Mail Order Pharmacies: DOD's Use of VA's Mail Pharmacy Could	 
Produce Savings and Other Benefits (22-JUN-05, GAO-05-555).	 
                                                                 
There has been long-standing congressional interest in whether	 
the Department of Defense (DOD) could use the Department of	 
Veterans Affairs (VA) Consolidated Mail Outpatient Pharmacy	 
(CMOP) system as a cost-effective alternative to beneficiaries	 
picking up outpatient refill prescriptions at DOD military	 
treatment facilities (MTF). To evaluate this possibility, DOD and
VA conducted a pilot program in fiscal year 2003 in which a VA	 
CMOP provided outpatient pharmaceutical refill services to DOD	 
beneficiaries served through three MTFs. GAO was asked to	 
estimate cost savings that could be achieved if DOD used VA's	 
CMOP instead of MTF pharmacies for outpatient refill		 
prescriptions, and what other benefits were achieved at the three
pilot sites. To estimate potential cost savings and determine	 
what other benefits were achieved, GAO reviewed pilot and	 
pharmacy program documentation and interviewed DOD and VA	 
officials responsible for purchasing and dispensing drugs. GAO	 
also compared drug and administrative costs of dispensing	 
outpatient refills through the fiscal year 2003 pilot program	 
with the costs of dispensing the refills at the three DOD MTFs	 
that participated in the pilot. 				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-555 					        
    ACCNO:   A27478						        
  TITLE:     Mail Order Pharmacies: DOD's Use of VA's Mail Pharmacy   
Could Produce Savings and Other Benefits			 
     DATE:   06/22/2005 
  SUBJECT:   Administrative costs				 
	     Drugs						 
	     Health care costs					 
	     Health care planning				 
	     Interagency relations				 
	     Pharmaceutical industry				 
	     Cost effectiveness analysis			 
	     Pilot programs					 
	     VA Consolidated Mail Outpatient Pharmacy		 

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GAO-05-555

     

     * Results in Brief
     * Background
          * VA CMOP
          * DOD and VA Drug Procurement Practices
          * Pilot Program for DOD Use of VA's CMOP
     * DOD Could Realize Financial Savings and Nonmonetary Benefits
          * DOD Can Save on Drug Costs by Using the CMOP
          * Cost Savings Depend on Closing MTF Outpatient Refill Operati
          * Use of CMOP Provided Nonmonetary Benefits to DOD
     * Concluding Observations
     * Agency Comments and Our Evaluation
          * Order by Mail or Phone

Report to the Chairman, Subcommittee on Oversight and Investigations,
Committee on Veterans' Affairs, House of Representatives

United States Government Accountability Office

GAO

June 2005

MAIL ORDER PHARMACIES

DOD's Use of VA's Mail Pharmacy Could Produce Savings and Other Benefits

DOD Use of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail
Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use
of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail
Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use
of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail
Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use
of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail
Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use
of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail
Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use
of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail
Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use
of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail
Pharmacy DOD Use of VA Mail Pharmacy DOD Use of VA Mail Pharmacy DOD Use
of VA Mail Pharmacy DOD Use of VA Mail Pharmacy

GAO-05-555

Contents

Letter 1

Results in Brief 3
Background 4
DOD Could Realize Financial Savings and Nonmonetary Benefits by Using VA's
CMOP 12
Concluding Observations 16
Agency Comments and Our Evaluation 17
Appendix I Scope and Methodology 20
Appendix II Average Drug Prices Included in Cost Comparison, June 2004 24
Appendix III Components of Administrative Costs 27
Appendix IV Services and Costs of VA's CMOP and DOD's TRICARE Mail Order
Pharmacy 29
Appendix V Comments from the Department of Veterans Affairs 31
Appendix VI Comments from the Department of Defense 33

Tables

Table 1: Copayments for DOD Civilian Beneficiaries 5
Table 2: DOD Outpatient Prescription Drug Costs, Fiscal Year 2004 5
Table 3: MTF Outpatient Refills, Fiscal Year 2003 16
Table 4: Estimated Annual Administrative Cost for MTF Outpatient Refill
Operations 27
Table 5: Average Administrative Cost Per Prescription for VA CMOP, Fiscal
Years 2003 and 2004 28

Figures

Figure 1: Number of Outpatient Pharmacy Benefit Users, July 2001 through
September 2004 7
Figure 2: Components of Final DOD and VA Drug Prices as of June 2004 10

Abbreviations

CMOP Consolidated Mail Outpatient Pharmacy DOD Department of Defense FSS
federal supply schedule MHS military health system MTF military treatment
facility PDTS pharmacy data transaction service POS point of service TMA
TRICARE Management Activity VA Department of Veterans Affairs

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separately.

United States Government Accountability Office

Washington, DC 20548

June 22, 2005

The Honorable Michael Bilirakis Chairman Subcommittee on Oversight and
Investigations Committee on Veterans' Affairs House of Representatives

Dear Mr. Chairman:

In fiscal year 2004, the Department of Defense (DOD) dispensed over 100
million prescriptions to about 6 million health care beneficiaries.1 These
beneficiaries picked up their drugs at military treatment facilities (MTF)
or at retail pharmacies, or had them delivered through DOD's mail order
program. About 19 million of the prescriptions were refill prescriptions
that were dispensed at MTF outpatient pharmacies. These drugs cost DOD
about $840 million. During that year, active duty military personnel and
their dependents2 accounted for 14 percent of MTF 30-day outpatient refill
prescriptions; 85 percent were for civilians, mainly retired military
personnel and their dependents.3

While DOD dispenses most prescriptions at MTFs, the Department of Veterans
Affairs (VA) uses a different approach to dispense prescriptions for its
beneficiaries. It dispenses most of its prescriptions through a system of
seven Consolidated Mail Outpatient Pharmacies (CMOP) that mail
prescriptions to VA beneficiaries. There has been long-standing
congressional interest in whether VA's CMOP could be a cost effective
alternative for DOD beneficiaries instead of picking up outpatient refill
prescriptions at MTFs.4 Due, in part, to this congressional interest, DOD
and VA conducted a pilot program during fiscal year 2003 to determine the
feasibility of using one CMOP to provide outpatient pharmacy refill
services free of charge to DOD beneficiaries who received prescriptions at
three participating MTFs. You asked us to report on the results of the
pilot program, specifically, what estimated cost savings could be achieved
if DOD used VA's CMOP instead of MTF pharmacies for outpatient refill
prescriptions, and what other benefits were achieved at the three pilot
sites.

