskamp. No.
The Chairman. Mr. Amodei.
Mr. Amodei. No.
The Chairman. Any further questions?
[No response.]
The Chairman. If not, we thank McKesson for your testimony,
Ms. Longwell.
Mr. Johnson. Mr. Chairman.
The Chairman. Mr. Johnson.
Mr. Johnson. Mr. Chairman, I make a motion under Rule 2----
The Chairman. Just a minute. We are going to excuse the
witness first.
Mr. Johnson. Okay. Thank you.
The Chairman. And then I will make a statement and
recognize you.
Ms. Longwell. Once again, thank you. Thank you for all you
do.
The Chairman. Thank you very much. Thank you.
For the record, this hearing has adjourned.
[Whereupon, at 12:24 p.m., the Committee was adjourned.]
A P P E N D I X
----------
Prepared Statement of Hon. Jeff Miller, Chairman
Good morning. This hearing will come to order.
I want to welcome everyone to today's hearing titled ``Examining
VA's Pharmaceutical Prime Vendor Contract.''
This Committee started investigating VA's Pharmaceutical Prime
Vendor, or ``PPV'', contract well before stories on the topic began
running in the press, and the findings raised enough questions to
warrant this hearing today.
The PPV contract, when written and executed correctly, is intended
to ensure VA medical facilities receive needed pharmaceuticals at a
competitive price and in a timely fashion.
Medical facilities throughout the Nation rely on this system to
ensure the best care for our veteran patients.
The Committee's investigation began when discrepancies appeared in
how VA ordering officials had been handling open market purchases of
items not available on the PPV contract.
These purchases go back much further than just the last year or
two: they span multiple administrations, showing many within VA chose
to ignore rather than fix a known problem.
While Federal Acquisition Regulations outline clear procedures on
how agencies can acquire items not on contract, VA officials for years
have ignored those procedures when purchasing supplies that were either
not available at the time or not on the PPV contract.
Instead of actually performing due diligence in its open market
purchasing, VA officials took the easy route and requested the PPV to
deliver the needed pharmaceuticals, or in some cases non-pharmaceutical
items.
An open market purchase requires a degree of competition; VA's
practices willfully ignored required competition, thereby compromising
best value to taxpayers and potentially compromising patient safety.
In short, what VA has been doing is not mere bureaucratic
oversight; it is illegal, with serious potential ramifications for
veterans.
I am disheartened by VA's treatment of the matter. We know that
senior officials at the Department have known of these practices for a
long time, yet did little to address the issue, and certainly were not
forthcoming about it to Congress.
In fact, VA has acknowledged knowing open market purchases through
the PPV could be problematic as far back as December of 2010, but only
in November of 2011 took formal action.
This action was little more than a re-statement of current law that
employees should already have been following and leadership enforcing.
One thing we will get to the bottom of is who knew of VA's illegal
buying and did nothing about it.
As has been the cause of several other problems identified by this
Committee, weaknesses in contracting at VA are a major cause of the
illegal purchases we are discussing today.
Instead of applying temporary bandages to cover up problems, VA
needs to address the recurring causes within its own department and fix
them.
Whether a complete contracting overhaul is needed or simply new
leadership that can enforce existing law, it is my sincere desire that
this Committee and the Department can resolve these issues and move
forward.
My concern about the depth and duration of this illegal purchasing
is serious enough that I have partnered with Chairman Issa of the
Oversight and Government Reform Committee in requesting needed
documents and information from VA to fix this problem.
I want to thank Chairman Issa for his help in investigating this
matter, and look forward to VA's full and timely cooperation.
Lastly, I want to note VA's continuing habit of not providing
requested information to this Committee.
One request is now a month overdue, and yet another is five months
overdue.
I want to work with your Department to get our veterans the
services and care they deserve, and that is going to require your
Congressional Affairs team working with us to deliver solutions.
I now recognize the Ranking Member for an opening statement.
Prepared Statement of Hon. Michael H. Michaud,
Acting Ranking Democratic Member
Thank you, Mr. Chairman.
We have before us today some of the most senior level managers
within the Department of Veterans Affairs--managers entrusted by the
public to run the second largest agency in the Federal Government
efficiently and effectively. We are here because VA has once again
demonstrated an inability to perform at the level expected in managing
procurement processes.
In testimony provided to the Committee, VA readily admits that
violations took place. However, they are quick to assure us that
changes have been implemented to fix the deficiencies at hand. Frankly,
Mr. Chairman, I have heard it all before.
Today I have just three questions.
First, to quote a phrase made famous during the Watergate scandal--What
did VA officials know, and when did they know it?
According to VA testimony, VA ``did not follow all applicable law
and regulation'' for approximately $1.2 billion in what are called
``open market'' pharmaceutical purchases since 2004.'' The VA also
states that ``once these deficiencies were elevated to senior managers
in 2011, VA worked to develop a solution.''
In December 2010, the VA decided to cease open market purchases in
the future Pharmaceutical Prime Vendor (PPV) contract. What was the
impetus behind this decision?
Was there an awareness in 2010 that there were serious problems
with VA open market purchases, problems so severe that a decision was
made not to include an open market clause in the new contract?
Yet nearly a year elapsed before VA took decisive action. At no
time during the course of this period is there any indication that
anyone in VA leadership simply insisted that open market purchases
conform to VA policies, regulations and law. How much money was wasted?
Have these $1.2 billion in purchases that were not in accordance
with applicable laws and regulations been ratified by the VA?
Are there assurances that only warranted contract officers will be
responsible for purchases above $3,000 going forward?
After the VA Inspector General in 2009 found a litany of problems
with improper open market purchases for medical equipment and supplies,
VA management and leadership should have been put on notice that
problems might exist in other prime vendor programs. The VA IG
recommended that VA needed to revise its FSS waiver process, but VA
responded that the waiver process in VA Handbook 7408.1 ``provided
sufficient controls and appropriate approval levels for open market
purchases.'' There is no evidence that VA paid any attention to the
waiver process for buying drugs and pharmaceuticals in the open market.
I find it hard to believe that, as the VA states, ``the process
that was in place since 2004 had become routine.'' I have to ask you,
what is routine about the abject failure to follow established policies
and procedures?
38 USC Section 8125 requires VA to submit a report every year to
the Committee on the health care procurement experience. I look forward
to receiving those reports from VA dating back to 2004.
My second question is who should be held accountable for this failure?
Time and time again, the VA comes to Capitol Hill and testifies
that it has wonderful policies and procedures in place. Unfortunately,
no one ever seems to follow these policies and procedures, and there
seems to be no consequences for these failures. Time and time again,
the VA OIG and GAO testify concerning serious problems with VA
management and controls, and time and time again VA ignores these
findings and fails to take pro-active action.
VA testimony includes an ``illustrative example'' of a GS-5
Pharmacy Specialist ``confronted with the choice of ordering an open
market item or doing without.'' Let me offer a better example, how
about the manager responsible for overseeing the GS-5 making sure the
pharmacy specialist knew what VA policies and procedures were required
and then ensuring they were followed?
However, what seems to be the actual case is that there was no
management and no accountability all the way up the line and procedures
and policies were not followed in purchasing $1.2 billion worth of
drugs and pharmaceuticals.
Third, how is this going to be fixed and how will these fixes improve
the care we provide to our veterans?
I want to know how the absence of an open market clause in the new
contract will affect veterans. I want to know if the VA is still making
open market purchases of drugs and pharmaceuticals, either through the
PPV or through other suppliers, and how can we be sure that proper
processes are in place and, more importantly, being actively supervised
by management. I want to be assured that VA open market purchases are
from reliable suppliers and that all purchased drugs and
pharmaceuticals meet all safety requirements.
The VA, in last year's budget submission, claims $355 million in
savings in 2012 and 2013 due to ``acquisition improvements.'' But if
the VA cannot follow its own policies and procedures, how much faith
can we have in claims of acquisition savings?
I would like to see detailed documentation that VA has achieved
savings and efficiencies while improving the procurement and
acquisition process, a process that seems, in light of the serious
breakdowns we are looking into today, to need much in the way of
reform.
There is a saying that ignorance of the law is no excuse.
I hope that VA can help us understand today what accountability we
should expect from failures that seem to arise not from ignorance, but
from willful neglect of VA policies, procedures, and existing laws and
regulations, and how this will change moving forward.
Prepared Statement of Hon. W. Scott Gould
Chairman Miller, Ranking Member Filner, and Members of the
Committee: Thank you for the opportunity to appear before you today to
discuss the Department of Veterans Affairs' (VA) Pharmaceutical Prime
Vendor (PPV) program and how we use the currently established contract
to obtain pharmaceuticals for our Veterans.
