DOD and VA Pharmacy: Progress and Remaining Challenges in Jointly
Buying and Mailing Out Drugs (25-MAY-01, GAO-01-588).		 
								 
The Department of Veterans Affairs (VA) and the Department of	 
Defense (DOD) have made important progress, particularly this	 
past year, in their collaborative efforts to jointly procure	 
drugs to help control spiraling prescription drug costs. While	 
their joint procurement efforts have been impressive, to date the
Departments have largely targeted generic drugs, which comprise  
less than 10 percent of their combined expenditures. More	 
dramatic cost reductions could be realized through procurements  
of high-cost brand-name drugs, although doing so can be more	 
complex and time consuming to garner the necessary clinical	 
support and provider acceptance on therapeutic			 
interchangeability. Nonetheless, DOD's greatly expanded retiree  
drug benefit and both Departments' developing formularies should 
provide added joint procurement opportunities for such drugs.	 
Also, the Departments have demonstrated that flexible approaches 
to developing joint solicitations can take into account 	 
differences in their health systems while still maximizing drug  
discounts. In GAO's view, their joint activities could be further
enhanced by periodically conferring with private managed care	 
pharmacy experts and reporting to Congress on their joint	 
procurement activities. DOD and VA need to ensure that high-level
attention remains focused on their joint procurement and	 
distribution activities as the ongoing leadership changes are	 
being made at the Departments. In the same regard, VA and DOD	 
have also made progress in their efforts to conduct a		 
consolidated mail outpatient pharmacy (CMOP) pilot. The sooner	 
the pilot proves feasible, the sooner DOD can begin to realize	 
the financial and quality of care benefits associated with the	 
transfer of its refill workload.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-588 					        
    ACCNO:   A00877						        
  TITLE:     DOD and VA Pharmacy: Progress and Remaining Challenges in
             Jointly Buying and Mailing Out Drugs                             
     DATE:   05/25/2001 
  SUBJECT:   Brand name specifications				 
	     Defense procurement				 
	     Drugs						 
	     Health care cost control				 
	     Interagency relations				 
	     Managed health care				 
	     Pharmaceutical industry				 
	     DOD TRICARE Program				 

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GAO-01-588
     
Report to Congressional Requesters

United States General Accounting Office

GAO

May 2001 DOD AND VA PHARMACY

Progress and Remaining Challenges in Jointly Buying and Mailing Out Drugs

GAO- 01- 588

Page i GAO- 01- 588 DOD and VA Pharmacy Letter 1

Appendix I Status of VA and DOD Pharmaceutical Procurements 32

Appendix II Planned DOD and VA Joint Procurements 39

Appendix III VA?s CMOP Program 44

Appendix IV Comments From the Department of Defense 46

Appendix V Comments From the Department of Veterans Affairs 49

Appendix VI GAO Contacts and Staff Acknowledgments 53

Tables

Table 1: VA and DOD Pharmaceutical Purchasing Vehicles 9 Table 2:
Therapeutic Areas We Suggested and VA and DOD

Targeted for Joint Procurement in the Future 12 Table 3: Matching VA and DOD
High- Dollar Drug Classes in 1999 19 Table 4: Joint VA and DOD Drug
Contracts as of April 2000 32 Table 5: New VA and DOD Joint Drug Contracts
Taking Effect

Since May 2000 (Status as of April 2001) 34 Table 6: Pending VA and DOD
Joint Drug Solicitations (Status as of

April 2001) 35 Table 7: Separate DOD and VA Drug Contracts (Status as of
April

2001) 36 Table 8: Planned Joint Procurements in Our Suggested Drug

Classes as of December 2000 39 Contents

Page ii GAO- 01- 588 DOD and VA Pharmacy Figures

Figure 1: Rise in VA and DOD Pharmacy and Health Care Expenditures, 1995-
2000 7 Figure 2: DOD and VA Beneficiary Populations- 1999 16 Figure 3: DOD
Prescription Drug Use and Costs by Beneficiary

Category, Fiscal Year 2000 18 Figure 4: DOD Prescriptions and Costs by
Pharmacy Source, Fiscal

Year 2000 21

Abbreviations

ACEI angiotensin converting enzyme inhibitor AMCP Academy of Managed Care
Pharmacy BPA blanket purchase agreement CMOP consolidated mail outpatient
pharmacy DAPA distribution and pricing agreement DOD Department of Defense
EENT ear, eye, nose, and throat FSS federal supply schedule GI
gastrointestinal HMG CoA RI hydroxymethylglutaryl coenzyme A reductase
inhibitor IOM Institute of Medicine LHRH luteinizing hormone- releasing
hormone MOA memorandum of agreement NSA nonsedating antihistamine PPI proton
pump inhibitor SSRI selective serotonin reuptake inhibitor VA Department of
Veterans Affairs

Page 1 GAO- 01- 588 DOD and VA Pharmacy

May 25, 2001 The Honorable Steve Buyer Chairman The Honorable Vic Snyder
Ranking Minority Member Subcommittee on Oversight and Investigations
Committee on Veterans? Affairs House of Representatives

The Honorable Christopher Shays Chairman Subcommittee on National Security,
Veterans Affairs and International Relations Committee on Government Reform
House of Representatives

The Honorable Terry Everett House of Representatives

The Honorable Corrine Brown House of Representatives

In fiscal year 2000, the Department of Veterans Affairs (VA) and the
Department of Defense (DOD) together spent about $3. 2 billion on
prescription drugs for beneficiaries. Reflecting national trends, VA and DOD
drug expenditures have risen significantly, consuming an increasing
percentage of their health care budgets. Newly legislated initiatives are
projected to further boost DOD?s annual drug costs by $800 million in fiscal
year 2002. To help control these expenditures, VA and DOD have separately
and, more recently, jointly contracted for pharmaceuticals to obtain large
discounts from drug manufacturers. 1 Considerable leverage can be exerted
when the departments commit to buy increased volumes of

1 Most VA and DOD pharmaceuticals are purchased at below commercial market
prices through multiple arrangements with drug companies. For larger
discounts, VA and DOD have been using national requirements contracts,
whereby they commit to give priority to using the contract drug rather than
equivalent substitutes, to guarantee drug companies a higher volume of
sales. These fixed- price contracts are usually for 1 year, plus four 1-
year option periods.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 588 DOD and VA Pharmacy

a particular drug when there are generic drugs or brand name drugs 2 that
are interchangeable in efficacy, safety, and outcomes. The departments?
ability to commit to jointly buy more of a particular drug depends largely
on their ability to influence provider prescribing practices through the use
of formularies. 3

Since the early 1980s, the Congress has urged VA and DOD to achieve greater
efficiencies through increased collaboration. In May 2000, we testified
before the House Committee on Veterans Affairs? Subcommittee on Oversight
and Investigations on VA and DOD?s joint pharmaceutical procurement and
distribution. 4 We identified a number of high- expenditure drug classes 5
and encouraged the departments to review them for clinical appropriateness
and potential cost- effectiveness for joint procurement. We also urged DOD
to consider using VA?s highly efficient consolidated mail outpatient
pharmacy (CMOP) centers 6 to handle DOD?s military pharmacies? refill
prescription workloads. The departments generally agreed with both
proposals. As part of your continuing oversight of these efforts, you asked
us to report on (1) VA?s and DOD?s efforts to increase joint pharmaceutical
procurement, (2) challenges cited by VA and DOD in doing so, and (3) the
status of their efforts to pilot test CMOP use at DOD.

2 Brand name drugs generally have a patent on their chemical formulation or
manufacturing process. After the patent expires, other drug makers can make
generic copies with the same active ingredient( s), strength, concentration,
dosage form, and administration. Generic drugs are often copied by multiple
manufacturers, resulting in much more competition and much lower prices than
brand name drugs.

3 Formularies are lists of medications that health care organizations
encourage or require their providers to use when they write prescriptions
for patients. By concentrating their purchases on particular drugs,
organizations can secure better prices.

4 DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals
Could Save Millions of Dollars (GAO/ T- HEHS- 00- 121, May 25, 2000). 5 A
drug class is a group of drugs that are similar in chemistry, method of
action, and purpose of use. For example, four selective serotonin reuptake
inhibitors (SSRI)- citalopram (Celexa), fluoxetine (Prozac), paroxetine
(Paxil), and sertraline (Zoloft)- are grouped in the antidepressant drug
class.

6 To achieve efficiencies in its pharmacy program, VA has established seven
CMOP centers to process high- volume prescription workloads using an
integrated, automated dispensing system. While veterans can still elect to
refill their prescriptions in person at VA pharmacies, last year about 60
percent of- or 50 million- veterans? refill prescriptions were
electronically sent from VA pharmacies to the CMOP centers and then mailed
to veterans.

Page 3 GAO- 01- 588 DOD and VA Pharmacy

To conduct our work, we interviewed VA and DOD pharmacy policy and
acquisition officials and reviewed records on procurement, policy, and mail-
out operations. We reviewed DOD?s and VA?s preliminary comments, joint
procurement plans, and cost avoidance estimates related to the drug classes
and individual drugs we identified as potential joint procurement
candidates. DOD and VA define cost avoidance as the difference between the
theoretical cost that would have occurred if contracts were not awarded and
the actual cost incurred for the drugs affected by each contract. 7 To learn
more about the joint procurement potential of drugs in these classes, we
consulted with a managed care pharmacist and obtained the views of academic
and private sector managed care pharmacy experts. 8 Regarding the CMOP
pilot, we interviewed DOD and VA officials and reviewed records concerning
interagency software needs and costs to establish an electronic link between
military pharmacy and CMOP center computers, as well as other issues
affecting the pilot?s progress. We also visited two VA and DOD medical
centers to observe pharmacy computer systems and to discuss links with CMOPs
for electronically transmitting refill prescriptions for processing and
mailing to beneficiaries. We conducted our work from June 2000 through April
2001 in accordance with generally accepted government auditing standards. 9

VA and DOD have made important progress- particularly this past year- to
increase their joint procurement activities. From October 1998 through April
2000, VA and DOD awarded 18 joint pharmaceutical contracts, which they
estimated to yield $40 million in fiscal year 2000 cost avoidance. Since
then, VA and DOD have awarded another 12 joint contracts and as of January
2001 have solicited another 14 joint contracts; they estimate

7 The departments estimated the theoretical cost by multiplying the weighted
average price per unit before the contract took effect, by the quantity
purchased in fiscal year 2000. For example, the departments? estimated cost
avoidance for cholesterol- lowering drugs takes account of expenditures for
all six such brand name drugs, not just the two each department has
contracted. In our view, this is a reasonable estimating methodology.

8 Our consultant, Dr. Peter M. Penna, has extensive experience in managed
care pharmacy operations and is a founding member and past president of the
Academy of Managed Care Pharmacy (AMCP). We also obtained the views of
academic and private sector pharmacy benefit management experts affiliated
with (1) AMCP, (2) the Institute of Medicine?s (IOM) VA Pharmacy Formulary
Analysis Committee, and (3) Rx Health Value (a national organization
supporting research, public education, and private sector and public sector
policies on the health and economic values of prescription drugs).

9 This work followed on that which we performed from August 1999 through May
2000 for our testimony. Results in Brief

Page 4 GAO- 01- 588 DOD and VA Pharmacy

additional annual cost avoidance of more than $30 million. Over the next few
years, the departments plan to target for joint procurement 112 generic and
brand name drugs from among the classes that we urged them to review in our
May 2000 testimony. Also, they plan to merge their separate national
contracts, which they estimate now yield over $184 million per year in cost
avoidance, as the contracts expire. The departments estimate that cost
avoidance from such activities will be an additional $100 million per year,
although they have not yet projected cost avoidance from joining their
separate contracts or for some later year procurements. Other recent actions
demonstrate the departments? commitment to increasing their joint
procurement activities. For example, their pharmacy policy and acquisition
officials are now meeting regularly, and a detailed interagency report to
track joint procurement progress and results has been developed.

Thus far, most VA and DOD joint procurements have been for generic drugs,
and the departments cite challenges to their jointly procuring more brand
name drugs. But contracting for brand name drugs can yield the largest
financial benefits because most of the departments? drug dollars- 91 percent
in VA?s case- is spent on brand name drugs. Yet unlike generic drugs,
contracting for brand name drugs can be challenging and contentious because
limiting beneficiary choice requires gaining clinical agreement on competing
drugs? therapeutic interchangeability. VA and DOD officials told us such
considerations are further exacerbated by their separate health care
systems? unique pharmacy policies and clinical requirements. For example, VA
and DOD told us that the drug needs of their different patient populations-
VA beneficiaries are mostly male and elderly, while DOD beneficiaries are
younger and include women and children- vary widely, requiring their
national formularies to differ in scope and selection of preferred drugs.
DOD officials also told us it is challenging to persuade nonmilitary doctors
participating in TRICARE- the department?s managed care and fee- for-
service health care program- to prescribe a contracted drug and, thus, meet
the commitment to more exclusive use of a drug.