1In fiscal year 2004, DOD served about 9 million health care
beneficiaries, of which about 6 million received prescriptions.

2This figure includes service academy students, active duty beneficiaries
who are transitioning from active duty as part of the Transitional
Assistance Management Program, and foreign military members.

3About 84 percent of DOD MTFs' 30-day outpatient pharmacy refills were for
retired military personnel (now civilians) and their dependents, and 1
percent was for other civilians, such as non-active duty Medal of Honor
recipients, or their dependents. DOD reported that the remaining 1 percent
of recipients was unknown.

To estimate potential cost savings and determine what other benefits were
achieved, we reviewed pilot and pharmacy program documentation and
interviewed DOD and VA officials responsible for purchasing and dispensing
drugs, including officials from the VA CMOP located in Leavenworth,
Kansas, and each of the three DOD MTFs involved in the pilot-Darnall Army
Community Hospital, Fort Hood, Texas (Fort Hood); the 377th Medical Group,
Kirtland Air Force Base, New Mexico (Kirtland); and the Naval Medical
Center San Diego, San Diego, California (San Diego). (See app. I for more
information on our scope and methodology.) To assess the costs of the
pilot, we considered two types of costs at each location-the costs of the
drugs themselves and the administrative costs of dispensing them. For drug
costs, we compared the costs of the drugs at the CMOP with the costs at
the three MTFs. To make this comparison, we identified 90 of the drugs
with the highest total costs out of the 1,397 drugs dispensed by the CMOP
through the pilot. The 90 drugs that we included in our comparison
accounted for 65 percent of total drug costs for the pilot program ($15.6
million), while the remaining drugs dispensed during the pilot accounted
for 35 percent of total drug costs. To compare VA's costs with DOD's costs
for the 90 drugs, we obtained the prices that the CMOP and MTFs paid for
the drugs in June 2004 (see app. II) and applied these prices to the
quantity of each drug dispensed during the pilot. To estimate costs for
the remaining drugs dispensed during the pilot, we collected information
on general differences in DOD and VA pricing that applies to all drugs. We
combined estimated savings from the 90 drugs in our analysis and the
remaining drugs to determine an estimate of drug cost savings during the
pilot. During the pilot program, beneficiaries chose to have the CMOP fill
a combined 47 percent of the prescription refills that usually would have
been handled at the three pilot MTFs. To estimate the potential for
savings if all prescription refills from the pilot MTFs were dispensed by
the CMOP, we multiplied the savings per prescription estimated from the
drugs dispensed through the pilot by the total number of refill
prescriptions from the three pilot MTFs in fiscal year 2003-including
those dispensed through the CMOP and those dispensed at the MTFs. For
administrative costs, we collected information on the costs of personnel,
equipment, supplies, and other aspects of dispensing outpatient refill
prescriptions at the MTFs and compared them to the administrative cost of
dispensing prescriptions through the CMOP. (See app. III.) We also
compared the costs and services of the CMOP program with DOD's mail order
program, the TRICARE Mail Order Pharmacy. (See app. IV.) To assess the
reliability of DOD and VA data, we interviewed agency officials and tested
the data for errors. We determined that the data were sufficiently
reliable for our purposes. We conducted our work from April 2004 through
May 2005 in accordance with generally accepted government auditing
standards.

4For example, on May 25, 2000, the Subcommittee on Oversight and
Investigations, House Committee on Veterans' Affairs, conducted a hearing
on joint procurement of drugs by DOD and VA. In his closing statement, the
subcommittee chairman directed DOD and VA to explore the possibility of
DOD using VA's CMOP. See also, GAO, DOD and VA Heath Care: Jointly Buying
and Mailing Out Pharmaceutcals Could Save Millions of Dollars,
GAO/T-HEHS-00-121 (Washington, D.C.: May 25, 2000) and GAO, DOD and VA
Pharmacy: Progress and Remainng Chalenges in Jonly Buying and Maing Out
Drugs, GAO-01-588 (Washington, D.C.: May 25, 2001).

                                Results in Brief

DOD could achieve savings if it used VA's CMOP to dispense its outpatient
pharmacy refill prescriptions by taking advantage of VA's generally lower
drug prices. VA's prices for the 90 drugs in our cost comparison were
generally lower than DOD's prices for the same drugs, based on June 2004
prices for the drugs dispensed during the pilot in fiscal year 2003. Using
the estimated differences in price for the 1,397 drugs dispensed through
the pilot, we estimate that the three pilot MTFs saved approximately
$646,000, or about $1.39 per prescription, in fiscal year 2003. If these
MTFs had fully utilized the pilot for all their outpatient refill
prescriptions dispensed during fiscal year 2003-including those dispensed
through the CMOP and those dispensed at the MTFs-savings could have been
higher, potentially totaling $1.5 million if the MTFs achieved the same
savings per prescription ($1.39) as estimated for the pilot. Additional
drug cost savings would also be possible if the CMOP was made aware of and
was able to use lower prices that DOD has negotiated for some drugs.
However, while DOD saved money on drug costs at the pilot MTFs, these
savings were offset because DOD paid administrative costs for refill
operations twice-first to pay VA for the administrative costs charged by
the CMOP and second to maintain outpatient pharmacy refill operations at
the MTFs. Consequently, to realize savings from the cost of drugs, DOD
would have to close its MTF outpatient pharmacy refill operations, as most
of the MTFs' dispensing costs are for personnel and equipment. In addition
to demonstrating the potential for financial savings, the pilot produced
nonmonetary benefits. For example, DOD beneficiaries who participated in
the pilot program reported satisfaction with the CMOP's accurate and
timely distribution of drugs. MTF officials reported benefits such as
reduced automobile traffic congestion and shorter pharmacy waiting times
because many civilian beneficiaries at the pilot sites no longer came to
MTFs to pick up refill prescriptions. In addition, according to DOD
officials, using the CMOP could allow military personnel to focus
primarily on DOD's core mission to provide services for active duty
beneficiaries and their families at the MTFs, consistent with DOD's goal
to support military readiness.

We provided a draft of this report to DOD and VA for comment. VA said that
it concurred with the draft report, and DOD said that it was technically
accurate but neither explicitly concurred nor nonconcurred. DOD also
included technical comments that we incorporated where appropriate. In
addition, DOD raised some concerns with the information presented in the
draft report such as the amount of refunds DOD expects to receive from
drug manufacturers. We believe the information in our report supports the
presentation of our findings.