Summary of Problem and Corrective Action:
VA acquires the majority of pharmaceutical products required
through companies represented on the Federal Supply Schedule (FSS) and
certified. Purchase and delivery of these pharmaceuticals is
accomplished through a separate vehicle called the Pharmaceutical Prime
Vendor or PPV contract. This two-tiered approach is an industry best
practice--gaining economies of scale to set prices for drugs and then
contracting for logistics services to deliver them at point and time of
need. PPV provides a critical link in the supply chain among drug
manufacturers, VA hospitals, and Veterans who need treatment. The PPV
contract was awarded competitively to McKesson Company in 2003. VA's
first order under this contract was placed in May of 2004 and VA has
used the contract continuously for the last 8 years.
VA has policies and procedures that govern how purchases are made
from the PPV contract. Since 2004, approximately 96 percent of the $30
billion has complied with all applicable law and regulation. However,
approximately 4 percent occurred using an ``open market'' clause in the
PPV contract, which was allowed under the contract, but which was to be
used in accordance with all applicable procurement law and regulation.
VA did not follow all applicable law and regulation for these
transactions. These deficiencies were the responsibility of VA to
identify and correct.
Once these deficiencies were elevated to senior managers in 2011,
VA worked to develop a solution that would correct flaws in our
internal processes and conform to regulation without preventing our
Veterans from receiving necessary medications. On November 8, 2011, VA
ordered its employees to end purchases being made through this flawed
process and replaced it with a process that conforms to applicable
regulations. Additionally, VA mandated training for employees
authorized to place orders, placed qualified contracting officer
representatives at the facility level to ensure compliance, and moved
forward with a new Request For Proposal (RFP) for a replacement PPV
contract that will not allow the mistakes of the past to be repeated.
At no time were our Veterans put at risk. The pharmaceuticals
purchased through PPV were FDA approved medications provided by
McKesson Corporation, a distributor that provides these same
pharmaceutical products to Wal-Mart, Target, RiteAid, Costco, CVS/
Caremark, DukeHealth, Tenet, Omnicare, Aetna, and Cigna, among others.
The result of these corrective actions preserves VA's access to
necessary drugs and complies with all applicable law and regulation. In
this way, we will continue to provide our Veterans with high quality
care, with their unique medical needs as our first priority.
Acquisition Reform at VA
VA has improved the quality and cost of its acquisition system over
the past 3 years. In October 2008, VA established the Office of
Acquisition, Logistics and Construction (OALC) to better address the
many challenges in acquisition identified through internal studies, as
well as recommendations from VA's Office of Inspector General and the
Government Accountability Office. This new Office, reporting to the
Deputy Secretary, resulted in the appointment of an Acting Chief
Acquisitions Officer (CAO) whose main focus is to improve acquisition
in the Department as specified in the Services Acquisition Reform Act
(SARA). Previously, the Department's Chief Financial Officer was
responsible for both business lines, which was contrary to the SARA
requirements.
The Secretary charged OALC to lead the Department's acquisition
transformation efforts by focusing on management information, improving
management of the acquisition life cycle, improving the acquisition
workforce, and leveraging technology to improve contracting outcomes.
VA has established the Senior Procurement Council and implemented
metrics to measure critical contracting requirements, implemented an
enterprise spend analysis process, established a risk management office
to oversee the A-123 process, established a Supplier Relationship
Management initiative to work with our suppliers to improve our
contracting processes, provided training to ensure a professional
acquisition workforce, and developed information technology (IT)
systems to simplify and standardize how we implement contracting
throughout the Department.
Additionally, the National Acquisition Center (NAC), a major
component of the VA Acquisition landscape, has an extensive program of
instruction for ordering officers on what their responsibilities are
and the limits of their authority. The NAC provides this training to
all ordering officers across VA and will provide refresher training to
all personnel filling this role, since 2011.
VA is working to ensure that all its contracting officers meet
Federal Acquisition Certification standards by the end of Fiscal year
2012. We are also focusing on institutionalizing program management
practices across the Department. A new Acquisition Executive Council
serves as the advisory body for developing VA's Acquisition Corps and
will identify positions throughout the Department requiring program or
project management certification.
Within VHA, procurement staffs were reorganized under a new
management line that provides management and oversight dedicated to
improving procurement operations. VHA completed its reorganization at
the end of fiscal year (FY) 2011. VHA, in partnership with OALC,
recently appointed a seasoned ``Federal Acquisition Certification in
Contracting'' (FAC-C) Level III procurement executive to serve as the
leader for VHA's procurement organization. VHA has additionally
recruited and hired experienced senior executives within the
procurement organization. Since February 2011, VHA has hired over 330
procurement professionals across the system, reducing the vacancy rate
of 25 percent to 8 percent for trained and qualified procurement
specialists. In FY 2011 these changes helped VA avoid $1.1 billion in
acquisition costs.
But despite these reforms, VA did not detect the problems with the
PPV open market clause, in part because the process that was in place
since 2004 had become routine. Moreover, when properly applied, the PPV
program provided a reliable, cost-effective and safe source of
pharmaceuticals. In the next section, we describe in greater detail how
this happened.
Decision to Use PPV to Distribute Drugs More Efficiently and
Effectively
In 1994, VA replaced its old ``depot'' distribution program with a
new commercial distribution strategy to eliminate its warehousing
system for storing and distributing drugs and supplies. Under the old
VA drug distribution system, drugs were ordered in bulk from
centralized depots. Orders could take up to 6 weeks for delivery,
inventory management was difficult and time consuming, and many needed
medications were nearing their expiration dates by the time they were
actually in the hands of VA pharmacy personnel. In addition, there was
as much as a 12 percent internal VA ``up charge'' for ordering and
distributing these products. VA facilities also purchased from other
supply sources to supplement their requirements for items not available
from the depots.
The health care industry moved away from this model of supply for
pharmaceuticals, medical, environmental, and virtually all other items
used in patient care to distribution contracts that provided just-in-
time acquisition and inventory processes and efficient online systems
for placing orders. VA decided to do the same and entered into its
first Pharmaceutical Prime Vendor contract in 1994.
This model has been adopted by virtually every other major health
care provider in both the private and public sectors and is regarded as
a best commercial practice. Other entities that use VA's prime vendor
contract include the Indian Health Service, the Bureau of Prisons, the
U.S. State Department (Peace Corps), the U.S. Public Health Service,
the Department of Homeland Security, and Howard University Hospital.
Authorized State Veterans Homes that have sharing agreements with VA
facilities also are eligible to use the contract.
The usual path a Federal agency uses to purchase supplies is to
establish a contract that sets a fixed price for a particular good. The
Federal Acquisition Regulation (FAR) implementing the Competition in
Contracting Act (CICA) defines the process for awarding and
administering the contract, including the establishment of a fair and
reasonable price for goods purchased. VA is also required to comply
with various other statutes, such as the Trade Agreements Act (TAA) and
the Buy American Act (BAA). These required terms and conditions are
outlined in applicable clauses in the contract. VA is required to
follow these laws and regulations and did so in awarding the current
PPV contract.
The PPV program remains the most cost-effective solution to
providing timely, cost-efficient, high quality health care products
across the country. It enables VA to get the medications VA provider's
need, when they need them. The pharmaceutical prime vendor is required
to follow FDA standards for product quality and patient safety.
The Current PPV Contract
The current contract was competitively awarded to the McKesson
Corporation on December 31, 2003, following the laws and regulations in
the previous section. The initial period of performance for this
contract was May 10, 2004, through May 9, 2006. The contract is
currently in its last option period, and expires in May 2012.
The contract provides drugs and supplies to VA and other government
customers via 750-plus separate accounts, including State Veterans
Homes, the Virgin Islands, Saipan, Puerto Rico, and Manila,
Philippines. This is accomplished through a seamless supply system that
typically delivers drugs within 24 hours (often less) of order
placement and offers VA a discount on all purchases. Pricing for the
majority of the pharmaceutical products distributed through the PPV is
established through contracts (e.g., the Federal Supply Schedule (FSS),
or national contracts) awarded by OALC as previously discussed.
The contract statement of work (SOW) requires the PPV to supply and
distribute drugs, pharmaceuticals, and certain other items that are
dispensed through pharmacies. The source of these items are labeled in
a web portal provided by McKesson to denote the various contract
vehicles under which the pharmaceuticals are offered including, for
example, FSS, VA national contracts, Basic Ordering Agreements, and
various other Federal contracts.
The current contract also enables VA to order, through the PPV
distributor, supplies that are not identified on any Federal contract
in order to avoid a disruption where a needed drug cannot be obtained
for a Veteran. This is referred to as the ``open market clause.'' The
current PPV contract states ``. . . the PPV may be requested by the
customer to supply and distribute open market drug/pharmaceutical
products/items/units on their behalf.'' The contract also stipulates
that the appropriate user will have followed applicable procurement
laws and regulations when using this clause. This enabled VA to
establish additional contracts for drugs not currently under a Federal
contact available through the PPV. These contracts were to be put in
place by warranted contracting officers using Federal and Department
regulations. The term ``open market'' means that the drug was not
purchased under any existing Federal contracts currently available to
the PPV. While the open market items that were acquired through the PPV
were ordered through the same commercial online ordering system as
contracted items and were sourced by the PPV contractor, these FDA-
approved medications were not available on a VA contract. This does not
mean the medications purchased were unsafe or were purchased from
unreliable sources; it means only that it was purchased without a valid
contract in place. This is where the improper use of the PPV contract
occurred and the ordering process broke down.