However, certain evolving circumstances and additional actions the
departments can take may help mitigate the challenges they cite. For
example, differences in VA?s and DOD?s beneficiary populations are lessening
as the percentage of DOD beneficiaries who are retirees continues to
increase, and these retirees require drugs more similar to VA?s population.
Differences will further diminish since DOD?s pharmacy benefit for retirees
65 and older expanded in April 2001. Further, changes under way in both
agencies? formularies should provide more

Page 5 GAO- 01- 588 DOD and VA Pharmacy

opportunities for VA and DOD to work together on joint procurement. Recent
legislation is prompting DOD to expand its formulary, which should make it
more comprehensive in scope like VA?s formulary. Moreover, VA and DOD have
successfully collaborated in developing two joint procurement solicitations
that preserve their separate pharmacy policies and clinical requirements. To
help influence nonmilitary providers and their patients to use contracted
drugs, DOD can build on its experience with TRICARE to better inform these
groups. Finally, in our view, the departments? joint procurement efforts
might also benefit from periodically conferring with private sector experts
and annually reporting progress to the Congress given its long- standing
interest in these activities.

VA and DOD have also made progress in their efforts to assess the
feasibility of conducting a CMOP pilot. In our May 2000 testimony, we
reported that DOD?s use of VA?s CMOP centers could cut current dispensing
costs and yield other operational improvements, such as patient safety and
convenience. In January 2001, DOD determined that it is feasible to develop
the necessary computer interface between military pharmacies and CMOP
centers and intends to seek money to pilot test the mailing of military
pharmacies? prescription refills. DOD officials estimate that developing the
computer interface should require about 9 months. However, other critical
operational and financial issues- and time frames for fielding the pilot-
have not yet been developed. If implemented promptly, the pilot would
provide needed lead time to build new CMOP facilities to accommodate DOD?s
workload in the event that DOD decides to use CMOPs systemwide.

In view of the leadership changes under way at both departments under the
new administration and to help ensure that the departments continue to build
on the progress already made in their joint procurement and distribution
efforts, we are making several recommendations. In reviewing a draft of this
report, DOD and VA provided separate comments in which they both concurred
with the report and our recommendations.

Reflecting national trends, VA and DOD prescription drug expenditures have
increased substantially in recent years and at a much higher rate than their
overall health care expenditures. (See figure 1.) 10 In fiscal year 2000,

10 The national rise in drug outlays has occurred for a number of reasons,
including increased use of drugs, the substitution of higher- priced new
drugs for lower- priced existing ones, and more direct- to- consumer
advertising by manufacturers. Background

Page 6 GAO- 01- 588 DOD and VA Pharmacy

VA purchased about $2.1 billion in pharmaceuticals-$ 256 million more than
in fiscal year 1999- to provide 86 million prescriptions for veterans. In
the same year, DOD purchased about $1.14 billion in pharmaceuticals- an
increase of $174 million from fiscal year 1999- to provide 54 million
military pharmacy and mail- order prescriptions for active duty and retired
military service members and their families. Similarly, DOD?s TRICARE retail
pharmacy program costs have skyrocketed- averaging 34 percent increases each
year since 1995. 11 A number of factors are likely to further drive up
pharmaceutical spending, such as a decrease in private insurance
pharmaceutical coverage for individuals eligible for VA or DOD benefits.
This is particularly so for DOD- as of April 1, 2001, approximately 1.4
million retirees and their dependents received new retail and mail- order
pharmacy benefits at an additional cost of about $800 million annually. 12

11 The direct care system of Army, Navy, and Air Force medical facilities is
supplemented by DOD?s regional TRICARE managed care support contracts, under
which retail pharmacy benefits are provided to eligible DOD beneficiaries.
In fiscal year 2000, DOD beneficiaries obtained 12 million retail pharmacy
prescriptions, which cost TRICARE contractors $455 million.

12 Beneficiaries 65 years of age and older received new pharmacy benefits
under the Floyd D. Spence National Defense Authorization Act for Fiscal Year
2001 (P. L. 106- 398). In the past, these beneficiaries have found it
difficult to obtain necessary medications at military pharmacies due to
DOD?s limited formulary. The new program will limit their outof- pocket
costs and increase their access to DOD?s mail- order pharmacy program and
28, 000 TRICARE retail pharmacies.

Page 7 GAO- 01- 588 DOD and VA Pharmacy

Figure 1: Rise in VA and DOD Pharmacy and Health Care Expenditures, 1995-
2000

Source: GAO analysis of DOD and VA information.

Since 1997, VA and DOD have each adopted centralized formularies to help
ensure that certain drugs are available at all veterans? and military health
care facilities as well as to control pharmacy benefit costs. VA?s national
formulary currently lists about 1,100 drugs representing 254

0 20

40 60

80 100

120 1995 2000 Percent change in expenditures

VA pharmacy DOD pharmacy DOD health care VA health care

Page 8 GAO- 01- 588 DOD and VA Pharmacy

classes, while DOD?s basic core formulary lists 175 drugs in 71 classes. 13
Most of the drug classes in both VA national and DOD core formularies are
open- that is, there are no restrictions on provider?s choice of which drug
to prescribe for a patient. However, a few drug classes are closed or
preferred, meaning that VA and DOD have varying restrictions on providers?
choice of drugs after determining that certain brand name drugs are
therapeutic alternatives- that is, interchangeable in terms of efficacy,
safety, and outcomes.

Having closed or preferred classes allows VA and DOD to competitively award
requirements contracts for the lowest- priced drugs. 14 In closed classes,
VA and DOD providers must prescribe and pharmacies must dispense the
contract drug, instead of therapeutic alternatives, to meet the terms of the
contract and guarantee drug companies a high market share. Case- by- case
exceptions are allowed, such as those for medical necessity. In preferred
classes, VA and DOD providers and pharmacies are encouraged to use the
preferred drug but may prescribe or dispense other drugs in the same class
without obtaining an exception. Due to the complexity of the care issues and
the need to garner clinical acceptance and support, VA and DOD can take as
long as a year between the date their respective class reviews establish
therapeutic interchangeability of competing brand name drugs and the date a
contract is awarded. Generic drug contracts do not require drug class
reviews- since competing products are already known to be chemically and
therapeutically alike- and, therefore, take less effort and time- about 120
days.

VA and military pharmacies use a number of purchasing vehicles to buy
prescription drugs at substantial discounts from market prices. (See table
1.) For example, in 1999, about 81 percent of VA and DOD?s combined $2.4
billion in drug expenditures was for drugs bought through the federal

13 VA?s national formulary includes drugs used for inpatient and outpatient
care, whereas the DOD basic core formulary is the minimum list of drugs used
for outpatient care that all military pharmacies must make available at each
facility. Locally, veterans and military medical centers, hospitals, and
clinic pharmacies can add drugs to their respective national and basic core
formularies based on their clinical services and the scope of inpatient and
outpatient care provided.

14 VA and DOD refer to these as committed- use contracts. About 2 percent of
the classes on VA?s national formulary are closed or preferred. Less than 10
percent of the classes on DOD?s basic core formulary are closed or
preferred.

Page 9 GAO- 01- 588 DOD and VA Pharmacy

supply schedule (FSS) for pharmaceuticals. 15 The remaining expenditures
were for purchases associated with the different requirements contracts VA
and DOD have with drug manufacturers- each using leverage with manufacturers
to achieve the lowest- priced product on its formulary.

Table 1: VA and DOD Pharmaceutical Purchasing Vehicles Purchasing vehicle
Description Discount

FSS for pharmaceuticals VA negotiates multiple award contracts with drug
companies to set prices available to all federal purchasers. FSS prices are
intended to be no more than the prices manufacturers charge their most-
favored nonfederal customers under comparable terms and conditions. Under
federal law, a drug manufacturers must list their brand name drugs on the
FSS to receive reimbursement for drugs covered by Medicaid.

About 50 to 58 percent lower than average wholesale price. b

FSS blanket purchase agreements (BPA) FSS contracts with drug manufacturers
contain BPA provisions so that VA and

DOD can negotiate additional discounts. Sometimes the lower prices are
dependent on specific volumes being purchased by particular facilities, such
as one or more VA or military hospitals. VA and DOD have negotiated a few
BPAs for preferred status on their respective national formularies.

Variable discounts below FSS prices.

Requirements contracts VA and DOD brand name drug and generic drug
requirements contracts differ as follows.

After performing drug class reviews, VA and DOD determine that some brand
name drugs are therapeutic alternatives. This determination allows VA and
DOD to conduct a competition among the equivalent drugs and to select one
winner based on price alone. VA and DOD commit to use the selected drug on
their respective national formularies and close the class. Providers must
prescribe and VA and DOD pharmacies must dispense the contract drug, instead
of therapeutic alternatives, to guarantee drug companies a high volume of
use. Case- by- case exceptions are allowed under certain circumstances, such
as for medical necessity.

In some cases, brand name drug requirements contracts are also based on
competitions among drugs that have been determined to be therapeutic
alternatives. Here, however, VA and DOD list the contracted drugs as
preferred agents on their respective national formularies, but do not close
the class. Individual VA and military pharmacies may add and use other drugs
in the same class on their local formularies.

For generic drugs, VA and DOD conduct a competition for an exclusive
contract with one manufacturer. Contracted items are usually selected from
among generic products approved by the Food and Drug Administration that are
tested against a standard of bioequivalence to the original brand name
version.

Average 33 percent lower than FSS prices.

a The Veterans Health Care Act of 1992 (P. L. 102- 585).

15 Administered by VA through multiple award contracts with manufacturers,
the FSS for pharmaceuticals is a list of over 17, 000 brand name and generic
drug products and their prices.

Page 10 GAO- 01- 588 DOD and VA Pharmacy

b Average wholesale price is what a manufacturer suggests wholesalers charge
pharmacies. Typically less than the retail price, average wholesale price is
referred to as a sticker price because it is not the actual price that large
purchasers normally pay. For example, in a 1997 study of prices paid by
retail pharmacies in 11 states, the average acquisition price was 18.3
percent below average wholesale price (Office of the Inspector General,
Medicaid Pharmacy- Actual Acquisition Cost of Prescription Drug Products for
Brand Name Drugs (Washington, D. C.: Health and Human Services, Apr. 1997).
Discounts for health maintenance organizations and other large purchasers
can be even greater.

Sources: Prescription Drugs: Expanding Access to Federal Prices Could Cause
Other Price Changes

(GAO/ HEHS- 00- 118, Aug. 7, 2000) and GAO analysis of DOD and VA
information.

For nearly 2 decades, the Congress has urged VA and DOD to maximize federal
dollars by sharing their health care resources. In May 1982, the Congress
enacted the VA and DOD Health Resources Sharing and Emergency Operations Act
(P. L. 97- 174), which generally encouraged the two departments to enter
into agreements to share health care services in existing or newly built
health care facilities. In 1996, the Congress began to specifically target
cooperation in the purchasing and distributing of pharmaceuticals for the
departments? respective beneficiaries. A 1999 report by a congressional
commission concluded that DOD and VA should combine their market power to
get better pharmaceutical prices through joint contracts. 16 More recently,
the Veterans Millennium Health Care and Benefits Act (P. L. 106- 117)
required VA and DOD to submit a report on how joint pharmaceutical
procurement can be enhanced and cost reductions realized by fiscal year
2004. In January 2001, VA and DOD submitted this report on efforts under way
to maximize efficiencies in health care systems. Finally, the Veterans
Benefits and Health Care Improvement Act of 2000 (P. L. 106- 419) included a
provision encouraging VA and DOD to increase to the maximum extent
consistent with their respective missions their level of cooperation in the
procurement and management of prescription drugs.

VA and DOD have made important progress, especially this past year, to
increase their joint pharmaceutical procurement activities. By May 2001, the
departments expect to have more than doubled the number of joint procurement
contracts entered into since our May 2000 testimony. And the departments
estimate substantial cost avoidance from current and planned joint
procurements- about $170 million per year. VA and DOD?s improved
communication and collaboration on these efforts should further enhance
their future performance.