                                   Background

DOD's beneficiaries have four options for obtaining prescription drugs.
They can pick them up directly from MTFs, network retail pharmacies, or
nonnetwork retail pharmacies. They can also receive them in the mail
through DOD's TRICARE Mail Order Pharmacy. DOD operates 536 pharmacies at
121 of its MTFs. Each MTF may have multiple pharmacies. For example, San
Diego maintains satellite pharmacies at several locations in addition to
its main pharmacy, which has a separate section that dispenses outpatient
refill prescriptions. Fort Hood and Kirtland each maintain a separate
pharmacy to dispense outpatient refill prescriptions, and Fort Hood
maintains several satellite pharmacies at health care clinics. In addition
to pharmacies at its MTFs, DOD contracts with Express Scripts, Inc., a
private pharmacy benefits management company, to operate DOD's retail
pharmacy program and its TRICARE Mail Order Pharmacy. For the retail
system, Express Scripts has a network of over 54,000 retail pharmacies
where DOD beneficiaries can pick up prescriptions; beneficiaries can also
utilize nonnetwork pharmacies, that is, any retail pharmacy not in Express
Scripts' network. For the TRICARE Mail Order Pharmacy, beneficiaries
submit their prescriptions to Express Scripts, which dispenses and mails
the drugs directly to the beneficiary. Civilian beneficiaries pay
copayments for drugs obtained through the mail or at retail pharmacies,
but do not pay at MTFs. (See table 1.) Active duty service members do not
pay copayments.

Table 1: Copayments for DOD Civilian Beneficiaries

Delivery option              Copayment                       Supply        
Military treatment facility  None                            Up to 90 days 
Retail network pharmacy      $3 generic; $9 brand            Up to 30 days 
Retail nonnetwork pharmacy   Greater of $9 or 20 percent of  Up to 30 days 
                                total cost                      
TRICARE Mail Order Pharmacy  $3 generic; $9 brand            Up to 90 days 

Source: DOD.

Note: Active duty service members do not pay copayments. For retail
pharmacies and the TRICARE Mail Order Pharmacy, DOD has established a new
copayment of $22 per prescription for drugs designated "non-formulary."
For nonnetwork retail pharmacies, the copayment is the greater of $22 or
20 percent of total cost. As of April 27, 2005, DOD had designated three
non-formulary drugs that are subject to the copayment. According to DOD
officials, drugs that are designated "non-formulary" are not available at
MTFs.

For most drugs, all four options are available to DOD beneficiaries
regardless of where they obtain health care services. For example, a
beneficiary can obtain a prescription from a private or military physician
and then choose to have the prescription filled at an MTF, a network or
nonnetwork retail pharmacy, or the TRICARE Mail Order Pharmacy. However,
DOD's cost differs considerably depending on the delivery option the
beneficiary chooses. (See table 2.)

Table 2: DOD Outpatient Prescription Drug Costs, Fiscal Year 2004

                                                             Average DOD cost 
                                            Number of 30-day       per 30-day 
Delivery option              Cost to DOD    prescriptions     prescription 
MTF pharmacies           $1,703,728,991a       78,572,443           $21.68 
Network and nonnetwork                                                     
retail pharmacies        $2,430,383,288b       39,879,525           $60.94
TRICARE Mail Order                                                         
Pharmacy                   $546,040,968b       16,890,727           $32.33

Source: DOD.

aIncludes only drug costs because beneficiaries at MTFs are not subject to
copayments and because DOD generally does not separate administrative
costs related to dispensing prescriptions from other administrative costs
at its MTFs.

bDOD's drug costs after adjusting for administrative fees and beneficiary
copayments.

DOD's average cost per 30-day prescription varies among the delivery
options for a number of reasons, including differences in the price of
drugs dispensed in each system, copayments, and administrative costs of
dispensing the drugs. For example, DOD does not receive federal discounts
when beneficiaries obtain drugs through retail pharmacies, so DOD's costs
for purchases at retail pharmacies are generally higher than at MTFs or
through the TRICARE Mail Order Pharmacy.5 The administrative cost of
dispensing drugs is not included in the MTF costs, but according to DOD
officials, MTFs remain the least expensive of the three systems. However,
an increasing number of DOD beneficiaries have chosen in recent years to
use retail pharmacies (see fig. 1), which is DOD's most expensive delivery
option.

5DOD has begun the process of seeking refunds from manufacturers who
supply drugs to DOD beneficiaries through retail network pharmacies. In
March 2005, the Coalition for Common Sense in Government Procurement,
which includes drug manufacturers, filed a petition with the United States
Court of Appeals for the Federal Circuit, seeking the court's review of an
October 2004 letter from the VA directing that refunds be made to DOD.

Figure 1: Number of Outpatient Pharmacy Benefit Users, July 2001 through
September 2004

Note: This figure shows which of the three points of service (POS) for
drugs in the military health system (MHS)-MTF, Retail, and DOD's TRICARE
Mail Order Pharmacy-that beneficiaries chose to use from fiscal years 2001
through 2004. The MHS has three missions: (1) maintaining the health of
active-duty service personnel; (2) medically supporting military
operations; and (3) providing care to the dependents of active duty
personnel, retirees and their families, as well as to survivors and their
dependents. The information in the figure was compiled by DOD from its
pharmacy data transaction service (PDTS).

VA CMOP

As part of its pharmacy system, VA operates a mail pharmacy program, the
CMOP, which uses automated equipment to dispense and mail prescriptions to
beneficiaries. VA operates seven CMOP facilities, which dispensed about 88
million prescriptions in fiscal year 2004. In that year, CMOP facilities
dispensed 76 percent of all VA prescriptions, including over 95 percent of
refill prescriptions. Most of the remaining prescriptions were dispensed
through pharmacies at VA's hospitals and clinics. VA beneficiaries
generally do not have the option to obtain prescriptions at retail
pharmacies.

DOD and VA Drug Procurement Practices

DOD and VA have a number of drug procurement options available to them
that can result in differences in drug prices. For example, DOD and VA
have access to discounted drug prices through the federal supply schedule
(FSS). The FSS is maintained by VA's National Acquisition Center and is
available to all federal purchasers. All FSS prices, regardless of which
federal agency purchases the drug, include a fee of 0.5 percent of the
price to fund the National Acquisition Center's activities. DOD and VA
also have access to federal ceiling prices, which are mandated by law to
be 24 percent lower than nonfederal average manufacturer prices.6 For some
drugs, DOD and VA negotiate, through national contracts or other
agreements, prices that are even lower than FSS or federal ceiling prices.
Generally, DOD and VA negotiate these contracts and agreements jointly, in
which case they both pay the same price for the drug. However, when VA or
DOD negotiates contracts and agreements separately, the two agencies may
pay different prices for the same drug. In a few cases, individual VA
medical centers or DOD MTFs have obtained lower prices through local
purchase agreements with manufacturers than they could have through the
national contracts, FSS, or federal ceiling prices. Differences in DOD and
VA prices can also occur when the departments order the same drug in
different package sizes or from different manufacturers.