Illustrative Example
In an effort to explain how non-contract items were ordered in the
past, the following exhibit provides a view of what the ordering
officer sees on the McKesson ordering system. In this screenshot, a
user has searched for Cisplatin, a chemotherapy drug used to treat
carcinomas, sarcomas, lymphomas, and germ cell tumors. Cisplatin is
administered intravenously and is considered a critical drug for cancer
treatment. In the scenario shown below, the PPV ordering system
returned all matching items in a list. This list displays whether stock
is available for the item in the column called ``DC_Qty.'' The search
return also displays the unit cost for the item in the column called
``Unit_Price.'' The column identified as ``Cust_Cntrct_Type''
identifies whether an item is on contract. In the search results, the
system shows that none of the contract quotes for Cisplatin that are
available on an FSS contract have stock available to order. However,
the item is clearly available from another source. It is understandable
that for many years, a GS-5 pharmacy specialist, motivated by a desire
to maintain a continuous supply of drugs for patients and when
confronted with the choice of ordering an open market item or doing
without, would have chosen the open market item.
Exhibit not available at time of print.
What is not readily apparent from the information presented in the
PPV portal or adequately explained in the training that VA ordering
officers received, is that in order for these orders to be fulfilled,
they would have to by purchased off-contract. This expedient choice
would have conformed with the FAR had the ordering officer held a valid
warrant and established a contract using appropriate procurement and
payment methods. The correct approach for performing the order above
would have been to engage a warranted contracting officer to acquire
the needed items under a contract and use the appropriate procurement
methods.
Corrective Action
VA has implemented a process to make open market procurements in
accordance with the FAR. VA will further improve the structure of the
follow-on PPV contract to ensure from the onset that only medications
available under Federal contract are viewable on the electronic
catalogue from which ordering officers place their requirements. There
will be no option for ordering officers to obtain non-contract
supplies. In addition, improved training will be provided for ordering
officers.
The new contract will preserve the ability to get needed drugs that
the PPV has provided VA since its inception and the health and safety
of Veterans will not be at risk. But it will be provided through a FAR-
compliant mechanism to obtain medications not on a Federal contract.
We expect to have this new contract awarded by the end of March
2012. Because this contract has not yet been awarded, we are limited in
the information we may discuss at this time. But we assure you, the new
contract will address VA's requirements while conforming to the FAR. We
will inform Congress of the details once we have awarded a new PPV
contract.
Conclusion
The failure to properly use and oversee the administration of the
open market clause of this contract represents a breakdown in our
system of management and accountability. We emphasize that this was a
procedural breakdown, that it in no way compromised Veterans safety and
affected not more than 4 percent of total pharmaceutical purchases
since 2004. We have taken steps to eliminate this possibility now, and
we are working to reduce the potential for other errors in the future
by more closely managing orders under the PPV contract, while still
ensuring our Veterans and their families receive the medications they
need.
Mr. Chairman, thank you for the opportunity to discuss this issue
on the record. We have been entrusted with the responsibility to
effectively administer and oversee health care for Veterans and their
families, and to do so responsibly using the resources appropriated by
Congress. My colleagues and I are prepared to answer your questions.
Prepared Statement of Linda A. Halliday
Mr. Chairman and Members of the Committee, thank you for this
opportunity to testify on the scope and methodology of the Office of
Inspector General's (OIG) ongoing reviews of VA's administration of the
Pharmaceutical Prime Vendor (PPV) contract and to also give a
historical background on the OIG's work in contracting and open market
purchases. I am accompanied by Michael Grivnovics, Director, Federal
Supply Service Division, and Mark Myers, Director, Health care
Resources Division, in the OIG's Office of Contract Review.
HISTORY
The OIG's Office of Contract Review (OCR) has conducted pre-award
and post-award contract reviews and other pricing reviews of Federal
Supply Schedule (FSS) and construction contracts since 1993. These
reviews provide both the OIG and VA with unique insight into the
commercial marketplace for pharmaceuticals; medical and surgical
supplies and equipment; and health care services. In addition, the
OIG's Office of Audits and Evaluations has conducted numerous audits
addressing purchasing practices at VA medical facilities, with emphasis
on open market, or non-contract, purchases. Based on this work, we have
advised VA, Congress, and other Government entities on vulnerabilities
in the Government's procurement practices and recommended changes
needed to protect patients treated at VA and other Government medical
facilities as well as the taxpayer.
Open market purchasing is not a new issue; over the past 12 years,
the OIG has issued 49 public reports that identified concerns with open
market purchases. In May 2001, we issued a report, Evaluation of the
Department of Veterans Affairs Purchasing Practices, in which we
reported that the ``effectiveness and integrity of the Federal Supply
Schedule (FSS) program has deteriorated.'' We noted that due to
legislative changes requiring acquisition streamlining and reform, the
FSS was no longer a mandatory source and there was an increase in open
market sales. As a result, a growing number of vendors had cancelled
existing contracts, decided not to submit proposals, removed high-
dollar sales items from the contract, or simply refused to offer Most
Favored Customer pricing. We noted that a ``vendor's ability to sell
open market in significant volumes effectively eliminates the
Government's ability to leverage prices using its aggregate buying
power.'' In response to the report, VA initiated a Procurement Reform
Task Force to address the issues. One of the outcomes of the Task Force
was to create a purchasing hierarchy that required VA to purchase
pharmaceuticals and medical/surgical supplies and equipment from
national contracts first before using alternative buying mechanisms
such as local contracts or buying open market.
In the 1990s and since 2008, we have worked with VA, the Department
of Justice, the Office of Management and Budget, the General Services
Administration (GSA), and the GSA OIG to identify shortcomings in the
FSS program that affect the Government's ability to leverage its
aggregate buying power and to receive prices that are fair and
reasonable at the time of award and remain so during the entire term of
the contract.
Reporting to Congress
From 2002-2004 and again from 2008-2010, the OIG worked with staff
from this Committee on two legislative initiatives focused on reforming
VA's procurement practices. Our recommendations during this process
addressed legislative initiatives that would improve VA's ability to
get items on contract and thus reduce open market procurements.
In December 2009, in testimony before this Committee's Subcommittee
on Oversight and Investigations, we testified about acquisition
deficiencies including open market purchasing. At that hearing, we
discussed reports issued in 2004, 2007, and 2009, that showed VA
facilities were not complying with the purchasing hierarchy and were
instead purchasing products open market.
In March 2011, in response to questions during a hearing before the
House Committee on Appropriations' Subcommittee on Military
Construction, Veterans Affairs, and Related Agencies, we testified
about issues facing VA and other Government purchasers on leveraging
the Government's buying power when contracting for pharmaceuticals. We
recognized that open market purchases were a problem and stated that
the causes included the fact that there was no requirement that
manufacturers offer generic drugs on contract and that the Trade
Agreements Act precluded some vendors from offering their products on
contract. As a result VA and other Government entities were buying open
market and possibly not complying with acquisition laws and
regulations.
Contract Process
In 2007, OCR found that VA was purchasing covered or branded
pharmaceuticals open market through the PPV even though the products
were on FSS contracts at a Federal Ceiling Price (FCP) as mandated by
statute. We determined that this occurred because of a loophole that
allowed purchasers to buy products through the PPV even though the
manufacturer declined to sell their products through the PPV. Because
the items were purchased open market, the prices exceeded the
contract's FCP. We reported the problem to VA's Pharmacy Benefits
Management (PBM) Services, the National Acquisition Center (NAC), and
VA's Office of General Counsel. As a result of our discussions, the PPV
electronic ordering system was modified to block purchases of items
from manufacturers who declined to sell through the PPV. However, in
2011, we found that the modification was ineffective because purchasers
were still buying contract items at open market prices through the PPV.
We determined that although the PPV's ordering system did block the
purchase, the purchaser had the ability to override the system and make
the purchase. We found no controls were in place to hold purchasers
accountable. For one vendor's product line, we found $5.7 million in
open market purchases of which $2.3 million represented overpayments
because VA paid more than the FCP. In addition to issuing three letters
to the NAC addressing our finding on open market purchases of products
from three separate manufacturers, we discussed the issue with PBM, the
NAC, and OGC.
