Contract Management: Further Efforts Needed to Sustain VA's	 
Progress in Purchasing Medical Products and Services (22-JUN-04, 
GAO-04-718).							 
                                                                 
The Department of Veterans Affairs (VA) provides healthcare to	 
millions of veterans at VA's medical centers and healthcare	 
facilities across the country. To support veterans, VA manages a 
Federal Supply Schedule (FSS) program and a national contract	 
program. Both use VA's sizeable buying power to provide VA and	 
other federal agencies discounts on medical products and	 
services. To cover its costs in running the FSS program, VA	 
charges its customers a user fee. Although sales through VA's FSS
and national contracts totaled almost $7 billion in fiscal year  
2003, concerns have been raised about the efficiency of these	 
contract programs. GAO was asked to determine whether the FSS and
national contracts have provided medical products at favorable	 
prices and to identify opportunities to improve purchasing	 
practices and increase savings. GAO was also asked to determine  
if VA's user fee is sufficient to cover program cost.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-718 					        
    ACCNO:   A10604						        
  TITLE:     Contract Management: Further Efforts Needed to Sustain   
VA's Progress in Purchasing Medical Products and Services	 
     DATE:   06/22/2004 
  SUBJECT:   User fees						 
	     Property and supply management			 
	     Contract administration				 
	     Contract costs					 
	     Service contracts					 
	     Procurement practices				 
	     Contract oversight 				 
	     Medical services rates				 
	     Medical supplies					 
	     Federal procurement				 
	     Drugs						 
	     Federal supply systems				 
	     Health care cost control				 
	     Medical equipment					 
	     Prices and pricing 				 
	     Audits						 
	     Veterans hospitals 				 
	     Health care costs					 
	     Health care programs				 
	     Health care services				 
	     Discounts						 
	     GSA Federal Supply Schedule			 

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GAO-04-718

United States General Accounting Office

GAO	Report to the Committee on Government Reform, House of Representatives

June 2004

CONTRACT MANAGEMENT

 Further Efforts Needed to Sustain VA's Progress in Purchasing Medical Products
                                  and Services

                                       a

GAO-04-718

Highlights of GAO-04-718, a report to the Committee on Government Reform,
House of Representatives

The Department of Veterans Affairs (VA) provides healthcare to millions of
veterans at VA's medical centers and healthcare facilities across the
country. To support veterans, VA manages a Federal Supply Schedule (FSS)
program and a national contract program. Both use VA's sizeable buying
power to provide VA and other federal agencies discounts on medical
products and services. To cover its costs in running the FSS program, VA
charges its customers a user fee.

Although sales through VA's FSS and national contracts totaled almost $7
billion in fiscal year 2003, concerns have been raised about the
efficiency of these contract programs. GAO was asked to determine whether
the FSS and national contracts have provided medical products at favorable
prices and to identify opportunities to improve purchasing practices and
increase savings. GAO was also asked to determine if VA's user fee is
sufficient to cover program cost.

GAO recommends that VA use its buying power to obtain more favorable
prices for healthcare services, and strengthen oversight to ensure its
medical centers obtain the best available prices. GAO also recommends that
VA identify the complete cost of the FSS program and reassess its user fee
to see if it needs to be adjusted. VA concurred with GAO's
recommendations.

June 2004

CONTRACT MANAGEMENT

Further Efforts Needed to Sustain VA's Progress in Purchasing Medical Products
and Services

The more than 1,200 FSS and 330 national contracts that VA has awarded
have resulted in more competitive prices and have yielded substantial
savings. VA has achieved these favorable prices and savings, in part, by
exercising its audit rights and access to contractor data to pursue best
prices aggressively for medical supplies and services. For example,
pre-award audits of vendors' contract proposals and post-award audits of
vendors' contract actions resulted in savings of about $240 million during
fiscal years 1999 to 2003. VA has also taken steps to further leverage its
buying power on widely used healthcare items-such as pharmaceuticals and
high-tech medical equipment-through its national contracts. According to
VA, its national pharmaceutical contracts have led to a cost avoidance of
$394 million in fiscal year 2003. However, VA has not taken the same
aggressive approach to negotiate more competitive prices for healthcare
services, such as radiology. In fiscal year 2003, healthcare services
totaled about $1.7 billion, yet VA facilities only purchased about $66
million through VA FSS contracts. Instead, most medical healthcare
services are purchased through contracts that individual VA medical
centers have negotiated, a process that may not provide the most favorable
prices.