16 The Congressional Commission on Servicemembers and Veterans Transition
Assistance report made numerous recommendations to improve the effectiveness
of DOD and VA programs providing benefits and services to active duty
military personnel and veterans. VA and DOD Have

Markedly Increased Their Joint Procurement Activities

Page 11 GAO- 01- 588 DOD and VA Pharmacy

From October 1998 through April 2000, VA and DOD awarded joint contracts for
18 products, which accounted for about $62 million in combined drug
expenditures in fiscal year 2000. (See table 4 in appendix I.) Although
these drugs account for just 1.9 percent of the departments? combined $3.2
billion drug spending in 2000, VA and DOD estimate these joint procurement
discounts achieved sizeable cost avoidance- about $40 million in 2000. This
is in addition to the significant cost avoidance the departments are already
experiencing from their separate contracts. Last year, the departments began
developing plans to merge these contracts as they expire and undertook other
collaborative actions that will increase the number of joint procurements in
the future.

In May 2000, we testified that VA and DOD could significantly increase
savings with expanded use of joint pharmaceutical procurement, especially
for products in high- expenditure drug classes- a number of which we
identified. Since that time, the departments have moved to more than double
their joint pharmaceutical procurements and the expected financial benefits
from these joint activities. As of January 2001, for example, VA and DOD
have awarded an additional 12 joint contracts for commonly used generic
drugs and are in the process of awarding another 14 joint contracts-
including one for a brand name nonsedating antihistamine drug. (See tables 5
and 6 in appendix I.) In 1999, these drugs accounted for about $123 million
of combined VA and DOD purchases. The departments estimate substantial
discounts from these new joint procurements- an additional $30 million in
drug purchasing cost avoidance each year for the 12 contracts already under
way- and millions more should stem from the 14 solicitations that are under
way.

As of December 2000, VA and DOD had preliminarily reviewed the
highexpenditure classes that we suggested could provide opportunities for
additional joint procurements. As a result, they plan over the next few
years to target for joint procurement 112 drugs- which accounted for about
$400 million of their combined expenditures in 1999. (See table 2 for the
major therapeutic areas and appendix II for details.) Further, VA and DOD
plan to propose more joint procurements after they complete their analysis
of the suggested classes. Most of these planned procurements are for generic
drugs, but some are for brand name drugs. For example, VA and DOD also
recently completed class reviews on the therapeutic interchangeability of
several brand name drugs used to treat sinus congestion and have found
sufficient clinical basis to pursue one or two joint procurements. Joint
Drug Procurements

Have Substantially Increased, and Many More Are Planned for the Next Few
Years

Page 12 GAO- 01- 588 DOD and VA Pharmacy

Table 2: Therapeutic Areas We Suggested and VA and DOD Targeted for Joint
Procurement in the Future

Dollars in millions

Major therapeutic area VA/ DOD purchases that can be contracted

Estimated cost avoidance for

VA/ DOD

Antihistamines $15.0 $2.4 Anti- infective agents 39.7 5. 7 Antineoplastic
(anticancer) agents 28.9 5. 1 Blood formation and coagulation 26.6 4. 4
Cardiovascular drugs 16.1 2. 5 Central nervous system agents 128.7 48.9
Diagnostic agents 36.1 3. 6 Gastrointestinal drugs 7.7 2. 1 Hormones and
synthetic substitutes 79.7 22.7 Serums, toxoids, and vaccines 15.9 0. 06
Unclassified therapeutic agents 6.9 2. 1

Totals $401.1 $99.5

Notes: These major therapeutic areas were among those that we suggested the
departments perform reviews, class- by- class, of their purchased drugs to
identify candidates for joint procurement. See appendix II in DOD and VA
Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could Save
Millions of Dollars (GAO/ T- HEHS- 00- 121, May 25, 2000). Also, dollars do
not equal total due to rounding.

Source: GAO analysis of VA and DOD information.

The departments estimate that discounts from joint procurements in the
targeted classes will yield about $100 million in additional annual cost
avoidance although they have not yet estimated cost avoidance for some later
year procurements. Also, DOD and VA agreed to merge 52 existing VA- only and
DOD- only contracts as these contracts expire. (See table 7 in appendix I.)
For example, the departments plan to merge their eight separate contracts
for brand name drugs used to lower cholesterol, treat gastrointestinal
problems, and control high blood pressure. These contracts yielded cost
avoidance in excess of $184 million in fiscal year 2000, which will likely
increase as the contracts are consolidated. But, the departments have not
yet estimated the consequent potential additional cost avoidance. While
potential cost avoidance is difficult to estimate- especially given the high
variability in drug market competition- it is likely that the more joint
procurements VA and DOD enter into, the greater the financial benefits they
will realize.

Page 13 GAO- 01- 588 DOD and VA Pharmacy

Prior to May 2000, VA and DOD had primarily used interagency sharing
agreements and work groups to collaborate on joint procurement activities.
In 1998, for example, the DOD/ VA Federal Pharmacy Executive Steering
Committee was established to increase the uniformity and cost effectiveness
of drug therapy in their separate health systems, including overseeing joint
contracts for high- dollar and high- volume drugs. But the geographical
separation of the departments? key pharmacy policy and acquisition staffs
continued to hamper their day- to- day communications on joint drug
activities and complicate their working relationships. 17 Since May 2000,
however, the departments have sought to remedy this. As a result, their key
pharmacy officials now meet regularly at hub locations to discuss and
further their joint procurement activities, and have developed a continually
updated interagency report on their joint procurement activities.

In August 2000, the DOD/ VA Federal Pharmacy Executive Steering Committee
began meeting regularly in San Antonio, Texas; Falls Church, Virginia; or
Chicago, Illinois, to identify drugs or classes for joint contracting and
discuss strategies based on ongoing clinical and formulary decisions. VA and
DOD pharmacy policy and acquisition center staff also started holding
frequent subcommittee meetings to focus on joint procurement issues.

Similarly, in July 2000 VA and DOD acquisition center executives and
managers began meeting regularly in Philadelphia or Chicago to review
progress under a memorandum of agreement (MOA) to combine their buying
power, reduce medical materiel costs, and eliminate contracting
redundancies. 18 In addition to implementing joint contracting decisions,
the MOA provided that the departments also work together to cancel DOD?s
distribution and pricing agreements (DAPA) with drug companies

17 DOD?s Pharmacoeconomic Center is in San Antonio, Texas, and its
acquisition center is in Philadelphia, Pennsylvania. VA?s counterpart
clinical and acquisition groups are in Hines (Chicago), Illinois.

18 The MOA, signed in 1999, provides that the responsibilities of DOD and VA
will be tailored for each medical product line and service in appendixes
that are separately coordinated by the appropriate offices. Current
appendixes are medical- surgical products and pharmaceutical products (a
medical equipment appendix is being developed), with other areas to be added
as needed. Improved Collaboration

Should Enhance Future Joint Procurement Performance

Page 14 GAO- 01- 588 DOD and VA Pharmacy

by converting them to VA?s FSS prices. 19 Since the May 2000 hearing, a
number of issues impeding progress on converting DAPA to FSS prices have
been resolved. For example, a needed computer interface was established
between the acquisition centers to expedite uploading FSS prices into DOD?s
pharmaceutical ordering and purchasing system, and VA agreed to offset its
normal surcharge on all FSS sales 20 to military pharmacies. By January
2001, DOD was able to convert its DAPAs and now both agencies use the same
FSS prices. As a result of last year?s progress on the MOA, DOD?s
acquisition officials expect to reassign some of their employees to work on
additional joint pharmaceutical contracting with VA.

Finally, VA and DOD?s new Joint Contract Status report, which is maintained
by VA?s pharmacy policy staff, details every drug and drug class with
combined purchase potential. VA and DOD pharmacy policy and procurement
staff use the report to monitor joint procurement progress and track
results. The report is continually updated to list all current joint and
separate (VA- only and DOD- only) contracts and those potential procurements
that are dependent on clinical and formulary decisions. A November 2000
update to the report details about 140 unique drugs and drug classes
providing the contracting status for existing joint and separate contracts
and, for many of these, estimates of award values and annual cost avoidance.
The report also lists proposed and pending joint contracts- including
several we had identified earlier as potential candidates- and the time
frames for the various procurement stages. Projected time frames for when
the departments? separate national contracts can be merged are also
included.

19 Historically, VA and DOD had about 250 differing price arrangements for
thousands of pharmaceutical products with many of the same companies. In
practice, DOD adopted the FSS price as the starting point for negotiations
on DAPAs. By converting the DAPAs, both agencies would pay the same FSS
prices to drug makers and some small administrative efficiencies would
follow.

20 To recover administrative costs associated with managing the FSS, VA
began collecting a fee of 0. 5 percent on drug manufacturers? FSS sales in
1995, which resulted in DAPA prices becoming slightly lower than FSS prices.
According to a DOD acquisition official, initial response from drug
manufacturers was to adjust both FSS and DAPA prices upward by 0. 5 percent.
However, DOD determined that manufacturers had no legal basis to raise DAPA
prices and notified manufacturers that it would no longer accept DAPA prices
equal to FSS. Under the MOA, DOD was concerned that the conversion to FSS
prices would potentially drive up military pharmacies? purchasing costs by
$2 million. To avoid this, VA agreed to refund to DOD FSS surcharges for the
first year of the MOA, which was implemented in January 2001.

Page 15 GAO- 01- 588 DOD and VA Pharmacy

Most VA and DOD joint procurements have been for low- cost generic drugs.
While these drugs make up a larger share of the departments? combined drug
volume than brand name drugs, brand name drugs make up a far higher share of
expenditures. For example, VA?s brand name drug purchases are 36 percent of
volume but 91 percent of expenditures. 21 Although in jointly procuring
brand name drugs it can be more complex and time- consuming to garner
clinical support and provider acceptance on therapeutic interchangeability,
the cumulative financial benefit potential is far greater. Along with such
inherent difficulties, VA and DOD cite such challenges as differences in
their beneficiary populations and formularies that make it difficult for
them to jointly procure brand name drugs. However, some of these differences
are diminishing, and the departments have already demonstrated in two cases
that they can jointly procure brand name drugs and still meet their unique
clinical and administrative needs. Also, the departments can take such
actions as periodically seeking input from experts and providing annual
reports to the Congress on their joint procurement activities to help
enhance their efforts to address these challenges.

According to VA and DOD officials, several aspects of their health care
systems create challenges that limit their opportunities to jointly procure
brand name drugs:

 VA and DOD officials cite differences in their patient populations- VA
serves mostly older men, while DOD also serves younger men and women and
children- as shown in figure 2. They said that the different populations
result in dissimilar patterns of drug use and demand among their respective
beneficiaries, resulting in fewer opportunities to combine drug requirements
and solicit joint contracts.

21 According to DOD, an estimated 40 percent of military pharmacies?
prescription volume in 1999 and 2000 was for brand name drugs; however, data
are unavailable on brand name versus generic drug costs. VA and DOD Cite

Challenges to Jointly Procuring Brand Name Drugs

Departments Cite Differing Beneficiaries, Formularies, Clinical Needs, and
Provider Prescribing Practices as Complicating Jointly Buying Brand Name
Drugs

Page 16 GAO- 01- 588 DOD and VA Pharmacy

Figure 2: DOD and VA Beneficiary Populations- 1999

Source: GAO analysis of 1999 Federal Market Facts, U. S. Medicine.

 VA and DOD officials told us that differences in the scope of their
national formularies also limit opportunities for joint drug procurements.
VA?s national formulary currently lists about 1,100 drugs for inpatient and
outpatient care representing 254 classes, while DOD?s basic core formulary
lists 175 drugs for outpatient care in only 71 classes. Also, DOD?s military
pharmacy formularies currently limit the drugs available to beneficiaries
seeking them whereas its TRICARE retail formularies are unrestricted such
that virtually any drug can be obtained. DOD officials are concerned that
joint contracts for particular brand name drugs would further restrict drug
choice at military pharmacies, which, in turn, could cause beneficiaries to
use the retail pharmacies for their drugs. This could drive up DOD?s overall
pharmacy costs because its contractors? drug costs are greater than its
discounted military pharmacy drugs. 22

22 DOD?s drug price discounts under its FSS and requirements contracts with
drug manufacturers reduce drug costs far below prices paid by TRICARE
contractors for retail pharmacy prescriptions- which, on average, cost 40
percent more.