Through pre-award and post-award reviews, which include extensive
discussions with manufacturers, in 2011 OCR identified a growing number
of issues relating to generic drugs including the inability and/or
unwillingness of vendors to put these items on contract, sell through
the PPV, or offer most favored customer pricing. This work also
provided us with insight into contracting and buying practices of
private health care providers and institutions. This information was
shared with the Office of Acquisitions and Logistics and PBM for the
purpose of finding solutions to this growing problem. In May 2011, OCR
was invited to participate in a 2-day meeting with PBM, the NAC, and
other VA officials to discuss open market purchasing through the PPV
and possible solutions. This was the first indication we had that VA
had concerns about the level of open market purchasing through the PPV.
We attended the meeting, provided our insight, and have been working
since October with VA's Integrated Product Team (IPT) to address
immediate, short-term, and long-term solutions. Some short-term
solutions proposed by the IPT resulted in amendments to the current PPV
solicitation to establish negotiated prices for items not on national
contracts and a requirement that these products comply with the Trade
Agreement Act.
Long-Term Solutions
Identifying viable long-term solutions is a not an easy task
because the causes, which are numerous and often complex, have never
been quantified. For example, some products are not available on
contract because vendors have chosen not to offer them on contract or
cannot offer the products on contract because the products do not
comply with the Trade Agreements Act. In other cases a non-contract
item may be purchased because contract items are unavailable due to
shortages. We also know that purchasers will buy open market when the
contract price exceeds the price offered by non-contract vendors. This
is particularly true when the brand name drug is on contract but the
generic equivalents are not. In addition, patient care and safety
concerns must be considered. Some solutions can be addressed through
contract provisions and internal policies and processes but others may
require legislation.
OIG'S CURRENT REVIEWS
At this time, we are conducting a review of PPV purchases for
fiscal year 2011 to quantify the extent and cause of the problems. This
includes quantifying the actual dollars spent on open market sales;
what percentage of these purchases were pharmaceutical items versus
medical/surgical items; and identifying patterns and trends of open
market purchases of pharmaceuticals. We also will determine and
quantify whether the pharmaceutical item purchased open market was on
contract and, if so, why the sale was listed as open market. If the
item purchased was not on contract, we will determine whether there was
a comparable item on contract. If comparable items were available, we
will try to determine why the contract item was not purchased. We also
will select a sample to ascertain the extent that purchases may have
violated existing procurement laws and regulations. We are attempting
to determine whether open market purchases of pharmaceuticals violated
the Trade Agreements Act. In addition, we are reviewing whether changes
made by VA in November 2011 to prevent or limit open market purchasing
through the PPV were effective.
We are also conducting a review of the internal controls of VA's
Fast Pay System, a system that expedites payments for goods received
under contract and makes payments generally within 24 to 48 hours. This
internal controls review will identify the risks and vulnerabilities
associated with reliance on related payment and processing activities
including whether items are received and correctly priced; payment
errors are corrected in a timely manner; contract terms are met; and
there is a segregation of duties to prevent fraud. The Fast Pay System
is unique to the PPV. Under the PPV contract, VA facilities are
required to use the Fast Pay process for PPV purchases.
We are conducting tests of sample invoices tracking from time of
ordering, payment through the Fast Pay System, and receipt of goods
from the ordering location. Further, we are examining the effectiveness
of the VA's Financial Services Center's financial controls by comparing
the payments made to the invoices at VA facilities. In addition, we are
assessing whether VA received correct and timely reimbursements for
purchases made on behalf of other Government agencies.
A longer-term review to be conducted by OCR is to review the prices
charged for items that were not purchased open market in comparison to
the contract price at the time of purchase to ensure that customers
were not charged more than the contract price. If this review
identifies overcharges, we will recommend that the contracting officer
issue a bill of collection and that VA take other action if
appropriate. If the current review shows that procurement laws and
regulations were violated, the longer term review will determine the
frequency and dollar value of such violations and make recommendations
for appropriate corrective action.
CONCLUSION
Over the last 12 years, the OIG has continually reported on the
issue of open market purchases and our concerns that the Government was
not sufficiently aggregating its buying power to obtain fair and
reasonable prices comparable to those paid by similar commercial
customers for the purchase of pharmaceuticals, medical and surgical
supplies, and health care resources. We will provide the Committee the
results of our ongoing reviews when they are completed. We will
continue to advise VA and Congress on issues related to VA procurement
and contracting issues.
Mr. Chairman and other Members of the Committee, this concludes my
statement and my colleagues and I would be pleased to answer any
questions that you may have.
Prepared Statement of Sharon Longwell
Good morning, Chairman Miller, Ranking Member Filner and Members of
the Committee. My name is Sharon Longwell and I am the Vice President
of Health Systems, National Accounts, for McKesson Corporation. I
appreciate the opportunity to appear before you today to discuss the
Department of Veterans Affairs' Pharmaceutical Prime Vendor (PPV)
contract.
I would like to begin by emphasizing four points:
(1) McKesson has delivered excellent quality and service to the VA
as the pharmaceutical prime vendor. Through the deep negative
distribution fee in our contract with the VA, we have provided the
Department with $526 million in savings over the terms of the prior PPV
contract.
(2) McKesson has consistently exceeded the requirements of the
contract and is providing state of the art technology and unparalleled
quality and value to the Department, including 99.9 percent accuracy in
fulfilling orders.
(3) For 179 years, McKesson has had an unwavering commitment to
the safe, rapid and cost effective delivery of FDA-approved
pharmaceuticals to all of our customers, from the largest hospital
system and chain drug store to the smallest neighborhood pharmacy and
all government contracts. All pharmaceutical products purchased from
McKesson by the VA, whether under VA ``contract'' or an ``open market''
item, have the required FDA approvals. McKesson complies with all
Federal and state laws and regulations governing sourcing, pedigree,
chain of custody and drug integrity.
(4) We are a proud member of the Department's mentor-protege
program as we offer partnership opportunities to veteran-owned and
disabled veteran-owned small businesses, and we continue to actively
recruit, hire and retain veterans as a vital part of our workforce.
For 179 years, McKesson has led the industry in the delivery of
medicines and health care products to drug stores. Today, a Fortune 15
corporation, we deliver vital medicines, medical supplies, care
management services, automation, and health information technology
solutions that touch the lives of over 100 million patients in health
care settings that include more than 25,000 retail pharmacies, 5,000
hospitals, 200,000 physician practices, and over 10,000 extended care
facilities and 700 home care agencies. In addition to the Department of
Veterans Affairs system, McKesson delivers medicines to a significant
number of Department of Defense and other government facilities. We are
also one of the Nation's largest distributors of biotechnology and
specialty pharmaceutical products and services for providers and
patients.
The Role of the Pharmaceutical Prime Vendor: Service, Savings, Safety
Service
In our role as the pharmaceutical prime vendor, McKesson delivers
pharmaceutical and certain medical/surgical products to more than 700
VA locations, including over 270 medical centers and seven consolidated
mail order facilities (CMOPs), providing the highest quality service to
more than five million veterans. We have invested an additional nine
million dollars in dedicated software, hardware, facilities and staff
for the PPV contract to improve service and drive down costs for the
VA. As the prime vendor, McKesson is responsible for providing
thousands of products at prices set under a Federal supply contract
which the VA has secured through negotiations with manufacturers.
McKesson's state of the art technology allows authorized VA buyers to
purchase products through an electronic order entry system which drives
them to the lowest priced contract item. If the authorized buyer
attempts to purchase product that is not on a VA negotiated contract
with the manufacturer, our system directs them to the lowest priced
contract item. If a product is out of stock, the system suggests the
lowest priced generic equivalent product that is on contract. Through
the transparency afforded by our electronic ordering and inventory
management systems, the VA can manage and track their inventory and has
real-time access to invoice and ordering data.
There are circumstances, however, when contracted pharmaceuticals
are in short supply or where the VA may not have contracted with
manufacturers for critical medicines, even though they are needed to
treat patients in a timely manner. Among the very specific and detailed
requirements of the Department's Statement of Work (SOW) for the
pharmaceutical prime vendor, it states that, in addition to supplying
the VA with products that the VA has secured with a Federal supply
contract, ``the PPV may be requested by the customer to supply and
distribute open market drug/pharmaceutical products/items/units on
their behalf.'' Under that provision, purchases of open market products
from McKesson are permitted by this contract. It is important to note
that, when the VA decided to purchase open market products from
McKesson, it paid the same or less than our private sector hospital and
institutional customers paid for the same products. Purchases of open
market products are a standard practice in the private sector. Based on
our experience, the VA's purchases of open market products, which are
less than 5 percent of their total, are quite low. In the private
sector, for instance, 30-40 percent of the purchases of hospital and
institutional customers are of open market products.
McKesson has a dedicated ``VA-only'' customer service department.