VA could also realize additional savings through improved medical center
purchasing practices. Despite increases in medical centers' FSS purchases-
which more than doubled between fiscal years 1999 and 2003-medical centers
have not always taken advantage of the best prices available through VA's
contracts. For example, in fiscal year 2001, a VA Inspector General (IG)
report stated that VA medical centers frequently purchased healthcare
products from local sources, instead of from available FSS contracts.
Although VA has since implemented policies and procedures that generally
require its medical centers to purchase medical products and services
through VA's contract programs, a more recent VA IG report found that
medical centers continued to make purchases from local suppliers. The VA
IG estimated that, with improved procurement practices at medical centers,
VA could save about $1.4 billion over 5 years. However, ensuring VA
medical centers comply with VA's purchasing policies and procedures will
be a challenge for VA, in part, because its monitoring of purchases lacks
adequate rigor.

The user fee that VA collects on FSS purchases-0.5 percent of sales-is
expected to approximate the program costs. VA, however, does not have
complete information on the costs to administer the FSS program. Without
this cost data, VA is unable to know whether it is charging an appropriate
user fee.

www.gao.gov/cgi-bin/getrpt?GAO-04-718.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact David Cooper at (202)
512-4841 or [email protected].

Contents EUR

  Letter

Results in BriefEURBackgroundEURMany VA Contracts Offer Favorable Prices
and Savings, but VA EUR

Could Further Leverage Its Buying Power When Acquiring Healthcare Services
Opportunities Exist to Obtain Additional Savings at the Medical Centers VA
Does Not Have Complete Information on the FSS Program

Costs Conclusions Recommendations for Executive Action Agency Comments
Scope and Methodology

                                       1

                                      2 4

                                       6

12

14 14 14 15 15

Appendix I	Description of Products and Services Included in FSS Schedules

        Appendix II Comments From the Department of Veterans Affairs 18

Tables

Table 1: Results of VA FSS Audits for Fiscal Years 1999 through 2003 Table
2: Fiscal Year 2003 Healthcare Services Purchased from Vendors and Other
Providers Table 3: Summary of FSS Purchases by VA Medical Centers in
Fiscal Years 1999 through 2003 Table 4: FSS Schedule Name and Description
of Items

                                       7

                                       11

                                     12 17

Figure

Figure 1: FSS and National Contract Sales, Fiscal Years 1999 through 2003
5

Abbreviations

BPA Blanket purchase agreement

FSS Federal Supply Schedule IG Inspector General

VA Department of Veterans Affairs

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

United States General Accounting Office Washington, DC 20548

June 22, 2004 EUR

The Honorable Tom Davis EURChairman EURThe Honorable Henry A.
WaxmanEURRanking Minority MemberEURCommittee on Government ReformEURHouse
of Representatives EUR

In fiscal year 2003, the Department of Veterans Affairs (VA) spentEURover
$26 billion to provide healthcare to 4.5 million veterans at VA's
EURmedical centers and other VA healthcare facilities across the country.
To EURprovide healthcare services for veterans, VA operates a Federal
Supply EURSchedule (FSS) program, which provides VA and other federal
agenciesEURaccess to over 1,200 contracts for buying medical products1 and
services EURfrom a wide range of vendors. Vendor prices are expected to be
at least as EURgood as those offered to the vendors' most favored
customers.2 To cover EURthe cost of operating the FSS program, VA charges
its customers a user EURfee. Once VA has awarded an FSS contract for a
medical product, it looks EURfor opportunities to award a national
contract that can provide even better EURprices. In fiscal year 2003, VA
sales through the FSS program were EUR$6.2 billion, and sales from
national contracts were $712 million. EUR

As one of the largest buyers of medical equipment, products, and
EURservices, VA has the ability to realize significant savings and achieve
EURmanagement efficiencies by leveraging its vast purchasing power. At
yourEURrequest, we reviewed VA's contract programs. Specifically, you
asked us to EUR(1) determine whether VA's FSS and national contracts
provide medicalEURproducts at favorable prices and achieve savings, (2)
identify opportunitiesEURto improve purchasing practices and increase
savings at VA medical EURcenters, and (3) determine if the FSS user fee is
sufficient to cover the EURprogram's costs. EUR

1 Medical products include medical and surgical supplies as well as
equipment and pharmaceuticals.

2 Most favored customer pricing refers to the vendor's best price based on
the evaluation of discounts, terms, conditions, and concessions that are
offered to commercial customers for similar purchases. The pursuit of most
favored customer pricing is consistent with the objective of negotiating a
fair and reasonable price.

To conduct our work, we reviewed VA's policies, procedures, and internal
controls associated with awarding and administering FSS and national
contracts. We also reviewed a May 2002 report by VA's Procurement Reform
Task Force and determined the status of VA's implementation of task force
recommendations to improve procurement practices across VA. We met with
officials from procurement and financial management activities at VA
Headquarters and officials at the National Acquisition Center, which is
responsible for managing both the FSS program and the national contracts
program. We conducted our review from July 2003 through April 2004 in
accordance with generally accepted government auditing standards. A more
detailed discussion of our scope and methodology is at the end of the
letter.