Two other factors account for the departments paying different prices for
the same drugs. First, both DOD and VA use prime vendors, which are drug
distributors, to purchase drugs from manufacturers and deliver them to DOD
or VA facilities. As of June 2004, VA used one prime vendor, while DOD
used five prime vendors, each one servicing different geographic areas.
Both departments receive discounts from their prime vendors that further
reduce the prices that DOD and VA pay for drugs. For DOD, the discounts
vary among prime vendors and the areas they serve.7 As of June 2004, VA's
prime vendor discount was 5 percent, while DOD's discounts averaged about
2.9 percent within the United States. Discounts from the prime vendors
serving the three pilot MTFs averaged about 3 percent. Second, the price
of drugs purchased directly by DOD facilities or the TRICARE Mail Order
Pharmacy included a 1.7 percent fee to fund the Defense Supply Center's
activities.8 Figure 2 shows the various components of DOD and VA drug
prices.

6See 38 U.S.C. S: 8126(a)(2) (2000). In addition to DOD and VA, the Public
Health Service and the Coast Guard have access to federal ceiling prices.
The nonfederal average manufacturer price, used to set the federal ceiling
price, is the weighted average price of a single form and dosage unit paid
by wholesalers to a manufacturer, taking into account cash discounts or
similar price reductions. Federal ceiling prices, in general, do not apply
to generic drugs.

7Both departments have negotiated these discounts, known as negative
distribution fees, with their prime vendors. The prime vendors can offer
DOD and VA these discounts because the vendors generate profits in the
following three ways: First, prime vendors generally can earn interest on
funds from the time they receive payment to when they pay manufacturers.
Second, combining purchases for their government and commercial customers,
prime vendors use leverage to negotiate discounts from drug manufacturers.
Third, according to a DOD official, prime vendors sometimes purchase large
quantities of drugs in advance of manufacturer price increases, a practice
that manufacturers are beginning to limit.

8The Defense Supply Center Philadelphia, part of the Defense Logistics
Agency, supplies and manages drugs, medical supplies, food, clothing, and
textiles for DOD.

Figure 2: Components of Final DOD and VA Drug Prices as of June 2004

aDifferences in price also occur when the departments order the same drug
in different package sizes or from different manufacturers, or when
individual facilities use local purchase agreements.

bDiscounts from the prime vendors serving the three pilot MTFs averaged
about 3 percent.

Pilot Program for DOD Use of VA's CMOP

During fiscal year 2003, DOD and VA conducted a pilot program to assess
the feasibility of dispensing outpatient refill prescriptions for DOD
beneficiaries using a VA CMOP. Under the program, the CMOP in Leavenworth,
Kansas, dispensed prescriptions for three DOD MTFs-Fort Hood, Kirtland,
and San Diego. Using automated phone systems for ordering prescription
refills-already in place at the three pilot MTFs-beneficiaries chose
whether to have each prescription refilled at the CMOP or at the MTF. Once
a beneficiary chose the option to have the CMOP dispense a refill, the
prescription was electronically transmitted from the MTF to the CMOP. The
CMOP then purchased drugs-or used drugs already in inventory-to dispense
each prescription. The CMOP mailed each refill prescription directly to
the beneficiary. After sending the refill prescription, the CMOP sent a
report of its activity back to the MTF, which maintained responsibility
for patient care.

During the pilot program, the VA CMOP distributed only prescription
refills-no original prescriptions and no controlled substances-to DOD
beneficiaries, although the CMOP routinely dispenses them for VA
beneficiaries. The TRICARE Management Activity (TMA)9 paid both drug and
administrative costs of the pilot program to VA during fiscal year 2003.
DOD beneficiaries did not pay a copayment or any other charge for the
drugs they received from the CMOP, the same as if they had obtained the
drugs at an MTF.

As of April 2005, two of the three MTFs, San Diego and Kirtland, continued
to have prescriptions filled through the VA CMOP. Fort Hood ended its CMOP
participation at the end of fiscal year 2003 when TMA informed the three
MTFs that it would not fund administrative or drug costs for
CMOP-dispensed drugs in fiscal year 2004. TMA later decided to pay
administrative costs, so, for fiscal year 2004, San Diego and Kirtland
paid only drug costs.

In fiscal year 2003, during the pilot program, beneficiaries chose to have
the VA CMOP fill a combined 47 percent of the prescription refills that
usually would have been handled at the three pilot site MTFs. In fiscal
year 2004 at San Diego and Kirtland, the two sites that continued CMOP
participation, beneficiaries chose to have the CMOP fill a combined 65
percent of the outpatient pharmacy refill prescriptions. The remaining
outpatient refill prescriptions were dispensed by MTF pharmacies.

9The TRICARE Management Activity manages DOD's health care system.

DOD Could Realize Financial Savings and Nonmonetary Benefits by Using VA's CMOP

DOD could achieve savings by taking advantage of VA's generally lower drug
prices if it used the VA CMOP to dispense its outpatient pharmacy refill
prescriptions. Estimated savings from the 90 drugs included in our price
comparison plus estimated savings from the other drugs dispensed in the
pilot during fiscal year 2003 total $646,000, or about $1.39 per
prescription. Additional savings would also be possible if the CMOP were
made aware of and used lower prices that DOD has negotiated for some
drugs. However, achieving savings would require closing MTF outpatient
pharmacy refill operations to offset CMOP administrative expenses. In
addition to demonstrating that financial savings are possible, the pilot
produced nonmonetary benefits such as providing high-quality service as
indicated by measurements of beneficiary satisfaction and rates of
accurate and timely distribution of drugs, reducing automobile traffic
congestion and pharmacy wait times, and freeing DOD resources for its core
mission of supporting military readiness.

DOD Can Save on Drug Costs by Using the CMOP

Our analysis showed that June 2004 VA CMOP drug prices were generally
lower than prices at the DOD MTFs. Based on the differences in drug prices
that existed in June 2004, we estimate that for these 90 drugs the three
pilot sites produced savings during fiscal year 2003 for DOD of about
$437,000, or about 4 percent. For these drugs, the estimated savings
averaged $2.74 per prescription. We estimated these savings by comparing
the June 2004 prices that the CMOP and DOD paid for 90 of the drugs with
the highest total costs that were dispensed at Fort Hood, Kirtland, and
San Diego by the CMOP during the fiscal year 2003 pilot program. (See app.
I for the methodology we used to select these drugs.)

