[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                THROUGH THE LOOKING GLASS: RETURN TO PPV

=======================================================================

                                HEARING

                               before the

                     COMMITTEE ON VETERANS' AFFAIRS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                        WEDNESDAY, JUNE 6, 2012

                               __________

                           Serial No. 112-65

                               __________

       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

                               __________

                              June 6, 2012

                                                                   Page

Through The Looking Glass: Return To PPV.........................     1

                           OPENING STATEMENTS

Chairman Jeff Miller.............................................     1
    Prepared Statement of Chairman Miller........................    54
Hon. Corrine Brown, Acting Ranking Democratic Member.............     3
    Prepared Statement of C. Brown...............................    55

                               WITNESSES

Hon. W. Scott Gould, Deputy Secretary of Veterans Affairs, U.S. 
  Department of Veterans Affairs.................................     5
    Prepared Statement of Mr. Gould..............................    55
    Accompanied by:

      John R. Gingrich, Chief of Staff, 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
      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
      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
Linda Halliday, Assistant Inspector General for Audits and 
  Evaluations, Office of Inspector General, U.S. Department of 
  Veterans Affairs...............................................    38
    Prepared Statement of The Office of Inspector General........    60
    Accompanied by:

      Gary Abe, Director, Seattle Office of Audits and 
          Evaluations, Office of Inspector General, U.S. 
          Department of Veterans Affairs
Maureen Regan, Counselor to the Inspector General, Office of 
  Inspector General, U.S. Department of Veterans Affairs.........    39
    Accompanied by:

      Michael Grivnovics, Director, Federal Supply System 
          Division, Office of Contract Review, Office of 
          Inspector General, U.S. Department of Veterans Affairs
Paul Flach, Vice President, Health Systems National Accounts, 
  McKesson Corporation...........................................    46
    Prepared Statement of Mr. Flach..............................    65

 
                THROUGH THE LOOKING GLASS: RETURN TO PPV

                              ----------                              


                        Wednesday, June 6, 2012

                     U.S. House of Representatives,
                            Committee on Veterans' Affairs,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:31 a.m., in 
Room 334, Cannon House Office Building, Hon. Jeff Miller 
[Chairman of the Committee] presiding.
    Present: Representatives Miller, Lamborn, Roe, Flores, 
Johnson, Denham, Runyan, Brown, Reyes, Michaud, McNerney, 
Donnelly, Walz, and Barrow.

           OPENING STATEMENT OF CHAIRMAN JEFF MILLER

    The Chairman. Good morning, everybody. This hearing will 
come to order.
    Before I begin, I want to note today's important place in 
the history of this Nation. It is the anniversary of the allied 
invasion of Normandy better known as D Day.
    Nearly 160,000 troops bravely fought for and obtained a 
foothold in Europe that would prove pivotal to our victory. 
Many of these troops gave the ultimate sacrifice and to the 
veterans who took part, we say thank you.
    This Committee will always remember the efforts of those 
who were there and we will work to ensure that we fulfill our 
obligations to them and all veterans.
    I want to welcome everybody to this hearing this morning 
entitled Through the Looking Glass: Return to PPV. We are 
returning to our examination of VA's pharmaceutical prime 
vendor contract after the hearing we held back in February.
    The PPV contract is the largest contract at VA valued 
around $4 billion. When executed correctly, the just in time 
delivery system of the PPV contract ensures that 
pharmaceuticals are delivered to VA's medical facilities in a 
timely fashion and at a competitive price.
    As the February hearing revealed, an important aspect of 
the PPV contract was not executed correctly for a long period 
of time. A subsequent information request to VA spurred by a 
subpoena that was authorized by this Committee confirmed this 
suspicion.
    When a needed pharmaceutical is either not available due to 
a supply shortage or not available through the PPV, federal 
acquisition regulations outline a clear path towards acquiring 
the pharmaceutical through an open market purchase.
    The open market process provides protections through due 
diligence, competition, and a contract. The actions of 
purchasing officials at VA willfully ignores these protections 
and were, in fact, illegal.
    In February, the illegal purchases were described as the 
routine way of doing business and according to the testimony we 
heard, no one within VA was held accountable.
    Now that VA has had even more time to consider the actions 
of its employees, it is my hope that the illegal purchases are 
no longer occurring and that the many employees involved in 
this throughout the VA have been held accountable. The problem 
is neither of those outcomes appears to have been achieved.
    While VA may boast about a reduction in unauthorized 
purchases of pharmaceuticals, this hearing is going to reveal 
that they still occur despite new training and policies 
throughout the entire department.
    The VA also identified employees who made unauthorized 
commitments and the disciplinary course of action was letters 
of counseling where appropriate. Not much of a disciplinary 
action given the egregious violations that have been 
identified.
    As VA will point out, there are ways outlined in federal 
acquisition regulation to review and ratify unauthorized 
commitments. The guidelines for ratification are clear. And I 
caution against anybody oversimplifying and misusing the 
ratification process as a way of dismissing the hundreds of 
thousands of unauthorized commitments made by VA employees.
    I am further disappointed to know that there was strong 
push back from many within the department in implementing the 
new procedures intended to minimize the illegal purchasing of 
pharmaceuticals.
    The illegal purchasing of pharmaceuticals does not help 
veterans. It is just another example of VA wishing to take the 
easy route instead of doing what is right and required as 
outlined in law, regulation, and VA policy.
    Despite VA's new policies and procedures and occasional 
counseling letters, I remained very concerned that there will 
be employees who continue trying to find some type of work-
around and that supervisors will not hold these employees or 
themselves accountable for their actions. The precedent of not 
holding anyone accountable is a bad one to continue to follow.
    The fact is VA knew they were heading down a slippery slope 
with regards to pharmaceutical purchases back in the 1990s, yet 
it appears that minimal effort was made to address this until 
this Committee put its oversight spotlight on it over a decade 
later.
    Many of those that did try to call attention to the problem 
were dismissed by their peers and even their supervisors for 
trying to do the right thing.
    We already know the problems that exist. What we need to 
know now is not only the detailed action that has been taken to 
fix them but also how it will prevent these same problems from 
occurring again in the future.
    It is my hope going forward that when VA identifies a 
problem just like this one, it is forthcoming with this 
Committee and Congress.
    We look forward to working to fix them together. Receiving 
VA's testimony less than 24 hours before this hearing, however, 
does not help us in this effort.
    With that, I yield to the gentle lady from Florida, the 
ranking member, Ms. Brown.

    [The statement of Chairman Miller appears in the Appendix]

           OPENING STATEMENT OF HON. CORRINE BROWN, 
                ACTING RANKING DEMOCRATIC MEMBER

    Ms. Brown. Thank you, Mr. Chairman, and thank you for 
holding these hearings.
    Before I begin, let me just say one of the most profound 
experiences that I have ever had in my life was going to 
Normandy and visiting the visitors center which I would 
recommend anyone if they have an opportunity to go to see the 
contributions that the men made to this country, not just to 
this country, but to the world. It was profound.
    And I want to thank Mr. Obey who was Chairman of the 
appropriations during that time and Mr. Murtha who made it 
happen.
    And for years when the families would visit Normandy, it 
was not a facility there for them to go and have a moment. And 
I can tell you the visitors center that is run by our Park 
Service in Normandy is something that the American people would 
be extremely proud of.
    But back to this hearing. Like I said before, thank you for 
having it.
    We just had one February the 1st, but today we are going to 
examine what steps the Department of Veterans Affairs have 
taken to correct problems identified in the pharmaceutical 
prime vendor, PPV, contract since the Committee February the 
1st, 2012 hearing.
    The hearing will also address concerns regarding the PPV 
contracts that have come to light since the hearing including 
accountability.
    I believe it is important to hold follow-up hearings to 
examine if VA is making progress, but also to ensure that the 
recommendations that are implemented are effective, efficient, 
and being monitored for these purposes.
    The recent IG audit shows that the VA fast pay system 
consistently provides payment within 48 hours to the PPV from 
the prime vendor shipment of the order. VA was paying the 
accurate amount for accurate goods received. VA was processing 
payment to the PPV in accordance to the law, regulations, and 
current terms of the PPV contract. VA was reimbursing by other 
government agencies in a timely and accurate fashion. All very 
positive steps.
    However, the audit report determined that the VA did not 
have reliable controls to ensure timely corrections of improper 
payments. This is not a new issue for VA. Lack of management 
control and not following established process procedure is a 
common theme in many former reports as well.
    The VA has proven that when determined to make correction 
action, they can successfully implement measures to do so. I do 
not understand why the VA has to wait for a hearing or the IG 
audit report for them to take these measures.
    Additionally, I would like to hear from VA what action it 
took with about how the National Acquisition Center PPV 
contracting officer who did not execute his responsibility 
properly for several months effectively stopped the process put 
in place. Was this individual recommended to provide additional 
training removed from his post?
    Finally, I am looking forward to hearing from VA on 
progress made since the last hearing to prevent unauthorized 
purchases through the PPV contract and how the new agreement 
differs from the previous contract because I understand that 
the same company got the contract.
    I want to thank you and I yield back the balance of my 
time.

    [The statement of Ms. Brown appears in the Appendix]

    The Chairman. Thank you very much.
    And the first panel at the table this morning, we are going 
to hear testimony from the Honorable W. Scott Gould, deputy 
secretary of Veterans Affairs. He is accompanied by Mr. John 
Gingrich, chief of staff; Philip Matkovsky, assistant deputy 
under secretary for Health for Administrative Operations; Mr. 
Glenn Haggstrom, executive director of the Office of 
Acquisitions, Logistics, and Construction; Mr. Jan Frye, deputy 
assistant secretary for the Office of Acquisition and 
Logistics; Steven Thomas, director of the National Contracting 
Service at the National Acquisition Center; and Michael 
Valentino, chief consultant of the Pharmacy Benefits Management 
Services.
    All of the individuals that I have just identified, I would 
like to ask if you would rise because I intend to swear you in. 
If you would raise your right hand.
    [Witnesses sworn.]
    The Chairman. Thank you.
    Deputy Secretary Gould, your complete written statement as 
customary in this Committee will be made a part of the official 
hearing record and you are recognized for five minutes. Thank 
you.

TESTIMONY OF THE 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; PHILIP MATKOVSKY, ASSISTANT 
     DEPUTY UNDER SECRETARY FOR HEALTH FOR ADMINISTRATIVE 
OPERATIONS, VETERANS HEALTH ADMINISTRATION, 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; 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

                  STATEMENT OF W. SCOTT GOULD

    Mr. Gould. Chairman Miller, thank you for that courtesy.
    And Ranking Member Brown and Members of the Committee, 
thank you for the opportunity to appear before you here today 
to discuss VA's pharmaceutical prime vendor program and our 
very measurable progress towards improving internal controls 
since we first put corrective actions in place in November.
    Thank you for introducing the fellow panel members. I would 
also like to add seated behind me are Mr. Craig Robinson from 
the National Acquisition Center and Phillipa Anderson from VA's 
Office of General Counsel.
    The subject of today's hearing concerns the management and 
administration of the pharmaceutical prime vendor contract. But 
before we dive into the subject of pharmaceutical contracting, 
I would like to say that pharmacy is an essential part of our 
health care operations.
    Pharmacy personnel filled 137 million prescriptions last 
year alone. They won the J.D. Power customer satisfaction best 
of the best rating for the last three years in a row and they 
have held administrative costs per prescription filled 
basically level for a decade.
    I believe it is fair to say that they have set a pharmacy 
and clinical benchmark in the industry and that is widely 
recognized.
    Now, returning to the pharmaceutical prime vendor contract 
or PPV as we know it, the PPV provides warehouse and shipping 
services for pharmaceuticals and related medical products to 
every VA location across the U.S. and around the world.
    The company that provides these services is McKesson. 
Working with VA, McKesson fulfills over a half million line 
items of activity per month.
    Last year, the month of September, VA discovered that about 
70,000 of these transactions were unauthorized commitments. 
This means that the commitments to purchase items, excuse me, 
from the contract were not accomplished in compliance with all 
applicable law and regulation.
    The scope of the problem and the corrective actions taken 
by VA in November of 2011 were reported in testimony before 
this Committee, as Ms. Brown pointed out, in February of this 
year. Since then, we have taken continued action including the 
following.
    We changed--made changes to the portal that prohibit 
unauthorized purchases directly through this venue.
    We have increased management oversight of ordering officer 
activities by both automated and manual processes.
    We have improved training for ordering officers and other 
VA personnel.
    We have escalated actions to hold noncompliant personnel 
accountable including extensive counseling, focused retraining 
for 81 individuals, entry of counseling letters in personnel 
files for 15 personnel which we all know affects their 
opportunity for promotion, suspension of 48 hours of ordering 
responsibilities for two ordering officers, and in one case 
resignation in lieu of termination.
    In addition, VA has reduced the total number of employees 
authorized to make commitments on the PPV from nearly 2,000 to 
less than 1,000.
    We have also expanded the number of drugs available on the 
contract markedly.
    We have completed competition of a contract under new and 
more restrictive terms that was awarded in April of 2012 and 
will go into effect in August of this year.
    I might point out that we believe that contract will save 
an additional $150 million a year, and we are in the process of 
ratifying all transactions under the FAR to ensure that the 
vendor acted in good faith and that the goods were provided and 
fair value received by VA.
    Front-line employees continue to respond well to this new 
direction and oversight. In fact, these actions have already 
achieved a dramatic reduction of unauthorized commitments from 
70,000 line items per month to less than 450 line items per 
month. That is 450 out of a half million transactions.
    The overall trend continues downward and we are working 
hard to change practices that existed at VA for over 17 years. 
And we will achieve our goal of full compliance with the FAR.
    Throughout this process, the discussion that we are about 
to have about the contract and its administration, we have been 
working to make sure that our overriding operational goal is 
met which is to provide safe, timely deliverables of 
pharmaceuticals to our veterans where and when they are needed.
    Mr. Chairman, my colleagues and I thank you for your 
continued interest in our progress on the PPV contract and we 
are prepared to answer your questions.

    [The statement of W. Scott Gould appears in the Appendix]