                              Results in BriefEUR

VA's FSS and national contracts generally provide favorable prices and
have achieved savings-in part, because VA has built into its contracts
important clauses that allow it to aggressively pursue best prices for
medical products and services. For example, through its FSS contracts, VA
exercises audit rights and access to contractor data, which have helped VA
negotiate better prices and achieve savings totaling about $240 million
from fiscal years 1999 to 2003. Consistent with a prior GAO
recommendation, VA has also emphasized using national contracts to
standardize and further leverage VA's buying power on widely used
healthcare items, such as pharmaceuticals, medical supplies, and high-tech
medical equipment.3 According to VA officials, VA plans to expand the use
of national contracts to negotiate even better prices. However, VA could
achieve additional savings. For example, to date, VA has rarely used its
contracting programs to leverage its buying power when acquiring
healthcare services. In fiscal year 2003, these services totaled about
$1.7 billion, yet VA only purchased about $66 million through VA FSS
contracts. Instead, most healthcare services are currently contracted for
by individual VA medical centers, a process that may not result in the
centers receiving favorable prices.

VA also has opportunities to improve purchasing practices and increase
savings at its medical centers. Most notably, VA medical centers have not
always taken advantage of the best prices available through FSS and

3 U.S. General Accounting Office, DOD and VA Pharmacy: Progress and
Remaining Challenges in Jointly Buying and Mailing Out Drugs, GAO-01-588
(Washington, D.C.: May 25, 2001).

national contracts. In fiscal year 2001, a VA audit report stated that VA
medical centers frequently purchased healthcare products from local
sources instead of from an FSS contract, in part because FSS contracts
were not used as a primary source of supply. In response to the
Procurement Reform Task Force's May 2002 recommendations, VA implemented
purchasing policies and procedures that require its medical centers to use
VA's contracts, to the extent feasible, to purchase medical supplies and
services. However, a March 2004 VA audit report found that medical centers
have continued to make purchases from local suppliers, indicating that
VA's oversight of medical center purchasing may not be sufficient to
ensure that centers comply with its purchasing policies and procedures.
The audit report estimated that VA could save about $1.4 billion over 5
years by using FSS and national contracts with more favorable prices.

To operate the FSS program, VA is supposed to identify all program costs
and charge a fee to its customers to recover these costs. Currently, VA
charges FSS users a fee of 0.5 percent of sales. VA, however, does not
have complete information on the costs to administer the FSS program.
While VA maintains FSS data on some program costs, it has not identified
the amount of the FSS fees associated with each of the activities that
support the program.

To improve VA procurement practices, we are recommending that VA take
steps to (1) explore opportunities to use its buying power to obtain more
favorable prices for healthcare services, (2) strengthen oversight to
ensure medical centers use FSS and national contracts to get the best
prices available, and (3) identify the complete cost of the FSS program
and reassess its user fee to determine if it needs to be adjusted. In
commenting on a draft of this report, VA agreed with GAO's conclusions and
concurred with its recommendations. VA's comments are included in appendix
II.

Background

VA operates one of the world's largest healthcare systems.4 In fiscal year
2003, VA spent about $26 billion to provide healthcare to 4.5 million
veterans. More than 1,300 VA healthcare facilities, which include 160
medical centers, provide a range of medical, surgical, outpatient,
rehabilitative, and long-term care products and services. Between fiscal
years 2001 and 2003, VA experienced over a 15-percent growth in the number
of patients treated.

The General Services Administration established the FSS program in 1949 to
facilitate federal agencies' acquisition of products and services from
commercial suppliers through schedule contracts. In 1960, the General
Services Administration delegated authority to VA to manage and award FSS
contracts for all medical products and services needed throughout the
federal healthcare system. VA currently operates eight schedules that
cover a wide range of medical products and services. (See app. I for a
complete list of the schedules.) In addition, VA currently has two new
schedules under consideration. The first, laboratory tests, will be an
expansion of VA's "clinical analyzers" schedule and will be used for
off-site tests such as cytology, pathology, and endocrinology. The second
schedule, "home infusion," will be used for intravenous services at
nonmedical facility sites, such as patients' homes. VA projects that these
two schedules will be available by the end of fiscal year 2004.

Currently, VA has over 1,200 FSS contracts in place for the eight
schedules. These FSS contracts are available for use by all government
agencies, including VA, the Department of Defense, Bureau of Prisons,
Indian Health Services, Public Health Services, and some state veterans
homes. All schedules are multiple award contracts with performance periods
up to 5 years, under which many vendors that meet all competition
requirements have contracts to sell products and services to the federal
government. For example, under the pharmaceutical schedule, all
manufacturers of aspirin can have a contract to sell their products to
government agencies.