0 1

2 3

4 5

6 <18 18- 44 45- 64 >64 Age group Millions of beneficiaries

DOD male DOD female VA male VA female

Page 17 GAO- 01- 588 DOD and VA Pharmacy

 VA and DOD officials are also concerned that closing some classes would be
clinically unacceptable for certain populations or individuals with certain
conditions. For example, VA and DOD have been reluctant to seek joint
contracts for orally inhaled corticosteroids (to treat asthma) because some
DOD clinicians would not accept limiting drug choices in the oral inhaler
class for clinical reasons, such as the special needs of children.
Similarly, VA and DOD clinicians said they would not accept closing the
selective serotonin reuptake inhibitor (SSRI) antidepressant class because
they already have many patients maintained on one SSRI, and switching their
SSRI drug therapy could have adverse treatment effects.

 Finally, DOD is concerned that its limited control of private provider
prescribing practices could result in significant costs to educate and
persuade these providers to prescribe drugs contracted under joint
procurements. Unlike VA beneficiary prescriptions, which are all written by
VA providers and dispensed by VA pharmacies, DOD beneficiary prescriptions
are written by both military and private providers and dispensed by both
military and retail pharmacies. In fiscal year 2000, about half of the 52
million prescriptions filled by military pharmacies were written by private
providers and TRICARE retail pharmacies filled 12 million prescriptions for
DOD beneficiaries.

Over the past decade, DOD?s patient profile and drug demands have become
more similar to VA?s. DOD retirees now make up over 50 percent of DOD?s
beneficiary population- a trend that is projected to continue- and account
for most of DOD?s drug costs. In fiscal year 2000, close to 70 percent of
military pharmacies? drug costs was for retirees? prescriptions. (See figure
3.) Further, DOD?s pharmacy benefits for 1.4 million retirees 65 and older
expanded in April 2001, which will add an estimated $800 million dollars per
year to DOD?s pharmacy expenditures. Increasing Numbers of

Military Retirees and Expanded DOD Benefits Are Lessening Differences
Between DOD and VA Drug Needs

Page 18 GAO- 01- 588 DOD and VA Pharmacy

Figure 3: DOD Prescription Drug Use and Costs by Beneficiary Category,
Fiscal Year 2000

Source: GAO analysis of DOD information.

A significant portion of VA and DOD?s combined drug expenditures is already
spent on drugs in classes used primarily to treat older patients. For
example, in 1999, 8 of the top 10 high- dollar drug classes in each
department were the same. (See table 3.) Most of the matching therapeutic
classes are widely used to treat health conditions common to the elderly:
high blood pressure, depression, ulcers, diabetes, and high cholesterol. As
DOD?s older beneficiary population continues to increase, the use of drugs
in these and similar classes and their related expenditures will increase as
well.

Active duty Active duty families Retirees 0 10

20 30

40 50

60 70

80

Prescriptions Drug costs

Percentage of use and costs Beneficiary category

Page 19 GAO- 01- 588 DOD and VA Pharmacy

Table 3: Matching VA and DOD High- Dollar Drug Classes in 1999 Ranking Drug
class and treatment condition VA DOD VA/ DOD expenditures a

Gastrointestinal agents (for ulcers and acid reflux) 1 2 $197.9 Antilipemics
(for high cholesterol) 2 1 195.7 Antidepressants 3 3 158.3 Calcium channel
blockers (for high blood pressure) 5 4 120.3 Antivirals (for herpes,
hepatitis, human immunodeficiency virus, and acquired immunodeficiency
syndrome) 6 9 92.7 Antidiabetics- oral hypoglycemics 8 8 74.1 Angiotensin
converting enzyme inhibitors (ACEI) (for high blood pressure) 9 7 69.8
Anticancer drugs b (for cancers such as breast, lung, and prostate) 10 10
55.7

Total $964.5

a In millions of dollars. b Excludes $32 million VA and DOD expenditures on
leutinizing hormone- releasing hormones (used to treat prostate cancer)
ranked in a separate class. Source: GAO analysis of VA and DOD information.

DOD and VA are expected to revise their formularies, which could increase
the number of closed and preferred drug classes used in their health care
systems. The larger their formularies, the greater the chance they will
overlap and provide the two departments more opportunities to jointly
procure brand name drugs.

Recent legislation has prompted DOD to make plans to increase the number of
drugs on its basic core formulary. In 1999, the Congress enacted legislation
requiring DOD to establish a preferred drug formulary by October 2000,
applicable to both military pharmacies and TRICARE retail and mail- order
pharmacies. 23 DOD missed this deadline and is developing regulations to
implement this requirement later this year. The legislation also allows DOD
to develop and implement a tiered retail and mail- order pharmacy copayment
system that creates financial incentives for beneficiaries to use less
costly formulary brand name and generic drugs. Once implemented, DOD
beneficiaries would have full access to nonformulary brand name drugs but
would be financially encouraged to choose less costly formulary brand name
drugs available for free at

23 As required by the National Defense Authorization Act for Fiscal Year
2000 (P. L. 106- 65), by October 1, 2000, DOD was to have established a
uniform formulary. Formulary drug selection is to take into account relative
clinical and cost effectiveness by drug class. Ongoing Changes to DOD?s

and VA?s Formularies Should Increase Joint Procurement Opportunities

Page 20 GAO- 01- 588 DOD and VA Pharmacy

military pharmacies or at lower out- of- pocket costs through mail- order or
retail pharmacies. 24 TRICARE contractor representatives told us that a
uniform formulary- one that applies to both military and TRICARE pharmacies-
and adequately tiered retail and mail- order pharmacy copayments are
critically needed to help them and DOD better manage pharmacy benefit costs
by steering use to less costly drugs.

In addition, the Congress enacted legislation in 2000 25 requiring DOD to
allow beneficiaries age 65 and older access to its retail and mail- order
pharmacy benefits- in addition to their continued eligibility to use
military pharmacies to obtain free medications. For the first time starting
in April 2001, all beneficiaries are eligible for DOD?s comprehensive
pharmacy benefits at the same copayment rates. However, DOD?s retail and
mailorder pharmacies are comparatively more costly sources for the same
drugs than its military pharmacies. (See figure 4.) An expanded basic core
formulary would encourage all beneficiaries to obtain more of their
prescriptions at the military pharmacies.

24 As of April 1, 2001, all nonactive duty DOD beneficiaries can obtain up
to 90- day supplies of generic and brand name prescription drugs from the
mail order pharmacy for $3 and $9, respectively. If beneficiaries use
TRICARE?s retail network pharmacies, they pay $3 and $9 for up to 30- day
supplies. DOD has not established a third- tier copayment for supplies of
nonformulary brand name prescription drugs, but it expects to do so later
this year as part of implementing the uniform formulary.

25 The Floyd D. Spence National Defense Authorization Act for Fiscal Year
2001 (P. L. 106- 398).

Page 21 GAO- 01- 588 DOD and VA Pharmacy

Figure 4: DOD Prescriptions and Costs by Pharmacy Source, Fiscal Year 2000

Source: GAO analysis of DOD information.

VA is also revising its formulary management processes and will continue to
change its formulary based, in part, on our earlier reviews 26 and a study
by the Institute of Medicine (IOM). 27 The IOM study was done in response to
congressional concerns that VA?s formulary may have been overly restrictive,
with potentially negative effects on health care cost and quality. IOM?s
study dispelled such concerns, concluding that VA was justified in creating
its formulary and that well- managed formularies are a key part of modern
health systems having positive effects on cost and quality. IOM recommended
in part that VA continue to prudently establish closed and preferred classes
on its formulary and to use more contracts to carefully limit drug choices
in more classes, based on quality and cost considerations. As VA?s and DOD?s
formularies continue to evolve, the number of overlapping classes should
increase, providing more candidates for joint brand name drug contracts.

26 VA Health Care: VA?s Management of Drugs on Its National Formulary (GAO/
HEHS- 00- 34, Dec. 14, 1999) and VA Drug Formulary: Better Oversight Is
Required, But Veterans Are Getting Needed Drugs (GAO- 01- 183, Jan. 29,
2001).

27 Description and Analysis of the VA National Formulary, Institute of
Medicine, National Academy Press, 2000.

2% 18% 80%

Mail- order prescriptions Retail prescriptions

Military prescriptions

7% 29% 64%

Mail- order costs Retail costs Military costs

Page 22 GAO- 01- 588 DOD and VA Pharmacy

VA and DOD have recently demonstrated in a few cases that, with flexible
arrangements, they can procure brand name drugs at maximum discounts, while
still allowing one or both departments to preserve drug choice.

 In August 2000, VA and DOD solicited bids for a joint procurement for one
of two nonsedating antihistamines (NSA)- loratadine (Claritin) and
fexofenadine (Allegra). To address a DOD concern and ensure that DOD
beneficiaries would not have to change their current medications, the
solicitation specifies that DOD beneficiaries already using an NSA would not
have to switch if the departments jointly contracted for the other drug.
Military pharmacies will only have to dispense the contracted drug for new
patient prescriptions.

 For the nicotine patch class (for smoking cessation), VA and DOD have
awarded a joint contract that requires only those VA and DOD facilities
offering smoking cessation programs to use the contracted drug. Simply
adding the contracted product to their formularies would have required VA
and DOD facilities without such programs to stock the patches. The joint
procurement allowed VA and DOD to realize an estimated $2.4 million in
annual cost avoidance.

 For the angiotensin converting enzyme inhibitor (ACEI) and calcium channel
blocker classes, DOD and VA have awarded contracts for preferred formulary
drugs without closing the classes. 28 While these contracts encourage
providers to prescribe less costly contracted drugs for their patients,
providers are free to prescribe noncontracted drugs without having to
justify medical necessity. These contracts have resulted in an estimated $13
million in annual cost avoidance.

 For the leutinizing hormone- releasing hormone (LHRH) class of anticancer
drugs, 29 DOD negotiated a blanket purchase agreement (BPA) to receive the
same price as VA?s contract price for Zoladex- a 33 percent discount off old
prices. 30 In return, DOD has agreed to the preferential use of Zoladex to
treat a subset of DOD?s population- adult prostate cancer

28 ACEIs and calcium channel blockers are different classes of
cardiovascular drugs used to treat high blood pressure and related
conditions. DOD?s preferred ACEIs are captopril (Capoten) and lisinopril
(Zestril). VA?s preferred dihydropyridine- type calcium channel blocker is
nifedipine sustained release tablets (Adalat CC).

29 The LHRH class includes goserelin (Zoladex) and leuprolide (Lupron). 30
FSS contracts contain BPA provisions so that DOD can negotiate additional
discounts in return for specific volumes being purchased by military
hospitals. To retain the 33- percent discount below current DOD prices, the
Zoladex BPA calls for achieving an overall military pharmacy market share of
80 percent of prescriptions for adult prostate cancer patients (age 18 years
and older) by September 2001. Flexible Procurement

Approaches Can Help Preserve Drug Choice While Reaping Discounts

Page 23 GAO- 01- 588 DOD and VA Pharmacy

patients. However, the BPA does not limit providers? choice in prescribing
LHRH drugs for women and children- a clinical concern that had caused DOD to
avoid closing this class. 31 DOD?s preferential use of Zoladex should
achieve substantial cost avoidance. VA?s separate national contract on
Zoladex- which closed the class on VA?s formulary- is achieving an estimated
$22 million in annual cost avoidance.

In addition, if VA and DOD determine that joint contracting for certain
classes is not advantageous, they can use joint BPAs to achieve greater
discounts without the more stringent use and time commitments required under
a contract. For example, drugs under a joint BPA could be assigned
preferential status on the departments? formularies to encourage- but not
require- providers to use the drugs. Competing drugs could also have equal
status under multiple joint BPAs rather than closing a class. For example,
VA negotiated discounts for SSRI antidepressants with three drug companies
under individual BPAs. 32 These BPAs were subsequently extended to DOD.
Unlike contracts, BPAs do not require long- term commitments. VA, DOD, or
the manufacturer can terminate BPAs with 30 days? notice. While joint BPAs
may not always realize the deep discounts provided under joint contracts,
they could reduce costs nonetheless.

DOD can work with its TRICARE managed care support contractors to encourage
nonmilitary providers to prescribe the contracted drugs included in DOD?s
developing uniform formulary as well as inform beneficiaries about the cost
benefit to them. About half of the 52 million prescriptions dispensed by
military pharmacies in fiscal year 2000 were written by nonmilitary
providers treating DOD beneficiaries.