    The Chairman. Thank you very much.
    Are you aware that VA has continued to purchase thousands 
of pharmaceuticals even though the practice was said to have 
stopped in November of last year and one of the ways VA has 
done this is by ordering drugs through a third party with whom 
VA has no relationship?
    And it appears, and, Ms. Brown, you asked me about the 
little drawing that I laid on everybody's desk, this is one of 
the work-arounds that we have found. The veteran asked VA for a 
drug. It appears that VA orders the drug through a third party 
who then goes to McKesson. And then, of course, the order is 
drop shipped directly to the veteran. VA never verifies that 
the drug is safe, accurate, or where it comes from.
    So is that a common practice within VA to go to a third 
party to order from McKesson?
    Mr. Gould. Mr. Chairman, we are a Fortune 10 company with 
300,000 employees and $130 billion a year budget. The chart in 
my written testimony shows a dramatic decrease in the number of 
unauthorized commitments from over 70,000 to less than 450.
    In my view as a senior manager in the private sector and as 
chief operating officer of VA, I believe this is clear 
unequivocal evidence that we get it, that change is happening, 
and our employees are responding.
    The Chairman. First of all, you are not a Fortune 10 
company. You are a government agency.
    Mr. Gould. With the equivalent size of a Fortune 10 
company, that is correct, sir.
    The Chairman. My question is, has or does VA use a third-
party company to order through to bypass laws, rules, and 
regulations to order from McKesson?
    Mr. Gould. Mr. Chairman, I would like Michael Valentino to 
address that issue.
    Mr. Valentino. Thank you.
    What you are referring to is a drop shipment provision or 
sometimes called a pass-through provision which is part of the 
pharmaceutical prime vendor contract. It is a--it can be a 
legitimate process for moving heavy, bulky products from the 
manufacturer to the VA site. I can give you an example.
    IV fluids are essentially water. If you try to move them 
from the manufacturer to the prime vendor to the VA, you add a 
lot of expense. So we have set up in collaboration with the 
National Acquisition Center a process where we place the order 
with the prime vendor. The prime vendor places the order with 
the manufacturer. That product is then shipped directly to our 
facilities and the payment goes through the prime vendor.
    The Chairman. So the order goes to the prime vendor or goes 
to the third party?
    Mr. Valentino. In this situation, it is my understanding 
that the order goes to the prime vendor.
    The Chairman. Why would the third party be necessary and 
who is that third party?
    Mr. Valentino. Well, in this situation, the third party is 
the manufacturer. So we order it from the prime vendor. The 
prime vendor sends that notification to the manufacturer who 
then ships it to our location.
    The Chairman. Okay. First of all, I do not believe that IVs 
are considered pharmaceuticals. They may be, but I do not 
believe they are.
    I am talking specifically about pharmaceutical drugs going 
to a third party and going back door to the prime vendor. Why 
would you need to do that?
    Mr. Valentino. Well, there are other situations----
    The Chairman. No. Specifically regarding drugs.
    Mr. Valentino. Yeah. Yeah. I will address that.
    The FDA for a variety of reasons usually based on safety 
has identified a small number of drugs that can only be ordered 
through specialty distributors or through their own facilities. 
Those drugs cannot come into the possession of the prime 
vendor.
    So these are drugs typically on VA contract. There is a 
federal supply schedule contract for those. And we have worked 
that issue with the National Acquisition Center where, again, 
we follow the same procedure as with the IVs but for a 
pharmaceutical product.
    So we will order it from the pharmaceutical prime vendor. 
They will notify the manufacturer or the specialty distributor. 
They will ship that product back to us and they will----
    The Chairman. And it is your testimony that that is exactly 
the way it occurs?
    Mr. Valentino. To the best of my knowledge, that is the 
exact way that it occurs for those specialty distribution 
drugs.
    Now, it is true there could be situations where those 
procedures have not been followed. Perhaps there is a situation 
where it is a non-contract drug that we have arranged to be 
drop shipped and we have not followed appropriate procedures.
    We believe that in March, that may have occurred ten times 
out of 500,000 line items. We are in the process of 
investigating that trying to find out exactly what happened. We 
do not know at this point.
    The Chairman. Mr. Gingrich, who is Mel Noel; do you know?
    Mr. Gingrich. No, sir.
    The Chairman. Does anybody at the table know who Melbourne 
Noel is?
    Mr. Valentino. Yes, I do. Mel Noel is a VA attorney with 
the Office of General Counsel.
    The Chairman. If somebody in the Office of General Counsel 
wrote a memo, would you expect that to be a truthful memo and 
would you trust the validity of the recommendation by somebody 
like Mr. Noel?
    Mr. Valentino. Are you asking me, sir, or----
    The Chairman. I am asking anybody that wants to answer, but 
I will direct it to you, sir.
    Ms. Brown. Mr. Chairman, did he see the memo?
    Mr. Gingrich. I have not seen the memo.
    The Chairman. Okay. Ms. Brown, let me go ahead and thank VA 
very much for providing us all of this information. As the 
Members of this Committee know, we did, in fact, vote to issue 
a subpoena to the VA. We ended up not submitting the subpoena 
to the VA with the agreement that VA--Ms. Brown, I am answering 
your question--with the understanding that they would provide 
information to us.
    One of the things that was provided to us, Ms. Brown, was a 
memo and this goes to show the Committee how far back this 
problem goes. This is not just this Administration. This is not 
just the previous Administration. This goes back to a previous 
Administration before that one.
    But there was a memo that was written by a group of people 
including Mr. Noel. There are three attorneys on this memo that 
basically say the current--this was the contract that we were 
talking about--the current pharmaceutical prime vendor 
solicitation includes an open market item provision that was 
found to be unobjectionable by the 025 NAC and although we 
warned them that including open market items was risky and 
pushing the envelope.
    Additionally it says that representatives ordering from a 
PPV or a med surge distributor should still comply with FAR 
13.2 actions at or below the micro purchase threshold.
    So what I am trying to lay out for the Committee is that 
this goes back a considerable length of time. And it is 
interesting that nothing was done until this issue was raised. 
And all of a sudden, a precipitous drop occurred even though 
the activity had been going on for well over a decade.
    And we hear people minimizing by saying that there were 
only ten purchases out of 500,000 purchases. I can promise you 
that we will show information today that will prove that that 
is not true, that veterans' health has been put at risk, that 
there have been incidents whereby the VA did not comply with 
Trade Agreement requirements, and that there were drugs that 
were, in fact, purchased that we do not know where they came 
from.
    And with that, Ms. Brown, you are recognized.
    Ms. Brown. Thank you, Mr. Chairman.
    Mr. Gould. Mr. Chairman, may I respond briefly to that----
    Ms. Brown. Yes, please.
    Mr. Gould. --please? Thank you, Ms. Brown.
    First of all, Mr. Chairman, if you do have any information 
that would be helpful to us in establishing accountability or 
further understanding this issue, we are open to it. To the 
best of my knowledge, you have not communicated that to the VA.
    The Chairman. Will the gentleman yield?
    Ms. Brown. This is my turn.
    The Chairman. Will the gentleman----
    Mr. Gould. If I may just and I just----
    Ms. Brown. I would like for him to finish his statement.
    Mr. Gould. I think there is an--there is certainly a duty--
there is a duty to share that information----
    The Chairman. The Chairman takes the chair back.
    Mr. Gould. This is----
    The Chairman. The Chairman takes the chair back. Mr. 
Gould----
    Mr. Gould. Mr. Chairman----
    The Chairman. No, ma'am. The Chairman takes the chair back.
    You provided this information to me. Your office provided 
this information.
    Ms. Brown. This is bullshit.
    The Chairman. Do not try to imply that I am trying to bring 
something to you that you are not aware of. The people behind 
you sitting behind you, sir, gave us this information. It came 
from your office.
    Mr. Gould. Mr. Chairman, we provided over 40,000 emails at 
the Committee's request. I assume that you have been through 
the bulk of them and may now have some issues that you want to 
raise with us. I hope that is a two-way process and that we 
have an opportunity to defend ourselves in this process.
    No one on this Committee is here--no one on this panel is 
here to mislead this Committee in any way. And I am not aware 
what--what is the date of that document that you are sharing?
    The Chairman. 1998, sir.
    Ms. Brown. Bullshit.
    Mr. Gould. 1998. Well, none of us here----
    The Chairman. Excuse me. Mr. Gould----
    Mr. Gould. --none of us on this panel were----
    The Chairman. --would you excuse me just a minute? I would 
like the lady's words taken down. Will you please read back 
exactly what the ranking member just said?
    Ms. Brown. Yes, do that.
    The Chairman. The Committee will stand in recess.
    Ms. Brown. Yes. I apologize, I apologize that we are here 
on a witch hunt.
    I apologize for saying bullshit and apologize that we are 
here on a witch hunt when we should be doing the veterans' 
business. Yes, I apologize.
    The Chairman. Thank you very much.
    I would like for the record, though, that that information 
be provided as quickly as possible to this Committee.
    Mr. Gould, you may continue.
    Mr. Gould. Thank you, Mr. Chairman.
    I am sorry. I was under the impression that Ms. Brown was 
about to have the floor. Is that----
    Ms. Brown. I yield my time to you. Do I still have time? 
Okay. I yield my time to you to respond, sir.
    Mr. Gould. Thank you, ma'am.
    Ma'am, I would just say that this team identified the 
problem. We took decisive action. What you see is evidence of 
strong, positive results reducing from over 70,000 unauthorized 
commitments to less than 450.
    We believe we are on the right track and that we are 
handling it in the right way with a tiered approach to 
training, counseling, and, frankly, sanctions that we have 
taken. And that has been a part of the reason for our very 
substantial progress over the last five months.
    Ms. Brown. Sir, I have another concern which is going the 
other way. You have gone from 2,000 to 1,000 people that have 
the authorization to issue these pharmaceuticals.
    I want to make sure that the veterans receive their 
medication in a timely fashion. And you all do a good job in 
this particular area. And I am concerned that--first of all, 
the question was whether or not the veterans ask for the 
medication.
    Is that the procedure?
    I would think that physicians write the prescriptions and 
then they order it from the pharmaceuticals. But help me with 
this process because something must be missing here because I 
do not think that veterans directly go to the pharmaceuticals 
and request any medication.
    Mr. Gould. No, ma'am. That----
    Ms. Brown. Help me with the procedure. Help me. What is 
going on in the process? I need to understand. I must be 
missing something here.
    Mr. Gould. So our number one goal is to make sure that 
veterans who need medicine get it promptly. And the whole idea 
behind the PPV contract is that it is delivered in basically 24 
hours under a watchful eye of physicians and pharmacists who 
make sure that the right drugs according to our formulary are 
delivered promptly.
    I would invite Mr. Matkovsky and Mr. Valentino to describe 
how that process looks at the bedside and then leads to the 
purchase and finally the delivery of the drugs to the veteran.
    Ms. Brown. Thank you, sir.
    Mr. Valentino. You are exactly right. When a patient elects 
to receive care from VA, they are assigned a primary care 
provider who evaluates them and their medical conditions, 
decides on a course of therapy.
    If that therapy involves pharmaceuticals, they write a 
prescription. That prescription is reviewed by a pharmacist. 
That data is entered into our electronic medical record and the 
prescription is provided to the veteran.
    Now, in between writing the prescription and having it 
provided, there is the ordering process and the things that we 
are talking about today.
    Ms. Brown. Yes, sir.
    Mr. Matkovsky. Sorry. We did, in fact, introduce greater 
rigor in the ordering process, so there are specific ordering 
officials. The number of people who had the authority to order 
was reduced.
    Ms. Brown. From 2,000 to 1,000?
    Mr. Matkovsky. Under 1,000, yes.
    Ms. Brown. Under 1,000. Did that slow down the delivery to 
the veteran?
    Mr. Matkovsky. It required us to change our work patterns 
to make sure that folks were dedicated to this activity as 
opposed to performing this among other duties. It changed the 
way we staffed it and it required us to have additional 
resources to staff that function.
    In addition, we added contracting officer representatives 
with explicit delegation of authority to review the invoicing 
process. Again, an additional resource required to review that 
more formally.
    So a reduction in the staff, an increased focus on the 
staff performing this function in lieu of any other functions, 
and then an additional supervisory activity for contracting 
officer representatives.
    Ms. Brown. Thank you.
    And I yield back.
    The Chairman. Mr. Frye, if you would, explain to us how a 
proper supervisor would screen a purchasing order.
    Mr. Frye. Well, again, I am not in the pharmaceutical 
business, but I go back to my experience of nearly 30 years in 
supervisory positions.
    I think it is as simple as this and I will add that we 
looked at the way VHA was doing it at the Washington Hospital. 
I sent my staff out to--and they spent an entire day with the 
pharmaceutical personnel. And the system worked very well and 
it was very simple.
    An ordering officer prepared an order and the supervisor of 
that ordering officer looked at the order to make sure that 
there were not drugs on it that were not authorized and then 
the supervisor authorized the order of those drugs.
    So I think it is really a pretty simple thing from my 
viewpoint and based on what my staff told me. And I was very 
complimentary of VHA in the Washington Hospital situation.
    The Chairman. If you would, to Ms. Brown's point, I think 
she is referring possibly to the warrants being removed from--I 
think that is what she was driving at.
    But emails that were received by this Committee from VA, 
you were noted as attempting to remove warrants from about 
2,000 contracting officers who were not acting in accordance 
with the law.
    And I want to know how many of those 2,000 contracting 
officers actually lost their warrants.
    Mr. Frye. This is an ongoing process. We have been at it 
for about two and a half years. Back in 2007, the rules changed 
for contracting officers. Contracting officers have to be 
certified in accordance with the federal acquisition 
certification contracting.
    They are certified at three levels and in order to be 
certified, you have to have educational credentials. You have 
to have certain training and certain experience.
    So as we looked at VHA's contracting officers, we found 
that there were quite a number of them that did not qualify to 
be contracting officers.
    I would add that most of these were not in the 
pharmaceutical arena, however. Most of these were in the 
prosthetics arena.
    We still have not accomplished the withdrawal of all of 
those folks who we do not deem to be totally qualified. 
However, we have got a plan in place and we plan to have them 
removed from their positions and----
    The Chairman. My question----
    Mr. Frye. --repurposed in other ways by the end of the 
fiscal year.
    The Chairman. If I could, my question was, how many of 
those 2,000 that you recommended have actually lost their 
warrants?
    Mr. Frye. I think last I knew, and Mr. Matkovsky might be 
able to shed some more light on it, I think we are down to 
about 1,700.
    The Chairman. Okay. Dr. Roe.
    Mr. Roe. I thank the gentleman for yielding.
    I am trying to get my arms around exactly a couple things 
here.
    One, why did it take 17 years to bring this to light?
    I mean, it seems to me like that the procedures that you 
are implementing now protects everybody. It protects the 
patient. It protects the VA. It protects the system. It 
protects everybody in the system.
    Why did it take 17 years to do this, Mr. Gould?
    Mr. Gould. Sir, the hardest problem in a large organization 
is to find something that is not a problem from the operational 
perspective. So what we saw was superb cost control, delivery 
within 24 hours, high-quality drugs going to the veterans where 
and when they needed them, the right place at the right time.
    So when this finally was raised to our attention----
    Mr. Roe. Let me interrupt you. How would you know that 
there are high-quality drugs going to veterans when you 
clearly--right here we clearly--the Trade Agreement Act clearly 
states that you cannot get drugs in certain countries because 
we do not have any way to know and, yet, those drugs are being 
shipped, because I have got some emails here that say they have 
been, to veterans? So how would you know?
    Mr. Gould. Well, we have terms and conditions in our 
contract that require compliance with all of those elements.
    Mr. Roe. But that was not happening, though. My point is--
--
    Mr. Gould. I would like to ask Glenn Haggstrom to respond 
to your question directly----
    Mr. Roe. Okay.
    Mr. Gould. --because it clearly was not the case that we 
were in violation of the Trade Act Agreement.
    Mr. Roe. Well, I have got some emails here that said you 
are from you all.
    Mr. Gould. And through this group of expert panel--I do not 
know where you got your emails. Again, sir, if there is 
anything that would help us do our job better, please disclose 
and let us know.
    Mr. Roe. We will definitely.
    Mr. Gould. But we reviewed 16--we reviewed 17 contracts for 
that, 16 of the 17, I believe, if my memory serves----
    Mr. Roe. So if there is a drug that has been sent to a 
veteran through this process that was produced in India which 
is not part of the Trade Agreement, maybe we should change that 
act. I mean, I am not saying we should not. And maybe those 
drugs are safe. The point is you would not know it.
    Mr. Haggstrom. Mr. Roe, I think when we discussed this the 
last time and in our work with McKesson, there is two issues at 
hand here. One is a Trade Agreement Act which when we do a 
contract in the government, if that contract has a life cycle 
value of over $203,000, the Trade Agreement Act clauses kick 
in.
    I think what Mike Valentino explained at our last panel was 
also there is an issue of even though a country may--we may not 
have a Trade Agreement Act with the country, that does not mean 
that that country does not have laboratories that have been 
certified by the FDA to make drugs in compliance with our 
processes.
    So that while we may not purchase drugs with a Trade 
Agreement Act country through a contract, we may still obtain 
those drugs----
    Mr. Roe. But how do you know that?
    Mr. Haggstrom. I would have to ask Mr. Valentino.
    Mr. Roe. I mean, you can say that, but how do you know you 
did that?
    Mr. Valentino. As we heard from McKesson at the last 
hearing, they were the drugs directly from the manufacturer or 
the manufacturer's authorized distributor. And they only 
purchase drugs that are manufactured in FDA approved 
manufacturing plants.
    So when we were ordering these non-contract drugs through 
McKesson, these are the very same drugs that they are providing 
to a CVS----
    Mr. Roe. So this little drawing is inaccurate where someone 
would--I as a doctor would write a prescription for this 
patient down here, this veteran, and VA would then go over here 
to the--a non-contract company which would then send it back to 
McKesson. That is not the way it works?
    Mr. Valentino. I cannot----
    Mr. Gould. Share a copy with us, it would----
    Mr. Roe. It may be wrong.
    Mr. Gould. --very helpful.
    Mr. Roe. I mean, this could be in error here.
    Mr. Valentino. I think one of the hard----
    Ms. Brown. Mr. Chairman, he has not seen it. Okay. Thank 
you. If you want to question him----
    Mr. Roe. Excuse me, but reclaiming my time. Anyway, if that 
is the way, maybe we are understanding it wrong. And then while 
you are looking at that----
    Mr. Gould. Mr. Roe, I would just point out that the drugs 
that we have for our veterans are as safe or safer than the 
drugs that are received all across America. And if there is a 
question here that you may have with the larger pharmaceutical 
system----
    Mr. Roe. No, no, no, that is not it. I mean, my question 
is, again, your internal controls, how do you know that this 
is, because of what you said about how McKesson did? Okay. Then 
we will go into that later.
    Mr. Gould. Well, actually, we have got an answer for you 
here.
    Mr. Roe. Okay.
    Mr. Valentino. So this looks to me as if it were a diagram 
outlining the drop ship issue which we addressed earlier. If 
this were what we are talking about, the arrow would be from VA 
to McKesson.
    Mr. Roe. So if I write a prescription to this veteran down 
here and it is not in that particular formulary that you have, 
it does not do this then? You are telling me this is wrong?
    Mr. Valentino. This does not--this describes the drop ship 
issue, not----
    Mr. Roe. That is what I am speaking of. If I write a 
prescription for a drug that is not in the formulary, not in 
the VA formulary, then what happens to it?
    Mr. Valentino. Well, just because the drug is not on the VA 
formulary does not mean that McKesson does not stock it. They 
stock virtually everything, formulary or not formulary, and we 
ordered it primarily through them. It just was not in 
conformance with the FAR. It was a non-contract purchase.
    But McKesson purchases drugs directly from the 
manufacturer, drugs that are FDA approved for use in this 
country, drugs that are manufactured in FDA approved plants. 
They do not procure private products from the gray market or 
secondary market.
    So they have an assurance that the drugs that they are 
buying and putting on their shelves to distribute to VA and 
other organizations, Walmart, Costco, CVS are high-quality 
drugs.
    Mr. Roe. Okay. We will have a chance.
    I yield back. Thank you.
    The Chairman. Mr. Walz.
    Mr. Walz. Well, thank you, Mr. Chairman.
    And thank you all for being here.
    I, too, like Dr. Roe, I am just trying to get my mind 
wrapped around everything.
    Deputy Secretary Gould, what is the purpose of PPV in your 
opinion?
    Mr. Gould. Sir, it is to get the right drugs in the right 
place within 24 hours that our physicians and pharmacists in 
the field want to get for a particular veteran. So it is health 
care, it is quality, and it is getting it there quickly.
    Mr. Walz. But with a recognition that you cut back on the 
number of people who were able to do that? Is it your opinion 
that it was being used in times that it was not necessarily 
doing that?
    Mr. Gould. My sense is that with the new processes, 
training, and technology that we have, we can accomplish that 
same mission to the same standard with fewer people.
    So what we are trying to do is bring into balance our 
overriding operational need, make sure veterans get the right 
drug at the right time, but make sure that we are being as 
efficient as we can and also responding to the requirements of 
the FAR so that we can avoid this problem in the future.
    Mr. Walz. Well, that is the way I see it. Our mission here, 
obviously it is patient-centric. What is best for the patient 
is what is best in this case.
    Mr. Gould. Yes.
    Mr. Walz. Making sure safety is adhered to is the questions 
that were being asked, a cost-benefit analysis to see if we can 
do it in the most cost-effective manner to the taxpayer----
    Mr. Gould. Yes.
    Mr. Walz. --while addressing some of those market 
fluctuations, drug shortages, and those types of things.
    Mr. Gould. That is correct.
    Mr. Walz. And we can do that in the manner. Is it fair 
though that the Committee's concern that this was operating 
outside of accepted practice, that the potential for abuse was 
here? Is it safe to say that?
    Mr. Gould. We are concerned about the fact that there were 
unauthorized commitments being made in the system and that is 
why together with training, focus on personnel and 
accountability, new systems, new business process, procedures, 
and management oversight, we have been able to lower that from 
70,000 down to under 450. So we are on track and we are doing 
the right thing. And we continue to go at our goal of zero 
unauthorized commitments.
    Mr. Walz. And I certainly appreciate that. I guess I am 
concerned. I am hearing things and a Committee that is usually 
not very contentious, you can certainly obviously feel it in 
the air.
    My concern is I have not seen any of these emails. I do not 
know them. Some of this was delivered yesterday apparently and 
they are going through discs to try and get them here. It is 
very hard to ask about this.
    Is there a legitimate question on safety concerns or does 
it go back to your previous answer that the broader 
pharmaceutical market and how they work is very similar to how 
it is working in VA?
    I am concerned with Dr. Roe's question that was there 
potential for unsafe drugs getting in veterans' hands.
    Mr. Gould. And, Mr. Walz, to the best of my knowledge, we 
have a safe veteran-focused system. You have got some of our 
leading experts at the panel here today.
    And I would just like Mike Valentino and others at the 
table to weigh in on that issue. We think we are the benchmark 
in the industry for pharmacy and clinical practice and we will 
stand by that.
    Mr. Valentino. I would say that I have no concerns about 
the safety of our drug supply because of the way we order drugs 
now and the way we have ordered them in the past.
    But I would point out that despite rigorous FDA review and 
approval, drugs do get into the marketplace that ultimately 
after they are in wide use are found to be problematic and are 
withdrawn from the market due to safety reasons. So I will make 
that distinction.
    I am not concerned over the safety of our products because 
of the way we order them, but from time to time, and we know 
the drugs that I am talking about, they get out on the market, 
they cause harm, and they are withdrawn.
    Mr. Walz. I got this yesterday, the most requested, top 
five most purchased items, cost, and all of that.
    Are the drugs being requested predominantly on PPV drugs 
that are not in the formulary as was previously asked or are at 
times they are on the formulary and they just went around to do 
it this way?
    Mr. Valentino. It is a combination. Sometimes these are 
drugs that are on the formulary. A very common example is a 
generic drug where we have attempted to put a contract in place 
and we have not been successful. We had not gotten sufficient 
bids to do that. So this could be a very common formulary drug 
for which we do not have a contract and we would have to order 
it through another mechanism.
    Mr. Walz. You may not have the data and, Deputy Secretary 
Gould, you may not have this in there, but is the VA's purchase 
of drugs more cost effective than say Medicare? Is the VA's 
purchase of drugs more cost effective than a private sector 
insurer hospital, if you could?
    Mr. Valentino. VA has some of the lowest drug prices 
available anywhere. This would even include other countries 
where they do index pricing. So----
    Mr. Walz. Is PPV part of the reason that it is cheaper?
    Mr. Valentino. It is part of the reason. It is not the 
primary reason. The primary reason is because of the agreements 
we have with the manufacturers because we will guarantee a 
certain amount of utilization.
    Mr. Walz. So we should try and utilize those as often as 
possible, right, because our argument has always been that 
negotiations on drug prices at Medicare would be a way to lower 
health care costs? Do you think VA proves that to be true?
    Mr. Valentino. I think we have a very robust system. We 
have an extremely good track record of keeping our costs very 
low and providing high-quality services.
    Mr. Walz. My final question, and I know I have run over 
time just a minute, do we ever get drugs cheaper by going PPV 
than we would off of a negotiated contract or is it always 
going to be more?
    Mr. Valentino. Well, let me answer that two ways. We always 
want to follow the procurement hierarchy which is national 
contract, FSS on down as we have heard.
    Yes, there have been times when we have been able to--when 
the price that we paid for a drug through a non-contract 
purchase was cheaper than through the procurement hierarchy. 
That is not why we want to do it. That is just sort of an 
incidental impact of what we do. But we believe in the 
hierarchy and we try to follow the hierarchy.
    Mr. Walz. I will yield back, Mr. Chairman. Thank you for 
the extra time.
    The Chairman. Thank you, Mr. Walz.
    Very quickly and I am just trying to get a handle.
    And also, Mr. Walz, I would let you know we have been 
getting data dumps by disc for about three months from VA. And 
we have made all of that information as we got it available to 