Since 1993, VA has been competitively awarding national contracts with
vendors for a larger discount based on volume purchasing. As of April
2004, VA had about 330 national contracts. National contracts are

4 U.S. General Accounting Office, VA and Defense Health Care: Potential
Exists for Savings through Joint Purchasing of Medical and Surgical
Supplies, GAO-02-872T (Washington, D.C.: June 26, 2002).

best suited for products that are widely used and where competition is
practical, such as pharmaceuticals and basic surgical supplies, and where
clinicians are likely to agree to standardized product use across all VA
medical centers. A national contract may also include requirements of
other federal agencies such as the Department of Defense.

Since 1999, VA's FSS and national contract sales have steadily grown (see
fig. 1).

Figure 1: FSS and National Contract Sales, Fiscal Years 1999 through 2003

Dollars in millions 7,000

6,000

5,000

4,000

3,000

2,000

1,000

0 1999 2000 2001 2002 2003

National contract sales

FSS sales

Source: VA data.

VA medical centers account for more than half of all VA FSS sales. In
fiscal year 2003, for example, VA medical center purchases represented
$3.9 billion, or over 63 percent, of the $6.2 billion in total sales from
VA's schedule contracts. While purchases from national contracts were much
less than those from the schedules-totaling approximately $712 million in
fiscal year 2003-VA medical centers accounted for about $591 million, or
83 percent, of the purchases from these contracts.

VA's National Acquisition Center is responsible for awarding and
administering FSS and national contracts. The National Acquisition Center
negotiates contracts, seeking to leverage VA's overall government buying

Many VA Contracts EUROffer FavorableEURPrices and Savings, EURbut VA Could
Further EURLeverage Its EURBuying PowerEURWhen AcquiringEURHealthcare
Services EUR

power by achieving pricing and terms equal to or better than those a
vendor offers its most favored customers. Vendors submit offers to the
National Acquisition Center, and contracting officers perform price
analyses to arrive at a fair and reasonable price.5 Once the contracts are
in place, it is then up to the purchasing offices at the VA medical
centers to buy products and services from the schedules.

In fiscal year 2001, the VA Inspector General (IG) issued a report that
expressed significant concerns about the effectiveness of VA's acquisition
system.6 As a result, the Secretary of Veterans Affairs established, in
June 2001, a Procurement Reform Task Force to review VA's healthcare
procurement system. In its May 2002 report, the task force set five major
goals that it believed would lead to improvements in VA's acquisition
system: (1) leverage purchasing power, (2) standardize commodities in VA,
(3) obtain and improve comprehensive procurement information for better
decision making, (4) improve the effectiveness of the procurement
organization, and (5) ensure that it maintained a talented and sufficient
procurement workforce. The task force made recommendations to help VA
achieve these goals.

The FSS and national contracts that VA has awarded have resulted in more
favorable prices and yielded substantial savings. To strengthen its
bargaining position during FSS contract negotiations, VA has relied on
pre-award audits of vendors' contract proposals and post-award audits of
vendors' contract actions. VA has further leveraged its buying power to
achieve discounts and savings through its national contracts-an area that
the VA Procurement Reform Task Force recognized offered significant
potential for additional cost savings and other procurement efficiencies.
However, VA could achieve additional savings through FSS and national
contracts for healthcare services.

5 During negotiations, vendors are required to disclose the prices and
concessions they offer their most favored customers. The FSS multiple
award schedules include a Price Reduction Clause that helps to ensure that
prices remain comparable to the prices granted to the vendors' most
favored customers throughout the life of the contract.

6 Department of Veterans Affairs, Office of Inspector General, Evaluation
of VA's Purchasing Practices, Report Number 01-01855-75 (Washington, D.C.:
May 15, 2001).

Audits Have Helped VA Obtain Most Favored Customer Prices and Savings

To help ensure VA obtains most favored customer prices on FSS contracts
for medical products and services, VA's Office of Inspector General
entered into a memorandum of understanding with VA's Office of Acquisition
and Materiel Management to conduct pre-award and post~award audits of FSS
contracts. These audits provide VA's contracting officers with detailed
information about vendors' commercial sales and marketing practices. With
this information, VA is able to strengthen the government's bargaining
position during negotiations and achieve savings through cost avoidance
and recoveries.

VA policy requires that pre-award audits be conducted before awarding
pharmaceutical contracts of $25 million or more, and other contracts of
$15 million or more.7 By performing a pre-award audit on a vendor's
proposal, VA can determine whether the pricing information is current,
accurate, and complete. Pre-award audits help VA avoid unnecessary costs
by obtaining the most favored customer price during negotiations.
Post-award audits also help VA protect against overcharging by vendors.
They often result in recovery of money from vendors who overcharged VA.
Most post-award audits are prompted by vendors' voluntary disclosures that
prices charged to the government were too high.