These drugs comprised 65 percent of total drug costs in the pilot. We did
not obtain individual prices for the drugs that comprised the remaining 35
percent of pilot drug expenditures. Therefore, we do not know what, if
any, specific differences exist in DOD's and VA's prices for these drugs.
However, general differences in DOD and VA drug purchasing apply to all
the drugs. As of June 2004, VA received a 5 percent price discount from
its prime vendor, and the three pilot MTFs received price discounts
averaging 3 percent from their prime vendors. In addition, DOD's Defense
Supply Center charged a fee of 1.7 percent for MTF drug purchases. These
differences amount to VA's drug prices being about 3.7 percent lower than
DOD's. Applying a 3.7 percent reduction to the remaining 35 percent of
drug expenditures yields overall estimated savings of about $209,000,
which amounts to $0.69 per prescription for the drugs in the pilot that
were not included in our analysis.

We estimate that the combined savings from the 90 drugs and the other
drugs dispensed through the pilot in fiscal year 2003 total $646,000,
making VA's total drug costs during the pilot approximately 3.9 percent
less than DOD costs, or approximately $1.39 less per prescription. If the
three MTFs had been able to achieve the same savings per prescription and
had fully utilized the pilot for all their outpatient refill prescriptions
in fiscal year 2003-including those dispensed through the CMOP and those
dispensed at the MTFs-drug cost savings during fiscal year 2003 could have
been about $1.5 million.

DOD could have realized even greater savings if the VA CMOP were made
aware of and used DOD's lower negotiated price for some drugs. About 15
percent of the prices for the 90 drugs in our price comparison were more
expensive for DOD MTFs when purchased through the VA than if they had been
acquired through DOD purchase agreements. For example, MTFs involved in
the pilot paid an average of $0.64 in June 2004 for each 30 mg capsule of
lansoprazole, a drug that stops production of stomach acid and is
prescribed for conditions such as gastroesophageal reflux disease, based
on an agreement with the drug's manufacturer. When ordering through the
CMOP, however, the pilot sites paid a higher price for lansoprazole-$1.77
per capsule in June 2004-which was based on the FSS price. DOD could
obtain the lower prices it has negotiated, according to CMOP officials, if
the MTFs ordered these drugs through their prime vendors at DOD prices and
had them delivered to the CMOP for distribution to DOD patients. Another
way to achieve lower drug prices, they said, would be for MTFs to obtain
rebates from drug manufacturers for the difference between the CMOP price
and the lower DOD price. For example, San Diego began to use this process
in fiscal year 2004. Officials at the MTF expect to receive rebates from
drug manufacturers of over $300,000 for drugs purchased during the first
quarter of fiscal year 2005. Based on our comparison of June 2004 drug
prices for the 90 drugs in our analysis, we estimate that if DOD's lower
prices had applied to the 15 percent of those drugs with lower prices at
the MTFs than at the CMOP-either by MTFs having the drugs delivered to the
CMOP through their prime vendors or obtaining rebates from drug
manufacturers-DOD would have saved an additional $500,000 in drug costs
during fiscal year 2003.

Cost Savings Depend on Closing MTF Outpatient Refill Operations

Since DOD beneficiaries chose to use the VA CMOP for 47 percent of their
outpatient refill prescriptions in fiscal year 2003, the MTFs' refill
workload was not eliminated. For example, the three MTFs dispensed about
79,000 refill prescriptions in September 2002, the month before the pilot
began, and dispensed about 37,000 prescriptions in September 2003, during
the pilot. The outpatient refill workload that remained at the MTFs
required that the MTF outpatient pharmacy refill operations remain open
and maintain personnel and equipment to dispense refills. Because most of
the MTFs' costs of dispensing refills are for personnel and equipment,
according to officials at the three MTFs, the decreased workload did not
lead to a proportional decrease in costs.

For dispensing drugs through the VA CMOP during the pilot, DOD agreed to
pay the CMOP's average administrative cost, which includes the cost to
mail prescriptions to beneficiaries. Because of a change in the way the
CMOP computed administrative costs in fiscal year 2003, DOD paid VA $2.36
prior to July 2003 and $2.27 from July 2003 to the end of the fiscal year,
on average per prescription to cover these costs.10 These costs include
VA's average administrative costs to fill each prescription of $1.34 prior
to July 2003 and $1.24 from July 2003 to the end of the fiscal year, plus
mailing costs of $1.02 and $1.03, respectively. We estimate that DOD's
administrative costs at the three MTFs were about $2.31 per refill
prescription-roughly equal to the administrative costs of obtaining refill
prescriptions through the CMOP and mailing them to beneficiaries.11
Consequently, closing MTF outpatient pharmacy refill operations would
offset CMOP administrative expenses and yield drug cost savings for DOD
from its use of the CMOP.12 (See app. III for a calculation of DOD's and
VA's administrative cost.)

Use of CMOP Provided Nonmonetary Benefits to DOD

The pilot also produced nonmonetary benefits. Based on VA's measurements
of beneficiary satisfaction and rates of prescription accuracy and
timeliness, the VA CMOP provided high-quality service to DOD
beneficiaries. However, because the pilot MTFs and the CMOP used different
methods for measuring accuracy and because DOD did not conduct
satisfaction and timeliness surveys for the three pilot MTFs, we could not
make a meaningful comparison between the two dispensing options.

10Before July 2003, the costs of individual CMOP facilities were funded
separately. In the case of the DOD pilot, the MTFs paid based on the costs
of only the Leavenworth CMOP. Beginning in July 2003, the CMOP changed the
way it allocated costs by charging a blended rate based on the costs of
all seven CMOP facilities.

11Since we could not obtain comparable cost information for fiscal year
2003 from each of the pilot sites, we used different time periods to
estimate annual administrative costs for each of the three pilot MTFs. We
used San Diego cost information from fiscal year 2002, Kirtland cost
information from fiscal year 2003, and Fort Hood cost information from
calendar year 2004.

12If MTFs close their outpatient refill operations, MTFs could continue to
dispense outpatient refill prescriptions at their main pharmacies or at
other pharmacies at the facilities.

