[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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_____
U.S. GOVERNMENT PRINTING OFFICE
74-591 WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
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.