DOD?s TRICARE contractors have large, nationwide networks of providers; 33
they also administer benefits and pay claims to non- network providers
caring for DOD beneficiaries. Contractor representatives told us that they
could disseminate key information about DOD?s uniform formulary, once it is
developed and implemented, on their provider Web sites and provide
beneficiaries with formulary pocket cards to take along on their medical
appointments. Patients would also be motivated to use

31 In addition to being used to treat prostate cancer, LHRH drugs may also
be used to treat breast cancer, endometriosis, and precocious puberty. 32 As
of March 2001, BPA discounts on Celexa, Prozac, and Zoloft range between 9.8
percent and 63. 5 percent below FSS prices. Paxil is available at FSS
prices. 33 Currently, DOD has 161, 000 civilian TRICARE network providers.
DOD Can Work With

TRICARE Contractors to Influence Providers? Prescribing Practices

Page 24 GAO- 01- 588 DOD and VA Pharmacy

drugs on the formulary because such use reduces their out- of- pocket costs.

Other managed care pharmacy experts told us that these types of outreach
efforts are a necessary and routine part of pharmacy benefit management.
According to these experts, the additional administrative effort and cost to
reach out to providers and beneficiaries will be more than offset by the
financial benefits of less costly drug procurement and utilization.

In our view, periodic expert input and congressional review could help
sustain the important progress VA and DOD have made to address the
challenges they face in jointly procuring drugs. While various experts in
managed care pharmacy- including several responsible for the IOM study 34
-agreed that the differences in VA?s and DOD?s demographics and health
systems are not insurmountable obstacles to joint procurements, they were
generally sympathetic to the clinical and operating challenges ahead as the
departments continue to expand their efforts. Also, several experts told us
that the departments? efforts might be enhanced by periodically conferring
with private managed care pharmacy experts in order to exchange information,
experiences, and lessons learned that are relevant to the departments? joint
procurement plans and efforts.

External reporting could also help bolster VA and DOD?s efforts to enhance
their joint procurement activities- a general finding we reported to the
Congress in May 2000. 35 At that time, we recommended that the departments
provide information to the Congress on their resource sharing activities-
including initiatives such as joint purchasing of pharmaceuticals- to help
the Congress and the departments weigh the advantages of such joint
activities from a federal perspective rather than

34 The IOM study was performed by professional staff working with a 14-
member committee. Membership included several individuals with expertise in
geriatrics and general medicine, directors of major clinical and health care
policy academic units, and leaders of institutional or managed care
organization formularies and pharmacy benefit plans.

35 VA and Defense Health Care: Evolving Health Care Systems Require
Rethinking of Resource Sharing Strategies (GAO/ HEHS- 00- 52, May 17, 2000).
Since 1987, the departments have reported annually to the Congress on the
status of their health care resource sharing program, as required under the
VA and DOD Health Resources Sharing and Emergency Operations Act (P. L. 97-
174). As of March 2001, the most recent report submitted to the Congress
covered sharing activities as of fiscal year 1998; fiscal year 1999 and 2000
reports were being developed. Conferring With Private

Sector Experts and External Reporting Could Further Enhance VA and DOD?s
Joint Activities

Page 25 GAO- 01- 588 DOD and VA Pharmacy

from each agency?s standpoint. Moreover, as part of this reporting, VA and
DOD could provide details on their ongoing and planned joint procurements
relative to the departments? top- ranking drug classes by volume and
expenditures. Also, they could report on the proportion that joint
procurements represent of the departments? combined pharmaceutical
expenditures and volume, including the annual cost avoidance due to joint
procurements. Such reporting would help facilitate congressional oversight
of the departments? efforts to increase their cooperation in the procurement
and management of prescription drugs, which has been legislatively
encouraged.

VA and DOD have also made important progress in their efforts to conduct a
DOD CMOP pilot for evaluating the merits and feasibility of using CMOP
centers systemwide. In our May 2000 testimony, we suggested that DOD
consider using VA?s highly efficient CMOPs to reduce its dispensing costs.
36 In January 2001, DOD determined that it is feasible to develop the
necessary computer interface between military pharmacies and CMOP centers,
but other pilot details- including time frames for its implementation- have
not yet been developed. If funded and done promptly, the pilot would provide
VA needed lead time to plan for and begin building new CMOP facilities to
accommodate DOD?s workload in the event that DOD decides to use CMOPs
systemwide.

In recent years, pharmacy officials have considered various options for
moving DOD?s 23 million per year refill prescription workload out of
military pharmacies, including using VA?s CMOP centers. 37 VA has realized
significant financial and operating benefits by using its seven CMOP centers
to handle its refill prescription workload instead of using VA hospitals.
(See appendix III for a description of VA?s CMOP operations.) In May 2000,
we testified that DOD?s use of VA?s CMOP centers likewise could reduce drug
dispensing costs and provide other operating benefits. DOD generally agreed
with this proposition and with the proposed pilot

36 Dispensing costs include pharmacy personnel salaries, utilities,
housekeeping, furniture, and other equipment, but not the actual costs of
the drugs. 37 DOD had considered contracting with a commercial company to
manage its refill prescription workload. This option was ruled out because
there was limited response to DOD?s request for information and there were
indications of high cost. Despite Progress,

Issues Need to Be Addressed to Get CMOP Pilot Under Way

DOD?s Use of CMOPs Could Cut Drug Dispensing Costs and Have Other Benefits

Page 26 GAO- 01- 588 DOD and VA Pharmacy

test to use CMOPs to develop information on such matters for potential cost
avoidance.

Also by using CMOPs, DOD would likely achieve operating benefits similar to
those realized by VA. For example, CMOP automated technologies have enabled
each full- time CMOP employee to dispense between 50,000 and 100,000
prescriptions annually compared to about 15, 000 prescriptions dispensed by
VA?s pharmacy employees. Using CMOP centers to boost the efficiency of DOD?s
refill process might help offset the shortages of qualified pharmacists and
other staff at its military pharmacies. DOD also expects that by freeing up
its military pharmacists from the labor- intensive task of dispensing
prescriptions, they would have more time to work with medical staff and
patients toward safer, more effective drug use. CMOP centers also have the
benefit of ensuring quality- with their bar- code technology, they have
achieved a near error- free dispensing rate. Other potential benefits from
using VA?s CMOP centers include customer service. By reducing military
pharmacies? refill workload, pharmacists would have more time to fill
initial prescriptions and thus reduce customer waiting times. Beneficiaries
have the convenience of receiving refills by mail rather than picking them
up at military pharmacies.

After conducting an assessment of the costs and time required to develop a
computer interface between DOD?s military pharmacies and VA?s CMOP centers,
DOD plans to seek funding for the project. However, DOD and VA have not
developed plans for how or when to address other significant operational and
financial issues that must be worked through to ensure a successful pilot
program.

DOD had several concerns in deciding whether to conduct a CMOP pilot with
VA. Primary among these concerns was determining the costs and time needed
to develop an interface that would allow DOD to electronically transfer
millions of refill prescriptions from its military pharmacies to the CMOP
centers and allow the centers to confirm the status of each refill. In
January 2001, DOD, in consultation with VA, completed a preliminary review
of the information technology requirements and determined that this effort
should take about 9 months of work by pharmacy information technology
specialists and cost roughly $640,000. DOD?s pharmacy programs director told
us that, considering the reasonableness of the cost and time estimates,
establishing a DOD- CMOP interface is no longer considered a major obstacle
and that he is seeking internal funding for the interface. Progress Made
Toward

Assessing Feasibility, but Other Issues Remain Before Pilot Is Undertaken

Page 27 GAO- 01- 588 DOD and VA Pharmacy

According to VA and DOD, other significant operational and financial issues
will need to be worked through if DOD decides to adopt CMOP use systemwide.
For example, VA would have to plan for and build the equivalent of two new
CMOP centers to accommodate DOD?s estimated refill mail- out workload of
more than 20 million prescriptions. According to VA officials, the two new
CMOP centers for DOD would require 2 to 3 years to build and cost about $27
million. Yet both DOD and VA officials agree that such costs could be
significantly reduced if existing VA- or DOD- owned building space could be
retrofitted for CMOP?s hightechnology equipment and production lines. Unused
warehouses and aircraft hangars, for example, might have the 75, 000 square
feet of open floor space VA?s CMOP design requires. Another DOD concern is
that adopting CMOP use could adversely affect military medical readiness.
If, for example, DOD?s prime vendors? drug sales to military pharmacies are
reduced with CMOP use, then surcharge revenues generated by such sales and
used for medical logistics and readiness planning would likewise be reduced.
38 As we testified in May 2000, this concern could be addressed if DOD?s
prime vendors directly supply the CMOPs with drugs needed to fill DOD
beneficiaries? prescriptions- but the departments need to decide on a
mutually acceptable course of action.

VA and DOD officials told us that an interagency memorandum of understanding
or sharing agreement would need to be established to do the pilot program
and address these and other joint operational and financial concerns. Such
an agreement would cover the various details governing DOD?s use of VA?s
CMOPs for processing and mailing- out military pharmacy refill prescriptions
to DOD beneficiaries. For example, officials anticipate that an agreement
will include provisions to accommodate DOD?s medical readiness concerns.

However, DOD and VA have not established time frames for addressing the
remaining issues in order to finish planning so that the pilot can begin. VA
and DOD?s existing sharing agreement governing their joint pharmaceutical
and related medical procurement activities could be used

38 Under the DOD prime vendor program, a wholesaler under contract to DOD
buys drugs from a variety of manufacturers and the inventory is stored in
commercial warehouses. A military pharmacy orders the drugs from the prime
vendor, who ships most items to the pharmacy the next day. According to DOD,
in return for the lucrative, large volume military pharmacy sales market,
these prime vendors are financially induced to provide high levels of
medical logistics support to Army, Navy, and Air Force units responsible for
worldwide deployments and wartime readiness.

Page 28 GAO- 01- 588 DOD and VA Pharmacy

for the CMOP pilot. Signed in 1999, the MOA provided for such future joint
department activities by executing and adding appendixes to spell out mutual
commitments and responsibilities. Alternatively, a new agreement could be
drawn up for the CMOP activity.

VA and DOD have made important progress, particularly this past year, in
their collaborative efforts to jointly procure drugs to help control
spiraling prescription drug costs. Their awarded joint contracts and planned
joint procurements are expected to reduce the departments? total drug costs
by almost $170 million a year. This is in addition to significant cost
avoidance under the departments? separate contracts- cost avoidance that
will likely increase as the contracts are combined in the future. While
their joint procurement efforts have been impressive, to date the
departments have largely targeted generic drugs, which make up less than 10
percent of their combined expenditures. More dramatic cost reductions could
be realized through procurements of high- cost brand name drugs, although in
doing so, it may be more complex and time- consuming to garner the necessary
clinical support and provider acceptance on therapeutic interchangeability.

Nonetheless, DOD?s greatly expanded retiree drug benefit, and both
departments? developing formularies should provide added joint procurement
opportunities for such drugs. In particular, DOD needs to complete
development of a uniform formulary of preferred drugs among its health
system?s pharmacy sources to better manage and control drug use. Also, the
departments? have demonstrated that flexible approaches to developing joint
solicitations can take into account differences in their health systems
while still maximizing drug discounts. And DOD can work with the TRICARE
contractors to help influence nonmilitary providers and their patients to
use contracted drugs. This will become particularly important once DOD
develops its uniform formulary of preferred drugs. In our view, their joint
activities could be further enhanced by periodically conferring with private
managed care pharmacy experts and reporting to the Congress on their joint
procurement activities. DOD and VA need to ensure that high- level attention
remains focused on their joint drug procurement and distribution activities
as leadership changes under the new administration occur at the departments.

In the same regard, VA and DOD have also made progress in their efforts to
conduct a CMOP pilot. DOD?s use of VA?s CMOPs to handle its large
prescription refill workload would result in drug dispensing cost reductions
and better use of limited resources. To accelerate the pilot, however, VA
and DOD need to develop an action plan with formal Conclusions

Page 29 GAO- 01- 588 DOD and VA Pharmacy

commitments. The sooner the pilot proves feasible, the sooner DOD can begin
to realize the financial and quality of care benefits associated with the
transfer of its refill workload.