The financial benefits attributed to these audit efforts have been
significant. During fiscal years 1999 to 2003, VA audits identified $151
million in cost avoidances from pre-award audits and $90 million in
recoveries from post-award audits (see table 1).

Table 1: Results of VA FSS Audits for Fiscal Years 1999 through 2003

                              Dollars in millions

                Fiscal year    Cost avoidance       Recoveries          Total 
                       1999                $32.7      $10.2             $42.9 
                       2000                 20.2       5.9        
                       2001                 17.1       24.4       
                       2002                 22.6       25.0              47.6 
                       2003                 58.2       24.3              82.5 
                      Total               $150.8      $89.8            $240.6 

                                Source: VA data.

7 Pre-award audits are generally done at the request of the contracting
officer.

National Contracts Have Resulted in Additional Savings

VA has also taken steps when possible to consolidate its requirements for
medical supplies and equipment and pharmaceutical products it purchases by
using national contracts. Through these contracts, VA has been able to
further leverage its buying power and obtain even better prices than are
available on FSS contracts.8 VA uses three methods to consolidate
requirements into national contracts.

First, VA consolidates contracts through "standardization"-that is, it
agrees on particular items that VA facilities purchase and then contracts
with manufacturers of these items for discounts based on a larger volume.9
By leveraging its large purchasing power, VA can achieve significant cost
savings and other procurement efficiencies. VA's standardization efforts
cover a variety of medical products, such as medical and surgical supplies
and prosthetic equipment, but most of VA's standardization has involved
buying pharmaceutical products at large discounts. Since VA issued a
policy in June 1999 requiring medical facilities to use standardized
products, VA increased its use of national contracts. According to VA
officials, VA's pharmaceutical standardization program led to savings of
$394 million for 84 categories of drugs in fiscal year 2003.10 VA
continues to look for opportunities for more national contracts. For
example, in fiscal year 2003, the National Acquisition Center awarded 73
contracts for

8 Most of the solicitations for these contracts are competitive, best
value procurements. National contracts' performance periods are normally
for one year with up to four option years.

9 In standardizing products, VA analyzes its procurement history and
identifies like items, such as gauze bandages, for which it could
potentially standardize and negotiate national contracts directly with
vendors for a larger discount based on volume purchasing. After like items
are identified, a team of clinicians-including doctors, technicians, and
nurses- assesses the products for quality and agrees on a specific item or
items that are acceptable for use by all VA hospitals. Acquisition
officials then negotiate national contracts with the vendors of the chosen
products to obtain lower prices.

10 To determine cost avoidance, VA compared the actual purchase cost of
the drug types and the theoretical cost had the contracts not been
awarded. For example, VA determined that a contract for Amiodarone (heart
medication) awarded in June 2000 resulted in fiscal year 2003 cost
avoidance of $4.7 million, or 58 percent of the actual cost, because the
cost of the drug in fiscal year 2003 was $3.4 million, and the theoretical
cost was $8.2 million. VA estimated the theoretical cost by multiplying
the weighted average price per unit that existed during the 3-month period
before the contract took effect, by the quantity purchased in the current
fiscal year. However, VA officials noted that its estimates of cost
avoidance do not consider factors such as inflation and price changes that
occurred since some of the older contracts were awarded. VA is currently
working with DOD to develop a more accurate methodology for estimating
pharmaceutical cost avoidance.

standardized medical products valued at $34 million and 12 additional
national pharmaceuticals contracts valued at $227 million.

Second, VA consolidates its purchases of high-tech medical equipment to
achieve additional savings. For example, the National Acquisition Center
has negotiated national contracts with major equipment manufacturers for
ordering X-ray, magnetic resonance imaging, diagnostic ultrasound, and
other high-tech medical equipment for VA medical centers and other federal
customers to obtain discount prices. Besides achieving savings through
volume purchasing, consolidating purchases expedites ordering, reduces
costs of administering contracts and placing orders, and provides needed
technical assistance to users in designing a system and resolving any
equipment issues. As a result, VA officials identified savings of $9
million in fiscal year 2003.

VA's prime vendor distribution contracts--the third contract consolidation
method VA uses-have also helped VA to achieve savings. These contracts
provide customers significant flexibility and choice. Using these
contracts, VA medical centers can place orders through the prime vendor,11
which arranges for timely deliveries from manufacturers. VA has two prime
vendor distribution contracts-one for pharmaceuticals and one for medical
and surgical products.

o  DEGVA's prime vendor distribution contract for pharmaceuticals-which
has been in effect since 1991-accounts for the distribution of nearly all
pharmaceuticals used at VA medical centers. The contract provides that the
prime vendor reimburse VA about 3-percent of pharmaceutical sales to
medical centers.12 Because this contract represented over $3.4 billion in
sales in fiscal year 2003, VA estimates it saved about $100 million.

o  DEGVA's medical and surgical prime vendor distribution contract has
been in effect since 2002. Total VA sales through the medical and surgical
prime vendor contract were $48.7 million in fiscal year 2003. According to
VA officials, this resulted in savings of $2 million. Currently, only
about one third of VA's medical centers opt to purchase products through
the prime

11 Prime vendors are contractors that buy inventory from a variety of
suppliers, store it in commercial warehouses, and ship it to customers
when ordered.