Regarding the VA CMOP's performance for fiscal year 2003, 97 percent of
DOD beneficiaries surveyed by VA rated their overall satisfaction with the
services it provided as excellent or very good. This rate is even higher
than the 91 percent of surveyed VA patients who rated the CMOP's
performance as excellent or very good in that year. In addition, for
fiscal year 2003, the CMOP reported that more than 99.9 percent of its
prescriptions were accurately dispensed, meaning that beneficiaries
received the correct medications in the correct amounts, with no damage or
labeling problems. Finally, the CMOP was able to deliver drugs to DOD
beneficiaries on average in 3.5 days from the time the prescription was
requested to the time it was received by the patient. To put VA's delivery
time in some perspective, a company that has one of the country's largest
private mail order pharmacy operations estimates that its customers
typically receive their mail order refill prescriptions in 3 to 5 days.

Another benefit, reported by DOD officials, was that use of the VA CMOP
helped reduce the number of civilians coming to military installations.
Because most prescriptions dispensed at MTFs were for civilian retirees
and their dependents (see table 3), using the CMOP to dispense some of the
prescriptions helped reduce facility overcrowding. For example, San Diego
and Fort Hood officials reported less crowding and shorter waiting times
at their MTF pharmacies during the pilot, and San Diego officials reported
less automobile traffic congestion and fewer parking shortages. In
addition, a Fort Hood official reported that after the CMOP pilot was
terminated, lines at the main pharmacy got very long and beneficiaries had
to wait 2 or more hours to have prescriptions dispensed. Moreover, these
officials told us that using the CMOP could fill a critical need during
times of heightened security because civilian beneficiaries might have
difficulty getting onto military installations to pick up their
prescriptions at MTF pharmacies.

Table 3: MTF Outpatient Refills, Fiscal Year 2003

                                        Percentage of              Percentage 
                       Number of 30-day         total                of total 
Beneficiary type       prescriptions prescriptions   Drug costa  drug cost 
Active duty and            4,302,836            12 $124,063,735         17 
their dependentsb                                               
Retirees and their        29,155,884            84  558,064,896         78 
dependentsc                                                     
Other civilians and          396,951             1    8,270,558          1 
their dependents                                                
Unknown                      780,108             2   22,575,907          3 
Totals                    34,635,780           100 $712,975,097        100 

Source: DOD.

Note: Columns may not add to totals due to rounding.

aThese figures include only drug costs; administrative costs of dispensing
drugs are not included.

bThis category includes service academy students, active duty
beneficiaries who are transitioning from active duty as part of the
Transitional Assistance Management Program, and foreign military members.

cRetirees and dependents are considered civilians.

According to DOD officials, using the VA CMOP could allow DOD pharmacy
staff to focus on DOD's core mission of supporting military readiness by
serving the pharmacy needs of active duty members and their dependents.
They said that the pilot, to the extent that it moved civilian workload
away from MTFs, was consistent with DOD's emphasis on having military
personnel support military readiness. If a greater percentage of MTFs'
workload was moved to the CMOP, then MTFs could have additional
flexibility to focus on military readiness needs. In addition, DOD
officials told us that transferring the outpatient refill pharmacy
workload to the CMOP could help in other ways, such as allowing the
department more flexibility to redeploy pharmacy staff to clinical
services.

                            Concluding Observations

The pilot demonstrated that DOD could achieve cost savings at very high
levels of beneficiary satisfaction by delivering drugs to beneficiaries
using the CMOP rather than MTF outpatient refill operations. Additional
cost savings could be realized if the CMOP were made aware of and used
lower prices that DOD had negotiated for some drugs. However, DOD savings
are dependent on closing the refill portion of its MTF pharmacy operations
to avoid paying MTF administrative costs for refills in addition to
administrative costs charged by the VA CMOP. While DOD's use of the CMOP
is a significant opportunity for DOD to achieve savings and expand its
sharing of resources with VA, there are other cost implications that could
become important if MTF refill operations were closed with the expectation
that beneficiaries would use the CMOP. Specifically, rather than obtaining
drugs from the CMOP, beneficiaries might choose instead to obtain their
drugs from a more costly option for DOD, such as retail pharmacies. Any
cost increases will challenge DOD to find more efficient ways to manage
its pharmacy benefits program, such as by encouraging beneficiaries to
choose the most cost-effective options for where they obtain their drugs.

                       Agency Comments and Our Evaluation

We received written comments from DOD and VA on a draft of this report. VA
concurred with our draft report. VA stated that our report would benefit
from a discussion of market pressures that control the cost of generic
drugs. However, these pressures were reflected in our work that focused on
the lowest prices VA and DOD could secure, which included purchasing
generic drugs. VA's written comments are reprinted in appendix V.

DOD made an overall comment that our report was technically accurate. It
made additional comments that we address below.

One comment concerned our characterization of refunds from drug
manufacturers. During our audit work DOD pharmacy officials told us that
they expect that manufacturer refunds will cover only a small portion of
the difference in cost between retail and MTF prices, and we included this
information in our draft report. However, in its letter providing the
agency's comments, DOD commented that this statement is inaccurate and
misleading, so we removed it from the report.

DOD also commented that the 1.7 percent fee charged on DOD drug purchases
should be considered in the context that it supports DOD's readiness
mission. Specifically, DOD stated that reducing the amount of drugs upon
which the fee is paid would cost DOD "somewhere else" to support the
mission. We disagree, and based on our findings, we believe that more
money would be available for DOD's use by using VA's CMOP. For example,
drugs purchased during the pilot by VA's CMOP were about 3.9 percent less
than if they had been purchased by the MTFs.

In addition, DOD stated that it is not correct that DOD would always
realize a savings on the acquisition cost of a drug by using the VA CMOP.
We noted in the draft report that we found VA's prices to be generally,
but not always, lower than DOD's. We noted that in some cases drugs were
more expensive for DOD MTFs when purchased through the VA than if they had
been acquired through DOD purchase agreements, and that additional cost
savings could be realized if the CMOP used these lower prices that DOD had
negotiated for some drugs.

DOD stated that it is unlikely that it could move all refill prescriptions
to the CMOP, and asserted that GAO recommended closing all MTF refill
services and providing them only to active duty members. However, our
report makes no such recommendation. Although cost savings through the
CMOP are dependent on closing MTF outpatient pharmacy refill operations,
we noted in the draft report that MTFs could continue to dispense
outpatient refill prescriptions at MTF main pharmacies. As noted in the
draft report, in fiscal year 2003, during the pilot program, 47 percent of
the prescription refills that usually would be handled at the three pilot
MTFs were dispensed at the CMOP. In fiscal year 2004 at San Diego and
Kirtland, the two sites that continued CMOP participation, program
participation increased as the CMOP filled 65 percent of the outpatient
pharmacy refill prescriptions. Determining whether to encourage
beneficiaries to use the most cost-effective dispensing method, which
would assure that savings are achieved while continuing to provide
high-quality pharmacy service to beneficiaries, is part of DOD's
responsibility to manage its pharmacy program in a fiscally sound manner.