In view of the leadership changes under way at DOD and VA, we recommend that
the departments sustain the momentum made this past year by jointly
procuring all brand name and generic drugs for which such procurement is
clinically appropriate and cost effective. Also, to help build on the
departments? progress with joint drug procurement and distribution
activities, we recommend that the Secretaries of Defense and Veterans
Affairs ensure that the Acting Assistant Secretary of Defense (Health
Affairs) and VA?s Under Secretary for Health take the following actions:

 as part of the departments? annual reporting to the Congress on resource
sharing activities, provide information on ongoing and planned joint
procurements- including the volume and expenditures relative to the
departments? top- ranking drug classes and total drug expenditures and the
consequent annual cost avoidance- as well as on progress toward implementing
a CMOP pilot;

 consider the benefits of periodically conferring with private, managed
care pharmacy experts to exchange information, experiences, and lessons
learned that could be relevant to the departments? joint drug procurement
activities; and

 work together to move ahead promptly on the CMOP pilot and develop an
interagency agreement governing the pilot?s operation, including actions
needed to provide added CMOP capacity should DOD decide to use the CMOPs
systemwide.

To further mitigate the remaining challenges to joint drug procurement that
are unique to the military health care system, we recommend that the
Secretary of Defense ensure that the Acting Assistant Secretary of Defense
(Health Affairs) take the following actions:

 complete the development and implementation of a uniform formulary of
preferred brand name drugs applicable to military hospital, TRICARE retail,
and mail- order pharmacy programs, including the use of tiered retail and
mail- order pharmacy copayments to encourage providers and beneficiaries to
use formulary drugs; and

 work with TRICARE contractors to better inform DOD nonmilitary providers
and their patients about the uniform formulary in order to encourage
providers to prescribe and beneficiaries to use less costly formulary drugs
throughout the military health care system. Recommendations for

Executive Action

Page 30 GAO- 01- 588 DOD and VA Pharmacy

DOD and VA reviewed and separately commented on a draft of this report. Each
concurred with the report and its recommendations. The departments stated
their commitment to sustaining and building on the progress already made in
jointly procuring drugs whenever clinically feasible and cost effective and
in their drug distribution activities.

The departments agreed, moreover, to annually report to the Congress on the
status of their joint drug procurements and the CMOP pilot and to
periodically confer with private, managed care pharmacy experts to exchange
information and lessons learned relevant to their joint procurement
activities. In particular, VA stated that a DOD/ VA meeting with private
managed care pharmacy representatives and buying groups will take place by
November 2001 to discuss strategies for procuring pharmaceuticals.

The departments also stated their intention to move ahead promptly on the
CMOP pilot and finalize an interagency agreement. VA anticipates this would
be completed by July 2001. According to the departments, the agreement will
outline plans and actions needed should DOD decide to use VA?s CMOPs
nationwide. Also, DOD has funded and expects to complete by March 2002 its
work to establish a computer interface between a military pharmacy and a
CMOP. Once the interface is developed, a pilot between a yet- to- be-
designated military pharmacy and a VA CMOP is targeted to begin in March
2002, according to VA.

Lastly, DOD agreed to complete the development of a uniform formulary of
drugs applicable to its military hospital, TRICARE retail, and mail order
pharmacies. DOD also agreed to work with the TRICARE contractors to
encourage DOD?s nonmilitary providers and their patients to use the
preferred, less costly formulary drugs.

The full texts of the departments? comments are reprinted as appendixes IV
and V. Agency Comments

Page 31 GAO- 01- 588 DOD and VA Pharmacy

We are sending this report to the Honorable Donald H. Rumsfeld, Secretary of
Defense; the Honorable Anthony J. Principi, Secretary of Veterans Affairs;
appropriate congressional committees; and other interested parties. We will
also make copies available to others upon request. Should you have any
questions on matters discussed in this report, please contact me at (202)
512- 7101. Other contacts and staff acknowledgments are listed in appendix
VI.

Stephen P. Backhus Director, Health Care- Veterans

and Military Health Care Issues

Appendix I: Status of VA and DOD Pharmaceutical Procurements

Page 32 GAO- 01- 588 DOD and VA Pharmacy

As reported in May 2000 testimony, 1 from October 1998 through April 2000,
VA and DOD awarded 18 joint contracts- mostly for generic drugs. If not for
these contracts, VA and DOD estimate that these purchases could have cost
$102 million in fiscal year 2000. Instead, actual costs were $62 million-
about 1.9 percent of the departments? combined $3.2 billion drug spending in
fiscal year 2000- an overall cost avoidance of 39 percent. Table 4 presents
information on the 18 contracts.

Table 4: Joint VA and DOD Drug Contracts as of April 2000 Product (brand
name, if applicable) Class (use)

Manufacturer (start date)

Theoretical cost, fiscal year 2000, if not contracted

Estimated cost avoidance,

fiscal year 2000 Anti- infective agents

Amoxicillin (Trimox) Penicillins (antibiotic) Apothecon (August 1999)

$861,000 $109,000 Amantadine Antivirals (influenza) Invamed, Inc.

(August 1999) 259,000 25,000

Autonomic drugs

Albuterol inhaler Inhaled bronchodialators (asthma) Warrick

Pharmaceuticals, previously, now IVAX Pharmaceuticals a

8,961,000 1,299,000 Nicotine patch (Habitrol) Miscellaneous autonomic

(smoking cessation) Novartis (June 2000 b )

2,475,000 270,000

Cardiovascular drugs

Diltiazem (Tiazac) Calcium channel blockers (high blood pressure) Forrest
Labs

(December 1998) 42,181,000 24,235,000

Verapamil Calcium channel blockers (high blood pressure) IVAX

Pharmaceuticals c (August 1999)

5,836,000 1,678,000 Captopril (Capoten) Angiotensin converting

enzyme inhibitors (ACEI) (high blood pressure)

Bristol- Myers Squibb, Apothecon (October 1999)

777,000 220,000 Gemfibrozil Antilipemics (cholesterol

reducer) Warner Chilcott (January 2000)

2,694,000 258,000 Prazosin Hypotensive agents (high

blood pressure) IVAX Pharmaceuticals c (October 1999)

627,000 36,000

1 DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals
Could Save Millions of Dollars (GAO/ T- HEHS- 00- 121, May 25, 2000).
Appendix I: Status of VA and DOD

Pharmaceutical Procurements

Appendix I: Status of VA and DOD Pharmaceutical Procurements

Page 33 GAO- 01- 588 DOD and VA Pharmacy

Product (brand name, if applicable) Class (use) Manufacturer

(start date) Theoretical

cost, fiscal year 2000, if not contracted

Estimated cost avoidance,

fiscal year 2000 Central nervous system agents

Salsalate Nonsteroidal antiinflammatory agents (arthritis)

Able (March 2000)

550,000 67,000 Nortriptyline Antidepressants Teva

Pharmaceuticals (October 1999)

786,000 232,000

Eye, ear, nose, and throat (EENT) preparations

Timolol opthalmic solution (Timoptic) Miscellaneous EENT (antiglaucoma)
Alcon Laboratories

(January 2000) 787,000 305,000

Timolol opthalmic gel (Timoptic- XE) Miscellaneous EENT (antiglaucoma) Merck
& Co.

(January 2000) 1,716,000 968,000

Levobunolol Miscellaneous EENT (antiglaucoma) Bausch & Lomb

(January 2000) 211,000 43,000

Gastrointestinal agents

Cimetidine Miscellaneous (histamine2 receptor antagonists) (ulcers and acid
reflux)

Sidmak Labs (November 1998)

2,601,000 1,173,000 Ranitidine Miscellaneous

(histamine2 receptor antagonists) (ulcers and acid reflux)

Geneva Pharmaceuticals (November 1998)

13,132,000 6, 728,000

Hormones and synthetic substitutes

Human insulin (Novolin) Antidiabetic agents (insulin) Novo Nordisk

Pharmaceuticals (November 1999)

16,075,000 1, 500,000

Skin and mucous membrane agents

Fluocinonide Anti- inflammatory agents (topical corticosteroid) Teva

Pharmaceuticals (September 1999)

1,305,000 510,000

Totals $101,835,000 $39,657,000

a VA and DOD?s joint contract with Warrick Pharmaceuticals expired in
November 2000. At that time, a new joint contract with IVAX Pharmaceuticals
(formerly Zenith/ Goldline) for the same generic albuterol inhaler products
took effect. b Contract awarded in April 2000 with a June 2000 start date.

c Formerly Zenith/ Goldline. Source: GAO analysis of DOD and VA drug
contracting data and information.

Since our May 2000 testimony, VA and DOD have more than doubled the number
of joint procurements. That is, from May 2000 through April 2001, VA and DOD
awarded or were soliciting 26 joint contracts. This includes joint
procurements for 25 generic drugs and one brand name antihistamine

Appendix I: Status of VA and DOD Pharmaceutical Procurements

Page 34 GAO- 01- 588 DOD and VA Pharmacy

drug. Based on our analysis of VA/ DOD 1999 pharmaceutical purchase data,
these 26 drugs amounted to about $123 million in combined drug expenditures.
Tables 5 and 6 present information on the 26 joint contracts and
solicitations.

Table 5: New VA and DOD Joint Drug Contracts Taking Effect Since May 2000
(Status as of April 2001) Product Class (use) Manufacturer Effective

date 1999

DOD/ VA purchases

DOD/ VA estimated annual cost

avoidance Anti- infective agents

Rifampin Antituberculosis agents Geneva

Pharmaceuticals October 2000 $631,000 $146,000 Acyclovir Antivirals (herpes)
IVAX

Pharmaceuticals a October 2000 2, 619,000 238,000

Antineoplastic (anticancer) agents

Hydroxyurea Antineoplastic agents Richmond Pharmaceuticals October 2000 1,
019,000 156,000

Autonomic (regulates autonomous nervous system) drugs

Albuterol inhaler Inhaled bronchodialators (asthma)

IVAX Pharmaceuticals a November

2000 7,350,000 1,722,000

Blood formation and coagulation

Pentoxifylline Hemorrheologic agents (vascular disease)

Sidmak Laboratories October 2000 3, 407,000 8,000

Cardiovascular drugs

Terazosin Hypotensive agents (high blood pressure and prostate hyperplasia)

Geneva Pharmaceuticals September

2000 28,300,000 22,640,000

Central nervous system agents

Naproxen and naproxen sodium Nonsteroidal antiinflammatory agents (pain
relief)

Geneva Pharmaceuticals July 2000 6,450,000 1,669,000

Acetaminophen Miscellaneous analgesics (pain relief and fever reducer)

JB Laboratories January 2001 3, 105,000 457,000

Gastrointestinal (GI) drugs

Sucralfate Miscellaneous GI drugs (ulcers) Teva

Pharmaceuticals October 2000 1, 661,000 430,000

Skin and mucous membrane agents

Clotrimazole cream Anti- infectives (antifungals for skin) Taro

Pharmaceuticals February 2001 894,000 339,000

Appendix I: Status of VA and DOD Pharmaceutical Procurements

Page 35 GAO- 01- 588 DOD and VA Pharmacy

Product Class (use) Manufacturer Effective date

1999 DOD/ VA purchases

DOD/ VA estimated annual cost

avoidance Unclassified therapeutic agents

Azathioprine Immunosuppressives (antirejection for organ transplant
patients)

Mylan Pharmaceuticals October 2000 3, 117,000 1,274,000

Devices

Insulin needle with syringe Supplies (diabetic use with human insulin)
Becton Dickinson May 2000 3, 697,000 1,347,000

Totals $62,250,000 $30,426,000

a Formerly Zenith/ Goldline. Source: GAO analysis of DOD and VA drug
contracting data and related information.

Table 6: Pending VA and DOD Joint Drug Solicitations (Status as of April
2001) Product Class (use) Solicitation

month 1999 DOD/ VA purchases

Fexofenadine (Allegra) or loratadine (Claritin)

Nonsedating antihistamines (allergy relief) August 2000 $29,936,000
Diltiazem immediate release Cardiac drugs (calcium channel blockers) January
2001 2, 473,000 Clonidine hydrochloride Hypotensive agents (high blood
pressure) January 2001 4, 793,000 Isosorbide mononitrate Cardiac drugs
(angina relief) January 2001 2, 024,000 Diclofenac Nonsteroidal anti-
inflammatory agents (arthritis and osteoarthritis) January 2001 2, 139,000
Etodolac Nonsteroidal anti- inflammatory agents (pain relief, rheumatoid

arthritis, and osteoarthritis) January 2001 294,000 Valproic acid
Miscellaneous anticonvulsants (seizure disorders) January 2001 659,000
Selegiline Miscellaneous central nervous system agents (Parkinsonian

syndrome relief) January 2001 975,000 Hydrochlorothiazide Diuretics (edema
and high blood pressure) January 2001 1, 078,000 Spironolactone Diuretics
(edema, high blood pressure, and congestive heart

failure) January 2001 803,000 Prednisone tablets Adrenals (anti-
inflammatory and allergic conditions) January 2001 410,000 Glipizide
Antidiabetic agents (sulfonylureas) January 2001 7, 312,000 Ketoconazole
cream Anti- infectives (antifungals for skin) January 2001 1, 848,000
Ticlopidine Blood platelet aggregation inhibitor (reduce risk of thrombotic

stroke) January 2001 6, 174,000

Total $60,918,000

Source: GAO analysis of DOD and VA drug contracting data and related
information.