12 Under this program, VA pays the prime vendor once the pharmaceuticals
have been shipped to VA medical centers. The prime vendor then generally
has up to 15 days to pay manufacturers, giving substantial "use of money"
benefits to the prime vendor. As a result, there is a "negative fee." The
current contract, which took effect on April 1, 2004, is valued at $2.9
billion per year and includes a reimbursement rate of about 5 percent.

vendor. To achieve even greater savings and efficiencies, VA has made a
policy that would require its medical centers to purchase all medical and
surgical products from a prime vendor. According to VA officials, VA's
policy should be in full effect in fiscal year 2005.

VA Has Potential for Additional Savings When Contracting for Healthcare
Services

While the National Acquisition Center has actively looked for ways to
reduce the cost of pharmaceuticals and medical supplies and equipment, it
has not taken the same aggressive approach to negotiate more favorable
prices for healthcare services.13 In fiscal year 2003, VA medical centers
purchased $1.65 billion in healthcare services (see table 2). Only $66
million of these services were purchased from FSS contracts. In most
cases, the healthcare services that the medical centers purchased were for
procedures or medical tests that could not be provided at a VA medical
center. For example, one VA medical center we visited contracted out
radiation therapy services to a local hospital because the center did not
have the equipment or staff to provide such services. In other instances,
healthcare services cover additional fee-based doctor, nursing, and dental
services provided inside and outside the VA medical centers.

13 Healthcare services were not included on the FSS until 2001.

Table 2: Fiscal Year 2003 Healthcare Services Purchased from Vendors and
Other Providers

                                           Description  Expenditures  Percent 
                 Medical care contracts and agreements  $665,502,189    40.25 
            aOff-station fee basis-medical and nursing  385,884,936     23.34 
                                              services                
                   Scarce medical specialist contracts  228,178,372     13.80 
            Contract hospital and outpatient treatment  187,735,882     11.36 
                        Emergency treatment of veteran   66,759,769      4.04 
                        Other contract hospitalization   58,591,270      3.54 
             bOn-station fee basis-medical and nursing   45,677,016      2.76 
                                              services                
                aOff-station fee basis-dental services   12,318,546      0.75 
                                           Consultants   1,855,481       0.11 
                 bOn-station fee basis-dental services        637,007    0.04 
                                            Counseling        187,727    0.01 
                                                 Total $1,653,328,195  100.00 

Source: VA data.

aService provided at a non-VA medical facility.

bService provided at a VA medical facility.

Nearly all of VA's existing healthcare services contracts are awarded and
administered by VA's medical centers. Typically, these contracts are with
local healthcare providers. As a result, there is generally no
coordination with the National Acquisition Center as to the type of
contract arrangements being negotiated, and no assurance that contracts
represent the best available prices. VA officials acknowledged that the
area of healthcare services has not been reviewed to determine the
potential for requirement consolidation and leveraging its buying power.
These officials, however, also explained that VA needs a database that
captures the specific types of healthcare services used by its medical
centers to determine which healthcare services could be consolidated to
achieve additional savings. We believe the National Acquisition Center is
in the best position to negotiate contracts that would help ensure more
favorable prices for healthcare services-as it does for pharmaceuticals,
medical supplies, and equipment-and could take steps to do this.

Opportunities Exist to Obtain Additional Savings at the Medical Centers

Over the past several years, VA medical center purchases from contracts
with more favorable prices have increased significantly, and VA has
achieved substantial savings. However, these savings could have been even
greater, as medical centers have not used these contracts as much as they
could have. Although VA has taken several actions to address this
weakness-including implementing new policies that establish purchasing
requirements and developing systems to capture data needed to make
informed acquisition decisions-it has yet to provide sufficient oversight
to ensure its new policies are adhered to.

Between fiscal years 1999 and 2003, total medical-center FSS purchases
more than doubled (see table 3). The most frequently used schedule was
pharmaceuticals.