DOD agreed that the pilot produced other benefits, such as reducing
facility traffic congestion, but further stated that our reference to
"civilian beneficiaries" could be misinterpreted to include beneficiaries
not currently covered, and should be defined as "retiree beneficiaries."
We believe that our use of the term "civilian beneficiaries" is
appropriate because, as DOD's data show, 85 percent of MTF 30-day
outpatient refill prescriptions in both fiscal years 2003 and 2004 were
for retirees and their dependents, and other civilians and their
dependents.

DOD also commented that patient choice as a DOD pharmacy benefit is a
lawful entitlement. According to DOD, it cannot mandate DOD beneficiaries
to utilize one option over another, and such a restriction would require
legislative action. We note, however, that DOD has taken action to
influence beneficiary behavior to choose one option over another option,
for example, by increasing copayment amounts to help it manage the
pharmacy benefit and control costs. DOD's pharmacy benefit regulations
state that "the higher cost-share paid for prescriptions dispensed by a
non-network retail pharmacy is established to encourage the use of the
most economical venue to the government."13 This type of action
demonstrates fiscal responsibility on DOD's part while it strives to
provide cost-effective pharmacy services to its beneficiaries.

1332 C.F.R. S: 199.21(i) (2004).

Finally, DOD stated that we assumed that current options are more costly
for DOD than having beneficiaries obtain their drugs from the CMOP, and
that this was a subjective conclusion. We based our conclusion on our
finding that the CMOP's drug costs during the pilot were approximately 3.9
percent lower than the costs for the same drugs at the three pilot MTFs.
In addition, we found that the administrative costs for dispensing refill
prescriptions were about the same at the MTFs and at the CMOP. And, as
noted in the draft report, the CMOP's drug costs and administrative costs
were lower than the drug and administrative costs for DOD's TRICARE Mail
Order Pharmacy.

DOD also included technical comments that we incorporated where
appropriate. DOD's written comments are reprinted in appendix VI.

As we agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 30
days from the date of this letter. We will then send copies to the
Secretaries of Veterans Affairs and Defense, and relevant congressional
committees. We will also make copies available upon request. In addition,
the report will be available at no charge on GAO's Web site at
http://www.gao.gov .

If you or your staff have any questions about this report, please contact
me on (202) 512-7101 or Michael T. Blair, Jr. on (404) 679-1944. William
Simerl and Richard Wade made key contributions to this report.

Sincerely yours,

Cynthia A. Bascetta Director, Health Care

Appendix I: Scope and Methodology Appendix I: Scope and Methodology

To address our objective, we compiled information on the operations of the
Department of Defense (DOD) and the Department of Veterans Affairs (VA)
Consolidated Mail Outpatient Pharmacy (CMOP) pilot program, and we
compared the costs of purchasing and dispensing drugs at the CMOP that
dispensed drugs for the pilot with the costs at the pilot military
treatment facilities (MTF).

To compile information on the pilot program and on related aspects of
DOD's and VA's pharmacy programs, we conducted site visits, reviewed
program documentation, and interviewed DOD and VA officials responsible
for purchasing and dispensing drugs. We interviewed or collected
documentation from

           o  officials at the VA CMOP involved in the pilot located in
           Leavenworth, Kansas, including the national CMOP director;
           o  officials at each of the three DOD MTFs involved in the
           pilot-Darnall Army Community Hospital, Fort Hood, Texas (Fort
           Hood); the 377th Medical Group, Kirtland Air Force Base, New
           Mexico (Kirtland); and the Naval Medical Center San Diego, San
           Diego, California (San Diego);
           o  DOD pharmacy officials, including the director of DOD pharmacy
           programs and pharmacy officials for the Air Force, Army, and Navy;
           o  officials at DOD's Pharmacoeconomic Center; and
           o  officials at VA's National Acquisition Center and DOD's Defense
           Supply Center, responsible for procurement of drugs.

           To compare the drug costs at the VA CMOP and the participating
           MTFs, we selected 90 of the drugs with the highest total
           expenditures dispensed through the pilot during fiscal year 2003.
           These 90 drugs, due to high volume, high unit cost, or both,
           comprised about 65 percent of total drug costs for the pilot. To
           select drugs for our analysis, we first identified the 100 drugs
           with the highest total expenditures dispensed through the pilot in
           fiscal year 2003. We then obtained available price information for
           June 2004 purchases of these drugs at the CMOP in Leavenworth,
           Kansas and the three MTFs that participated in the pilot. We used
           June 2004 prices for each drug because DOD and VA officials told
           us that June 2004 data were the most reliable data available.
           According to the officials, because drugs can have many different
           prices throughout the year, obtaining DOD prices that can be
           accurately compared to the full range of prices that VA paid for
           drugs throughout fiscal year 2003 was not feasible.

           We evaluated the quality of the drug pricing data by checking for
           missing and inconsistent values and interviewing agency officials,
           including those from VA's CMOP, VA's National Acquisition Center,
           DOD's Pharmacoeconomic Center, and DOD's Defense Supply Center.
           Based on these interviews and on documentation obtained from the
           officials, we considered differences between DOD and VA drug
           prices caused by separate pricing agreements, differences in prime
           vendor discounts, differences in fees to fund drug procurement,
           differences in drug package sizes, and, for some drugs,
           differences in manufacturers.

           We eliminated drugs from our analysis in cases where differences
           in the prices for them at the various locations could not be
           explained by these factors, in cases where DOD officials believed
           the drug pricing to be erroneous, or in cases where June 2004 drug
           pricing was unavailable. After eliminating these drugs, 90 of our
           original 100 drugs remained. We also adjusted for differences in
           DOD and VA unit measurements to ensure that the unit prices were
           comparable to each other.

           We estimated VA CMOP drug costs during fiscal year 2003 for each
           of the 90 drugs by multiplying the CMOP's June 2004 unit price by
           the number of units dispensed by the CMOP for each MTF during
           fiscal year 2003. Using the same method for costs at the three
           MTFs-multiplying MTF June 2004 unit prices by the number of units
           dispensed by the CMOP for each MTF during fiscal year 2003-we
           estimated the amount that the three DOD MTFs would have spent on
           the same drugs. The difference between VA's and DOD's total
           estimated costs for the 90 drugs during fiscal year 2003 is our
           estimate of savings for these drugs during the pilot. In cases
           where no units of a drug were ordered through the pilot by an MTF
           during fiscal year 2003, the price of that drug at that location
           was not included in our comparison.