When an authorized VA buyer orders product by 6pm, it is delivered the
next morning, thereby assisting the VA with inventory management and
saving the Department millions of dollars in working capital. Our
accuracy in fulfilling orders is 99.9 percent. At any time, the VA can
access a full listing of McKesson's current inventory for any one of
our 31 distribution centers nationwide, many of which are strategically
located near VA facilities in order to provide maximum coverage in
instances of immediate need. Furthermore, McKesson holds the largest
inventory of any pharmaceutical distributor to ensure our world-class
service levels. I am proud to say that we have not only met the
requirements of our contract, but we have, in fact, consistently
exceeded its requirements for service and quality.
Savings
When McKesson was awarded the Pharmaceutical Prime Vendor contract
for the Department of Veterans Affairs in 2004 after a highly
competitive bidding process, the negative distribution fee that we
offered the VA in our contract was so aggressive that we were publicly
criticized within the industry. In fact, allegations were made that we
could not service the contract with such unprecedented and deep cuts in
our distribution fee.
McKesson offered the best proposal on price and technology to win
the award. The VA has had an opportunity to review the prime vendor
relationship every 2 years, and has chosen to renew our contract at
each option period as an endorsement of our continued savings and high
level of performance. McKesson's performance with the VA has resulted
in a Federal `budget multiplier', saving the Department over half a
billion in taxpayer dollars.
Safety
All pharmaceuticals purchased for the VA through McKesson, whether
they are under VA negotiated contracts or open market products, have
the required U.S. Food and Drug Administration (FDA) approvals.
McKesson complies with Federal and state laws and regulations governing
sourcing, pedigree, chain of custody and drug integrity. McKesson
purchases pharmaceuticals directly from the manufacturer.
Manufacturers, whether domestic or foreign, have facilities that are
registered with and subject to inspection by the FDA. While
manufacturers are ultimately responsible for the safety and efficacy of
the prescription drugs they manufacture, the FDA enforces the
applicable statutes and regulations to ensure that prescription drugs
marketed in the United States are safe and effective, regardless of the
point of manufacture.
McKesson's quality and safety standards are equally rigorous
regardless of customer, contract, or any other factor. In fact, all of
the products bought by the VA from McKesson, including open market
products, come through the same secure supply chain that serves your
local hospital, chain or neighborhood pharmacy. McKesson leads the
industry in innovative solutions to make the Nation's pharmaceutical
supply chain, already the best in the world, stronger and more secure.
In summary, McKesson has delivered significant, measurable value
under the Pharmaceutical Prime Vendor contract.
(1) McKesson has delivered excellent quality and service to the VA
as the pharmaceutical prime vendor. Through the deep negative
distribution fee in our contract with the VA, we have provided the
Department with $526 million in savings over the prior PPV contract.
(2) McKesson has consistently exceeded the requirements of the
contract and is providing state of the art technology and unparalleled
quality and value to the Department, including 99.9 percent accuracy in
fulfilling orders.
(3) For 179 years, McKesson has had an unwavering commitment to
the safe, rapid and cost effective delivery of FDA-approved
pharmaceuticals to all of our customers, from the largest hospital
system and chain drug store to the smallest neighborhood pharmacy and
all government contracts. All pharmaceutical products purchased from
McKesson by the VA, whether under VA ``contract'' or an ``open market''
item, have the required FDA approvals. McKesson complies with all
Federal and state laws and regulations governing sourcing, pedigree,
chain of custody and drug integrity.
(4) We are a proud member of the Department's mentor-protege
program as we offer partnership opportunities to veteran-owned and
disabled veteran-owned small businesses, and we continue to actively
recruit, hire and retain veterans as a vital part of our workforce.
Specifically:
McKesson has advanced veteran-owned small business goals.
We currently contract with over 100 veteran-owned business suppliers
and 2,800 small, veteran and minority-owned businesses overall.
McKesson is one of 20 prime vendors and the only health
care company chosen to participate in the prestigious Department of
Veterans Affairs mentor-protege program.
RelayHealth, McKesson's connectivity business, won the
Department of Veterans Affairs ``Blue Button for All Americans''
contest in 2011 by making a Blue Button personal health record system
available to all patients, including veterans. We donated the $50,000
award to the Wounded Warrior Project.
Missouri presented McKesson with a ``Flag of Freedom''
award in 2011 for our commitment to hiring veterans in the state.
The McKesson Military Resource Group, comprised of
employees who are military veterans and military family members,
advocate McKesson's efforts to respect, honor and partner with the
military community. They are also engaged in supporting the company's
focus on hiring and retaining veterans.
McKesson sponsors events focused on the veteran
community, including San Francisco's Fleet Week, the National Veteran
Small Business Conference, and the California Disabled Veteran Business
Alliance's annual Keeping the Promise Exposition.
Our annual ``Community Days'' have brought together over
15,000 McKesson employees across the country in 2011 to assemble tens
of thousands of care packages for active duty troops deployed around
the world and wounded warriors recuperating stateside.
At McKesson, we take enormous pride in driving efficiencies that
improve the quality and delivery of health care for our Nation's
veterans. We have been and will always be committed to providing the
highest levels of service as we safely and rapidly deliver cost-
effective medications to the VA and the veterans they serve.
MATERIAL SUBMITTED FOR THE RECORD
Post-hearing Questions from Hon. Bob Filner, Ranking Democratic
Member, Committee on Veterans' Affairs to Hon. Eric K.
Shinseki, Secretary, U.S. Department of Veterans Affairs
February 27, 2012
The Honorable Eric K. Shinseki
Secretary
U.S. Department of Veterans Affairs
810 Vermont Avenue, NW
Washington, DC 20420
Dear Mr. Secretary:
In reference to our Full Committee hearing entitled, ``Examining
VA's Pharmaceutical Prime Vendor Contract'' that took place on February
1, 2012, I would appreciate it if you could answer the enclosed hearing
questions by the close of business on April 3, 2012.
In an effort to reduce printing costs, the Committee on Veterans'
Affairs, in cooperation with the Joint Committee on Printing, is
implementing some formatting changes for materials for all Full
Committee and Subcommittee hearings. Therefore, it would be appreciated
if you could provide your answers consecutively and single-spaced. In
addition, please restate the question in its entirety before the
answer.
Due to the delay in receiving mail, please provide your response to
Carol Murray at [email protected], and fax your responses to
Carol at 202-225-2034. If you have any questions, please call 202-225-
9756.
Sincerely,
BOB FILNER
Ranking Democratic Member
DMT:cm
__________
Questions for the Record
Examining VA's Pharmaceutical Prime Vendor Contract
February 1, 2012
Department of Veterans' Affairs
1. Concerning the VA's open market drug and pharmaceutical
purchases over the period of January 1, 2006 through December 31, 2011:
a. Please list the top 5 most purchased drugs in terms of volume,
number of purchases, and dollar value.
b. What policies and procedures were in place to flag or identify
items frequently purchased and then to seek to place these items on
contract?
c. What percentage of overall open market purchases were made
through the Prime Pharmaceutical Vendor (PPV)?
2. Since the November 8, 2011 memorandum prohibiting ``improper
purchase of all open market items through the PPV'' how many open
market purchases has VA made?
a. Of these purchases, how many have been made through the PPV?
b. Of these purchases, how many have required ratification after
the purchase?
c. Of these purchases, how many have followed the waiver
procedures found in VA Handbook 7408.1?
d. Of these purchases, what has VA done to ensure that prices
paid were reasonable and that drugs and that all drugs and
pharmaceuticals met all safety rules, regulations and laws?
e. Of these purchases, how many of these purchases involved so-
called ``gray market'' drugs or suppliers?
3. Your November 8, 2011 memorandum states that ``[s]pecial
procedures have been developed to quickly purchase open-market
pharmaceuticals to reduce the lead times for these procurements
(attached).''
Attachment not available at time of print.
a. Please provide a copy of these ``special procedures.''
b. Do these ``special procedures'' deviate from the waiver
procedures found in VA Handbook 7408.1? If so, please provide a
detailed rationale for these deviations.
c. What safeguards are currently in effect to eliminate purchases
made by non-warranted contract officers for amounts greater than
$3,000?
d. What safeguards are in effect to ensure that purchases made
involving less than $3,000 are made properly?
e. What policies and procedures are in place to ensure that fair
prices are paid for open market purchases?
4. The OIG's testimony indicated that there are no controls in
place to hold purchasers accountable who ``override the system'' when
purchases were blocked by the PPV's ordering system.
a. Please explain to the Committee, in detail, what it takes for
a purchaser to override the system and who is the person who has that
authority, both prior to, and after November 8, 2011?
b. Is there a report that is required that would indicate how
many times the override authority is used and why there is a need to
override the system? If there is such a report, to whom is it forwarded
and who receives copies?
5. For 12 years the OIG has been reporting on the FSS and has
issued no less than 49 reports that include concerns about open market
purchases. That amounts to about 4 reports a year or one every 3
months.
a. How is it that this issue continues to grow seemingly
unchecked with no effective controls or oversight in place?