  Table 3: Summary of FSS Purchases by VA Medical Centers in Fiscal Years 1999
                                  through 2003

                              Dollars in millions

                                  Fiscal year

Description of Federal Supply Schedule  1999   2000    2001   2002    2003 
              Pharmaceuticals             $1,239 $1,571  $1,957 $2,477 $3,237 
       Medical equipment and supplies      231     278    297    302   
      In-vitro diagnosis and test kits      54     47      59     50   
      Lab tests: blood/blood products       52     69      63     75   
          Patient mobility devices          29     28      38     46   
        X-ray equipment and supplies        20     18      18     16   
              Dental supplies               7       7      7      8    
            Healthcare services            N/A     N/A    N/A     15   
                   Total                  $1,632 $ 2,018 $2,439 $2,989 $3,879 

Source: VA Data.

Although medical centers' FSS purchases showed an increase between fiscal
year 1999 and 2001, the VA IG reported in May 2001 that medical centers
were often not using the VA contracts to purchase medical products because
medical centers were not required to buy from FSS and national contracts.
In response, the Procurement Reform Task Force recommended that VA
establish a contract hierarchy to guide its

purchasing practices. In November 2002, VA implemented a new policy14
requiring VA medical centers to purchase medical products first from a
national contract, second from a blanket purchase agreement (BPA),15 and
third from an FSS contract. Only when items are not available from these
sources should VA medical centers enter into local agreements or purchase
items directly from local vendors-the least desirable option.

Despite these efforts, the VA IG again reported in March 2004 that medical
center purchases were not made from the best sources.16 For example, the
VA IG analyzed a sample of purchases made in fiscal year 2002 valued at
$23.4 million. Although all of the products were available through VA
contracts, the medical centers purchased only $14.2 million, or about 60
percent, of the products off the national contracts. The remaining $9.2
million, or about 40 percent, was spent on generally higher priced locally
purchased products. The VA IG estimated that over five years (the typical
life of national contracts) VA could save about $1.4 billion if medical
centers purchased medical products from FSS and national contracts.

There are two primary reasons why VA medical centers have not purchased
medical products from the best sources. First, as pointed out by the VA
task force, VA does not have a readily accessible database that medical
center personnel could use to determine the availability of medical
products. VA is developing a web-based searchable database to provide
catalog information from vendors holding FSS and national contracts. The
new system, which was partially implemented in July 2003, is being
designed to allow medical center personnel to search for medical surgical
products available under FSS contracts and some national

14 The Deputy Assistant Secretary for Acquisition and Materiel Management
approved a class deviation from VA Acquisition Regulation that changed the
contracting hierarchy. Class deviation from VAAR 808.001, Priorities for
Use of Government Supply Sources, Nov. 20, 2002

15 These BPAs are simplified methods of filling anticipated repetitive
needs for supplies or services currently available on an FSS contract.
This method allows the government the opportunity to negotiate better unit
pricing based on anticipated sales volume or market share and to provide
more timely procurement of products and services needed on a recurring
basis. For example, the National Acquisition Center has negotiated a
national BPA for several types of anti-embolism stockings.

16 Department of Veterans Affairs, Office of Inspector General, Audit of
VA Medical Center Procurement of Medical, Prosthetic and Miscellaneous
Operating Supplies, Report Number 02-01481-118 (Washington, D.C.: Mar. 31,
2004).

VA Does Not Have Complete Information on the FSS Program Costs

Conclusions

contracts. According to VA officials, the new system is expected to
provide access to national contracts by October 2004. Second, according to
the VA IG, VA has yet to provide adequate oversight to ensure that its
recently implemented policy to use the contract hierarchy is being
followed. For example, although two purchasing activities within VA had
established procedures to monitor compliance with the new policy, the
procedures only covered compliance with the use of national contracts and
BPAs and did not cover FSS contracts. Consequently, VA cannot fully
determine whether medical centers comply with the new contract hierarchy.

To operate the FSS program, VA is supposed to identify all program costs
and charge a fee to its customers based on these costs. Currently, VA
charges FSS users a fee of 0.5 percent of sales to cover the cost of
operating the schedules program.17 VA maintains data on some FSS program
costs, such as employee salaries and benefits. However, VA has not
identified the costs associated with other activities, such as audit and
legal services. Without knowing the full cost of administering the
program, VA has no assurance that the user fee accurately covers program
costs.

VA's aggressive efforts to ensure most favorable pricing in awarding FSS
and national contacts for medical products and services have saved
taxpayers hundreds of millions of dollars. Despite this accomplishment, VA
could achieve significantly more savings-through leveraging its purchasing
power to negotiate FSS and national contracts for healthcare services used
at VA's 160 medical centers and through improved oversight of medical
center purchases. Without such actions, VA risks losing opportunities to
realize additional savings. At the same time, the costs of operating VA's
contracting programs need to be better understood to ensure that the user
fees VA collects from its customers are not excessive.