the minority staff. So, you know, it has been coming in your 
direction.
    There is a memo from November 7th, 2011, the PPV integrated 
product team. And I am trying to figure out. On the last page, 
there was open discussion and it says that L. Schwartz asked if 
TAA compliance was part of the McKesson PPV contract. And the 
answer was TAA compliance is required for contract items but 
not open market.
    Could you explain the difference and why TAA compliance is 
not required?
    Mr. Haggstrom. Mr. Chairman, I think as we talked earlier, 
TAA compliance kicks in when the value of the contract exceeds 
$203,000. Below $203,000, the Trade Agreements Act does not 
have an effect on our a contract for the Federal Government.
    The Chairman. So if the contract was less than that----
    Mr. Haggstrom. For an open market contract less than 
$203,000, the Trade Agreement Act would not be applicable.
    The Chairman. Okay. Mr. Runyan.
    Mr. Runyan. Thank you, Mr. Chairman.
    I just want to touch on one thing I think we bring up every 
time we have a hearing like this. And I think coming, Secretary 
Gould, from your boss, Secretary Shinseki, is accountability.
    And we talk about it all the time and you just brought it 
up, brought an example up where you had contracting officers 
that were not qualified to be a contracting officer.
    Where is the accountability? Where is the teeth of people 
motivated fearful of losing their position?
    I mean, you stated earlier that training, counseling, 
sanctions. I mean, I know sometimes people are going to lose 
their jobs. And I think a lot of times we shy away. And I think 
the secretary agrees with the statement that people need to do 
their job or bad things are going to happen to them.
    I know in my life, fear is a hell of a motivator and then 
having consequences to your actions a lot of times keep people 
doing the right thing.
    I mean, when you say the word sanctions, can you elaborate 
on that a little bit? What are the teeth? I mean, I know we 
deal with it, but the teeth of how we are actually going to get 
people to do what they are supposed to do?
    Mr. Gould. Right. And accountability and discipline are the 
hallmark of a great organization.
    Mr. Runyan. Well, that's inherent in an individual. But 
from a leader perspective, you have got to----
    Mr. Gould. Absolutely. So we started first with the 
principle of fairness. So you go to somebody and just fire them 
out of the blue for something they have been doing for 17 
years, I do not think we would agree that that would be fair.
    So we started by sitting down and training every individual 
and making sure we had the right policy in place, coming to 
terms with the fact that we had not been able to come into 
compliance. And we knew we had to change our policies and train 
our people to do it.
    So we began with the training and then we escalated through 
that. Meanwhile, the numbers start to come down immediately, 
70,000 all the way down to less than 450. That is the journey 
we have been on the last five months. Something is working.
    And now what we did is we walked through counseling, 
individual counseling. If you do this, this will be the 
consequence. We had over a dozen counseling letters entered 
into people's files. That affects their promotion, their 
paycheck, their families.
    We also suspended two individuals for a 48-hour period, 
saying, look, if you do that, you are going to lose the right 
to do it in our organization.
    And, finally, an individual decided to retire in lieu of 
being dismissed.
    So what--that, I believe, strikes the right balance between 
career teeth. If you continue to do this, bad things will 
happen and responsibility and that responsibility to fairness, 
to teach, to train, to coach as you have seen in your career 
many times is essential to maintain trust with employees and 
senior management.
    And that is what we think we have achieved together here 
over the last five months. The numbers have gone from 70,000 to 
less than 450. We think that is evidence of dramatic change. It 
means our field folks are getting it and we did not have to 
fire 300 of them to make that happen.
    Mr. Runyan. No. And I agree getting the right people in 
place, but I think also is not becoming complacent in the 
downturn to 450. Obviously you said it before. You want zero 
and that is the goal because at the end of the day, we are 
talking about taxpayer dollars at the end of the day. And----
    Mr. Gould. Mr. Matkovsky is very, very close to this, done 
a superb job, and I would like him to add to the--to my 
response.
    Mr. Matkovsky. The discussion about warrants and the 
removal of warrants, in the field, all pharmacy staff who had 
previously had contracting officer warrants have had those 
warrants pulled back. The same is true for our logistics staff 
in the field.
    So any hospital staff who were logisticians, not 
contracting series had their warrants pulled back. As Mr. Frye 
alluded, the only remainder are the prosthetics staff and we 
are on a plan to complete the transition of those warrants to 
contracting.
    We think that is part of imposing discipline, that those 
who are trained, educated, are in the contracting officer job 
series are going to be those that we entrust to have a 
contracting officer's warrant.
    In addition to that, week in, week out, there is management 
attention, month in, month out, there is management attention 
and scrutiny to the actions of our staff be they ordering 
officials or contracting officers' representatives. Repeat 
memos from leadership, repeat communications to pay attention, 
that this is something that both on the contracting side and 
the health care administration side, we are jointly committed 
to this.
    I think we have struck that tone that you have addressed of 
organizational discipline and commitment.
    Mr. Runyan. And my time is expired, but I think when you 
look at it, we have just scratched the surface. And you have 
got to continue to press across the board and not allow--I 
would respectively say to have your organization in line so we 
do not have to drag you up here and do this to you all the 
time.
    So thank you. I yield back.
    Mr. Gould. You have that commitment and we are on the case 
here. And we think that is the reason why we have seen such 
dramatic change over the last five months.
    Mr. Runyan. Thank you.
    The Chairman. Mr. Gould, are all purchases TAA required 
authorized or not?
    You may have in the last hearing said that all purchases 
that VA made were TAA compliant. Is that----
    Mr. Gould. Comply with the law and that has the $203,000 
limit.
    The Chairman. Okay. So that opens up a question then. So if 
it is less than that, it does not have to be?
    Mr. Gould. Well, when Congress passed that law, the 
decision was $203,000 and we do abide by that.
    The Chairman. So if it is less than $203,000, it may not be 
TAA compliant?
    Mr. Gould. It is not required to be TAA compliant below 
$203,000.
    The Chairman. So it could not be TAA required, right?
    Mr. Gould. Right. Yes.
    The Chairman. I know the law says it does not have to be.
    Mr. Gould. Correct.
    The Chairman. But it could be? Under $230,000 or $203,000, 
it could be?
    Mr. Gould. Two hundred and three, it could be.
    The Chairman. Okay.
    Mr. Gould. Yes.
    The Chairman. Could VA stack those contracts at less than 
$203,000 on top of each other in order to circumvent the law?
    Mr. Gould. It is an interesting hypothetical. I think the 
over--the paramount drive that we have as an organization is 
when there is a need, we go out to contract for it. We go out 
to get it done.
    So waiting or delaying to be able to bundle or aggregate 
contracts so they reach above $203,000 seems far fetched to me, 
but let me see if there is anybody else on the team that has--
--
    The Chairman. I apologize. I am going the other direction. 
I am wondering if there is ever a time where they would be a 
split contract, that it could be a $5 million contract, $1 
million, whatever the number is, but that it is segmented or 
split into smaller segments and if that happens, what happens 
to the TAA compliance requirement?
    Mr. Gould. Philip.
    Mr. Matkovsky. So you are asking us would there be a 
concerted action to split a transaction so it falls below the 
203?
    The Chairman. Has it occurred.
    Mr. Matkovsky. We do not believe it has occurred, sir.
    The Chairman. And I do not have an email from 1998 that 
says that happened, but----
    Mr. Matkovsky. Sir, you know, again, you know, the 
overriding drive here, this is a just in time medication 
inventory system. I really do not have any knowledge of 
somebody willfully splitting transactions to occur below.
    The Chairman. Mr. Michaud.
    Mr. Michaud. Thank you very much, Mr. Chairman, and I want 
to follow that same vein of thinking as far as TAA on the open 
market.
    You said you did not think it occurs. Could you provide the 
Committee with what in the instance of the drugs and where they 
came from, can you provide the Committee with that information 
that fall underneath the 203?
    Mr. Gould. Sir, we would certainly be willing to look into 
that and see if it is possible to do and deliver that to the 
Committee.
    Mr. Michaud. Now, if it goes through, and there will be the 
same question for McKesson, I mean, if it has to go through 
McKesson or whoever, it seems to me there must be a record of 
that occurring.
    And I would like to know how many contracts are out there, 
what drugs, where they came from that might be below that 
$203,000, if you can provide that for the Committee.
    My other question is, is dealing with the drug shortage, 
has that affected the VA supply for the open market purchasing 
at all?
    Mr. Gould. Mr. Michaud, this is--obviously we are part of a 
broader system that does have periodic shortages from time to 
time.
    Michael, would you care to comment on that?
    Mr. Valentino. Yes. That is absolutely correct. As I am 
sure a lot of Members know, drug shortages are occurring with 
increasing frequency and for a longer duration. There are a lot 
of factors leading to those drug shortages which we probably do 
not need to go into.
    But VA is impacted just as every other organization in the 
country and beyond is impacted. So we have developed a number 
of ways that we can mitigate the impact on the veterans.
    So, for example, a lot of our chronic medications we 
dispense in three-month supplies. There have been times when we 
have had to reduce that to one-month supplies. There have been 
extreme situations where we have had to switch patients from 
one drug to another.
    But I do not think you can say that the change in our 
procedures has been a direct contributing factor or really 
exacerbated that in any significant way. At least with the 
information that we have, we believe that not to be the case.
    Mr. Michaud. Moving forward since you have given the award 
out, do you foresee under any circumstances where the VA would 
allow to make open market purchasing through the PPV?
    Mr. Haggstrom. No, sir, we do not. We have worked very 
closely with McKesson who was the successful awardee of the 
follow-on pharmacy prime vendor contract. We have taken the 
experiences that we have dealt with these last many years and 
we have asked McKesson to engineer out of the system the 
opportunity to do that.
    I believe when you will hear McKesson testify, in looking 
through their testimony, they have implemented what they call a 
restrict and notify component that will automatically remove 
non-contract items from the order in the new contract and 
notify the pharmacy that it has done so.
    Mr. Michaud. Thank you.
    My last question, and we were just handed this document. I 
think it was a lot of the information which I have not seen 
either coming from different memos that you provided the 
Committee.
    But--and I do not know if the chair might want to add in--
on the very last page, on December 2011, the second paragraph 
up says Mel, which I assume is Mel Noel, specifically noted 
that VA should ask McKesson to offer these TAA noncompliant 
drugs like Stesavin on its fast pay list.
    Are you aware of that happening? And this is just something 
that was handed out this morning. Have you ever asked McKesson 
to do something that--to provide drugs that are not TAA 
compliant?
    Mr. Gould. Mr. Michaud, I think there would be a real value 
in us seeing that document and be able to give you a careful 
answer. I think Steve Thomas might be able to share a little 
bit of light on that here.
    Mr. Thomas. Yes. I can tell you on the new contract, we 
have something called whack-based generics and those will not--
will be compliant with the TAA. And that is going to take a lot 
of work on the part of McKesson because they are not used to 
doing this to make sure that the drugs that they distribute to 
us are in accordance with TAA.
    They are not accustomed to doing that because the other 
pharmacies in the United States will get products from India 
and from China so they are--they have a concerted effort right 
now to assure us that we will not be getting--we will be 
getting drugs that are compliant.
    Mr. Michaud. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Mr. Thomas, does that mean that McKesson may 
have been providing drugs that were not TAA compliant that, in 
fact, came from countries that we do not want them coming from?
    Mr. Thomas. Again, I would refer to what Mike Valentino 
said. In spite of the fact that some products come from other 
countries like India and China, they are still FDA approved 
facilities.
    So when I get my prescriptions filled or possibly when you 
get your prescriptions filled, you may get product from India 
and China. It is the government that is restricted to not 
getting products from non-TAA agreement countries.
    The Chairman. Thank you.
    Mr. Johnson.
    Mr. Johnson. Thank you, Mr. Chairman.
    Secretary Gould, according to the VA's ratification policy 
and acquisition regulations for each illegal purchase, the VA 
must produce records, documents, statements of facts, 
explanations, a description of work, an estimated and agreed 
upon price, a citation of the appropriation, the name of the 
individual responsible for the unauthorized commitment, and 
more.
    Are you stating today that you have done this for each and 
every one of the hundreds of thousands of illegal purchases 
made?
    Mr. Gould. No, we are not. That process is still underway. 
It involves review by VHA, by OALC, and by general counsel.
    And for the folks that are listening into this and veterans 
especially listening to this process, I just want to describe 
at a general level what ratification means.
    Mr. Johnson. We are going to get into that.
    Mr. Gould. We have an unauthorized commitment and what we 
want to be sure is we want to be sure that we got good value, 
we actually received those drugs, and that----
    Mr. Johnson. Mr. Gould, I do not mean to interrupt you, but 
I have got limited time and I have got a number of questions. 
So you have answered that one.
    Mr. Gould. It is a VA----
    Mr. Johnson. The VA can only--Mr. Gould, reclaiming my 
time, I do not want to go any further into this.
    Mr. Gould. Yes, sir. I understand.
    Mr. Johnson. The VA can only ratify a purchase made by an 
unauthorized individual if it has not been paid for. Since the 
VA's fast pay system pays within 24 to 48 hours, the VA has 
been paying for a product before they confirm that they have 
received it. Therefore, it cannot be ratified.
    Since we know the fast pay system paid for items before VA 
confirmed that they received these items, how did you ratify 
these purchases or how do you ratify these purchases?
    Mr. Gould. First of all, we have very strong general 
counsel that has rendered an opinion that we, in fact, can 
ratify that. As I described to you a moment ago, the process is 
still underway.
    Our contract is based on fast pay. What that means is our 
veterans and taxpayers enjoy a substantial discount for prompt 
pay of services that we provide. The vast majority of them, 
over 99 percent, there is no question about----
    Mr. Johnson. So you are saying that you ratify them after 
they have been paid for?
    Mr. Gould. That is correct by definition.
    Mr. Johnson. But you cannot do that by your own policy.
    Mr. Gould. Sir, that is not correct. That is not correct. 
So we have a process for ratification after payment. It is 
essentially a cure for this process. It is stated under the FAR 
and the VAR. We are following that to the letter of the law and 
we are in the process of doing that now.
    Mr. Johnson. Okay. Legal precedent notes that ratification 
can only occur where the person ratifying the agreement has 
knowledge of the material facts pertaining to the agreement as 
a rare occurrence. VA's decade and a half long abuse is not a 
rare occurrence of institutional ratification.
    Did VA ever conduct a detailed investigation into this 
issue and, if so, why has Congress never been informed?
    Mr. Gould. First I would argue strongly that this is a very 
rare event in VA. As I have tried to stress to the Committee 
today, a half a million line item events per month of which 
today less than 450 fall into the category that we are 
discussing. It is a rare event.
    Mr. Johnson. Back to the question. Did VA conduct an 
investigation? Has VA ever conducted an investigation?
    Mr. Haggstrom. Yes, sir. I believe an investigation had--
the ratification authority within the department rests with our 
heads of contracting activities that has been delegated.
    Mr. Johnson. Has VA ever conducted an investigation?
    Mr. Haggstrom. VHA is in the process right now of reviewing 
these unauthorized commitments, gathering the information on 
who, what, when, where, and how and the cost. And we are in the 
process right now of reviewing----
    Mr. Johnson. So the investigation is ongoing?
    Mr. Haggstrom. It is ongoing, sir.
    Mr. Johnson. Okay. All right. So if the VA did not 
investigate, they could not know all of the material facts. 
Therefore----
    Mr. Gould. Sir, I would also point out the IG----
    Mr. Johnson. --the purchases cannot be ratified?
    Mr. Gould. --is also conducting an investigation now.
    Mr. Johnson. Okay. So the investigation is ongoing and by 
your own policy, it requires that the person doing the 
ratification knows the material facts. The fact that the 
investigation--you cannot know the material facts until the 
investigation is completed. The ratification cannot be done. Is 
that not correct?
    Mr. Gould. Philip, would you care to add to this?
    Mr. Matkovsky. I will add just a little bit.
    So, Mr. Chairman, I know you are aware of the FAR's seven 
components in a ratification action, so I am not going to go 
through the litany of them.
    In the process as we have applied it, and we would be happy 
to share these documents with you after the fact, it is a 
contracting officer who is reviewing every single line item for 
the month in which the transactions were committed.
    In that line item, we have the individual who had committed 
the order. We have the item that was ordered, the quantity that 
was ordered, the unit price, the extended price, and any 
mitigating circumstance that may have resulted in the 
unauthorized commitment.
    The FAR also requires us to actually explain how we would 
intend to avoid this in the future as well. That is part of the 
action that we are engaged in.
    That CO who performs that analysis, the program requests 
the ratification. That goes through a review. It then goes up 
through our head of contracting activity. Because of the 
scrutiny of this process, sir, we have requested that that go 
through OALC, through the senior procurement executive, as well 
as to general counsel to ensure that we have dotted all the Is.
    Mr. Johnson. Well, Mr. Chairman, my time has expired, but 
what is clear to me is that the VA's argument of ratification 
is inaccurate and not in accordance with normal laws and 
regulations and it appears that they are attempting to redefine 
ratification to suit this particular purpose.
    And with that, I yield back.
    Mr. Gould. Mr. Chairman, I strongly disagree with that 
statement. I think that the facts that we put forward here show 
that we know what the law is. We are abiding by it step by 
step. We defined that we are in the middle of a process with 
three principal players.
    And at the bottom of this, at the end of the day is the 
notion that McKesson, a private sector company, provided us 
with a good we asked for. And that pill or pharmaceutical was 
taken and used for a veteran. No one at this table is disputing 
that that happened.
    So I believe that it is fair for them to be in a position 
where they might like to be paid. And so we are going through 
that process to ratify. It is a legal process to cure and we 
are in that process now. And we believe that it is likely that 
these individual unauthorized events will be ratified.
    The Chairman. Are you contending that all of the issues 
that are being involve--that ratification is involved and now 
McKesson has not been paid?
    Mr. Gould. No. As Mr. Johnson pointed a moment ago, we are 
obligated under contract to pay them.
    The Chairman. I am sorry. But you made a statement that 
would lead somebody that may be listening on the webcast that 
McKesson has not been paid. That is kind of the issue in the 
ratification question that Mr. Johnson has raised and I have 
raised with the fast pay system.
    I guess my question is, if you can ratify anything, which 
it appears that that is what may be occurring, what is the FAR 
and the VAR even for?
    Mr. Gould. Well, go to a simple example. Let's assume for a 
moment that one of these transactions is not ratified. McKesson 
has already received payment. How would we deal with that?
    The answer is we would reconcile payment in the next round. 
This is a long-term relationship with a company. If we find a 
problem, we will be able to deal with that accordingly.
    The Chairman. But under the fast pay system, they are paid, 
bam. Within 48 hours, they are paid.
    Mr. Gould. And we receive a discount immediately within 48 
hours.
    The Chairman. But they are paid. So, I mean----
    Mr. Gould. That is correct.
    The Chairman. --it is not that McKesson is not getting 
paid. And I think everybody here agrees that the veteran needs 
to get their medication and the vendor needs to be paid.
    Mr. Gould. Yes.
    The Chairman. I think the thing that we are most focused on 
is why for 17 years up until actually November of last year, I 
mean, your own charts show a drastic drop from $14 million to 
under $2 million and it gradually goes down. I would point out 
that your chart shows a tick up in April in cost. I do not know 
what the bump is. It is not large, but, I mean, it kind of 
bounced off the bottom.
    I am just trying to figure out why it sounds like you can 
ratify anything and kind of wipe the slate clean for the last 
however many years. Is that kind of what you are doing through 
the ratification process? If not, why are you doing it?
    Mr. Gould. We are doing a number of things. And I will ask 
Philip to chime in.
    First and most important, we are striving to improve how we 
use this contract mechanism and we have shown evidence of that 
occurring through additional training, business procedures, 
accountability, and technology steadily over the last five 
months. Results indicate that we are fixing this problem.
    When it comes to the issue of ratification, in each 
instance, we want to learn where we went wrong so that we can 
correct the process and we want to make sure that both the 
government and the vendor were fairly treated. And that is our 
goal in this process, to comply with the law and to make sure 
that those two things are brought into balance.
    We believe that most, if not all, of the transactions are 
likely to be ratified. If they are not, if we find there is a 
reason that it should not be ratified, we will take that action 
and we will pull money back for that services from McKesson.
    At the end of the day, McKesson had someone call them from 
VA who they would fairly have reason to believe had the 
authority to place an order. They accepted the order and 
delivered. And a veteran used that medicine to get well. And 
now we are coming back through our process to ratify that that 
transaction was fair for both parties. And we are intent on 
doing that and we are in the middle of doing it now.
    The Chairman. And there is not a Member of this Committee, 
either side of the aisle, that does not want the veteran to get 
their medication and to get well.
    Mr. Gould. Yes.
    The Chairman. The issue that we are all trying to get to 
the bottom of is all of a sudden in November of last year----
    Mr. Gould. Right.
    The Chairman. --there was a sea change at VA. Something was 
done prior to and we are trying to get to the bottom of why was 
it done that way.
    And with that, Mr. McNerney and then we will have an 
opportunity to have another round.
    Mr. McNerney. Thank you, Mr. Chairman.
    It appears to me that there are two issues here. First 
there are illuminating past errors and to decide if there is 
blame to be assigned and the second is to make sure that future 
pharma deliveries are done properly, accurately, safely, and 
timely and that there are no overpayments.
    So let's talk about the first issue in my mind first. What 
I do not understand is how, and the Chairman has hit on this 
before, how these unregulated purchases were allowed to take 
place for so long despite warnings dating back to 1998.
    So was there intentional obstruction? Specifically did Mr. 
Haggstrom or others refuse to comply with Committee requests 
for information? Those are my questions.
    Mr. Gould. No, I do not believe that to be the case. I 
think the Chairman put it nicely a moment ago. In November, 
there was a sea change. Why I think that happened is that this 
management team that you see testifying here today recognized 
they had a problem, took corrective action, and now five, six 
months later, we are seeing the results of that corrective 
action clearly and objectively.
    Mr. McNerney. Okay. But why would it take so long for that 
to come about and was there obstruction or was this panel or 
others in the VA intentionally obstructing us in this Committee 
from getting information?
    Mr. Gould. No, sir. Our intent and everyone at this table 
is to live the first of our five values as an organization and 
that is integrity.
    So if there is any issue about the amount of time that it 
took, and we all believe that it took a while to get here, it 
is not because of a lack of integrity of any member here, but 
the process of finding out, getting the facts, doing the 
analysis, obtaining legal opinion, working through the 
contentious issues, and packaging that up to come up here to 
The Hill.
    Mr. McNerney. Is there blame to be assigned for this lack 
of--for how long it took to correct the unauthorized purchases?
    Mr. Gould. Sir, our view is that as soon as we recognized 
there was a problem, the senior management team here took 
action.
    As I have testified previously, we first knew, I first knew 
in September. By November, we had policies in place, training. 
We had gone through a legal review, endless hours of review 
inside the building.
    And since that moment, we have seen a steady decline in the 
number of unauthorized commitments. I would submit that when we 
knew what we knew, we took decisive action and now five, six 
months later, you can see the results of that. Things have 
changed. There is a sea change at VA.
    Mr. McNerney. Okay. About future performance. Your graph 
does show dramatic improvement.
    Mr. Gould. Thank you.
    Mr. McNerney. But what I am concerned about is that the 
right questions are not being asked or answered. So I will just 
ask what I think is the basic question.
    How often do vets not get the specific drugs as ordered and 
how often are there overpayments?
    Mr. Gould. So thank you for raising the question about 
quality of service once again.
    And I want to come back to the team and make that clear how 
well we have been doing as an organization, that no veteran 
listening into this should be concerned that they are getting 
the right drugs at the right time and the right place.
    Michael.
    Mr. Valentino. So similar answer as before. Drug shortages 
do occur in this country. We have a very good way of addressing 
these through restricting quantities, shifting to other drugs, 
in some cases postponing procedures. We are affected just like 
everybody else in the country. We do the very same things.
    This contract, I do not have concrete information to 
suggest that this contract and the way we have changed our 
procedures has exacerbated or directly caused a veteran to not 
get a necessary drug.
    Mr. McNerney. So as far as you are concerned, there is no 
cases of a veteran getting the wrong or a bad drug or not 
getting it on time?
    Mr. Valentino. I am just saying I am not aware of any cases 
or significant trends in that area. I cannot say that it has 
never happened anywhere ever.
    Mr. Matkovsky. What we are saying is that it is not 
causally because of this contract and this mechanism of 
managing our pharmaceutical supply.
    Mr. McNerney. All right, Mr. Chairman. I will yield back.
    The Chairman. Mr. Denham.
    Mr. Denham. Thank you, Mr. Chairman.
    Is it your belief that even though federal acquisition 
regulations were not being followed that the VA was getting a 
good value for its purchase?
    Mr. Gould. Yes. We went back and researched all of the 
prior transactions looking at them from a price standpoint, 
quality, I think, unambiguously there.
    Fifty percent of them were at the price that was then 
prevailing in the market. About a quarter were below it and 
about a quarter above.
    We think that in the final analysis which will be delivered 
by the IG possibly as early as next month, that we will show 