Over the last several years, DOD and VA have awarded separate contracts for
many different pharmaceuticals and related supplies. The following

Appendix I: Status of VA and DOD Pharmaceutical Procurements

Page 36 GAO- 01- 588 DOD and VA Pharmacy

table provides information on the separate contracts that the departments
are planning to merge or combine as they expire.

Table 7: Separate DOD and VA Drug Contracts (Status as of April 2001)
Generic name (and brand name, if applicable) Drug class (use) Manufacturer

Expiration date of contract?s current option year

Option years remaining

Estimated cost avoidance,

fiscal year 2000 (if available) DOD separate contracts

Cerivastatin (Baycol) Bayer Simvastatin (Zocor)

Hydroxymethylglutaryl coenzyme A reductase inhibitor (HMG CoA RI) (to lower
cholesterol)

Merck 03/ 31/ 02 3 $22,316,000

Omeprazole (Prilosec) Proton pump inhibitor (PPI) (ulcers and acid reflux)

AstraZeneca 09/ 30/ 01 1 19,429,000 Lisinopril (Zestril) ACEI (high blood

pressure) AstraZeneca 07/ 31/ 01 1 10,073,000 Hepatitis A (Vaqta) Vaccine
(immunization) Merck 09/ 17/ 01 1 1, 675,000

VA separate contracts

Lovastatin (Mevacor) Simvastatin (Zocor)

HMG CoA RI (to lower cholesterol) Merck 06/ 01/ 01 1 31,311,000

Lansoprazole (Prevacid) PPI (ulcers and acid reflux) TAP

Pharmaceuticals 02/ 05/ 02 0 43,924,000 Lisinopril (Prinivil) ACEI (high
blood

pressure) Merck 10/ 19/ 01 2 30,001,000 Goserelin acetate implant (Zoladex)
Luteinizing hormone releasing hormone

(LHRH) agonist (prostate cancer)

AstraZeneca 01/ 12/ 02 0 21,773,000 Nifedipine extended release (long
acting) (Adalat CC) Calcium channel blocker

(high blood pressure) Bayer 11/ 30/ 01 1 3, 009,000 Oxazepam
Benzodiazepines-

sedative and anti- anxiety Wyeth- Ayerst 01/ 14/ 02 2 534,000 Ondansetron
(Zofran) Antinausea (for

chemotherapy patients) GlaxoSmithKline 06/ 08/ 01 4 Not available
Amitriptyline Antidepressant CibaGeneva 09/ 25/ 01 0 Not available
Amitriptyline/ Perphenazine Antidepressant Mylan

Pharmaceuticals 04/ 06/ 01 1 Not available Amoxapine Antidepressant Schein
09/ 25/ 01 0 Not available Atenolol Beta blocker (high blood

pressure) CibaGeneva 04/ 06/ 02 0 Not available Benztropine mesylate Anti-
Parkinson?s disease Par Pharmaceuticals 04/ 06/ 01 1 Not available
Carbidopa/ Levodopa Anti- Parkinson?s disease Teva

Pharmaceuticals 04/ 06/ 01 1 Not available Carisoprodol Skeletal muscle
relaxant CibaGeneva 09/ 25/ 01 0 Not available

Appendix I: Status of VA and DOD Pharmaceutical Procurements

Page 37 GAO- 01- 588 DOD and VA Pharmacy

Generic name (and brand name, if applicable) Drug class (use) Manufacturer

Expiration date of contract?s current option year

Option years remaining

Estimated cost avoidance,

fiscal year 2000 (if available)

Cephalexin Antibiotic (to treat a variety of respiratory infections)

Teva Pharmaceuticals 04/ 06/ 01 1 Not available

Chlorhexidine gluconate 4 percent topical solution (Dyna- Hex) Supplies-
topical

antibacterial Western 06/ 16/ 01 0 Not available Chlorpromazine
Antipsychotic

(schizophrenia) CibaGeneva 04/ 06/ 01 1 Not available Colchicine Antigout
agent West- Ward 04/ 06/ 01 1 Not available Cyclobenzaprine hydrochloride
Skeletal muscle relaxant Mylan

Pharmaceuticals 09/ 25/ 01 0 Not available Desipramine Antidepressant
Richmond 04/ 06/ 01 1 Not available Fluphenazine hydrochloride Antipsychotic

(schizophrenia) Mylan Pharmaceuticals 04/ 06/ 02 0 Not available Fosinopril
(Monopril) ACEI (high blood

pressure) Bristol Myers Squibb 01/ 11/ 02 1 Not available Gel, absorbent
sponge (Gelfoam) Supplies Upjohn 09/ 30/ 01 2 Not available Glyburide
Sulfonylurea

(oral antidiabetic drug) Teva

Pharmaceuticals 03/ 21/ 01 1 Not available Haloperidol Antipsychotic

(schizophrenia) CibaGeneva 04/ 06/ 01 1 Not available Hydrochlorothiazide
(Triamterene) Diuretic CibaGeneva 04/ 06/ 01 1 Not available Ibuprofen
Nonsteroidal antiinflammatory drug

(arthritis and pain relief) Interpharm 04/ 06/ 01 1 Not available

Imipramine Antidepressant CibaGeneva 09/ 25/ 01 0 Not available Indomethacin
Nonsteroidal antiinflammatory drug

(arthritis and pain relief) Richmon 04/ 06/ 01 1 Not available

Isosorbide dinitrate Cardiovascular (vasodilator) CibaGeneva 09/ 25/ 01 0
Not available Loperamide Antidiarrhea Teva

Pharmaceuticals 09/ 25/ 01 0 Not available Methocarbamol Skeletal muscle
relaxant CibaGeneva 09/ 25/ 01 0 Not available Metoprolol Beta blocker

(high blood pressure) Teva

Pharmaceuticals 09/ 25/ 01 0 Not available Minoxidil Antihypertensive

(high blood pressure) Par Pharmaceuticals 04/ 06/ 01 1 Not available

Nitroglycerin patches (Nitro Dur) Antiangina Schering 01/ 31/ 02 0 Not
available Penicillin VK Antibiotic( to treat a

variety of serious infections)

Teva Pharmaceuticals 04/ 06/ 01 1 Not available

Perphenazine Antipsychotic (schizophrenia) CibaGeneva 04/ 06/ 01 1 Not
available Pindolol Beta blocker

(high blood pressure) Teva

Pharmaceuticals 09/ 25/ 01 0 Not available

Appendix I: Status of VA and DOD Pharmaceutical Procurements

Page 38 GAO- 01- 588 DOD and VA Pharmacy

Generic name (and brand name, if applicable) Drug class (use) Manufacturer

Expiration date of contract?s current option year

Option years remaining

Estimated cost avoidance,

fiscal year 2000 (if available)

Promethazine Antihistamine CibaGeneva 04/ 06/ 01 1 Not available Shampoo,
coal tar (Tar Plus) Skin agent CTC Cayuga 08/ 31/ 01 1 Not available
Sulindac Nonsteroidal antiinflammatory drug

(arthritis and osteoarthritis)

CibaGeneva 09/ 25/ 01 0 Not available Thiothixene Antipsychotic

(schizophrenia) CibaGeneva 04/ 06/ 01 1 Not available Trazodone
Antidepressant Schein 04/ 06/ 02 0 Not available Trifluoperazine
hydrochloride Antipsychotic

(schizophrenia) CibaGeneva 04/ 06/ 01 1 Not available Trihexyphenidyl
hydrochloride Anti- Parkinson?s disease Schein 04/ 06/ 02 0 Not available
Verapamil hydrochloride Calcium channel blocker

(high blood pressure) CibaGeneva 09/ 25/ 01 0 Not available

Total $184,043,000

Source: GAO analysis of contracting data in the DOD- VA Joint Contract
Status report (November 2000 update) and related information

Appendix II: Planned DOD and VA Joint Procurements

Page 39 GAO- 01- 588 DOD and VA Pharmacy

In December 2000, DOD and VA pharmacy officials completed their preliminary
review of drugs in the high- expenditure classes we had suggested as future
candidates for joint procurement. 1 Table 8 is a list of the drugs for which
the departments told us they plan to pursue joint procurements in the near
future, as well as their data on expenditures and estimates of annual cost
avoidance that would stem from the procurements. VA and DOD pharmacy
officials told us that they may identify additional drugs and classes for
joint procurement once they complete their reviews.

Table 8: Planned Joint Procurements in Our Suggested Drug Classes as of
December 2000 Brand name, if applicable Generic name Combined VA & DOD

purchases, 1999 VA & DOD

estimated cost avoidance Antihistamine drugs

Zyrtec Cetirizine $13,436,936 $2,284,279 Numerous generic sources
Hydroxyzine 899,451 44,973 Numerous generic sources Diphenhydramine 663,146
33,157

Anti- infective agents Antifungals

Numerous generic sources Ketoconazole 1,724,950 86,248

Cephalosporins

Ceftin Cefuroxime (oral/ injectable) 2, 671,539 801,462 Suprax Cefixime
469,072 140,722 Cefzil Cefprozil 1, 155,506 346,652 Lorabid Loracarbef
124,443 37,333 Cedax Ceftibutin 224 67 Omnicef Cefdinir 4, 356 1,307

Quinolones

Levaquin Levofloxacin (oral/ injectable) 9,562,528 1,434,379 Cipro
Ciprofloxacin (oral/ injectable) 12,546,398 1, 881,960 Floxin Ofloxacin
(oral/ injectable) 1, 975,137 296,271 Trovan Trovafloxacin (oral) 768,245
115,237 Trovan Alatrofloxacin (injectable) 783,185 117,478 Noroxin
Norfloxacin 64,752 9, 713

Other anti- infectives

Numerous generic sources Clindamycin 2,887,625 144,381 Numerous generic
sources Sulfamethoxazole/ Trimethoprim 1,285,831 64,292 Numerous generic
sources Methenamine 380,327 19,016

1 See appendix II in DOD and VA Health Care: Jointly Buying and Mailing Out
Pharmaceuticals Could Save Millions of Dollars (GAO/ T- HEHS- 00- 121, May
25, 2000). Appendix II: Planned DOD and VA Joint

Procurements

Appendix II: Planned DOD and VA Joint Procurements

Page 40 GAO- 01- 588 DOD and VA Pharmacy

Brand name, if applicable Generic name Combined VA & DOD purchases, 1999

VA & DOD estimated cost

avoidance

Numerous generic sources Nitrofurantoin 2, 072,447 103,622 Numerous generic
sources Metronidazole (oral/ injectable) 1,176,862 58,843

Antineoplastic agents (to treat various cancers)

Casodex Bicalutamide 9, 584,228 1,437,634 Eulexin Flutamide 6,035,939
905,391 Numerous generic sources Cisplatin 2,362,369 354,355 Nilandron
Nilutamide 2,235,160 335,274 Nolvadex Tamoxifen (pending availability

of multiple generic sources) 6,549,821 1,964,946 Numerous generic sources
Doxorubicin 623,662 31,183 Numerous generic sources Cyclophosphamide 502,522
25,126 Numerous generic sources Mitomycin 292,365 14,618 Numerous generic
sources Bleomycin 397,512 19,876 Numerous generic sources Daunorubicin
314,472 15,724

Blood formation and coagulation Anticoagulants

Numerous generic sources Warfarin 17,114,629 3, 422,926 Lovenox Enoxaparin
9,344,763 934,476 Fragmin Dalteparin 153,425 15,342

Cardiovascular drugs Antiarrhythmics

Numerous generic sources Procainamide 765,625 38,281 Numerous generic
sources Quinidine 703,782 35,189 Numerous generic sources Mexiletine 444,730
22,237 Numerous generic sources Disopyramide 496,261 24,813

Angiotensin converting enzyme inhibitors (ACEI)

Vasotec Enalapril (pending availability of multiple generic sources)
1,527,934 458,380