Recommendations for DEGWe are making three recommendations aimed at
helping VA achieve maximum savings through its contract programs.
Specifically, we

Executive Action recommend that the Secretary of the Department of
Veterans Affairs

17 Department of Veterans Affairs has collected this fee since 1996. It
collected $66.1 million in user fees between fiscal years 2001 and 2003.

o  DEGexplore opportunities to use its buying power to obtain more
favorable prices for healthcare services,

o  DEGstrengthen oversight to ensure medical centers use FSS and national
contracts to get the best prices available, and

o  identify the complete cost of the FSS program and reassess its user fee
to

Agency Comments

Scope and Methodology

determine if it needs to be adjusted.

In commenting on a draft of this report, the Secretary of Veterans Affairs
agreed with GAO's conclusions and concurred with its recommendations. VA's
written comments are included in appendix II.

To identify the steps taken by the VA to ensure that schedule contracts
provide medical products at favorable prices, we reviewed VA's policies,
procedures, and internal controls associated with awarding and
administering FSS contracts, as well as for national contracts that are
structured to achieve even better prices for VA's customers. We discussed
implementation of VA policies, procedures and internal controls with
agency officials at VA's National Acquisition Center in Hines, Illinois;
VA Headquarters in Washington, D.C.; and the VA's Office of Inspector
General in Washington, D.C. We also visited six VA medical centers to help
determine how VA procurement practices were being implemented. We
collected data on FSS and national contracts purchases from the National
Acquisition Center and the Financial Services Center, Austin, Texas.
Further, we reviewed and analyzed VA's cost avoidance estimates related to
the purchase of pharmaceuticals from national contracts.

To identify opportunities to improve purchasing practices and increase
savings, we met with VA medical center procurement officials. We reviewed
the VA's Procurement Reform Task Force (May 2002) report that recommended
ways to better leverage VA's purchasing power and determined the status of
VA's implementation of task force recommendations to improve procurement
practices across VA. Additionally, we reviewed VA IG reports and analyzed
VA data on medical center procurement practices.

To determine how much the VA spends annually administering the schedules
program and the extent user fees cover program costs, we interviewed and
obtained information from officials in the program and financial officers
at VA headquarters and its National Acquisition Center.

We asked VA officials to identify the costs incurred to operate the
schedules program. Further, we reviewed the legislative authority that
allows VA to use excess fees to cover other program costs. We discussed
this information with the VA program officials and VA General Counsel
staff located in Washington, D.C.

As agreed, unless you publicly announce its contents earlier, we plan no
EURfurther distribution of this report until 30 days from its issue date.
At that EURtime, we will send copies of this report to the Honorable
Anthony J. EURPrincipi, Secretary of Veterans Affairs; appropriate
congressionalEURcommittees; and other interested parties. We will also
provide copies to EURothers on request. In addition, the report will be
available at no charge on EURthe GAO Web site at http://www.gao.gov. EUR

If you or your staff has questions concerning this report, please contact
meEURat (202) 512-4841 or by e-mail at [email protected], or James Fuquay
atEUR(937) 258-7963. Key contributors to this report were William
Bricking, EURMyra Watts Butler, Jean Lee, Fred Naas, Sylvia Schatz, and
Karen Sloan. EUR

David E. Cooper EURDirectorEURAcquisition and Sourcing ManagementEUR

Appendix I: Description of Products and Services Included in FSS Schedules

Table 4: FSS Schedule Name and Description of Items

                                Name Description

                    Medical/surgical equipment and supplies

Repair service for home dialysis equipment
Home oxygen-contractual agreements
Other medical supply
Home oxygen-supplies
Oxygen equipment & supplies
Prosthetic supplies
Home dialysis equipment & supply
Medical supplies
Medical, dental, and scientific equipment
Medical, dental and scientific equipment-non-capitalized

Dental equipment and supplies	Other medical and dental supply Medical,
dental, and scientific equipment Medical, dental and scientific
equipment-non-capitalized

Patient mobility devices 	Equipment rentals Prosthetic repair services and
supplies

X-ray equipment and supplies	Medical supplies Medical, dental, and
scientific equipment Medical, dental and scientific
equipment-non-capitalized

In-vitro diagnostics, reagents and test kits Blood and blood products

                              Healthcare services

Medical care contracts and agreements

a

Off-station fee basis medical & nursing services

b

On-station fee basis medical & nursing services Emergency treatment of
veteran

a

Off-station fee basis dental services

b

On-station fee basis dental services
Other contract hospitalization
Consultants and counseling
Scarce medical specialist contracts
Contract hospital and outpatient treatment

Pharmaceuticals 	Drugs, medicines and chemical supplies Prescriptions
Medicines, drugs, and chemicals

Laboratory tests, clinical analyzers Blood and blood products

Source: VA Data. aService provided at a non-VA medical facility. bService
provided at a VA medical facility.

Appendix II: Comments From the Department of Veterans Affairs

Appendix II: Comments From the Department of Veterans Affairs

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