that there was no economic consequence to these unauthorized 
commitments.
    Mr. Denham. And what other matrix do you use to show that 
we are getting a good value? Is it just price?
    Mr. Gould. Oh, of course not. The number one thing is the 
health of our veterans and making sure that the specific drugs 
that we use are targeted to have the positive effect on disease 
and disease management which is one of the reasons why we so 
carefully watch and monitor our formulary. Mr. Valentino is an 
expert in that.
    Mr. Denham. Isn't that what Mr. Valentino just testified to 
was that we are not sure how many times or what percentage we 
are getting correct? We do not know if your answer to Mr. 
McNerney's question was we do not know how many times we have 
got it wrong. Why wouldn't we know?
    Mr. Valentino. We are not aware of any instances where 
that--where a drug shortage situation has been directly linked 
to our prime vendor program or exacerbated.
    Mr. Denham. Well, when you say you are not aware, what does 
that mean? Do you have a matrix in place that you can say we 
are a hundred percent compliant, we have never made any 
mistakes?
    Mr. Valentino. We monitor--I think we might be mixing some 
issues. In terms of service delivery to the veteran, we do 
monitor that. Four out of five prescriptions are mailed to our 
consolidated mail-out patient pharmacies. We have performance 
metrics for timeliness, right drug, various things. And we 
operate at above six sigma for the majority of those.
    That is one of the reasons why our customers surveyed by 
J.D. Power have given us such high ratings. So in terms of 
accuracy, we are extremely accurate. Do mistakes occur? Yes, 
they occur. But it is--six sigma is essentially less than four 
issues of nonconformance per million transactions. So we are 
extremely, extremely accurate. And I think it is not really 
related to the supply issue.
    Mr. Denham. What percentage of our pharmaceuticals are 
outside of McKesson?
    Mr. Valentino. Prior to September, a very, very small 
amount.
    Mr. Denham. Well, what is a small amount?
    Mr. Valentino. It--I do not have those exact figures. I 
would estimate less than one percent. Since that time, we have 
continued to order some non-contract drugs through McKesson 
using other procedures and other vendors, but it is still a 
very, very small amount. I would guess at this point in time 
that it is probably less than seven or eight percent that do 
not go through McKesson. That is a--that is just a guess. We 
can provide the Committee with detailed information if that 
would be desired.
    Mr. Denham. Thank you.
    I yield back.
    The Chairman. Mr. Reyes.
    Mr. Reyes. Thank you, Mr. Chairman.
    And I have to confess. I am still confused about a couple 
of things. One, so one agreement that this does not represent, 
what actually happens?
    The Chairman. Put the veteran and his doctor. If you just 
put veteran and doctor----
    Mr. Reyes. Okay.
    The Chairman. --and they order to VA. That is the drop 
ship.
    Mr. Reyes. Okay. So the way it is portrayed here, it is not 
accurate because it still goes through McKesson, right, on the 
chart here; is that correct?
    The Chairman. In the hand-drawn chart, it shows going--
where I asked the question in regards to a third party, you say 
that is incorrect?
    Mr. Reyes. That is incorrect in regards to how we process 
transactions with McKesson?
    Mr. Valentino. We would go directly from VA to McKesson and 
the arrow would come right back to us.
    Mr. Reyes. And so that statement down here in red says VA 
never sees the order, confirms the order, and, therefore, 
cannot say all veterans are safe and all drugs are TAA 
compliant. Is that inaccurate as well?
    Mr. Valentino. You know, I do not think I have enough 
information to really comment decisively, but it does not seem 
to be----
    Mr. Reyes. Accurate.
    Mr. Valentino. --an accurate statement.
    Mr. Reyes. Okay. But let me because I want to----
    Mr. Matkovsky. One thing to answer, though, you know, the 
person placing the order would be an ordering official who has 
an explicit delegation for that authority. The invoice would 
come in and it would be reconciled by a contracting officer's 
representative. So on both sides of the transaction, there are 
now controls.
    Mr. Reyes. And the reason I ask that question is because I 
may be the only Member of the Committee that has a VA account, 
diabetes as a result of Agent Orange. And there is a new 
medication that I have been on now for two months that I intend 
to go to the VA and see if it can be provided through the VA 
because right now it is fairly expensive.
    So my concern is I have from my private doctor this 
prescription. I can go to the VA and ask for that medication 
and it would go through McKesson which is the current 
contractor, right?
    Mr. Valentino. It would depend on the drug. If it is a drug 
that is not subject to a restricted distribution, then, yes, it 
would go through McKesson. We would order the product. It would 
be shipped to us and we would provide that in a finished 
prescription to you.
    Mr. Reyes. Okay. And my other question is, in 17 years, how 
many--McKesson has not been the only contractor for those 17 
years, correct?
    Mr. Valentino. Correct.
    Mr. Reyes. So how many have been, because they bid--what is 
the process? They bid every couple of years or something like 
that?
    Mr. Valentino. I will defer to Mr. Thomas, but the last 
contract was a contract for two years with three renewal 
options that VA could exercise. So a total of an eight-year 
contract. The ones prior to that were five-year contracts and 
there were actually two previous contracts.
    This goes back to a pilot that was done in the early 1990s 
and then it was successful. It was converted into a multi-award 
contract. There were several prime vendors. We solicited a 
single prime vendor for five years and then eight years. And 
then we are going to be into our new contract.
    Mr. Thomas may have some additional information.
    Mr. Thomas. Mike is correct. The last two contracts have 
been eight-year contracts totally, two original years and three 
two-year options.
    Mr. Reyes. So in the last 17 years, there have been three 
contractors?
    Mr. Thomas. To the best of my recollection, that is 
correct, yes.
    Mr. Reyes. And to the question that the Chairman asked 
about structured contracts, that is illegal under FAR, right, 
to take a contract, break it down so it is under $203,000 just 
to get around the issue? Isn't that illegal under FAR?
    I know it is illegal when you are bidding out construction 
and all these other things. I would imagine that it applies to 
this as well.
    Mr. Gould. Congressman, I would have to agree with you. It 
is a hypothetical. As we responded, we do not think it has 
happened. We do not see any evidence of that.
    But to respond to your specific question, would it be 
illegal, Jan, do you have a view?
    Mr. Frye. I think if someone intentionally set about to do 
that, it would probably be illegal. I would have to defer to 
counsel and we would certainly look at that if it came to our 
attention. As was stated earlier by, I think, Mr. Matkovsky, we 
have no indication that that has been done.
    Mr. Reyes. Yeah. But that is not on structured contracts, 
right, when you structure them to be under the ceiling so that 
you can----
    Mr. Frye. Well, again, if we did it with malice or 
forethought, if we did it to avoid some rule or regulation or 
law----
    Mr. Reyes. It would be illegal?
    Mr. Frye. --it would be looked at with a jaundiced eye. 
So--and, again, we have no indication that I know of at this 
point that that has happened.
    Mr. Reyes. Okay. Thank you, Mr. Chairman. I yield back.
    And thank you, gentlemen.
    The Chairman. Ms. Brown.
    Ms. Brown. Thank you, Mr. Chairman.
    Once again, I think I am a little confused as to what is 
the real problem here. But I want you all to clear a couple of 
things up.
    It seems as if this has been going on since 1998 which is 
about three or four administrations. And I am trying to figure 
out what is the problem, what are we trying to get to, because 
how many veterans do we serve per month, per year with 
prescriptions? And do we not require that the VA work along 
with the Department of Defense so we can get the best cost for 
the price of the drugs?
    Mr. Gould. Absolutely.
    Ms. Brown. I mean, you all do a good job with that and I 
want to thank you.
    Not like what we did when that pharmaceutical bill we 
passed that we demanded that the secretary do not negotiate the 
price of the drugs. You all negotiate the price of the drugs, 
if that is my understanding, you get the best cost for the 
veteran. In addition to that, you need to pay them timely and 
then they give a credit to the veteran. Clear that up for me.
    Mr. Gould. So, Ms. Brown, our most important duty here is 
the uninterrupted flow of medicine to our veterans. There is no 
government waste here. There has been no danger to veterans. 
There is no incident of harm.
    We have been moving toward our goal of zero unauthorized 
commitments. We are doing that. If I may quote the Chairman, 
there has been a sea change here. We have gone from 70,000 to 
under 450.
    The concern that we continue to have is that any 
unauthorized commitments is inappropriate and we are bound and 
determined to try to eliminate them.
    Ms. Brown. Can you explain unauthorized commitment because 
it seems as if we think unauthorized is improper? Did the 
physician not write the prescription? Explain to me this 
unauthorized because I am real confused about who should do 
that.
    Mr. Gould. The best one line description of an unauthorized 
commitment that I have heard is any purchase by an individual 
without proper authority or without following proper 
procedures. In no way does that get into the patient/doctor 
relationship which you are pointing out. That is untouched by 
this process.
    Ms. Brown. Unauthorized could be the drug that our 
colleague just mentioned and this is a drug that is not on the 
formulary. So, therefore, it is a procedure that they need to 
get reviewed before they could actually purchase that.
    Mr. Gould. I see your distinction. One is authorization to 
be on the formulary.
    Ms. Brown. Yes.
    Mr. Gould. The specific lack of authorization I was 
pointing to was not authorized to place an order with McKesson 
so they would have the training and the authorization to do 
that.
    Philip.
    Mr. Matkovsky. Ma'am, the PPV contract has access to 
pharmaceuticals that are on contract. These ordering officials 
that went from 2,000 down below 1,000 employees, and these are 
good staff who are working hard to try to follow the rules, 
when they order a medication that does not have a VA contract 
through the PPV, when they did that, that was the unauthorized 
commitment.
    It could be Cisplatin, a chemotherapy drug that is on our 
formulary. But because there was not a contract number there 
for them to appropriately order that and they lack the 
authority, they did not have warrant authority to commit the 
government. That is what made it unauthorized.
    Ms. Brown. Uh-huh. Okay. You were interrupted by one of my 
colleagues and you were trying to make a point. Can you finish 
that point, sir?
    Mr. Gould. Ma'am, thank you for that opportunity.
    I believe it had to do with the ratification process. And I 
think I subsequently got to explain that ratification is a 
cure, a legal process provided under the FAR and the VAR that 
we are scrupulously following. It involves three principal 
players within VA, general counsel, Office of Acquisitions, 
Logistics, and Construction, and our VHA team. And our goal and 
our efforts are to follow that process to the letter and come 
with a final determination.
    Ms. Brown. So in closing, because I have another meeting I 
have to go to, would you restate for the veteran that is 
listening that his prescription is safe, timely, cost effective 
for the veterans?
    Mr. Gould. Yes, ma'am. This is the largest direct health 
care system in America. We do 90 million patient visits a year. 
We do 200 million lab reports. We fill 137 million 
prescriptions. This is a system whose quality is second to 
none.
    This very, very tiny area, less than one percent of all the 
activity, we are spending all of our time focusing on the 
exception. And the number of exceptions is below 450 in a half 
million events a month.
    Our veterans should be confident that this is a system that 
is built to deliver quality to them. And this process can be 
better and it is getting better due to the leadership of this 
team.
    Ms. Brown. Well, thank you so very much for your service 
and may God continue to bless America.
    And I yield back the balance of my time.
    Mr. Gould. Thank you, ma'am.
    The Chairman. Thank you very much, Ms. Brown.
    Mr. Gould, has VHA in the past--I know there has been a sea 
change. We agree to that.
    Mr. Gould. Thank you, Mr. Chairman.
    The Chairman. Did VHA procure non-emergency covered drugs 
through the open market and agree to pay an unadjusted open 
market price instead of the federal ceiling price? Has that 
occurred?
    Mr. Valentino. If I understood your comment and your 
question, you are asking if we purchased a non-contract drug 
through the prime vendor?
    The Chairman. A non-emergency covered drug.
    Mr. Valentino. Okay.
    The Chairman. Non-emergency covered drug through the open 
market, like a noncompliant drug, and agree to pay an 
unadjusted open market price instead of the federal ceiling 
price.
    Mr. Valentino. We are aware that that has occurred. If you 
take a step back and ask why would somebody do that, there--it 
is very common for the manufacturer to want to sell you a whole 
case or a dozen of a product.
    And there are cases where we do not need a dozen. We need 
one. So there have been situations where ordering officers have 
ordered that single unit through the prime vendor at a price 
that could be higher than the contract price to avoid buying an 
extra 11 units that they do not need.
    So, yes, that is an issue. We--it is one of the things that 
we need to fix. We need to try to bring those drugs through the 
prime vendor distribution system or alternately have those made 
through a warranted contracting officer and try to negotiate 
with the manufacturer for smaller quantities.
    The Chairman. And the reason I ask the question is because 
I have got a memo basically that talks about that and says the 
Office of General Counsel has always been of the opinion that 
it is illegal to do that.
    So my colleague, Ms. Brown, and I, I think we are on the 
same side but something happened. Somebody all of a sudden 
figured out that prior to November of last year, something was 
not being done correctly and it has been changed.
    I am interested to know. You talked about reaching back to 
McKesson if they are, in fact, during your ratification process 
you find that, in fact, they were overpaid.
    If McKesson was, in fact, meeting the contract, are there 
not penalties in place for the employee that, in fact, may have 
made the error and other than a letter in the file? What 
happens then?
    Mr. Gould. Other than the suspension that we have already 
done, the retirement in lieu of discharge that has already 
occurred to hold people accountable. And there is a tiered 
process that we have for accountability.
    The Chairman. What level was the person that retired? What 
level person was that in the----
    Mr. Gould. He resigned.
    Mr. Matkovsky. It was an ordering official.
    Mr. Gould. Yeah.
    The Chairman. Okay.
    Mr. Matkovsky. Sir, the--it was stated earlier that this 
was somehow or another a rubber stamp process. I think it is 
very important to underscore that the person who is going 
through the ratification process, she herself is a warranted 
contracting officer and could lose her warrant if it is found 
that she is doing a perfunctory or otherwise pass-through 
process. So I do not think she is doing that.
    If the contracting officer identifies that a set of 
transactions, a transaction, a commitment cannot be ratified, 
the government can seek recompense from the employee. We have 
that within our authority. And we can use a mechanism of offset 
from their paycheck to enforce that recoupment. We have not 
found that yet. And, again, this is a warranted official who is 
going through this process.
    The Chairman. Okay. Thank you.
    Dr. Roe.
    Mr. Roe. I just have one big question that Mr. Reyes 
brought up. And are there or is there a circumstance, again so 
I understand this, where VA would go around McKesson to provide 
a drug that I have written a patient at the VA a prescription 
for, because the way I understood you saying that, that there 
is not?
    He asked that question and you said, no, this diabetic drug 
he has would go directly to McKesson. That would then go out.
    Are there circumstances where that would not occur in a 
non-emergent basis?
    I could understand an emergency where you have got to go 
out and get something if it is helpful or whatever it might be.
    Mr. Valentino. If a blue box that goes from VA to the--and 
it says unaffiliated, no contract company, so we have no 
relationship with them, we do believe that that has occurred a 
small number of times. And we are investigating that. But I 
would point out----
    Mr. Roe. The correct answer is, yes, it could happen?
    Mr. Valentino. Yes, it could happen. But there are very 
legitimate reasons for doing drop ship with companies we do 
have a relationship with. And that does occur.
    Mr. Roe. See, I think that was where my--I thought that 
could happen and I think I would be careful about making a 
statement that there is absolutely no incident of harm that 
occurred to the VA because you do not have the quality control 
when that occurs. You have great quality control measures in 
here and I like what is going on. Let me just say that.
    This has been a tremendous improvement over a year ago. It 
is unbelievable the amount of improvement you have made. But it 
would be hard to make a statement that Mr. Gould that you--
because when you do that, you do not know you should have those 
quality control measures. That is the point I was----
    Mr. Reyes. Dr. Roe, because I think what is pertinent here 
is that it is labeled down here under the blue box 
unaffiliated, no contract company.
    You just said that at times when you do have an established 
contract or affiliation with that company, that is when you 
think that might happen; is that correct?
    Mr. Valentino. I think everything is correct, but let me 
clarify. The FDA sometimes will say this drug has some issues, 
we want to control the distribution. We cannot get it through 
McKesson. So we place the order through McKesson. McKesson 
transmits that order to the manufacturer or the manufacturer's 
distributor. It comes back to us and then the payment goes 
through there.
    But we do believe that there--there have been some reports. 
We have not fully investigated them, we have not fully 
investigated them, where in March, ten times we may have 
ordered a non-contract drug through a third party and it was 
drop shipped to VA, but it came to us. It came to us. It did 
not go right to the patient.
    Mr. Reyes. To the veteran?
    Mr. Valentino. Right. So we had an opportunity to review 
what that product was.
    Now, not to muddy the waters too much, but I will also say 
that there are situations with medical surgical supplies where 
we have a formal contract with a vendor to drop ship adult 
diapers, catheters, those kinds of things directly to the 
patient. It is a formal contract we have with the manufacture--
with the distributor. We have agreed upon prices, agreed upon 
service delivery, but these are----
    Mr. Roe. That is a different issue.
    Mr. Valentino. These are med surge issues.
    Mr. Roe. That is a different issue.
    Mr. Valentino. Right.
    Mr. Roe. I yield back, Mr. Chairman.
    Mr. Reyes. Thank you, Dr. Roe.
    The Chairman. Mr. Walz.
    Mr. Walz. Thank you, Mr. Chairman.
    Just a quick follow-up. Again, I have said it a lot of 
times in here and I know all of you feel that this is a zero 
sum proposition with our veterans. Our goal is to try and get a 
hundred percent compliance.
    But you are telling me now, Mr. Gould, you are at 99.99991 
in terms of those 456 is where it is at.
    My question would be is, if I took this diagram and I 
crossed off VA and I put in my hospital out there and crossed 
out the hospital here, 40 percent of our drugs are coming from 
overseas manufacturers, is that correct, on this in the general 
population roughly?
    Do you know that, Mr. Valentino?
    Mr. Valentino. I do not.
    Mr. Walz. I think that is WHO's numbers, the World Health 
Organization's numbers or whatever. The chance of getting a 
drug this--by the way, that this is a concern and you talk 
about the ten. You were talking about the unaffiliated. That is 
happening in the private sector, right, as the norm?
    Mr. Valentino. Yeah. Sir, that is a good point. The, you 
know, the pharmaceutical market is a world market now. It is 
not a domestic market as it once was. These drugs are being 
manufactured all over the world, raw materials coming from 
everywhere, FDA approved manufacturing plants everywhere. This 
is a global pharmaceutical----
    Mr. Walz. Because I think this is a very important point we 
are bringing up and I think looking for and doing our oversight 
is absolutely appropriate of what we should be doing, asking 
you to come here and do that.
    But when I started to look and doing a little research in 
preparation for this, global drug procurement is a huge issue 
in developing nations, in developed nations on how you are 
reaching that and how those models are followed between the 
public and private sector of getting there.
    What I want to be very clear of is that, yes, the law is 
being followed, yes, we are doing those things, patient-
centered, safety, making sure that accountability to the 
taxpayers and all that.
    I also, though, want to be careful that we are not closing 
the door to potential avenues of making all those things more 
efficient if that potential lies there.
    Mr. Valentino. I personally believe--this is--I am not 
speaking on behalf of VA, but I personally believe that the 
Trade Agreements Act holds VA and other federal agencies to a 
significantly higher standard. The threshold is much higher for 
us to make sure that we have a----
    Mr. Walz. And does the data show that holding that to a 
higher standard improves patient safety would be the question I 
would ask?
    I think that the default position is, I think FDA and we 
should have control over those manufacturing facilities, but if 
they can be certified, if they can be policed accordingly or 
whatever, are we then cutting off our veterans from the ability 
to be able to get the drugs they need at a cheap rate?
    That is a broader question here, but I think that brings up 
the--I would yield back, Mr. Chairman, then the remainder of my 
time.
    The Chairman. Mr. Denham, do you have any questions?
    Mr. Denham. No.
    The Chairman. Mr. Reyes? Mr. Michaud?
    Mr. Reyes. Mr. Chairman, just one question.
    You stated that about seven percent of your drug purchases 
are not being done through McKesson or under PPV. Where are you 
purchasing the drugs from?
    Mr. Matkovsky. When we instituted the new restrictions, 
anything that was going to be north of micro purchase limit 
could not be purchased anymore by an ordering official. It was 
to be purchased by a warranted contracting officer.
    So we have examples where our field contracting officers 
are competing and awarding contracts to other than McKesson, 
sir. So--but it is a contract. It is a contract action. It is 
competed. It is let by a warranted contracting officer, et 
cetera.
    Mr. Reyes. And can you furnish us with the number of those 
kinds of contracts? Is it----
    Mr. Matkovsky. I think we volunteered that we would collect 
the data, yes, sir.
    Mr. Reyes. Okay. All right. That is it. Thank you, Mr. 
Chairman.
    The Chairman. Mr. Valentino, you said, I think, if my notes 
are correct, that VA used the inappropriate drop ship. I say 
illegal, but whatever, you know. It was used approximately ten 
times in March? Does that sound----
    Mr. Valentino. Yeah. We have had ten--when we look at the 
unauthorized commitments, we asked for a reason. And based on 
the data that we have from March, we have not fully 
investigated this, we believe the number is approximately ten 
give or take.
    The Chairman. If you know that, can you give me an idea of 
from like November 2011 to date? I mean, you talk about March. 
How about prior to March?
    Mr. Valentino. We--as each month progressed, we began to 
collect more and more specific information, so we could really 
drill down on the causes. I am not certain that we have been 
collecting those standardized reasons back to November.
    Initially it was a free text field that obviously requires 
a lot of work on our part to categorize those. So we can 
attempt to do that. We will do our best to collect that 
information.
    The Chairman. Is it correct to say then to the best of your 
knowledge, there was no work-around from the November time 
frame of 2011 to date, and that is what the diagram is kind of 
implying, that there was a way that you did not do it directly 
with McKesson, but you went to a third party back doored into 
McKesson, but to your knowledge, that did not occur----
    Mr. Valentino. To my knowledge----
    The Chairman. --except on limited occasions like the ten?
    Mr. Valentino. Yeah. And, I mean, there are--you know, I am 
guessing, but there are plausible reasons why that happened ten 
times.
    So, for example, prior to October, we essentially had one 
payment mechanism with McKesson, the payment card. On October 
1st, we established credit card accounts with McKesson so that 
we could order open market products. So it is not inconceivable 
that when somebody contacted the manufacturer for a drop ship 
order that they gave them the wrong account number.
    We have instituted read back procedures now so when we do 
give a number, we ask the vendor to please read that back to 
make sure that we have the right one.
    The Chairman. And that raises another question. When I 
asked one question, you talked about gave them the incorrect 
number. Could they have purposely given the incorrect number in 
order for that to occur?
    My question is, I do not know where there would be anything 
plausible since it is illegal where there would be a plausible 
reason that they--unless, as you said, it was an error. And I 
am again just trying to--but you all have been here and taken 
our questions and we appreciate that.
    I would ask if there are any other Members that have any 
questions that they may want to ask, any comments or statements 
since I was pretty quick to shut you down after going through 
testimony, but if you do have some questions. And, again, I 
think this Committee will all agree that from the November 2011 
time frame to date, you have been making great strides. We are 
trying to go backwards to figure out why it was done for so 
long, the way it was done.
    And Ms. Brown and I will have an opportunity to talk. You 
know, if there was a need for a change, all we would ask is let 
us have an opportunity to--if it is a statute, give us a chance 
to fix it so that you can better do your job.
    But I am still not convinced that prior to the time that 
you began to make these changes that something was not 
happening within the system that goes prior to the Obama 
administration to the Bush administration to the Clinton 
administration. So this is not political in any way. Just 
happens to be when we happened to figure it out.
    But with that, if you have any closing comments, Mr. Gould.
    Mr. Gould. Mr. Chairman, thank you for your questions here 
today.
    I know that on both sides of the aisle the spirit is taking 
care of our veterans and making sure that they get the services 
that they need.
    I particularly appreciate your recognition of the sea 
change. When this team brought forward the problem and took 
corrective action, we were hoping to see the kind of results 
that we have been able to produce for you here today and we are 
convinced that there is a new culture that is a part of VA.
    And I want to thank the front-line individuals who are 
making that happen each and every day. Thank you.
    The Chairman. And, Mr. Gingrich, one quick question. When 
could the Committee expect to see the results of the 
investigation that is ongoing now that we have been talking 
about for the last two hours?
    Mr. Gingrich. You are talking about the IG investigation, 
sir? It is supposed to----
    The Chairman. Your internal investigation into what 
happened prior to November 2011.
    Mr. Gingrich. Sir, the plan is to have the ratifications 
done in series and we will have the first come to you by July 
or in July.
    The Chairman. Okay. Thank you very much. Thank you.
    And what I would like to do is take about a five-minute 
break if we can and we will reconvene in five minutes.
    [Recess.]
    The Chairman. The Committee will reconvene. Thank you very 
much for allowing us a short break and thank you very much for 
sitting through the last couple of hours of questioning.
    The second panel we are going to hear from, Ms. Linda 
Halliday, the assistant inspector general for Audits and 
Evaluations at the Department of Veterans Affairs, Office of 
Inspector General. She is accompanied by Mr. Gary Abe, director 
of the Inspector General's Seattle Office of Audits and 
Evaluations who could very well be Secretary Shinseki's twin 
brother.
    We will also hear from Maureen Regan, counselor to the 
inspector general, and she is accompanied by Michael 
Grivnovics, close, director of the Federal Supply System 
Division in the IG's Office of Contract Review.
    Both of your complete statements will be entered into the 
record.
    And, Ms. Halliday, you are recognized for five minutes.