Beta blockers

Numerous generic sources Sotalol 5,005,439 1,501,632 Numerous generic
sources Labetalol 1,573,565 157,356

Other cardiovascular drugs

Numerous generic sources Furosemide 1, 630,777 81,539 Numerous generic
sources Isosorbide Mononitrate 1, 620,024 81,001 Numerous generic sources
Hydralazine 674,814 33,741 Numerous generic sources Bumetanide 487,739
24,387

Antihyperlipidemic drugs (cholesterol drugs)

Numerous generic sources Cholestyramine 1,166,412 58,321

Central nervous system agents Nonsteroidal anti- inflammatory agents

Numerous generic sources Tramadol 5,841,091 1,752,327 Numerous generic
sources Aspirin 1,768,906 88,445

Appendix II: Planned DOD and VA Joint Procurements

Page 41 GAO- 01- 588 DOD and VA Pharmacy

Brand name, if applicable Generic name Combined VA & DOD purchases, 1999

VA & DOD estimated cost

avoidance

Numerous generic sources Ketorolac 2,560,703 128,035

Anticonvulsants

Neurontin Gabapentin (pending availability of multiple generic sources)
26,738,641 13,369,320 Numerous generic sources Primidone 534,091 26,705

Antidepressants

Prozac Fluoxetine (pending availability of multiple generic sources)
48,395,578 24,197,789 Numerous generic sources Bupropion IR 6,600,897
990,135 Numerous generic sources Clomipramine 406,082 20,304

Antipsychotic agents

Numerous generic sources Clozapine 5,961,811 1,490,453 Numerous generic
sources Thioridazine 413,297 20,665

Sedative and other anti- anxiety agents

Buspar Buspirone (pending availability of multiple generic sources)
16,185,766 4, 855,730

Antimigraine drugs

Imitrex Sumatriptan 12,935,098 1, 940,265 Maxalt Rizatriptan 236,950 35,542
Amerge Naratriptan 109,002 16,350

Diagnostic Agents Diabetes (used to test blood glucose levels)

Numerous brands available Glucose test strips 36,074,109 3, 607,411

Gastrointestinal (GI) drugs Miscellaneous GI drugs

Pepcid Famotidine (pending availability of multiple generic sources)
6,537,179 1,961,154 Numerous generic sources Sulfasalazine 1,128,842 169,326

Hormones and synthetic substitutes Bronchial steroids (for asthma)

Azmacort Triamcinolone 7, 662,025 383,101 Flovent Fluticasone 5, 982,060
299,103 Aerobid- M Flunisolide 243,172 12,159 Pulmicort Turbuhaler
Budesonide 774,095 38,705

Nasal steroids (for allergies and sinus congestion)

Flonase Fluticasone 2, 089,579 104,479 Nasacort Triamcinolone 1, 745,301
87,265 Multiple brand names available Flunisolide 97,197 4, 860 Rhinocort
Budesonide 109,993 5, 500 Nasonex Mometasone 441,404 22,070

Oral contraceptives

Numerous generic sources Ethinyl Estradiol/ Norethindrone 3,308,311 165,416
Ortho Tri- Cyclen Ethinyl Estradiol/ Norgestimate 2,274,929 123,746

Appendix II: Planned DOD and VA Joint Procurements

Page 42 GAO- 01- 588 DOD and VA Pharmacy

Brand name, if applicable Generic name Combined VA & DOD purchases, 1999

VA & DOD estimated cost

avoidance

Numerous generic sources Ethinyl Estradiol/ Norgestrel 3,117,758 155,888
Numerous generic sources Desogestrel/ Ethinyl Estradiol 1, 623,634 81,182
Numerous generic sources Ethinyl Estradiol/ Levonorgestrel 622,247 31,112
Numerous generic sources Desogestrel/ Ethinyl Estradiol 238,727 11,936
Ortho- Cyclen Ethinyl Estradiol/ Norgestimate 841,502 42,075 Numerous
generic sources Ethinyl Estradiol/ Norgestrel 499,565 24,978 Numerous
generic sources Mestranol/ Norethindrone 58,294 2, 915 Numerous generic
sources Ethinyl Estradiol/ Norethindrone 20,232 1, 012 Numerous generic
sources Ethinyl Estradiol/ Levonorgestrel 94,322 4, 716 Numerous generic
sources Levonorgestrel 257,557 12,878 Loestrin Fe Ethinyl Estradiol/ Ferrous

Fumarate/ Norethindrone 228,940 11,447 Numerous generic sources Ethinyl
Estradiol/ Norethindrone 42,071 2, 104 Numerous generic sources Ethinyl
Estradiol/ Norethindrone 1,264,092 63,205 Numerous generic sources Ethinyl
Estradiol/ Ethynodiol

Diacetate 335,339 16,767 Ovrette Norgestrel 112,667 5, 633 Numerous generic
sources Ethinyl Estradiol/ Levonorgestrel 62,678 3, 134 Numerous generic
sources Ethinyl Estradiol/ Norethindrone 64,348 3, 217 Numerous generic
sources Ethinyl Estradiol/ Norethindrone 37,353 1, 868 Numerous generic
sources Ethinyl Estradiol/ Norethindrone 13,381 669 Numerous generic sources
Ethinyl Estradiol/ Levonorgestrel 273,042 13,652 Numerous generic sources
Ethinyl Estradiol/ Levonorgestrel 84,429 4, 221 Numerous generic sources
Desogestrel/ Ethinyl Estradiol 10,597 530 Numerous generic sources Ethinyl
Estradiol/ Norethindrone 873 44 Numerous generic sources Ethinyl Estradiol/
Norethindrone 1,322 66 Numerous generic sources Mestranol/ Norethindrone
63,680 3, 184 Numerous generic sources Mestranol/ Norethindrone 944 47
Numerous generic sources Ethinyl Estradiol/ Norethindrone 16,115 806
Numerous generic sources Ethinyl Estradiol/ Levonorgestrel 235 12 Numerous
generic sources Ethinyl Estradiol/ Norethindrone 177 9 Numerous generic
sources Ethinyl Estradiol/ Levonorgestrel 924 46 Estrostep Ethinyl
Estradiol/ Ferrous

Fumarate/ Norethindrone 2,299 115 Numerous generic sources Ethinyl
Estradiol/ Norethindrone 133 7 Numerous generic sources Mestranol/
Norethindrone 130 7

Estrogens (osteoporosis prevention and menopause symptoms)

Numerous generic sources Medroxyprogesterone 3, 671,195 367,120

Antidiabetic agents

Glucophage Metformin (pending availability of multiple generic sources)
41,085,310 20,542,655

Appendix II: Planned DOD and VA Joint Procurements

Page 43 GAO- 01- 588 DOD and VA Pharmacy

Brand name, if applicable Generic name Combined VA & DOD purchases, 1999

VA & DOD estimated cost

avoidance Serums, Toxoids, and Vaccines Vaccines

Multiple brands available Hepatitis B 10,858,147 a 49,505 Multiple brands
available Hepatitis A 4, 990,355 a 10,608

Unclassified therapeutic agents Immunosuppressive (antirejection drugs used
for transplant patients)

Numerous generic sources Cyclosporine 6,884,250 2,065,275

Totals $401,095,902 $99,466,145

a Military pharmacy purchases from pharmaceutical prime vendors. Excludes
1999 DOD purchases directly from manufacturers. Source: GAO analysis of DOD
and VA information.

Appendix III: VA?s CMOP Program Page 44 GAO- 01- 588 DOD and VA Pharmacy

VA was the first organization in the United States to deliver prescription
medications to patients on a large scale by mail. After World War II, this
service was started as a convenience to disabled, homebound veterans. By
1992, nearly all of VA?s outpatient pharmacies provided mail service, but
consolidation of mail prescription workloads from multiple VA hospitals into
centralized operations had only been initiated on a limited basis. 1 In
1994, the first CMOP at Leavenworth, Kansas, began processing high volume
mail prescription workloads using an integrated, automated dispensing
system. Since that time, VA has expanded the program to include a total of
seven CMOPs located in Leavenworth, Kansas; Los Angeles, California;
Bedford, Massachusetts; Dallas, Texas; Murfreesboro, Tennessee; Hines,
Illinois; and Charleston, South Carolina. In fiscal year 2000, those
facilities processed about 50 million prescriptions.

Patients are provided care by VA hospitals or clinics with new prescriptions
being dispensed directly from those hospitals or clinics. Patients? refill
prescription requests are received by telephone or in person and processed
at the individual VA sites daily. Once processed, the refill prescription
orders are sent electronically from multiple VA medical facilities to a CMOP
for processing. The CMOP dispenses the pharmaceuticals as specified by the
participating medical facility, delivers the completed prescriptions
directly to the patient by mail, and returns the dispensing data to the
participating hospital or clinic electronically. A patient contacts the
hospital or clinic directly if there are any questions or problems.
According to VA, the CMOP model takes advantage of economies of scale for
mail prescription processing and distribution while at the same time
preserving the patient- provider relationship.

VA data show that productivity at the CMOP is at levels between 50,000 and
100,000 prescriptions per year per full- time employee. According to VA,
such productivity rates are several times greater than traditional hospital
and clinic systems. Patients generally receive their medications by mail
within 4 days of their orders going from the VA medical facility to a CMOP.

1 For a description of VA mail- service pharmacy operations up through the
early 1990s, see VA Health Care: Modernizing VA?s Mail- Service Pharmacies
Should Save Millions of Dollars (GAO/ HRD- 92- 30, Jan. 22, 1992). Appendix
III: VA?s CMOP Program

CMOP History How CMOPs Operate

Appendix III: VA?s CMOP Program Page 45 GAO- 01- 588 DOD and VA Pharmacy

CMOPs charge VA medical facilities to recover direct operating costs to
purchase pharmaceuticals and related supplies as well as to dispense,
package, and mail prescriptions to patients. According to VA documents, in
fiscal year 2000, the nondrug CMOP cost charged to VA medical facilities
averaged $2.00 per prescription and the CMOP drug cost charged averaged
$20.33 per prescription. For each prescription, the nondrug cost charged
included $0.77 in personnel costs, $0.40 in operating costs, and $0.83 in
mailing costs. 2 For fiscal year 2000, the CMOP workload was about 50
million prescriptions of about $1 billion in drug products and $100 million
in nondrug expenses.

VA?s business plan for the CMOPs includes performance improvement measures
for prompt delivery, accurate dispensing, properly packaged prescriptions,
safe work environments, reliable and appropriate equipment, right supplies
of drugs on hand, and customer satisfaction. Also, using barcode technology
in the automated dispensing process and other quality steps, the CMOP
program has achieved an overall accuracy rate of 99.99 percent- which means
getting the right drug- in the correct dosage, with the correct
instructions- to the right people. In addition, the CMOPs are fully
accredited by the Joint Commission on the Accreditation of Health Care
Organizations.

2 These charges exclude CMOP costs for building and equipment depreciation
($ 0. 17) and other VA overhead costs ($ 0.20). VA centrally finances these
costs with other internal funding sources. CMOP Costs to VA

Medical Facilities CMOP Quality

Appendix IV: Comments From the Department of Defense

Page 46 GAO- 01- 588 DOD and VA Pharmacy

Appendix IV: Comments From the Department of Defense

Appendix IV: Comments From the Department of Defense

Page 47 GAO- 01- 588 DOD and VA Pharmacy

Appendix IV: Comments From the Department of Defense

Page 48 GAO- 01- 588 DOD and VA Pharmacy

Appendix V: Comments From the Department of Veterans Affairs

Page 49 GAO- 01- 588 DOD and VA Pharmacy

Appendix V: Comments From the Department of Veterans Affairs

Appendix V: Comments From the Department of Veterans Affairs

Page 50 GAO- 01- 588 DOD and VA Pharmacy

Appendix V: Comments From the Department of Veterans Affairs

Page 51 GAO- 01- 588 DOD and VA Pharmacy

Appendix V: Comments From the Department of Veterans Affairs

Page 52 GAO- 01- 588 DOD and VA Pharmacy

Appendix VI: GAO Contacts and Staff Acknowledgments

Page 53 GAO- 01- 588 DOD and VA Pharmacy

Dan Brier, (202) 512- 6803 Carolyn Kirby, (202) 512- 9843

In addition to those named above, the following staff made key contributions
to this report: William Lew, Allan Richardson, Karen Sloan, and Richard
Wade. Appendix VI: GAO Contacts and Staff

Acknowledgments GAO Contacts Staff Acknowledgments

(101630)

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