6. In testimony VA claims to have avoided $1.1 billion in
acquisition costs due to changes in FY 2011 such as hiring 330
procurement professionals. Can you please point to other specific
changes where VA can demonstrate cost avoidance?
7. As of February 8, 2012, in terms of open market purchases, is
the VA in violation of the Federal Acquisition Regulations (FAR) or the
Veterans Affairs Acquisition Regulations (VAAR)?
a. In your view, do all purchases, including those made in
amounts greater than $3,000 require a warranted contract official?
8. With the admitted loss of control of the open market
purchases, has there been any action taken to discipline and hold
accountable the management who allowed this to happen?
a. What lessons has VA senior management learned from this
failure and what steps has it taken to ensure that systemic problems
and failures are identified at the earliest possible time and corrected
in a speedy and timely fashion?
9. In testimony you give an example of how a GS-5 pharmacy tech
could choose the open market purchase and get the needed drug as
opposed to going without.
a. Please give a detailed response on the purchasing hierarchy
involved in open market purchases at the VA Medical Center level.
Please include titles and timelines at each level of authority.
10. Time and again the Government Accountability Office (GAO) and
the VAOIG have reported lack of sufficient knowledge of policies and
procedures by staff, confusion in the field and the need for more
training.
a. What are you doing to ensure that the proper staff is trained
and that follow-up measures are taken to ensure that the staff remains
trained if and when there is a procedural change to the acquisition and
procurement process?
11. In testimony you state that senior management was first made
aware of the open market purchase problem in 2011 VA developed a
solution to correct the flaws in ``our internal processes and conform
to regulation.'' Please provide a specific timeline of:
a. Who was first aware of the deficiencies, how did they become
aware and when did they notify the next management level?
b. What specific actions were taken and when by each level of
management?
c. If there were delays in informing the next level of
management, what was the reason for the delay?
12. You indicated that VA had decided in December 2010 to take the
``open market purchase'' clause out of the next iteration of the PPV
contract.
a. What led to that decision?
b. If the VA will no longer be making open market purchases
through the PPV, how will the field be affected as far as obtaining a
needed drug that is not on contract?
c. What safeguards are currently in place, or will be put in
place, to ensure that drugs and pharmaceuticals purchased through
suppliers other than the PPV meet all safety requirements and are
purchased at a fair price?
13. Looking forward, what steps will VA take to ensure the open
market drug and pharmaceutical purchases involve items for which there
is a confirmed chain of custody between the manufacturer and supplier?
a. What steps will VA take under the new PPV contract to ensure
that suppliers from which open market items are purchased are not
charging exorbitant prices for items in short supply?
b. What steps will the VA take to govern its dealing with gray
market suppliers?
14. Of the approximately $1.2 billion in open market purchases:
a. How many of the purchases were made by warranted contract
officials?
b. What steps is VA taking to ratify the improper purchases, or
those that were made without a warranted contract official approval?
15. Do you have copies of existing waiver requests under VA
Handbook 7408.1 for the $1.2 billion in open market purchases dating
back to 2004?
a. If you do not have the waiver requests, please explain why
there are no waiver requests and when going forward, what enforcement
measures are in place to ensure that appropriate employees are in
compliance with VA Handbook 7408.1.
16. Please provide the Committee with the detailed steps, from
initial prescription to purchase and delivery, needed to make open
market purchases in compliance with your November 8, 2011 memorandum.
17. In last year's budget submission, VA claimed $355 million in
savings in 2012 and 2013 due to ``acquisition improvements.'' Please
provide the Committee with an accounting of exactly where the $355
million was saved and what improvements were made. Please include a
timeline with this as well.
Responses from Hon. Eric K. Shinseki, Secretary,
U.S. Department of Veterans Affairs to Hon. Bob Filner,
Ranking Democratic Member, Committee on Veterans' Affairs
Department of Veterans' Affairs
1. Concerning the VA's open market drug and pharmaceutical
purchases over the period of January 1, 2006 through December 31, 2011:
a. Please list the top 5 most purchased drugs in terms of volume,
number of purchases, and dollar value.
Response:
Top 5 most purchased drugs in terms of volume (National Drug Code
units):
(1) Magnesium Citrate Liquid, Oral
(2) Dextromethorphan 10mg/Guaifenesin 100mg/5ml Syrup
(3) Lidocaine 5%Oint, Top
(4) Oxycodone HCL 5mg Tab
(5) OMEGA-3 (N-3) Polyunsaturated Fatty Acids 1gm Cap
Top 5 most purchased drugs in terms of number of purchases:
(1) Magnesium Citrate Liquid, Oral
(2) Lidocaine 5 percent Oint Top
(3) Dextromethorphan 10mg/Guaifenesin 100mg/5ml Syrup
(4) Bacitracin Zinc 500Unt/Polymyxin B S04 10000Unt/GM Oint,Top
(5) Bacitracin 500Unt/gm Oint Top
Top 5 most purchased drugs in terms of dollar value:
(1) Chondroitin NA 40mg/Hyaluronate NA 30mg/ml
Inj,Oph.Syringe,0.5ml
(2) Venlafaxine HCL 75mg Tab
(3) Duovisc,Kit 0.5ML/0.55ML Inj,Oph
(4) Nafcillin NA 2gm/VIL Inj
(5) Nafcillin NA 10gm/VIL Inj
b. What policies and procedures were in place to flag or identify
items frequently purchased and then to seek to place these items on
contract?
Response: The majority of VA pharmaceutical expenditures ( 95%) are
for branded pharmaceutical items that are under contract; either a
Federal Supply Schedule Contract or a VA National Contract. While it is
VA's desire to have the remaining, mostly generic, 5 percent of
pharmaceutical expenditures made under contract, it is not always
possible to do so.
The procedure VA uses to identify drugs that are frequently
purchased but not under contract is simply to review the PPV purchasing
data for items designated as non-contract. However, it is not uncommon
for VA to review its purchasing data to identify a generic
pharmaceutical item which is not available under contract, aggregate
purchasing requirements and conduct a solicitation, but not receive any
bids/offers. In these cases, VA's only alternative is to purchase these
drugs via the streamlined acquisition procedures allowed by the Federal
Acquisition Regulation or via a formal procurement request to a
warranted contracting officer.
c. What percentage of overall open market purchases were made
through the Prime Pharmaceutical Vendor (PPV)?
Response: For the period of November 8, 2011 through February 8,
2012, our data indicates that approximately 79 percent of VHA's open-
market purchases in support of our pharmacy departments were purchased
through the PPV vendor, but not through VA's PPV contract.
2. Since the November 8, 2011 memorandum prohibiting ``improper
purchase of all open market items through the PPV'' how many open
market purchases has VA made?
Response: From November 8, 2011 through February 8, 2012, there
were approximately 73,000 open market line items purchased in support
of Veterans' medication needs.
a. Of these purchases, how many have been made through the PPV?
Response: Of the approximately 73,000 open-market line items that
were purchased from November 8, 2011 through February 8, 2012,
approximately 57,760 (79 percent) were purchased from the VA's Pharmacy
Prime Vendor, but not under the PPV contract.
b. Of these purchases, how many have required ratification after
the purchase?
Response: Analysis of procurement data for the month of January
2012 is underway to determine what number of actions will require
ratification. Data analysis has been completed for the period of
November 8, 2011 through December 31, 2011, which resulted in 5,733
orders being ratified.
c. Of these purchases, how many have followed the waiver
procedures found in VA Handbook 7408.1?
Response: None of the open-market purchases cited for the period of
November 8, 2011 through December 31, 2011, followed the waiver
procedures found in VA Handbook 7408.1. A waiver is not required for
purchase of items that are not on contract.
d. Of these purchases, what has VA done to ensure that prices paid
were reasonable and that all drugs and pharmaceuticals met all safety
rules, regulations and laws?
Response: After November 8, 2011, all open market purchases at or
above $3,000 are being made by warranted contracting officers to ensure
the prices paid were fair. For items less than $3,000, VA uses
streamlined acquisition procedures to ensure fair prices.
e. Of these purchases, how many of these purchases involved so-
called ``gray market'' drugs or suppliers?
Response: As per McKesson's testimony at the February 1, 2012
hearing, McKesson assures VA that it does not purchase any drugs and
pharmaceuticals from secondary or ``gray'' markets.
3. Your November 8, 2011 memorandum states that special procedures
have been developed to quickly purchase open-market pharmaceuticals to
reduce the lead times for these procurements (attached).
a. Please provide a copy of these ``special procedures.''
Response: Please see Attachment VHA SOP 160-010-01, Attachment 13
for Pharm Procurements.
b. Do these ``special procedures'' deviate from the waiver
procedures found in VA Handbook 7408.1? If so, please provide a
detailed rationale for these deviations.