 STATEMENTS OF LINDA A. HALLIDAY, ASSISTANT INSPECTOR GENERAL 
 FOR AUDITS AND EVALUATIONS, OFFICE OF THE INSPECTOR GENERAL, 
 U.S. DEPARTMENT OF VETERANS AFFAIRS, ACCOMPANIED BY GARY ABE, 
 DIRECTOR, SEATTLE OFFICE OF AUDITS AND EVALUATIONS, OFFICE OF 
INSPECTOR GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS, MAUREEN 
REGAN, COUNSELOR TO THE INSPECTOR GENERAL, OFFICE OF INSPECTOR 
 GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS, ACCOMPANIED BY 
 MICHAEL GRIVNOVICS, DIRECTOR, FEDERAL SUPPLY SYSTEM DIVISION, 
 OFFICE OF CONTRACT REVIEW, OFFICE OF INSPECTOR GENERAL, U.S. 
                 DEPARTMENT OF VETERANS AFFAIRS

                 STATEMENT OF LINDA A. HALLIDAY

    Ms. Halliday. Chairman Miller and Members of the Committee, 
thank you for the opportunity to discuss the results of the 
recent OIG report addressing VA's pharmaceutical prime vendor 
fast pay system.
    Our work was done at the request of the Committee and the 
VA secretary. We reviewed the internal controls of the VA's 
fast pay system in support of provisions of the prime vendor 
contract. We focused on the ordering, receipt of 
pharmaceuticals, and payment activities.
    Our review assessed controls in pharmacy operations at four 
VA consolidated mail outpatient pharmacies and four VA medical 
centers along with the Financial Services Center and the 
National Acquisition Center and included a review of the 
invoices paid.
    Our review found VA was providing payments to the prime 
vendor within 48 hours of the prime vendor's shipment of an 
order. VA was paying an accurate amount for the actual goods 
received, processing payments to the prime vendor in accordance 
with laws, regulations, and the current terms of the prime 
vendor contract, and receiving reimbursement by other 
government agencies in a timely and accurate fashion.
    Controls over corrections of overpayments are critical 
under the fast pay system since corrections are identified and 
adjustments are made after payments are processed.
    The pharmacy benefits management's business practice is to 
review prices for pharmaceutical items purchased from the prime 
vendor each month beginning three months after the purchase. 
This process experienced delays as the National Acquisition 
Center contracting officer redirected his efforts to plan the 
future contract.
    The NAC contracting officer continued to provide the 
pharmacy benefits management price reviews to the prime vendor. 
However, he did not follow-up on the results.
    The total value of the potential pricing differences 
identified in the monthly reviews of the prime vendor purchases 
from December 2009 through April 2011 was approximately $46.4 
million.
    We want to emphasize and be very clear on this that these 
are pricing differences, not payment errors, and that pricing 
corrections occur for several reasons such as retroactive price 
adjustments, item count errors, and product returns.
    We determined that VA's controls did not reliably ensure 
timely resolution of the pricing differences. However, we also 
found that there was reasonable assurance that the pricing 
differences were resolved over time during McKesson's credit 
and re-billing process.
    We also assessed pharmacy ordering and receiving operations 
to address whether VA had established adequate controls by 
examining the ordering and receiving duties of pharmacy staff 
to ensure they were adequately segregated.
    We determined controls were not effective at three of the 
four VAMC pharmacies we visited. These sites did not segregate 
duties among staff to prevent any one individual from having 
the ability to both order and to receive non-controlled 
pharmacy supplies.
    Our report offered recommendations to ensure timely 
completion of price analysis, proper segregation of supply 
ordering and receiving duties, and adequate verification of 
supply receipts.
    The VA officials presented acceptable implementation plans 
to correct the weaknesses identified in our fast pay review.
    Mr. Chairman, Maureen Regan will now address open market 
purchases. This concludes my statement and we would be happy to 
answer any questions.

    [The statement of The Office of Inspector General appears 
in the Appendix]

                   STATEMENT OF MAUREEN REGAN

    Ms. Regan. Good afternoon. Thank you.
    The primary purpose of the current review that is being 
conducted by the Office of Contract Review is to quantify 
purchases identified as open market for fiscal year 2011. We 
used a database maintained by McKesson and VA to identify those 
purchases.
    To conduct a review, we identified purchases as open market 
when there was no underlying contract number listed in the 
appropriate database field. And what we found was a little bit 
surprising.
    Of the $4.3 billion in purchases through the prime vendor, 
we found that about $290 million were identified as open market 
in the database. Of that, $283 million represented 
pharmaceutical purchases. The other $7 million was medical 
surgical items.
    We reviewed all the purchases for 100 of the top selling 
pharmaceuticals identified as open market and these purchases 
represented about $108 million of the $283 million or 38 
percent. Of that, 43 of the items or 58 percent of the dollars 
in our sample were actually contract items. They had been 
misrepresented as open market in the database.
    And, we went back and looked at pricing and we found that 
they were sold at the contract price when pricing was not 
affected by allocations.
    We learned through this process that pricing and other 
adjustments are made continuously by the PPV to reflect price 
changes due to contract awards and modifications. Therefore, 
purchasing information cannot be quantified by simply reviewing 
data captured for a period of time. You have to look at data a 
long period of time because of the process of adjusting the 
dollars.
    We concluded that McKesson has done a good job of 
correcting pricing through credits and re-billing when the 
prime vendor system is updated by VA to reflect changes in 
contract pricing.
    But we also found that there are delays in updating the 
system and those are due in part to poor communication between 
Pharmacy Benefits Management and the National Acquisition 
Center's FSS and National Contract Divisions.
    In our sample, we identified nine items that were purchased 
open market. The products were actually on Federal Supply 
Schedule contracts, but they were purchased through the prime 
vendor by VA at open market prices.
    This happened because the manufacturer did not agree to 
sell their product through the prime vendor. So McKesson was 
not required to give the VA the prime vendor price. By 
purchasing through the prime vendor, VA overpaid $4.8 million 
for these items.
    This was of concern to us because we identified this 
problem through our post-award reviews back in 2007 and 
reported it to VA. We were told that the purchasing system was 
changed to block purchasers from buying these products through 
the prime vendor.
    However, when we reported the problem again in 2011, also 
through our post-award reviews, we learned that at VA's 
request, the system allows the purchaser to override the block.
    We also reviewed the accuracy of VA's reported .4 percent 
in open market sales through the prime vendor contract in 
December of 2011. We found that the procedures implemented in 
November 2011 did not preclude or prohibit open market 
purchasing. Instead open market purchases were shifted from the 
PPV contract, the prime vendor contract, to other financing 
accounts.
    We identified approximately $7 million purchased through 
the new open market purchasing system which represented about 
two percent of the total purchases by VA through McKesson, so 
the appropriate amount of open market purchases was about 2.4 
percent, not .4 percent as reported.
    Based on the review that we conducted of the open market 
purchases and our ongoing pre- and post-award audits of the 
federal supply schedule contracts, we know that open market 
purchasing through the prime vendor is impacted by several 
factors including items that are not on contract but are needed 
to provide care to our veterans, a growing number of product 
allocations and shortages which necessitate purchasing items 
open market at non-contract prices, and purchasing items 
through the prime vendor for convenience instead of buying 
direct from the manufacturers who do not participate in the 
program.
    We also know again through our pre and post award work that 
a growing number of generic drugs are not on contract. Unlike 
branded drugs, there is no requirement that manufacturers offer 
generics on FSS contracts.
    In addition, an increasing number of products are no longer 
manufactured in the United States or a designated country and, 
thus, cannot be offered on contract due to Trade Agreement Act 
requirements.
    We are currently reviewing open market purchases to 
determine whether the purchasers violated federal procurement 
laws and regulations including the Trade Agreements Act.
    This concludes our statement. We will be happy to answer 
any questions the Committee may have.

    [The statement of The Office of Inspector General appears 
in the Appendix]

    The Chairman. Thank you very much.
    If you would, and this may dovetail on what you just talked 
about, Ms. Regan, and, Ms. Halliday, I think you touched on 
this a little bit, but in VISN 8, evidence suggests, and this 
is a peninsular part of Florida, that they purchased Letrozol--
is that the right name, I assume it is, it is the generic name 
for Femara--on the open market even though there was a contract 
for the medication.
    And according to an email exchange that VA provided to us, 
they overpaid for the medication and violated their own 
directives and additionally it does not appear that Letrozol is 
Trade Act Agreement compliant. It apparently is manufactured in 
Macau, in China.
    And I would just like to know. Tell me what you know about 
this, if you know that specific instance, and is this an issue?
    Mr. Grivnovics. I do not know of the specific instance you 
are referencing, but in talking to people at the CMOPs and at 
some of the facilities that we had visited, they do 
occasionally get noncompliant TAA products delivered either to 
the CMOP or to the individual facility pharmacy.
    And the individuals that are there receiving and recording 
that information do check to see if those products are coming 
from a designated country. And if they find that they are not, 
they do send them back the PPV. Does this happen in all 
instances, I cannot say for sure, but they do check to make 
sure the products are compliant with TAA.
    The Chairman. So if there was a contract, if the drug was 
on contract and no open market, would it not be required to 
come from a TAA compliant country?
    Ms. Regan. Not knowing all the facts, were they buying the 
generic brand or were they buying the branded drug?
    The Chairman. They were buying the generic and I think that 
is where you just said the generic may not have to comply with 
that.
    Ms. Regan. With the generic itself, if the generic is on a 
federal supply schedule or national contract, it does have to 
comply with the Trade Agreements Act. But generic drugs are not 
required to be on contract. The branded drug can be on 
contract, but a lot of times your price difference is very 
significant between buying the branded drug which would be on 
contract and buying the generic product open market.
    We would be happy to look at the issue if you want.
    The Chairman. If you would. The drug is spelled L-E-T-R-O-
Z-O-L. That is the generic name. It appears that the brand name 
is Femara.
    Ms. Regan. Right.
    The Chairman. And maybe McKesson can answer this when they 
come up. But the evidence that I have is that there is a 
contract for the medication. And if that is the case, then it 
should be TAA compliant. Go ahead.
    Ms. Regan. If they were buying the drug that is on 
contract, in other words, the NDC number would have to be the 
branded drug that is on contract, not a generic brand, either 
manufactured by the same company or manufactured by another 
vendor.
    The Chairman. So you are telling us that a generic drug 
does not have to come from a TAA compliant country?
    Ms. Regan. If the generic drug is bought open market, there 
is no contract that requires TAA compliance by the 
manufacturer.
    The Chairman. Okay. I thought there was something we were 
talking about that there was a $203,000 level of purchase, not 
whether it was on contract or not.
    Ms. Regan. I would have to see the specifics of how this 
was purchased in order to answer your question.
    The Chairman. Thank you.
    Did your audit investigate payments made before delivery of 
the pharmaceuticals under the fast pay system?
    Ms. Halliday. Yes. We tested several transactions to look 
at the ordering and to look at the payments. Traditionally the 
fast pay system makes--payment within 48 hours.
    What we wanted to make sure was that there was 
reconciliation between what was being received and the order so 
that we did not have any problems or disconnects there and then 
that would put VA in a situation of paying for something they 
had not received.
    The Chairman. Mr. Reyes.
    Mr. Reyes. Thank you, Mr. Chairman.
    In your report, you state that one medical facility 
pharmacy purchased $29.1 million of non-controlled substances 
from the PPV in 2011, yet the pharmacy staff did not inventory 
PPV shipments of non-controlled pharmaceutical supplies with 
the invoices.
    So a couple of questions. What is your observation about 
this issue and can you please provide us some examples of what 
are non-controlled supplies versus controlled pharmaceutical 
supplies?
    Ms. Halliday. We considered that a significant weakness at 
that medical center and that is the exact scenario that I just 
described that could put VA in the position of paying an 
invoice, yet possibly not receiving the goods.
    There has to be that reconciliation that you know you have 
received what you are paying for. It is more critical in the 
fast pay system because the payments are made upon shipment of 
goods.
    Now, adjustments are made. It takes a little time, but we 
also followed that process and found that the adjustments were 
happening when there was an item count difference like I 
referenced in my statement.
    So I think that there was generally a good control at most 
places, but the sites that we went to, there was the one site 
at the VAMC in Dallas that they said they were spot checking, 
but we could not find evidence of that when we were on site.
    Mr. Reyes. And the other question I have involves the 
limits that the Chairman just mentioned about $203,000. In your 
investigation, were there any what is commonly referred to as 
structured contracting which means they would break it down 
just so it would be under the in this case $203,000 limit? Was 
there any instance or any evidence of that?
    Ms. Regan. We have not seen any evidence of that yet, but 
the review is still ongoing. So we could see some as we 
continue to go through the data, but we have not seen that yet.
    Mr. Reyes. Okay. All right. Thank you, Mr. Chairman. I 
yield back.
    The Chairman. Mr. Michaud.
    Mr. Michaud. Thank you, Mr. Chairman.
    Dealing with the Trade Act adjustment, have you looked at, 
and it is my understanding that $203,000 is the limit, have you 
been able to look at the drugs below that purchase amount that 
has been purchased from overseas, whether it is China, India, 
and what type of drugs those are?
    Ms. Regan. That is one of the issues that we are still 
looking at to see if we can quantify that. What we do know from 
our pre- and post-award work is that drugs from non-designated 
countries is a huge issue. There are some drugs that you cannot 
buy on contract because they are not manufactured in the U.S. 
or a designated country. And so that is a problem.
    But we have even had a couple of voluntary disclosures from 
companies with contracts that mixed up TAA compliants and non-
compliant products. One of them had some product made in this 
country and some made overseas and they sent the wrong one. The 
Trade Agreements Act only applies to the Federal Government 
purchases. But there are a lot of drugs that are just not 
manufactured here anymore.
    Mr. Michaud. Now, have you also looked at, I know there has 
been some discussion that you can buy them overseas as long as 
they are FDA approved, have you looked at the process whether 
FDA is actually doing the appropriate approval in those 
particular areas?
    Ms. Regan. The issue is whether or not they are 
manufactured in FDA approved plants. And that is an FDA issue. 
Our contracts have a clause that require FDA compliance not 
just where they are manufactured but also for improper 
marketing, kickbacks, things like that in the pharmaceutical 
industry.
    I know we have worked with the Department of Justice on two 
cases in which products were sold to us that were made in 
plants that had not been certified or had been decertified. One 
of them was actually a plant in Puerto Rico, the Sidra case. 
And there is another case being settled now by the Department 
of Justice.
    So we work with them to make sure that VA's interests get 
protected. But we do not have any authority to go out and look 
at the plants or anything else.
    Mr. Michaud. Because that would be my second concern is 
whether or not a plant is supposedly an FDA approved 
manufacturing plant when, in essence, it is not complying with 
the laws.
    In your opening remarks, you talked about on the open 
market sales through PPV that it is at 2.4 percent. The VA said 
it was, I believe, four percent as VA reported.
    Why the discrepancy?
    Mr. Grivnovics. The open market purchases that went through 
the PPV contract are 0.4 percent, but we found that the 
facilities can still also buy from McKesson through a different 
account. I will just call it an open market charge account, 
let's say. So facilities can still go that route and it is not 
through the PPV contract anymore. So that is that two percent 
that we referred to.
    Mr. Michaud. Okay. Great. Thank you, Mr. Chairman.
    The Chairman. Mr. Walz.
    Mr. Walz. Well, thank you, Chairman.
    And, again, thank you all for being here. In full 
disclosure, I am a big fan of the IG, so I never make any bones 
about that.
    Ms. Halliday, in listening to Deputy Secretary Gould's 
assessment, and I know it is a subjective term, that there has 
been a sea change since last year, does your work reflect that 
would you say?
    Ms. Halliday. We looked at the fiscal year 2011 
transactions and we could start to see what we thought were 
improvements, especially tightening up controls in the 
contracting piece. I think that significant deficiencies 
existed over time. The ordering officials and the reviews by 
supervisory contracting officers that had been very weak, we 
see attention to that now.
    Mr. Walz. And does your analysis then show is there any 
correlation in doing that with either a decreased amount of 
service to veterans or an increase in their service or----
    Ms. Halliday. I could not comment to that.
    Mr. Walz. --is that hard to--that is hard to say?
    Ms. Halliday. Yes.
    Mr. Walz. Because I am still getting my mind wrapped around 
if use of PPV, if it is helping the veterans and at the long 
run, obviously that caused part of it.
    Did you see, and I listened, you know, your detailed 
description, the PPV program, is it fraught with fraud, waste, 
and abuse or is it simply could have been managed better?
    Ms. Halliday. Well, when we looked at the fast pay 
procedures, we found it to be a good system. You are processing 
millions of transactions and there were controls over these 
transactions and the payment. There seemed to be a conscious 
effort to try and reconcile the payments with the actual 
invoices.
    Mr. Walz. And that is to be a good partner with our private 
sector suppliers, correct, and make sure that they are not 
waiting?
    This was always a big problem I had on small contracts. 
Nobody wanted to mow the yard at the armory because they were 
not sure they would get paid or that type of thing.
    Ms. Regan. One thing about the prime vendor contract, and I 
know I am dating myself here, but back in the early 1990s, we 
bought direct from the manufacturers. We did not use a prime 
vendor and we had a large depot system. When the Federal 
Acquisition Streamlining Act and the Federal Acquisition Reform 
Act were passed in the mid 1990s, all that had to go away.
    I know from our pre and post awards at that point in time, 
we were actually paying a little more for the product because 
the manufacturers and commercial customers go through a prime 
vendor, a distributor. So McKesson does not just have the VA. 
They have a lot of other hospitals in the private sector.
    Mr. Walz. Walmart, correct?
    Ms. Regan. Yes. A lot of your hospital systems used a prime 
vendor before VA did. And, actually, it is a negative fee that 
the VA gets for using the prime vendor.
    Mr. Walz. I found this kind of interesting, Mr. Chairman. I 
have to say I was noticing again the title of this hearing. The 
through the looking glass part I am getting at is we are kind 
of arguing against using private sector for reduction of costs 
which might be my through the looking glass.
    But that aside, two last questions. Ms. Regan, you 
mentioned something that was--it sounded somewhat troubling to 
me and it was in your testimony. The VA was able to override 
the block they had and shift from the PPV to other areas.
    What did that mean exactly or what was happening there?
    Ms. Regan. Manufacturers are not required to sell through 
the prime vendor. They have to actually have an agreement with 
McKesson. To get into detail, it is a charge back issue. If 
McKesson pays $100 for the drug and our price is $80, there is 
a charge back system that they would get back the $20.
    So there has to be an agreement with the manufacturer of 
the product and the prime vendor. And there are some 
manufacturers who have not agreed to do that. So VA is supposed 
to order directly from the manufacturer to buy these products. 
These are usually branded drugs which means prices are capped 
at the Federal Ceiling Price. We are not supposed to pay more 
than the contract price.
    When it is purchased not from the manufacturer in those 
cases but through McKesson, we do not get and we do not have 
any right to get the contract price. We have done a couple 
reviews where we paid a lot more than the contract price. In 
fact, in this one, I think it was about $9 million in sales of 
which 4.8 of that was overpriced. That is significant----
    Mr. Walz. Yeah.
    Ms. Regan. --even though it is a few products. When we 
recognized it in 2007, we talked to VA about it and they told 
us they blocked it so that when a purchaser went in the system, 
they could not buy it. We found in 2011 when we did other work 
that the purchases were not blocked.
    And so I worked with the IPT for the new contract and the 
issue came up. And that is where I found out that, the block is 
there, but they can just override it.
    Mr. Walz. Now, that is an important oversight piece. And I 
am going to ask you this and I ask from your experience on 
this. Just ask you to be candid on this.
    Has McKesson been good actors in this for you? I mean, you 
have got a private sector company trying to do what they should 
do, make profit.
    Ms. Regan. I think as we said, we thought McKesson has done 
a really good job. This is really complicated especially with 
contract pricing changing every couple days. I mean, the new 
prices for branded drugs go into effect in January. With 
modifications, additions, subtractions, the prices on other 
drugs are changing all the time. And as we looked over the 
issues over time, we found we were paying the contract price. 
So we did not find any problems with McKesson.
    Mr. Walz. So if there were overpayments, it was not the 
case of McKesson or a private entity overcharging on purpose? 
They were following the rules, following the----
    Ms. Regan. Right.
    Mr. Walz. --procedures that were in place?
    Ms. Regan. I would say what we found was VA overpaid 
because they did not order correctly. But as far as McKesson, 
the prices that they charged the VA were comparable to the 
contract prices. The other problem you get into is with 
allocation and shortages where we do not get the contract price 
sometimes.
    Mr. Walz. Right.
    Before I yield back, Mr. Chairman, I know this is not your 
area, but maybe you can influence the look at this. I keep 
coming back to this Trade Agreements Act with the very changing 
dynamics of global pharmaceuticals. And I think in the future, 
that is going to be even a bigger issue. And if this Committee 
can drive some of that talk, it would be great.
    But I yield back.
    The Chairman. Thank you very much.
    Members, any other questions?
    I apologize for shortening our question period, but we are 
about to back up against a vote and I would like to get the 
next panel before us for their testimony and their questions.
    So thank you very much for your work and your testimony 
this morning. You are excused.
    Ms. Halliday. Thank you.
    The Chairman. And as the second panel leaves the table, I 
invite the third to come on forward. And on this panel, we will 
hear from Mr. Paul Flach. He is the vice president of Health 
Systems National Accounts for McKesson Corporation.
    Mr. Flach, you have heard me say this already. Your 
complete written statement will be made part of the official 
hearing record. Thank you for being here with us today and you 
are recognized for five minutes.

                    STATEMENT OF PAUL FLACH

    Mr. Flach. Thank you, Mr. Chairman.
    Good afternoon, Mr. Chairman and Members of the Committee. 
My name is Paul Flach, as the Chairman had stated, and I am 
vice president of McKesson Health Systems National Accounts for 
McKesson Corporation.
    On behalf of McKesson, the company committed to our veteran 
employees and to the contract we have with the VA, I would like 
to acknowledge and thank the Committee and the Department of 
Veterans Affairs for all that you do for America's veterans 
every day.
    Mr. Chairman, as you know, McKesson provided testimony on 
the pharmaceutical prime vendor contract before this Committee 
earlier this year. We understand your oversight responsibility 
for the Department of Veterans Affairs and particularly as it 
relates to the PPV contract.
    We recognize the importance of this contract to the VA's 
health care system and ultimately to America's veterans.
    I am here today to provide the Committee with some 
additional information about the PPV contract as well to answer 
to your questions.
    As our PPV contract requires, McKesson provides thousands 
of products to the VA at prices set under federal supply 
contracts which the VA has secured through direct negotiation 
with pharmaceutical manufacturers.
    In April of 2012, the VA purchased through the prime vendor 
contract 99.83 percent of its products under the VA negotiated 
contract with manufacturers.
    There are circumstances, however, when contracted 
pharmaceuticals are in short supply or other critical medicines 
are needed to treat patients.
    Purchase of pharmaceuticals that are not on contract are 
frequently referred to as open market purchases. Stated simply, 
open market purchases are for products which are not subject to 
a contract price negotiated by the VA with the manufacturer.
    We would like to emphasize that all pharmaceutical products 
purchased by the VA from McKesson whether under VA contract or 
an open market item have the required FDA approvals.
    Purchases of open market products are a standard practice 
in the private sector. In the private sector, for instance, 30 
to 40 percent of the purchases made by hospitals and 
institutional customers are for open market products.
    Since November when the VA asked for our assistance, we 
have been working closely with them to restrict open market 
purchases under the PPV contract.
    As a result of these efforts and other steps taken by the 
VA, open market purchases under the PPV contract have 
dramatically declined from less than five percent previously to 
less than 2.1 percent in November 2011 and to .17 percent in 
April of 2012.
    In collaboration with the VA last fall, we modified our on-
line electronic ordering systems. Open market items can no 
longer be viewed on the ordering screen by those who are 
placing an order under the PPV contract. McKesson was given 48 
hours to make this change and we met the VA's deadline.
    McKesson is preparing for the new PPV contract that will go 
into effect in August. We will be enhancing our technology 
beyond what is required to meet the VA's intention to restrict 
open market purchases.
    Our systems are complex and must be able to process over a 
million line items on a daily basis. Therefore, we are making 
these enhancements judiciously because the VA relies on the 
timely delivery of the medications and orders to provide 
medical care for our Nation's veterans.
    As part of developing technology enhancement, we are 
building a restrict and notify component with plans for this 
functionality to be available later this fall. If the VA 
attempts to order a pharmaceutical product from our 
distribution centers, it will result in an open market purchase 
under the PPV contract. Our system will automatically remove 
the item from the order and send a corresponding notification 
back to the VA.
    This notice will alert the VA that we are not delivering 
the specified pharmaceutical product and enable it to identify 
alternatives to meet the patient's need on a timely basis.
    Mr. Chairman, in April, McKesson was selected by the VA to 
continue as the pharmaceutical prime vendor. The VA conducted a 
rigorous competition for this contract award and we are honored 
to be selected again as the PPV and are committed to continuing 
to deliver outstanding value and service to the VA and our 
veterans.
    On behalf of McKesson, I want to thank the VA for the trust 
they continue to place in our performance, our people, and our 
company. McKesson is very proud of our unique ability to 
improve the delivery, cost efficiencies, and quality of care 
for our Nation's veterans. America's veterans deserve the best 
health care and McKesson is committed to a partnership that 
continually enhances the VA's ability to provide critical 
services to the veterans they serve.
    Mr. Chairman, thank you for the opportunity to appear here 
today. I am happy to answer your questions.

    [The statement of Paul Flach appears in the Appendix]

    The Chairman. Thank you very much, Mr. Flach.
    If you would, we have heard from a couple of panels that 
there are ways that VA employees can purchase a pharmaceutical 
off contract, and what I would like to get from you is, if you 
would, are you aware of the methods that they may be using and 
can you explain your understanding of the methods that they may 
use?
    Mr. Flach. Mr. Chairman, by purchasing off contract, you 
mean off the PPV contract, purchasing open market product?
    The Chairman. Yes.
    Mr. Flach. Open market product, as I mentioned, in 
November, we put in a block that restricted the ability for the 
VA facilities to be able to view any open market product on the 
ordering system of McKesson. That would not allow them to place 
any orders directly into the system.
    However, there are instances, such as the scanning of the 
shelf, where like Walmart, Costco, they use these hand-held 
order entry devices to scan to order product. They scan the bar 
code label on the shelf and if one of those items happens to be 
an open market product and they import that into our ordering 
system, that item will go into that purchase order to be 
ordered.
    Now, we have informed the VA that we had this issue and 
that, there were ways that the facility could identify those 
items and delete them from the order.
    When we put this enhancement in place in the late fall with 
the new contract, that component will not be there anymore. 
That will go away because if they do scan that item and it does 
go into the system, it will be eliminated from the order and we 
will notify the facility that that has taken place.
    The Chairman. The question would be, do you think it was 
done unintentionally, was it done intentionally by the employee 
in order to get the item ordered?
    I mean, we have all seen where people take a bar code and 
tape it to something and then they just zip, zip, zip. You see 
it as you go through a home building store.
    And my question is, why would an employee want to do that?
    Mr. Flach. Mr. Chairman, I really cannot speak to whether 
or not they are doing it intentionally or not. I mean, the fact 
of the matter is the shelf label may have the bar code there 
that indicates it is a non-contract product. And when they scan 
it, it ultimately is imported into the ordering system.
    The Chairman. So you do not believe that a VA employee is 
attempting to do a work-around after the November 2011 time 
frame in order to keep being able to buy that open market 
product?
    Mr. Flach. I would not believe that they would do it 
intentionally. I think it would probably be inadvertent, that 
it was done when they scanned the shelf.
    I will say, though, also that when they do that scan, they 
have the ability at that point to eliminate that item off the 
hand-held unit as well as eliminate the item from the order 
when it gets transmitted into the system.
    So the capability does exist to remove the item from the 
order before they transmit to McKesson.
    The Chairman. Can you talk about the differences that you 
have seen recently within VA in their ordering process?
    Mr. Flach. As I mentioned, dramatically the number of 
orders and the dollars have gone down from November 2011 to 
almost nothing in the month of March or April. It was like 
$600,000. Understanding that as the Committee strives to get 
this number to zero, the drop has been dramatic. I mean, the 
open market purchases have decreased on a substantial basis.
    The Chairman. Mr. Reyes.
    Mr. Reyes. Thank you, Mr. Chairman.
    And as a veteran with a VA account, I want to thank you for 
the diligence that McKesson has in providing drugs to the VA 
for our veterans.
    But I want to ask is there a circumstance where VA would 
purchase from you but not under the PPV contract?
    Mr. Flach. Yes. There are other ways to order from McKesson 
besides the PPV account.
    Mr. Reyes. Can you explain some of those?
    Mr. Flach. When we were approached in October or back in 
2011, we were informed that in October the open market 
purchases were no longer going to be allowed on the PPV 
contract.
    At that point in time, there was no other vehicle for which 
the VA could order through McKesson because it was only that 
prime vendor account that was in place.
    So we, working with the VA, put together a credit card 
account that would allow them to purchase within the micro 
threshold of $3,000. So they could, in fact, order open market 
product under that credit card that would not then go under the 
PPV account.
    Mr. Reyes. And it is also my understanding that the 
discount under the new contract is 8.65 percent which is up 
from the previous 5.15.
    Can you tell us or explain to the Committee how you arrive 
at this percentage and can you explain to us how the discount 
works?
    Mr. Flach. How the discount basically works is you get 8.65 
percent off of any product that is purchased or any item 
purchased through the prime vendor program.
    As far as the details on how that price is derived, I would 
have to default to our accounting folks on that piece because 
it is a very convoluted and complex process how they come up 
with that pricing. So I am not sure if the Committee wants to 
get into all that today.
    Mr. Reyes. Okay. I will yield back, Mr. Chairman.
    Thank you very much.
    Mr. Flach. Thank you.
    The Chairman. Mr. Michaud.
    Mr. Michaud. Thank you, Mr. Chairman.
    Thank you very much for coming today.
    You mentioned the open market has dropped dramatically 
since November from the VA.
    Are you concerned of where the VA might be getting open 
market products from or----
    Mr. Flach. Obviously when they purchase the open market 
product, according to the regulations as I understand it, they 
have to have fair and open competition. They have to go to 
other companies to get pricing in my understanding.
    We may win, we may lose on the price. I mean, obviously we 
would like to keep that business. But if through their process 
it goes to another company, then that is the nature of the game 
unfortunately.
    Mr. Michaud. Uh-huh. You heard a lot of discussion this 
morning about the Trade Act Agreement and what the VA might be 
purchasing from overseas and not McKesson as a whole.
    I know that the VA has to comply with the Trade Act. But 
for your total products that you provide for whether it is 
hospitals or what have you, how much of it is--do you do 
analysis if it is Trade Act compliant even though you do not 
have to or is a lot of it coming from overseas?
    Mr. Flach. Sir, we only buy from FDA approved suppliers. 
Now, you have the restriction within the VA of the TAA 
compliance component. And we have always been under the 
impression that the TAA compliance for this contract was at the 
discretion of the VA.
    Now, as you have heard testimony on the next contract, 
McKesson is going to be responsible for the TAA compliance in 
that new category that they have designed called WAC price 
generics.
    At that point, we will be compliant. We will have to be 
compliant to TAA. The only way we can be compliant with TAA on 
those products is we have to go to the supplier for them to 
tell us if they are compliant to the TAA. There is no other way 
for us to know that information.
    Mr. Michaud. Uh-huh. But for your other customers other 
than the VA, do you know if they are, even though they do not 
have to be, do you know if they are TAA compliant?
    Mr. Flach. It is my understanding that the majority, if not 
all the commercial customers that we do business with, do not 
take into account the TAA compliance.
    Mr. Michaud. Okay.
    Mr. Flach. They could buy from whatever country that it is 
manufactured in.
    Mr. Michaud. Okay. Now, you mentioned you would have to go 
to the supplier manufacturer to find out whether or not they 
are FDA approved.
    How would you know if they really are? I mean, if they tell 
you they are, but they are really not, I mean, how would you 
really check that out?
    Mr. Flach. Our agreement with any supplier that we do 
business with requires that they are the FDA approved supplier. 
It has to be verified by that supplier that the FDA has, in 
fact, approved them.
    My assumption, and I cannot speak for the purchasing folks, 
but my assumption would be that if we find out that they are 
not, we would no longer do business with that company.
    Mr. Michaud. Okay. And in your contract with those 
particular companies, if on day one they might be FDA approved, 
but 30 days into the process they are not for whatever reason, 
what would happen with your contracts with that particular 
company?
    Mr. Flach. It would be my understanding that we would, and, 
again, I would have to defer to the processes in place for our 
purchasing department, but it would be my understanding that we 
would stop business with that customer, that supplier.
    Mr. Michaud. But how would you know unless they told you 
and if they were going to deceive you in the first place, what 
makes you think that they will let you know that they are no 
longer FDA compliant?
    Mr. Flach. I am sure somehow along the way it will come to 
light and we would address it. I mean, we would have to go by 
what they tell us or if someone else, a customer, whoever it 
may be, would find out that they are no longer FDA compliant or 
the FDA notifies us that they are not compliant, we would then 
cease and desist business with that customer, that supplier.
    Mr. Michaud. Thank you very much.
    Thank you very much, Mr. Chairman.
    The Chairman. Mr. Flach, a great deal of attention was paid 
to a drawing whose artist will remain unnamed this morning, but 
basically it was showing possibly where a doctor would 
prescribe a drug, VA would go to a third party, and I can get 
the artist to sign that for you if you would like.
    Mr. Flach. I will have it framed later.
    The Chairman. It would go to a third party and that third 
party then would order from McKesson. McKesson would drop ship 
it then to the veteran.
    Are you aware of this ever occurring?
    Mr. Flach. Yes. In the commercial world, this is common 
practice.
    The Chairman. I am just talking about within VA.
    Mr. Flach. In the VA, yes. I mean, as Mike Valentino 
addressed, there are situations where there are products that 
we cannot handle. The supplier has specifically stated that it 
is a specialty product that has to go through the supplier. It 
cannot go through McKesson as the prime vendor.
    It may require special handling such as vaccines that the 
supplier does not want to go through the wholesaler or it may 
be manufacturer control problems where the supplier says, look, 
I do not want to put it in the wholesale channel because what 
is going to end up happening is you are going to have a 
hoarding of that product, so I want to control the supply 
chain. So it has to be purchased direct.
    Those situations occur all the time and I am sure that they 
have occurred with the VA.
    The Chairman. But why wouldn't VA deal directly with 
McKesson, McKesson go to the third party and backwards? Why 
would the VA go around to the other supplier? If you are the 
PPV, why would they go to somebody else and then the billing 
come through drop shipping and billing through you?
    Mr. Flach. My understanding, and correct me if I am wrong, 
Mr. Chairman, but the third party in my mind is the supplier. 
When a drop ship is ordered, the customer can either call the 
supplier directly and place the order and have the order 
shipped to them and then the supplier can either bill the 
facility directly or they can do what we call a drop ship bill 
through where they would drop ship the product to the customer 
and then they would bill through McKesson.
    The other situation occurs where the VA facility can call 
McKesson. We have a dedicated VA service department, all they 
handle is the VA. The VA could call the VA service department. 
They would say I want to order these products. Here is my 
account number. We would then call the supplier on behalf of 
the VA and place the order with the supplier. Then the same 
situation occurs. The supplier then ships the product directly 
to the VA without having to go through another party which is 
McKesson and then bill through us.
    The Chairman. It seems to me as the PPV, that is the way 
you would want it to occur so you have pretty much control over 
what goes on instead of you being left out of the original 
ordering of the product.
    Mr. Flach. I am sorry. I missed----
    The Chairman. Well, you said there are two options.
    Mr. Flach. Yes.
    The Chairman. One, they can go to McKesson.
    Mr. Flach. Yes.
    The Chairman. McKesson can make the request of the 
manufacturer or VA can go straight to the manufacturer.
    Mr. Flach. Correct.
    The Chairman. Why wouldn't they just go to the PPV? Why 
wouldn't they go to McKesson? Why would they go around you?
    Mr. Flach. There are instances when they may not want to 
bill through McKesson. Now----
    The Chairman. But can you think of a reason why they 
wouldn't want to go through the people who hold the largest 
contract in the VA?
    Mr. Flach. One of the things they do have at their 
discretion is there are some items that are on our ordering 
screen that are drop ship only like the Baxter IVs, that they 
can order those directly on the system and it goes directly to 
Baxter electronically.
    So that can be done in that manner. Now, under the new 
agreement, all the drop ship orders, it is my understanding, 
are to go through McKesson. They want them to be called into 
McKesson.
    Now, when that happens, what that does is that gives us the 
ability to ask the customer or verify that the item you are 
buying is, in fact, on contract. And if it is on contract, we 
are going to use your prime vendor contract account. If it is 
not on contract, it is open market, then we are going to use 
your open market account. So we can help eliminate more of this 
open market issue.
    The Chairman. Mr. Reyes, any questions?
    Thank you very much. We have six minutes to get to the 
floor for our vote. Thank you, McKesson.
    Mr. Flach. Thank you, Mr. Chairman.
    The Chairman. And I apologize for not swearing you in by 
the way. I do not want VA to think we singled them out. I 
actually should have done the second and third panel.
    But I appreciate everybody coming today for this second leg 
in this PPV issue.
    All Members will have five legislative days for which to 
revise and extend and add any extraneous material. And without 
objection, so ordered.
    And this hearing is adjourned.