Response: No, the special procedures do not alter the requirements
to obtain a waiver if the needed product is available on a Federal
Supply Schedule (FSS) contract.
c. What safeguards are currently in effect to eliminate purchases
made by non- warranted contract officers for amounts greater than
$3,000?
Response: A combination of training, data analysis, and progressive
discipline is being used to address this issue. Procurements are being
analyzed and letters of counseling issued to individuals that have made
improper purchases. Currently letters have been issued for improper
purchases made between November 8, 2011 and December 31, 2011. January
data is currently being evaluated and appropriate action, where
warranted.
Also, Pharmacy Ordering Officers have been directed that for all
purchases above $3,000, it must be directed to and made by a warranted
contracting officer.
d. What safeguards are in effect to ensure that purchases made
involving less than $3,000 are made properly?
Response: Open-market purchases valued under $3,000 fall under the
Government Purchase Card Program. VHA's Network Contracting Office
Purchase Card Managers and Purchase Card coordinators are assuring that
pharmacy staff have the required training and support to be purchase
card holders. Purchases made through the purchase card program are
subject to monthly, quarterly and random audits and reviews performed
by oversight staff and finance office.
e. What policies and procedures are in place to ensure that fair
prices are paid for open market purchases?
Response: After November 8, 2012, all open market purchases at or
above $3,000 are being made by warranted contracting officers to ensure
the prices paid were fair in accordance with applicable laws and
regulations. For items less than $3,000, VA uses streamlined
acquisition procedures to ensure fair prices in accordance with
applicable laws and regulations.
4. The OIG's testimony indicated that there are no controls in
place to hold purchasers accountable who ``override the system'' when
purchases were blocked by the PPV's ordering system.
a. Please explain to the Committee, in detail, what it takes for a
purchaser to override the system and who is the person who has that
authority, both prior to, and after November 8, 2011?
Response: When a VA Pharmaceutical Prime Vendor ordering activity
places an order for an item that is restricted or blocked, the
Pharmaceutical Prime Vendor contractor-owned ordering system generates
a message stating that the item is ``restricted.'' The ordering
activity then can reorder the item and override the restriction or
block by checking the ``Do Not Substitute'' button on the ordering
system screen. No authorization is needed by ordering activities to
override the system. The decision to order a restricted or blocked item
is made at the VHA Field activity level and has been in effect prior
to, and after November 8, 2011. What has changed since November 8,
2011, is that the Pharmaceutical Prime Vendor contractor was requested
to, and has, separated open market items from the PPV contract items.
The open market items were placed under a separate account making them
no longer visible to VA Pharmaceutical Prime Vendor customers under
their regular account or screen. Open market items are now only visible
under a facility's open market account and screen.
b. Is there a report that is required that would indicate how many
times the override authority is used and why there is a need to
override the system? If there is such as report, to whom is it
forwarded and who receives copies?
Response: There is no such report that identifies ``overrides.''
However, there is a monthly ``Do Not Sub Activity Report'', which
details all the orders placed by facilities where the ``Do Not
Substitute'' button was checked. The report is sent to VHA's PBM Group
located in Hines, Illinois, and to the National Acquisition Center's
Contracting Officer for review and analysis.
5. For 12 years the OIG has been reporting on the FSS and has
issued no less than 49 reports that include concerns about open market
purchases. That amounts to about 4 reports a year or one every 3
months.
a. How is it that this issue continues to grow seemingly unchecked
with no effective controls or oversight in place?
Response: VA addressed these concerns at the time of each report,
and each recommendation was addressed, corrective action identified
with milestones, and eventually closed. In an effort to provide
effective controls and oversight, VA developed a set of tools, over the
last 3 years, which dramatically changed its ability to deal with these
issues. These tools include a new management team; streamline
authority; and the introduction of a new capability to deliver micro-
purchases. VA has reduced the number of its Head of Contracting
Activity (HCA) from 30 to six. VA also issued clear direction to the
field to fortify its position regarding open market purchases.
6. In testimony VA claims to have avoided $1.1 billion in
acquisition costs due to changes in FY 2011 such as hiring 330
procurement professionals. Can you please point to other specific
changes where VA can demonstrate cost avoidance?
Response: In FY 2011, VA pursued a variety of acquisition savings
efforts across the Department, including improved market analysis,
enhanced focus on competition, and pursuit of various strategic
sourcing and other requirements consolidation initiatives. For example,
the Department aggressively participated in the Federal Strategic
Sourcing Initiatives (FSSI) program. In FY 2011, VA accounted for more
than 44 percent of all usage related to the FSSI Domestic Delivery
Services (DDS2) program. DDS2 savings in FY 2011 were $149.6 million.
Also in FY 2011, VA was a Federal leader in leveraging the FSSI Office
Supplies Second Generation (FSSI OS2) program, resulting in $11.8
million in office supply savings.
7. As of February 8, 2012, in terms of open market purchases, is
the VA in violation of the Federal Acquisition Regulations (FAR) or the
Veterans Affairs Acquisition Regulations (VAAR)?
Response: To the best of our knowledge, open market purchases are
processed in accordance with the FAR, VAAR and acquisition policies.
a. In your view, do all purchases, including those made in amounts
greater than $3,000 require a warranted contract official?
Response: Yes. Only a warranted contracting officer may legally
bind the government contractually in obligations above the micro-
purchase level (>$3,000). Ordering officers may be appointed by
cognizant warranted contracting officers to place orders against
existing contracts, but these ordering officers must be supervised by
the contracting officer, who appointed them and limit their duties to
placing orders against a specific contract.
8. With the admitted loss of control of the open market purchases,
has there been any action taken to discipline and hold accountable the
management who allowed this to happen?
Response: The failure to properly use and oversee the
administration of the open market clause of the PPV contract represents
a breakdown in our system of management and accountability. This was a
common practice that dominated for 17 years. The situation evolved over
time and the managers and leaders associated with that environment are
no longer with the Department. As stated in testimony, VA has thought
deeply about the issue of accountability and after extensive internal
deliberations and analysis concluded that there is no one individual to
hold accountable for the pervasive misuse of the open market clause.
We emphasize that this was a procedural breakdown, that it in no
way compromised Veterans safety and affected not more than 4 percent of
total pharmaceutical purchases. We have taken steps to eliminate this
possibility now, and we are working to reduce the potential for other
errors in the future by more closely managing orders under the VA's PPV
contract, while still ensuring our Veterans and their families receive
the medications they need.
a. What lessons has VA senior management learned from this
failure and what steps has it taken to ensure that systemic problems
and failures are identified at the earliest possible time and corrected
in a speedy and timely fashion?
Response: In November 2011, VA implemented a process to make open
market procurements in accordance with the FAR. VA will further improve
the structure of the follow-on PPV contract to ensure upon full
transition to the new contract that only medications available under
Federal contract are viewable on the electronic catalogue from which
ordering officers place their requirements. There will be no option for
ordering officers to obtain non-contract supplies. However, there will
be an option for ordering officers to purchase generic pharmaceuticals
under the new VA PPV contract based upon a discount from the Wholesale
Acquisition Cost (WAC) which has been competed among the offerors; thus
making these generics now part of the PPV contract. The awarded PPV
shall be required to provide FDA approved and Trade Agreement Act (TAA)
products which are also WAC Based Priced Generics (WBPG); have National
Drug Codes (NDC); and have a published WAC through the PPV contract.
Order placement of WBPG through the PPV contract is optional and
subject to periodic review by the Government.
9. In testimony you give an example of how a GS-5 pharmacy tech
could choose the open market purchase and get the needed drug as
opposed to going without.
a. Please give a detailed response on the purchasing hierarchy
involved in open market purchases at the VA Medical Center level.
Please include titles and timelines at each level of authority.
Response: Open-market pharmaceutical procurements at the medical
center level follow the following hierarchy----
(1) Open-market procurements valued at $3,000 or below are ordered
by trained Government Purchase Card holders that work within the
Pharmacy Department. This could be a GS-5 pharmacy tech or other
departmental staff. Purchases valued less than $3,000 are typically
ordered the same day the requirement is identified.
(2) Open-market procurements valued above $3,000 are procured by
warranted contracting officers in the supporting Network Contracting
Office. Using the expedited procedures identified in Attachment 13 of
VHA SOP 160-010-01, awards are typically made within 5 to 7 business
days if the value of the order is less than $25,000. It does take
longer for orders valued above $25,000 due to the advertising
requirements of FAR Part 5. However, the vast majority of orders are
valued less than $25,000.
10. Time and again the Government Accountability Office (GAO) and
the VA OIG have reported lack of sufficient knowledge of policies and
procedures by staff, confusion in the field and the need for more
training.
a. What are you doing to ensure that the proper staff is trained
and that follow-up measures are taken to ensure that the staff remains
trained if and when there is a procedural change to the acquisition and
procurement process?