    [Whereupon, at 1:25 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.
    Before we begin, I would like to note today's important place in 
world history as the anniversary of the Allied invasion of Normandy, 
better known as D-Day.
    Nearly 160,000 troops bravely fought for- and obtained- a foothold 
in Europe that would prove pivotal to our victory.
    Many of those troops gave the ultimate sacrifice, and to the 
veterans who took part, including those no longer with us, we say thank 
you.
    This Committee will always remember your efforts and work to ensure 
we fulfill our obligation to you and all veterans.
    I want to welcome everyone to today's hearing titled ``Through the 
Looking Glass: Return to PPV.''
    We are returning to our examination of VA's Pharmaceutical Prime 
Vendor (PPV) contract after a hearing this Committee held in February.
    The PPV contract is the largest contract at VA, valued around $4 
billion.
    When executed correctly, the ``just-in-time'' delivery system of 
the PPV contract ensures pharmaceuticals are delivered to VA's medical 
facilities in a timely fashion and at a competitive price.
    As the February hearing revealed, an important aspect of the PPV 
contract was not executed correctly for a long period of time.
    A subsequent information request to VA, spurred by a subpoena 
authorized by this Committee, confirmed this.
    When a needed pharmaceutical is either not available due to a 
supply shortage, or not available through the PPV, federal acquisition 
regulations outline a clear path toward acquiring the pharmaceutical 
through an open market purchase.
    The open market process provides protection through due diligence, 
competition, and a contract.
    The actions of purchasing officials at VA wilfully ignored these 
protections and were, in fact, illegal.
    In February, the illegal purchases were described as the routine 
way of doing business, and according to the testimony we heard, no one 
within VA was held accountable.
    Now that VA has had even more time to consider the actions of its 
employees, it is my hope that the illegal purchases are no longer 
occurring and that the many employees involved in this throughout VA 
have been held accountable.
    The problem is neither of those outcomes has been achieved.
    While VA may boast about a reduction in unauthorized purchases of 
pharmaceuticals, this hearing will reveal that they still occur despite 
new training and policies throughout the entire department.
    VA also identified employees who made unauthorized commitments and 
the disciplinary course of action was letters of counseling ``where 
appropriate.''
    Not much of a disciplinary action, given the egregious violations 
identified.
    As VA will point out, there are ways outlined in federal 
acquisition regulation to review and ``ratify'' unauthorized 
commitments.
    The guidelines for ratification are clear, and I caution against 
oversimplifying and misusing the ratification process as a way of 
dismissing the hundreds of thousands of unauthorized commitments made 
by VA employees.
    I am further disappointed to know that there was strong pushback 
from many within the department in implementing new procedures intended 
to minimize the illegal purchasing of pharmaceuticals.
    The illegal purchasing does not help veterans; it is another 
example of VA wishing to take the easy route instead of doing what is 
right and required as outlined in law, regulation, and VA policy.
    Despite VA's new policies and procedures and occasional counseling 
letters, I remain concerned that there will be employees who continue 
trying to find some workaround, and that supervisors will not hold 
these employees or themselves accountable for their actions.
    The precedent of not holding anyone accountable is a bad one to 
follow.
    The fact is, VA knew they were heading down a slippery slope with 
regards to pharmaceutical purchases back in the 1990s, yet minimal 
effort was made to address this until this Committee put its oversight 
spotlight on it, over a decade later.
    Many of those that did try to call attention to the problems were 
dismissed by their peers and even their supervisors for trying to do 
the right thing.
    We already know the problems exist- what we need to know now is not 
only the detailed actions VA is taking to fix them, but also how it 
will prevent these same problems in the future.
    It is my hope going forward that when VA identifies problems such 
as this, it is forthcoming with Congress about them, and we work 
together to fix them.
    Receiving VA's testimony less than 24 hours before this hearing, 
however, does not help in that effort.
    With that, I now yield to the gentlelady from Florida, Ms. Brown.

                                 
               Prepared Statement of Hon. Corrine Brown, 
                    Acting Ranking Democratic Member
    Thank you, Mr. Chairman, for holding this hearing.
    Today we are going to examine what steps the Department of 
Veterans' Affairs has taken to correct problems identified in the 
Pharmaceutical Prime Vendor (PPV) contract since the Committee's 
February 1, 2012 hearing. The hearing will also address concerns 
regarding the PPV contract that have come to light since the hearing, 
including accountability.
    I believe it is important to hold follow-up hearings to examine if 
VA is making progress, but also to ensure that the recommendations that 
are implemented are effective, efficient and being monitored for those 
purposes.
    The recent IG audit showed that the VA's Fast Pay System 
consistently provided payments within 48 hours to the PPV from the 
prime vendor's shipment of an order; VA was paying the accurate amount 
for actual goods received; VA was processing payments to the PPV in 
accordance with laws, regulation, and current terms of the PPV 
contract; VA was reimbursed by other government agencies in a timely 
and accurate fashion. All positive steps.
    However, the audit report determined the VA did not have reliable 
controls to ensure timely correction of improper payments and the 
controls were not sufficient to reduce the risk of program fraud or 
abuse.
    This is not a new issue for VA. Lack of management controls and not 
following established procedures is a common theme in many former 
reports as well.
    The VA has proven that when determined to make corrective actions 
they can successfully implement measures to do so. I don't understand 
why the VA has to wait for a hearing or an IG audit report for them to 
take those measures.
    Additionally, I would like to hear from VA what action it took with 
about how the National Acquisition Center's PPV contracting officer who 
did not execute his responsibilities properly for several months 
effectively stopping the process put in place. Was this individual 
reprimanded, provided additional training, removed from his or her 
post?
    Finally, I look forward to hearing from VA on progress made since 
the last hearing to prevent unauthorized purchases through the PPV 
contract and how is the new agreement different from the previous 
contract.
    Thank you and I yield back.

                                 
                    Prepared Statement of Mr. 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 the activities we have undertaken to improve 
internal controls since we testified before this Committee on February 
1, 2012. I am accompanied today by Mr. John Gingrich, VA's Chief of 
Staff; Mr. Glenn Haggstrom, Principal Executive Director for the Office 
of Acquisition, Logistics and Construction; Mr. Jan Frye, Deputy 
Assistant Secretary for Acquisition, Logistics and Construction; Mr. 
Steven Thomas, Director of National Contract Service at the National 
Acquisition Center; Mr. Philip Matkovsky, Assistant Deputy Under 
Secretary for Health for Operations and Management for Administrative 
Operations, Veterans Health Administration (VHA); and Mr. Michael 
Valentino, Chief Consultant for Pharmacy Benefits Management Services, 
VHA.
    When we testified before this Committee in February, we described 
how VA's PPV system provides timely access to pharmaceuticals for 
Veterans with very favorable pricing for the Department and the 
American taxpayer. In fiscal year (FY) 2011 alone, the PPV contract 
returned $225 million to VA through purchase discounts and provided 
significant additional service delivery benefits to VA. We also 
described some of the problems we experienced with our execution of the 
PPV contract, specifically related to conformance with all applicable 
Federal procurement laws and regulations. Today, I will describe the 
actions we have undertaken with the PPV program to improve conformance 
with procurement laws and regulations and the effect of these actions 
during the five month period between November 2011 and March 2012. I 
will also describe the initiatives we will implement that will further 
improve our procurement compliance.
Background
    Initial concern about the PPV program grew from an internal review 
early in 2011 that revealed that four percent of our total PPV 
expenditures were unauthorized commitments. An ``unauthorized 
commitment'' is any purchase of a pharmaceutical item from the PPV made 
by an individual without the appropriate authority or made without 
following the proper procedures. This occurs when a Pharmacy Ordering 
Officer (OO) orders an item that is not currently covered by a valid 
government contract. VA has made procedural and systems changes that 
have significantly reduced the incidence of unauthorized commitments. 
Today, the number of unauthorized commitments is less than 0.1 percent.
    VA has continued its efforts since November 2011 to improve the PPV 
program in several key areas by: improving training and implementing 
systems and process changes; bringing unauthorized commitments into 
conformance with laws and regulations via a review and formal 
ratification process; increasing management oversight; and implementing 
personnel actions when necessary to hold individuals responsible for 
violating procedures.
Improving Training and Processes
    VA has implemented procedural changes, reduced the number of 
authorized pharmacy ordering officers, provided repeated training, and 
increased management oversight to reduce unauthorized commitments. As a 
result of these efforts, between September 2011 and March 2012, VA has 
reduced PPV unauthorized commitments from 70,309 in September 2011 to 
434 in March 2012, and reduced the number of employees making 
unauthorized commitments from 327 in November 2011 to 81 in March 2012. 
The following graph shows the reduction in unauthorized commitments 
from September 2011 through March 2012. In March 2012 there were 
approximately 490,000 line items ordered. Of the total, roughly 434 
individual line items may have constituted unauthorized commitments. 
This reflects less than one-tenth of one percent of all items ordered 
in the month of March. Those orders were placed by 132 ordering 
officers. Of the 132 individuals, 81 individuals placed orders that 
were not due to either system or vendor errors.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



Ratifying Unauthorized Commitments
    As I noted earlier, an unauthorized commitment is any purchase of a 
pharmaceutical item either made by an individual without warrant 
authority or made without following proper procedures. When a vendor 
has acted in good faith to provide VA with a good or service and VA has 
received that good or service, Federal Acquisition Regulation (FAR) 
provides a mechanism for that unauthorized commitment to be reviewed 
and retrospectively brought into conformance with the FAR. FAR Subpart 
1.602-3 provides a policy for ratifying unauthorized commitments and 
restrictions for performing those ratifications. VA has applied 
ratification processes to unauthorized commitments. Unauthorized 
commitments that occurred before November 10, 2011 were determined by 
the Office of General Counsel as institutionally ratified. Unauthorized 
commitments occurring after November 10, 2011 underwent a formal 
ratification process in accordance with the Federal Acquisition 
Regulation. The approximately 434 unauthorized commitments that 
occurred in March are currently undergoing formal ratification. These 
formal ratification actions bring the unauthorized commitments into 
conformance with the FAR. It must be noted that, in addition to 
following the policy and restrictions of FAR Subpart 1.602-3, agencies 
are required to make positive efforts to minimize unauthorized 
commitments. VA has undertaken significant efforts to minimize these 
unauthorized commitments.
    For example, VA implemented a number of procedural changes that 
placed new management responsibilities on our field staff and required 
our staff to change how they use the PPV system. To ensure staff 
members are adequately trained, VA has taken several important steps. 
VA identified and designated a Contracting Officer Representative (COR) 
for each PPV ordering location. The FAR and VA Acquisition Regulations 
(VAAR) require that CORs have separation of duties to prevent the same 
individual who places an order against the PPV contract from also 
receiving that order. CORs were officially appointed in writing by the 
Administrative Contracting Officers (ACO) and have completed Federal 
Acquisition Certification (FAC-COR) Level I training. This 8-hour 
training course requires a final exam that the student must pass with a 
score of 100 percent. COR training completion is documented in VA's 
Talent Management System. The Office of Acquisition and Logistics (OAL) 
also has developed supplemental specialized COR training specific to 
the PPV contract. The PPV specific training helps ensure that PPV CORs 
conduct their duties under the direction of the Procurement Contracting 
Officer (PCO) at the National Acquisition Center (NAC). Currently, all 
317 CORs have completed their training.
    In addition, the Pharmacy Benefits Management (PBM) office 
developed several tools for use by its 984 Ordering Officers (OO) 
including a SharePoint page with daily reports from McKesson of 
unauthorized commitments. The purpose of these tools is to provide an 
additional means for OOs to monitor PPV purchases at a facility level.
    Fast Pay Payment Reconciliation Training was provided to all Chiefs 
of Pharmacy on March 21, 2012, and all VISN Pharmacy Executives on 
March 27, 2012. The training provided instruction on: checking in; 
signing and dating pharmaceutical receipts; and, accurately reconciling 
invoices to ensure payments to the PPV are made only for drugs that 
have been received.
    Approximately 81 OOs were identified who potentially made 
unauthorized commitments in March 2012. VA provided targeted training 
to each of these individuals to manually check and ensure that 
unauthorized commitments are prevented. The training occurred on May 
18th, 2012, for all OOs on duty and will be completed for the remaining 
OOs on the day they return to duty.
Increasing Management Oversight
    VA also has strengthened oversight of PPV contract administration. 
The NAC's Procurement Contracting Officer (PCO) is now supported by 
ACOs and CORs. The CORs monitor proper execution of the OOs' 
responsibilities in accordance with the contract assigned to each PPV 
ordering location. The CORs report contract administration issues to 
the ACOs. A working group of ACOs, CORs, and other representatives are 
in the process of fine tuning the duties, responsibilities and 
communication processes for the ACOs and CORs to further improve the 
oversight function. The Office of Acquisition, Logistics and 
Construction (OALC), the Office of the Under Secretary for Health, and 
the Pharmacy Benefits Management Service jointly monitor purchase data.
Implementing Personnel Actions
    PPV Ordering Officers were required quickly to learn new ordering 
procedures for open-market pharmaceuticals. VHA has employed a tiered 
approach beginning with training. If inappropriate ordering continues 
to occur after appropriate training is administered, counseling is 
given followed by administrative action, possible removal of delegated 
ordering authority or loss of employment.
    The individuals that made unauthorized commitments for 
pharmaceuticals were identified by location and name. To date, no 
malicious intent was found, but network and facility management were 
apprised of all the named employees who had executed unauthorized 
commitments. This number was 342 individuals. All orders were reviewed 
by VA headquarters and network management staff, and, where 
appropriate, formal letters of counseling were issued to the 
individuals. In fact, as a result of this process of progressive 
discipline, one VA employee elected to resign rather than face 
disciplinary action.
    Although it will be difficult to achieve a zero defect standard 
based on the volume of orders and human involvement, our goal remains 
compliance with the FAR. Efforts to date have yielded significant 
results. A preliminary review of the March data indicates that there 
are substantially fewer unauthorized commitments than during any 
previous month. PPV ordering data will continue to be monitored. We 
will take appropriate personnel actions where required. The Under 
Secretary for Health and Principal Executive Director for OALC recently 
issued a joint memo to Veterans Integrated Service Network (VISN) 
directors, medical center directors, and designated PPV ordering 
officers. The memo clearly reiterated the expectation that any improper 
ordering of non-contract items must cease. It provided three additional 
opportunities for ordering officers to prevent unauthorized 
commitments, and confirmed that individual ordering officer delegations 
may be removed or suspended if unauthorized commitments continue.
Expanding the Number of Drugs Under Contract
    VA believes awarding additional contracts for VA's known 
pharmaceutical requirements also will help resolve the majority of open 
market purchases and will help bring previously unauthorized 
commitments further into conformance with applicable laws and 
regulations. VA has pursued two simultaneous approaches to increasing 
the number of drugs available under contract: awarding a new PPV 
contract, and awarding additional contracts for pharmaceuticals.
The New PPV Contract
    There will always be pharmaceutical needs of Veterans that are not 
fully met by existing government contracts. VA will need to retain FAR 
compliant purchasing flexibility to meet Veterans' needs. The new PPV 
contract does not include open market purchasing, but does include a 
mechanism to reduce the need for open market items. The mechanism is 
termed Wholesale Acquisition Cost (WAC) Based Priced Generics (WBPG), 
which results in PPV contract pricing for generic drugs that have a 
published WAC, a National Drug Code (NDC), and are Trade Agreement Act 
(TAA) compliant. The WBPG items are last in the priority of purchasing 
after all other government contract vehicles are exhausted. VA's policy 
for obtaining drugs not available through any contract will be to 
either: procure them through the Government Purchase Card program if 
the dollar value of the purchase is no more than $3,000; or have a 
warranted contracting officer execute the procurement using the 
streamlined acquisition procedures allowed by the Federal Acquisition 
Regulation.
    Looking forward, a new PPV contract was competitively awarded to 
the McKesson Corporation on April 10, 2012, following all applicable 
procurement laws and regulations. The contract allows for a 120-day 
implementation period which ends on August 10, 2012. The initial period 
of performance for this contract will be from August 10, 2012 through 
August 9, 2014. The contract has three 2-year renewal options. A bridge 
contract covering the period May 10, 2012, (when the current PPV 
contract expired) through August 9, 2012, was recently awarded to 
provide continuity of access to pharmaceuticals.
    Like the previous contract, this new contract provides drugs and 
supplies to VA and other government agency customers to over 750 
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 provides VA a discount on 
all purchases. Pricing for the majority of the pharmaceutical products 
distributed through the PPV is established through other contracts 
(e.g., the Federal Supply Schedule (FSS), or national contracts) 
awarded by OALC. Unlike the previous contract, the new one places many 
formerly open market drugs under contract at the WBPG price, which was 
determined by a warranted contracting officer to be fair and 
reasonable. This single change in the new contract will resolve the 
vast majority of the concerns with the previous contract.
    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, and that any inadvertent orders 
placed are not delivered by the PPV. There will be no option for OOs to 
obtain non-contract supplies under the contract. In addition, improved 
training will continue to be provided for ordering officers as the need 
arises.
    Using a Federal Acquisition Regulation compliant mechanism that was 
not included in the previous contract, the new contract will preserve 
the ability to get needed drugs from the PPV. The health and safety of 
Veterans will not be put at risk with the new sourcing methodology.
    On May 17, 2012, VA's Office of the Inspector General (OIG) issued 
its report entitled, ``Review of the Controls for the Pharmaceutical 
Prime Vendor Fast Pay System.'' The report concluded that the Fast Pay 
system provided timely payments to vendors and that VA paid accurate 
prices, but that inadequate controls were in place to ensure timely 
correction of improper payments and to reduce the risk of program fraud 
or abuse. VA has concurred with the report and the Action Plan to 
address the OIG recommendations is underway.
    We look forward to the results of the second OIG review of PPV, 
which will provide additional information on the underlying causes of 
the unauthorized commitments and the magnitude of those purchases. We 
will quickly address any actionable findings to improve our 
pharmaceutical procurement processes.
Awarding Additional Contracts for Pharmaceuticals
    The long-term plan to reduce the need for open market items is to 
increase the number of items on government contracts. There are 
currently 87 national contracts in place, and VA has 48 additional 
procurement requests in process for solicitation and award. VA, in 
collaboration with its partners in the Department of Defense, Indian 
Health Service, and other Federal agencies, will continue to identify 
drugs or drug classes suitable for national contracting.
Conclusion
    VA staff members have worked diligently and conscientiously to 
provide needed pharmaceuticals to our Veterans where and when they are 
needed. We have also worked to ensure that applicable laws and 
regulations are being followed. Our frontline staff have proven their 
commitment to serve Veterans, by learning new procedures, changing 
their use of the PPV system, and collectively reaching current 
performance in excess of 99.9 percent. Our procurement staffs have 
instituted ratification processes that ensure any unauthorized 
commitments subsequently conform to the FAR. VA managers continue to 
monitor performance and provide oversight for the current PPV contract. 
VA has lowered the number of OOs in the system and increased the 
numbers of drugs on contract without increasing outages. Where 
educational efforts to prevent unauthorized commitments were 
unsuccessful, VA has taken and will continue to take appropriate 
personnel action. Again, the PPV ordering problems largely were 
procedural breakdowns that affected a small volume of pharmaceutical 
purchases and in no way compromised Veterans' safety.
    Mr. Chairman, thank you for the opportunity to discuss on the 
record what actions we have accomplished, as well as the remaining work 
that needs to be accomplished as we transition to the new PPV contract 
in August 2012. 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 The Office of Inspector General
    Chairman Miller and members of the Committee, thank you for the 
opportunity to discuss the results of a recent Office of Inspector 
General (OIG) report dealing with Pharmaceutical Prime Vendor (PPV) 
Fast Pay System and provide an update on our continuing work to review 
purchases that were allegedly made in violation of the PPV contract. 
The OIG is represented by Ms. Linda A. Halliday, Assistant Inspector 
General for Audits and Evaluations; Ms. Maureen Regan, Counselor to the 
Inspector General; Mr. Gary Abe, Director, OIG's Seattle Office of 
Audits and Evaluations; and Mr. Michael Grivnovics, Director of the 
OIG's Office of Contract Review, Federal Supply Service Division.
BACKGROUND
    In 1994, VA implemented the PPV program to reduce the costs for 
storing and distributing pharmaceutical supplies. The McKesson 
Corporation was awarded the most recent PPV contract that expired on 
May 9, 2012. VA competitively awarded McKesson a long-term contract 
effective August 10, 2012; a bridge contract was established to ensure 
continuation of services in the interim. Use of the PPV is mandatory 
for VA pharmacies and optional for certain Other Government Agencies 
(OGAs) and authorized users, such as the Indian Health Service (IHS) 
and State Veterans Homes. In fiscal year (FY) 2011, VA purchased 
approximately $4.3 billion pharmaceuticals from the PPV. The PPV 
contract is for distribution services only. Pharmaceutical pricing is 
established through Federal Supply Schedule (FSS) and other national 
contracts awarded by VA's National Acquisition Center (NAC). Except for 
local Veterans Integrated Service Network (VISN) contracts, contract 
pricing data in the PPV purchasing system is entered by VA, not 
McKesson. The issue that arose in 2011 was that VA and other agencies 
were using the PPV contract improperly to purchase pharmaceuticals and 
other items open market. A related issue was whether the fast payment 
procedures in the PPV contract resulted in a lapse in controls 
regarding the purchasing and receipt of products.
    The Federal Acquisition Regulation (FAR) allows the use of fast 
payment procedures to help agencies meet payment timeliness 
requirements of the Prompt Payment Act. The PPV contract defines the 
Fast Pay system as an expedited payment procedure whereby payments are 
made to the PPV within 48 hours of shipment of an order. The current 
PPV contract requires all VA PPV orders to be processed using the Fast 
Pay system. The Fast Pay system procedures generally occur in the 
following sequence: authorization and ordering; receipt of the invoice; 
payment approval and authorization; disbursement of funds; and receipt 
and acceptance of items ordered.
    Fast Pay allows agencies to authorize and pay vendors after the 
vendor's invoice is received but prior to receipt and acceptance of the 
order. Payments are made when the invoice is received, based on the 
vendor's certification that it has delivered the supplies on the 
invoice and will remedy deficiencies in the supplies it delivers. The 
reliability of the Fast Pay system depends on promptly verifying that 
purchased items have been received, ensuring that receiving reports and 
payment documents match, and correcting discrepancies after payments 
have been made.
    VA's Fast Pay system uses a U.S. Bank credit card-like account to 
pay the PPV for each VA pharmacy ordering facility's prime vendor 
purchases. When the PPV fills a facility's order, U.S. Bank processes 
the purchase through the facility's Fast Pay account using an 
electronic interface between the prime vendor and U.S. Bank. U.S. Bank 
pays the PPV each day for the orders it receives and transmits a daily 
transaction file of purchases to VA's Financial Services Center (FSC).
    The FSC staff reviews the files before transmitting payment 
information to VA's Financial Management System (FMS). The FSC staff 
issues a single payment to U.S. Bank for the prior day's purchases from 
the PPV then charges each facility's prime vendor obligation account 
for the payment amount of the billed PPV pharmaceutical supplies. 
Facilities then reconcile payments made to the PPV with their prime 
vendor orders.
REVIEW OF THE CONTROLS FOR THE PHARMACEUTICAL PRIME VENDOR FAST PAY 
        SYSTEM
    In this report, which was done at the request of the Committee and 
the VA Secretary, we reviewed the internal controls of VA's Fast Pay 
System, specifically assessing the adequacy of VA's internal controls 
in support of the provisions of the PPV contract. We focused on the 
ordering, receipt of pharmaceuticals, and payment activities. 
Specifically, we examined the controls at four Consolidated Mail 
Outpatient Pharmacies (CMOPs), four VA Medical Centers (VAMCs) 
pharmacies, the payment controls at the FSC and the NAC, along with 
reviewing a sample of invoices. We also reviewed a sample of orders 
placed by Other Government Agencies \1\.
---------------------------------------------------------------------------
    \1\ In February 2012, VA reported that State Veterans Homes, Howard 
University Hospital, the Indian Health Service, Bureau of Prisons, 
Peace Corps, U.S. Public Health Service, and Department of Homeland 
Security used the PPV contract.
---------------------------------------------------------------------------
    Our review found:
      VA was consistently providing payments to the PPV within 
48 hours from the prime vendor's shipment of an order.
      VA was paying the accurate amount for actual goods 
received.
      VA was processing payments to the PPV in accordance with 
laws, regulations, and current terms of the PPV contract.
      VA was reimbursed by other Government agencies in a 
timely and accurate fashion.
      VA did not have reliable controls to ensure timely 
correction of improper payments and the controls were not sufficient to 
reduce the risk of program fraud or abuse.
Accurate Prices for Actual Goods Received
    Each week, at the eight VA facilities we reviewed, the staff 
reconciled their prime vendor purchases with summary payment reports 
provided by the FSC, ensuring that payment amounts were correct. VA 
financial management staff also researched FMS transactions that had 
been rejected during payment processing by the FSC and monitored the 
facility's PPV obligations. We did not identify reconciliations that 
were not resolved or unresolved exceptions such as open items on 
reconciliations, or rejected transactions that were not paid timely.
    Seven of the eight ordering facilities had sufficient controls in 
place to ensure that pharmaceutical purchases were checked against 
invoices at delivery and discrepancies corrected.
Consistent Compliance with Federal Laws
    We found VA uses Fast Pay provisions of the Prompt Payment Act to 
meet contractual requirements to pay the PPV within 48 hours of 
shipment of an order.
Other Government Agencies Reliance on PPV
    The PPV contract allows other entities to use the PPV program and 
the Fast Pay system. According to FSC officials, only the Indian Health 
Service (IHS) used the Fast Pay system. In FY 2011, IHS purchased about 
$46 million in pharmaceutical supplies, representing about 1 percent of 
the total $4.3 billion of PPV purchases. We did not review PPV items 
purchased by OGAs that did not use VA's Fast Pay System because no VA 
funds were at risk of loss to VA.
    IHS reimbursements were paid in the correct amounts, and IHS 
reimbursed VA within an average of 23 days from the date an order was 
placed. We considered IHS reimbursements to VA timely based on the 
Prompt Payment Act requirement that payment be made within 30 days.
Resolving Inaccurate Payments
    Controls over corrections of overpayments are critical under the 
Fast Pay system since corrections are identified and adjustments made 
after payments are processed. In addition to our eight facilities, we 
reviewed procedures for identifying and resolving overpayments at the 
NAC and the Pharmacy Benefit Management (PBM) Services. We found no 
evidence that all of these responsibilities were properly executed.
    PBM's business practice is to review prices for all pharmaceutical 
items purchased from the PPV each month, beginning 3 months after the 
purchase. For example, purchases made in July 2011 would be reviewed in 
October 2011. This delay allows sufficient time for price adjustments 
initiated by purchasing activities or the PPV to be adjusted to reflect 
correct amounts. PBM provides the NAC contracting officer a monthly 
price analysis, which shows differences between amounts paid and the 
contract prices for specific pharmaceutical items. The contracting 
officer is responsible for resolving PPV pricing anomalies.
    PBM staff completed their March 2011 pricing analysis in August 
2011 (2 months late). Their price analysis for April 2011 purchases was 
completed in December 2011 (5 months late). According to PBM officials, 
they reprioritized their work because the NAC's PPV contracting officer 
was not timely resolving potential pricing differences identified by 
the PBM and completing additional analyses would only have increased 
the contracting officer's backlog.
    The process of resolving potential pricing differences, which the 
NAC put in place, had stopped. As a result, VA was at risk of not 
processing appropriate pricing adjustments. The total value of 
potential pricing differences identified by PBM for the monthly reviews 
of PPV purchases from December 2009 through April 2011 was 
approximately $46.4 million. The contracting officer stated the primary 
reason for the delay in resolving pricing differences with the PPV was 
that he needed to use that time to prepare the future PPV contract. 
While we found that PBM and NAC controls did not reliably ensure timely 
correction of potential pricing differences, our subsequent work in the 
ongoing review of PPV open market purchases for FY 2011 has shown that 
these potential pricing differences had been satisfactorily resolved 
through the credit and rebilling process.
    Facility pharmacy staff made timely payment corrections for 
overpayments. According to PPV records, the PPV reimbursed VA pharmacy 
facilities a total of approximately $23.5 million (.5 percent of $4.3 
billion) in overpayment corrections and about $15.4 million (.4 
percent) in return credits in FY 2011. Pricing corrections occur for 
several reasons, such as retroactive price adjustments, item count 
errors, and product returns. For example, a retroactive price 
adjustment is required when the PPV changes a price of an item on 
January 5, 2012, but applies it to all purchases of that item from 
January 1, 2012. We determined that controls at VA facility pharmacies 
were considered adequate and that facility pharmacy staff made timely 
payment corrections for overpayments.
Protection Against Possible Fraud and Other Abuses
    As the highest area of risk, we assessed pharmacy ordering and 
receiving operations to address whether VA has established controls to 
reduce the risk of fraudulent payments and other program abuses for 
PPV. At each pharmacy, we assessed whether the ordering and receiving 
duties of pharmacy staff were adequately segregated.
    In general, we determined controls were not effective in mitigating 
the risk of program fraud. Segregation of duties is a strong 
fundamental control in ordering and receiving functions. Duties such as 
ordering supplies, receiving supplies, making payments, and certifying 
funding should be assigned to separate individuals to the greatest 
extent possible. By separating certain duties within an organization, 
no single employee should be in the position to perpetrate and conceal 
fraud. For example:
      Three of four VAMC pharmacies needed to strengthen 
controls to ensure an adequate segregation of duties existed. They did 
not segregate duties among different staff to prevent any one 
individual from having the ability to both order and receive non-
controlled pharmacy supplies. With regard to controlled substances, at 
the four VAMC pharmacy the duties were properly segregated.
      The four CMOPs had adequate controls to segregate duties 
among designated ordering officers and staff who verified that ordered 
items were received. Controls in place were working effectively to 
ensure ordering officers and receiving staff held separate system 
access keys to log into the prime vendor account. At no point were 
individuals allowed to perform ordering and receiving functions. VA 
policy requires CMOPs establish unique individual user identification 
and passwords for all functions related to inventory maintenance and 
control, to include ordering and receiving on the PPV and CMOP 
automated inventory systems.
QUANTIFYING OPEN MARKET AND PRICING ISSUES
    Currently we are completing our review of PPV purchases for FY 
2011. The purpose of the review is to quantify the open market sales, 
identify reasons why items were not purchased through existing 
contracts, and evaluate whether VA was overcharged for items on 
contract. We also reviewed purchasing data for December 2011, to verify 
the accuracy of the reported 0.4 percent in open market purchases for 
that month and validate whether controls implemented in November 2011 
were effective in controlling open market purchases. In addition, we 
are reviewing open market purchases to determine whether they violated 
procurement laws and regulations and whether the purchases were in 
compliance with the Trade Agreements Act. We expect to issue a final 
report in July 2012. We also have reviewed the new PPV contract to 
determine if additional terms and conditions will reduce open market 
purchases.
FY 2011 Open Market Purchases
    Our review found that it is not possible to easily quantify open 
market purchases by simply reviewing purchasing data captured for a 
specific period of time. Due to delays in processing new pricing 
through contract modifications and entering the information into the 
PPV system, purchasing information is updated continually by McKesson 
through a system of credits and rebills. This process corrects data 
relating to whether the item was on contract versus open market and 
adjusts the price paid to reflect the correct contract pricing.
    We identified $4.3 billion in overall reported sales in FY 2011 of 
which approximately $290 million was identified as open market because 
there was no underlying contract number listed in the appropriate data 
field. Approximately $283 million of the $290 million represented 
pharmaceutical purchases and remaining $7 million represented medical/
surgical items.
    We selected 100 of the top pharmaceutical items identified as open 
market for review, which represented $108 million (43 percent) of the 
open market pharmaceutical purchases.
      We found that 43 of the 100 items ($63 million) were on 
contract at the time of purchase. This represents 58 percent of the 
dollar value of 100 items in our sample. Of the 43 items, 29 ($36 
million) were sold at the contract price. The 14 remaining items ($27 
million) were sold at a price that exceeded the contract price with 
potential overcharges of $9.4 million. However, upon further review, we 
found that $5.5 million of the potential overcharges was due to product 
allocation \2\, not overcharging, and the remaining $3.9 million 
related to delays in contract pricing adjustments, which appear to have 
been corrected through the credit and rebilling process.
---------------------------------------------------------------------------
    \2\ For some pharmaceuticals VA is guaranteed a fixed quantity. VA 
can purchase additional quantities but those would be at open market 
prices.
---------------------------------------------------------------------------
      We determined that 48 of the 100 items were not on 
contract for all or part of FY 2011. These items represented $36 
million (33 percent) of the open market purchases in our sample. We 
identified comparable items on FSS contracts for 15 of the 48 items 
($9.1 million). For 12 of the 15 items, ($7.6 million), the FSS prices 
were lower. However, we found that many of the comparable items on FSS 
were not available at the time of purchase due to manufacturer 
shortages and backorder issues. We concluded that for those items that 
a comparable FSS product was available, VA paid $904,000 more than it 
would have paid if the contract item had been purchased. Although the 
prices paid for the remaining 3 items ($1.5 million in purchases) were 
less than the FSS price, the items should have been purchased from the 
FSS as required by VA policy. We could not identify with any degree of 
certainty a comparable item on FSS for the remaining 33 items ($26.6 
million). These items were purchased at McKesson's list price.
      We also identified 9 items ($8.6 million) that were on 
FSS but purchased at open market prices through the PPV. Most of these 
were covered or branded drugs on FSS at the Federal Ceiling Price, 
which is the highest price VA can pay when purchasing from the 
manufacturer or the manufacturer's authorized distributor. Because the 
FSS contractor elected not to participate in the PPV program, the PPV 
is not required to offer the FSS price. These purchases resulted in up 
to $4.8 million in overpayments. We have not identified a legitimate 
reason to justify purchasing these products open market through the PPV 
instead of the manufacturer. We initially identified this problem 
through our post-award reviews and raised this issue to VA in 2007 and 
again in 2011. In 2007, we were told that the PPV purchasing system was 
changed to block purchasers from buying these products through the PPV. 
However, in 2011, when we found the problem continuing, we learned that 
at VA's request the system allows the purchaser to override the block.
    We concluded that McKesson has done a good job of correcting 
pricing through credits and rebilling when the PPV database is updated 
by VA to include changes in contract pricing. However, we believe 
delays in identifying and correcting contract pricing are caused by 
poor communication between PBM and the NAC's FSS and National Contracts 
divisions.
Review of December 2011 Purchases
    We reviewed the accuracy of VA's reported 0.4 percent in open 
market sales through the PPV contract for December 2011. However, we 
found the procedures implemented in November 2011 did not preclude or 
prohibit open market purchasing. Instead, open market purchases were 
shifted from the PPV contract to other financing accounts. We reviewed 
purchases through the new open market purchasing system and identified 
approximately $7 million in purchases, which represented 2.0 percent of 
the total purchases by VA through McKesson. The percentage of open 
market purchases by VA through McKesson was approximately 2.4 percent, 
not 0.4 percent as reported. Our review of open market purchasing 
trends under the new system was inconclusive because a large number of 
the products were actually on contract.
    In addition to reviewing the purchases identified in the FY 2011 
data as open market, we sampled items identified as contract sales. We 
did not find significant problems with overcharging. As with the open 
market items, corrections are made over time as adjustments to the 
contract price are awarded and entered into the PPV system.
Open Market Issues
    Based on our review and our ongoing pre-award and post-award audits 
of FSS contracts, we believe that open market purchasing through the 
PPV is impacted by several factors including items not on contract but 
needed to provide care, a growing number of product allocations and 
shortages necessitating purchasing items at non-contract prices, and 
purchasing items through the PPV for convenience instead of buying 
direct from manufacturers who do not participate in the PPV program. A 
growing number of items are not on contract because there is no 
requirement that manufacturers offer generic drugs on FSS contracts. In 
addition, a growing number of products are no longer manufactured in 
the United States or a designated country and thus cannot be offered on 
contract due to Trade Agreement Act requirements. We are currently 
reviewing open market purchases to determine whether the purchasers 
violated Federal procurement laws and regulations, including the Trade 
Agreements Act.
Review of Terms and Conditions in Recently Awarded PPV Contract
    We also reviewed the changes made to the new PPV contract to 
determine if such changes will preclude open market purchasing and if 
prices paid for products previously classified as open market will be 
fair and reasonable. The new PPV contract states non-contract (open 
market) items are excluded from the PPV contract and Ordering Officers 
are prohibited from buying open market items through the PPV contract. 
Generic items that are not on a Federal government contract and have a 
published Wholesale Acquisition Cost (WAC), are approved by the Food 
and Drug Administration, and are compliant with the Trade Agreements 
Act, can now be purchased through the PPV contract at a price 
negotiated prior to award. These products are known as WAC Based Priced 
Generics (WBPG). For the most part, open market purchases should 
decrease significantly with the availability of WBPGs. However, open 
market purchases can still occur by buying such open market products 
via a different payment account. Such purchases are not considered a 
PPV purchase because they are not processed through the PPV account.
    We are also concerned that FSS vendors who sell generic products 
may remove their products from their FSS contracts and have them sold 
by the PPV as WPBGs. The FSS will no longer receive a discount off the 
FSS vendor's list price but will pay the listed WAC price less a 
discount equal to the awarded distribution fee. Based on our experience 
conducting pre-award reviews of proposals for FSS contracts, we have 
concerns whether the negotiated PPV price for these generic products is 
fair and reasonable.
CONCLUSION
    VA has implemented controls to provide timely and accurate payments 
for pharmaceutical items processed through VA's Fast Pay system as well 
as following laws, regulations, and policies. However, system controls 
to identify and correct pricing differences by the PPV and to reduce 
the risk of fraud and other program abuses were either not in place or 
were not effective. Without strong system controls, VA risks paying the 
incorrect price for pharmaceuticals as well as increasing their 
vulnerability to program fraud.
    Our review of open market purchases found that the open market 
purchases were significantly less than originally stated. We found that 
McKesson was doing a good job of adjusting prices through credits and 
rebillings to ensure that contract items are purchased at contract 
prices when VA provides data. It is not uncommon for pricing changes to 
be implemented months after the fact due to delays in contract 
modifications that result in retroactive pricing. In addition, due to 
product shortages and allocations, VA does not always get contract 
pricing.
    Mr. Chairman, this concludes our statement and we would be pleased 
to answer any questions you or other members of the Committee may have.

                                 
                    Prepared Statement of Mr. Flach
    Good morning, Chairman Miller, Ranking Member Filner and Members of 
the Committee. My name is Paul Flach, and I am Vice President of 
McKesson Health Systems, National Accounts, for McKesson Corporation.
    Mr. Chairman, before I begin today, I would like to say that my 
company appreciates the veterans who work for McKesson and feels both 
enormous pride and responsibility for our selection as the 
Pharmaceutical Prime Vendor to the Department of Veterans Affairs. I 
know that all of you on this Committee and at the Department of 
Veterans Affairs are working hard for America's veterans every day. 
Thank you for your efforts.
    For 179 years, McKesson has led the industry in the distribution of 
medicines and health care products. Today, a Fortune 14 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, McKesson 
delivers medicines to the 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.
    Mr. Chairman, as you know, McKesson provided testimony on the 
Pharmaceutical Prime Vendor (PPV) contract before this Committee 
earlier this year. We understand your oversight responsibility for the 
Department of Veterans Affairs and particularly as it relates to the 
PPV contract. We recognize the importance of this contract to the VA's 
health care system and, ultimately, to America's veterans. I am here 
today to provide the Committee with some additional information about 
the PPV contract as well as to answer your questions.
    As the Department's Pharmaceutical Prime Vendor since 2004, 
McKesson is proud to partner with the VA to provide pharmaceuticals to 
more than five million veterans and to continue delivering excellent 
quality and service to the VA. Through the deep negative distribution 
fee in our contract with the VA, we have provided the Department with 
$526 million in savings over the VA's prior PPV contract. We have been 
able to do this while consistently exceeding the requirements of the 
contract and providing state of the art technology and unparalleled 
quality and value to the Department.
Pharmaceutical Purchasing Through McKesson
    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).
    As our PPV contract requires, McKesson provides thousands of 
products to the VA at prices set under federal supply contracts which 
the VA has secured through direct negotiations with pharmaceutical 
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 item under a VA-negotiated 
contract. If a contract product is out of stock, the system directs the 
buyer to the lowest priced generic equivalent product that is on a VA-
negotiated contract.
    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. 
McKesson has a dedicated ``VA-only'' customer service department. Our 
accuracy in fulfilling orders is 99.9 percent. 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. 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 consistently exceeded 
the PPV requirements for service and quality.
PPV Purchases Are Almost Exclusively VA-Negotiated Contract Products
    The VA has successfully negotiated a significant number of 
contracts with manufacturers for the purchase of pharmaceuticals, which 
exceeds, by far, the number of pharmaceutical manufacturer contracts 
typically held by health care institutions within the private sector. 
In April 2012, the VA purchased, through the PPV contract, 99.83 
percent of its products under VA-negotiated contracts with 
manufacturers.
    There are circumstances, however, when contracted pharmaceuticals 
are in short supply or other critical medicines are needed to treat 
patients. Purchases of pharmaceuticals that are not on contract are 
frequently referred to as ``open market'' purchases. Stated simply, 
open market purchases are for products which are not subject to a 
contract price negotiated by the VA with the manufacturer. We would 
like to emphasize that all pharmaceutical products purchased by the VA 
from McKesson, whether under VA ``contract'' or an ``open market'' 
item, have the required FDA approvals.
    Purchases of open market products are a standard practice in the 
private sector. In the private sector, for instance, 30-40 percent of 
the purchases made by hospital and institutional customers are for open 
market products.
Dramatic Decline in Open Market Purchases
    Since November, when the VA asked for our assistance, we have been 
working closely with them to restrict open market purchases under the 
PPV contract. As a result of these efforts and other steps taken by the 
VA, open market purchases under the PPV contract have dramatically 
declined from less than 5 percent previously to less than 2.1 percent 
in November 2011 and then to 0.17 percent in April 2012.
    In collaboration with the VA last fall, we modified our online 
electronic ordering systems. Open market items can no longer be viewed 
on the ordering screen by those who are placing an order under the PPV 
contract. McKesson was given 48 hours to make this change, and we met 
the VA's deadline.
Additional Steps With the New Pharmaceutical Prime Vendor Contract
    McKesson is preparing for the new PPV contract that will go into 
effect in August. We will be enhancing our technology, beyond what is 
required, to meet the VA's intention to restrict open market purchases. 
Our systems are complex and must be able to process over a million line 
items on a daily basis. We are making these enhancements judiciously 
because the VA relies on the timely delivery of the medications it 
orders to provide medical care for our nation's veterans.
    As part of developing this technology enhancement, we are building 
a ``restrict and notify'' component with plans for this functionality 
to be available later this fall. If the VA attempts to order a 
pharmaceutical product from our distribution centers that would result 
in an open market purchase under the PPV contract, our system will 
automatically remove the item from the order and send a corresponding 
notification back to the VA. This notice will alert the VA that we are 
not delivering the specified pharmaceutical product and enable it to 
identify alternatives to meet patient need on a timely basis.
Conclusion
    Mr. Chairman, in April, McKesson was selected by the VA to continue 
as the Pharmaceutical Prime Vendor. The VA conducted a rigorous 
competition for this contract award. We are honored to be selected 
again as the PPV and are committed to continue to deliver outstanding 
value and service to the VA and our veterans.
    On behalf of McKesson, I want to thank the VA for the trust they 
continue to place in our performance, our people and our company. 
McKesson is very proud of our unique ability to improve the delivery, 
cost efficiencies and quality of care for our nation's veterans. 
America's veterans deserve the best health care, and McKesson is 
committed to a partnership that continually enhances the VA's ability 
to provide critical services to the veterans they serve.
    Mr. Chairman, thank you for the opportunity to appear here today. I 
am happy to answer your questions.

                                 
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