Response: In order to ensure that the proper staff is trained and
that follow-up measures are taken to ensure that the staff remains
trained, VA has taken several important steps. VA has identified a
Contracting Officer Representative (COR) for each PPV ordering
location. The CORs have a separation of duties, in that they are not
the same individual that places orders against the PPV contract. The
CORs were officially appointed in writing by the Administrative
Contracting Officers (ACO) and completed Federal Acquisition
Certification (FAC-COR) Level I training. The Office of Acquisition and
Logistics (OAL) also has developed supplemental specialized COR
training specific to the PPV contract. The PPV specific training will
help ensure that the PPV CORs conduct their duties under the direction
of the Procurement Contracting Officer (PCO) at the National
Acquisition Center. ACOs were identified as prescribed under Federal
Acquisition Regulations (FAR) Part 43.302 and in concert with policy.
The ACOs will perform contract administration functions in support of
the contracts under which the COR has been specified, will support
program reviews, and provide ongoing status and performance reports to
the PCO.
11. In testimony you state that senior management was first made
aware of the open market purchase problem in 2011. VA developed a
solution to correct the flaws in ``our internal processes and conform
to regulation.'' Please provide a specific timeline of:
a. Who was first aware of the deficiencies, how did they become
aware and when did they notify the next management level?
b. What specific actions were taken and when by each level of
management?
c. If there were delays in informing the next level of
management, what was the reason for the delay?
Response: As stated in testimony, the first known recognition that
open market purchases were not being executed appropriately was in
January 2009. At that time, NAC officials worked with general counsel,
acquisition review, IG and VHA to correct issues related to the CMOP.
Recognition of more pervasive problems at the facility level was not
collectively recognized by acquisition, general counsel and pharmacy
management until March 2011. The goal at that time was to correct the
open market deficiency in the next PPV contract while deliberations
occurred to find an alternate mechanism to procure pharmaceutical
products that comported with applicable laws and regulations. In
September 2011, the issue was brought to the attention of VA's Chief of
Staff and by November action was taken to stop all purchases that did
not comply with applicable laws and regulations.
12. You indicated that VA had decided in December 2010 to take the
``open market purchase'' clause out of the next iteration of the PPV
contract.
a. What led to that decision?
Response: The National Acquisition Center National Contract Service
Pharmaceuticals Chief discovered the open market clause was
inconsistent with procurement regulations. The PPV workgroup (a
workgroup comprised of VHA PBM, General Counsel, technical, other
Federal Agencies, and contracting representatives) agreed to the
exclusion of open market items in the new PPV solicitation.
The existence of the clause and recognition that it was
inconsistent with procurement regulations was not an indication that
open market purchases were not being executed in accordance with
applicable laws and regulations. As stated in the previous response,
recognition of more pervasive problems at the facility level was not
collectively recognized by acquisition, general counsel and pharmacy
management until March 2011. The goal at that time was to correct the
open market deficiency in the next PPV contract while deliberations
occurred to find an alternate mechanism to procure pharmaceutical
products that comported with all applicable laws and regulations. In
September 2011, the issue was brought to the attention of VA's Chief of
Staff and by November action was taken to stop all purchases that did
not comply with applicable laws and regulations.
b. If the VA will no longer be making open market purchases
through the PPV, how will the field be affected as far as obtaining a
needed drug that is not on contract?
Response: The drugs VA previously purchased as open market through
the Prime Vendor Fast Pay arrangement will now be part of the new
ensuing VA PPV contract to ensure availability.
c. What safeguards are currently in place, or will be put in
place, to ensure that drugs and pharmaceuticals purchased through
suppliers other than the PPV meet all safety requirements and are
purchased at a fair price?
Response: All open market purchases at or above $3,000 are being
made by warranted contracting officers to ensure any item procured
meets all safety requirements and that prices paid are fair. For items
less than $3,000, VA purchase card holders use the streamlined
acquisition procedures and adhere to policy to determine a fair price.
13. Looking forward, what steps will VA take to ensure the open
market drug and pharmaceutical purchases involve items for which there
is a confirmed chain of custody between the manufacturer and supplier?
Response: In addition to drugs purchased through the PPV that are
under contract, the follow-on PPV contract also includes items
previously considered open market PPV items. Bringing all of these
products under a single PPV contract umbrella will ensure there is a
confirmed chain of custody or pedigree for all drugs purchased. As
stated by VA's PPV in its testimony, it only purchases drugs either
directly from the manufacturer or from the manufacturer's authorized
distributor. In addition to this assurance, drug pedigree information
is available to VA from McKesson whenever it is needed.
a. What steps will VA take under the new PPV contract to ensure
that suppliers from which open market items are purchased are not
charging exorbitant prices for items in short supply?
Response: Under the new PPV contract, items previously considered
open market are now considered contract items. All items purchased
under the new contract will be made: (1) at prices VA negotiates with
the manufacturer of the drug, minus the PPV discount, or (2) at the
Wholesale Acquisition Cost or WAC, again, minus the PPV discount.
Adherence to the terms and conditions of the contract, which will be
monitored by the VA contracting officer will ensure that fair and
reasonable prices are being charged.
b. What steps will the VA take to govern its dealing with gray
market suppliers?
Response: As per McKesson's testimony at the February 1, 2012
hearing, McKesson assures VA that it does not purchase any drugs and
pharmaceuticals from secondary or ``gray'' markets.''
14. Of the approximately $1.2 billion in open market purchases:
a. How many of the purchases were made by warranted contract
officials?
Response: Of the approximately $1.2 billion in open market
purchases, it is not possible to determine which individuals made which
purchases for the purpose of calculating how many of the purchases were
made by warranted contracting officers. VA is aware that there was a
potential for improper purchasing through VA's PPV; however, as
explained in 14(b), VHA has evaluated improper open-market purchases
made between November 8, 2011 and December 31, 2011 and processed the
paperwork to ratify those actions. The same process will continue to be
used going forward. VA will continue to closely monitor and oversee
open-market purchases to ensure that improper purchases have ceased.
b. What steps is VA taking to ratify the improper purchases, or
those that were made without a warranted contract official approval?
Response: VHA has evaluated improper open-market purchases made
between November 8, 2011 and December 31, 2011, and processed the
paperwork to ratify those actions. January data is still being
evaluated, but the same process will continue to be used. VA will
continue to closely monitor and oversee open-market purchases to ensure
that improper purchases have ceased.
15. Do you have copies of existing waiver requests under VA
Handbook 7408.1 for the $1.2 billion in open market purchases dating
back to 2004?
a. If you do not have the waiver requests, please explain why
there are no waiver requests and when going forward, what enforcement
measures are in place to ensure that appropriate employees are in
compliance with VA Handbook 7408.1.
Response: A waiver request is only required when an item is not
available under any existing VA Federal Supply Schedule, national
contract or national blanket purchase agreement. Thus a waiver request
was not warranted as the open market items procured where not covered
by any of the above contracts. VHA Procurement and Logistics Office and
VHA PBM will provide oversight and ensure compliance with the waiver
process as outlined in VA Handbook 7408.1.
16. Please provide the Committee with the detailed steps, from
initial prescription to purchase and delivery, needed to make open
market purchases in compliance with your November 8, 2011 memorandum.
Response: Please see attached PPV Ordering Procedures, Ordering
Process; PPV Ordering Procedures Memo; SOP 160-030-01.
17. In last year's budget submission, VA claimed $355 million in
savings in 2012 and 2013 due to ``acquisition improvements.'' Please
provide the Committee with an accounting of exactly where the $355
million was saved and what improvements were made. Please include a
timeline with this as well.
Response: In its FY 2012 budget submission, VHA identified $1.2
billion in operational improvements, of which $355 million was
identified as savings resulting from acquisition improvements. To
address concerns raised by OIG and GAO, VHA convened an
interdisciplinary team late in the first quarter of FY 2012 to review
and revise the VHA-specific acquisition savings initiatives. This team
consisted of staff from VHA procurement and logistics at both the
Central Office and field levels, as well as representatives from the
Office of Management (OM), the Office of the VHA Chief Financial
Officer (CFO), the VA Office of Acquisition and Logistics (OAL).
Representatives from the Veterans Benefit Administration (VBA) were
also invited in an observational capacity to ensure that any best
practices learned were shared among the administrations.
The team was chartered with the following objectives: (1) identify
areas of opportunity for increased rigor and stricter criteria for
defining cost savings (specific areas of focus included validation of
savings calculation methodologies; documentation requirements;
establishment of an ongoing audit process to ensure reporting is
accurate; and additional savings initiatives not identified in previous
program iterations. (2) Review external best practices and audit
findings to inform the above issues and to identify additional areas of
opportunity in VA acquisition savings practices.
In its recommendations, the interdisciplinary review team provided
a list of new, retained, or revised initiatives from which VISNs and
program offices can identify savings towards FY 2012 goals. These
recommended initiatives, as well as the requested timeline, have been
provided as a separate attachment.