           We did not obtain individual prices for the drugs that comprise
           the remaining 35 percent of pilot drug expenditures. Therefore, we
           do not know what, if any, differences exist in the VA's and DOD's
           prices for these drugs. For these drugs, we estimated differences
           in drug prices as of June 2004 based on differences in prime
           vendor discounts and the fee charged by DOD's Defense Supply
           Center, which are general differences in DOD and VA drug pricing
           that apply to all drugs.

           To compare the administrative costs of dispensing refill
           prescriptions at the CMOP with the costs at MTFs participating in
           the pilot, we collected cost information from program officials
           and evaluated it to ensure that it was comparable to the costs
           from the other sites. Although DOD generally does not separate
           information on MTF administrative costs, we were able to obtain
           this information for refill prescriptions at the three MTFs. Our
           cost comparison included the costs of personnel, equipment,
           supplies, space, utilities, and other aspects of refill
           operations. Although precise cost information was not always
           available, we reviewed the information and interviewed officials
           at each site to determine that it was sufficiently reliable for
           the purposes of our cost comparison.

           Because moving refill workload to the CMOP without decreasing
           fixed costs could inflate the average MTF administrative cost per
           prescription, we used the best available information to estimate
           the per prescription administrative costs for dispensing refill
           prescriptions at the three DOD MTFs as if the CMOP pilot did not
           exist. For Fort Hood, we obtained information on administrative
           costs for calendar year 2004 after officials had discontinued use
           of the CMOP and reorganized the outpatient refill pharmacy to
           separate it from the main pharmacy in January 2004. For Kirtland,
           we obtained cost information for fiscal year 2003. Although the
           pilot was operating during this time, Kirtland officials indicated
           that they had not changed any fixed costs, such as personnel or
           equipment, due to the pilot. To estimate the number of refill
           prescriptions that the Kirtland pharmacy would have filled if the
           CMOP pilot had not been operating, we added the number of
           outpatient refill prescriptions filled through the CMOP for
           Kirtland beneficiaries to the number of outpatient refill
           prescriptions dispensed at the Kirtland pharmacy. Because the
           operating costs for Kirtland were incurred while the number of MTF
           prescriptions was lower due to the CMOP operation, we had to
           adjust the variable costs to correspond with the higher number of
           prescriptions that the MTF would have dispensed without the CMOP.
           Therefore, we used the total number of outpatient refill
           prescriptions that the Kirtland pharmacy would have filled if the
           CMOP pilot had not been operating to estimate variable costs, such
           as bottles, labels, and other supplies. We also used this total
           number of prescriptions when determining the overall average cost
           of dispensing refill prescriptions at the MTFs. San Diego has been
           participating in the CMOP program since the start of fiscal year
           2003, and has made changes to its pharmacy operations, such as
           changes to staffing, due to CMOP use. To estimate the cost of
           refill prescriptions without influence from the CMOP pilot, San
           Diego officials provided us with information on costs and the
           number of refill prescriptions from fiscal year 2002, before the
           pilot began operation. Appendix III contains the information we
           obtained from the pilot sites and VA to estimate MTF and CMOP
           administrative costs.

           To compare the VA CMOP with DOD's TRICARE Mail Order Pharmacy, we
           interviewed or obtained documentation from officials at VA's CMOP;
           VA's National Acquisition Center; DOD's Defense Supply Center;
           DOD's Pharmacoeconomic Center; and the TRICARE Mail Order Pharmacy
           contractor, Express Scripts, Inc. To compare drug costs between
           the CMOP and the TRICARE Mail Order Pharmacy, we selected the 100
           drugs with the highest total costs dispensed during the first year
           of the TRICARE Mail Order Pharmacy program (March 2003-February
           2004). Next, we obtained June 2004 prices for these drugs for the
           CMOP and the TRICARE Mail Order Pharmacy. We used June 2004 prices
           for each drug to ensure comparability since drug prices can vary
           significantly over time, and because DOD and VA officials told us
           that June 2004 data were the most reliable data available. We
           eliminated 11 drugs from our comparison because prices were
           unavailable or due to inconsistencies in the data that we could
           not explain. We compared prices for each of the remaining 89
           drugs, adjusting for differences in VA's and DOD's drug data, such
           as unit measurement differences. To estimate annual cost
           differences for the drugs in our comparison, we multiplied the
           June 2004 DOD and VA unit prices by the number of units ordered
           for each drug during the first year of the TRICARE Mail Order
           Pharmacy program, from March 2003 to February 2004.

           We conducted our work from April 2004 through May 2005 in
           accordance with generally accepted government auditing standards.

           Source: GAO analysis of DOD and VA data.

           Note: These prices are the average final prices paid by the
           Leavenworth CMOP and three MTFs during June 2004, including prime
           vendor discounts and fees for DOD's Defense Supply Center and VA's
           National Acquisition Center. In some cases, drug prices do not
           appear in this table because we eliminated them from our analysis
           for a number of reasons. For example, the MTF did not dispense the
           drug through the fiscal year 2003 pilot, or DOD officials believed
           the drug price was erroneous.

Appendix II: Average Drug Prices Included in Cost Comparison, June 2004
Appendix II: Average Drug Prices Included in Cost Comparison, June 2004

                                         June 2004 price per unit
                                                              377th           
                                                            Medical           
                                             Darnall Army    Group,     Naval 
                                                Community  Kirtland   Medical 
                              VA Leavenworth    Hospital, Air Force    Center
Drug                                 CMOP     Ft. Hood      Base San Diego
accu-chek comfort curve-h                                        
test strip                          $0.32        $0.33           
albuterol                                                                  
90mcg/ipratropium 18mcg                                          
200 dose inhaler                   $23.91       $24.18    $24.35    $24.36
alendronate 10mg                    $0.78        $0.80           
alendronate 35mg                    $5.50        $5.60     $5.65     $6.84 
alendronate 70mg                    $5.48        $5.63     $5.64     $6.19 
amlodipine besylate 10mg            $1.23        $0.88     $0.88     $0.88 
amlodipine besylate 2.5mg           $0.80        $0.83     $0.83 
amlodipine besylate 5mg             $0.78        $0.80     $0.81     $0.81 
anastrozole 1mg                     $4.21        $4.35     $4.38 
atorvastatin calcium 10mg           $1.28        $1.33     $1.34 
atorvastatin calcium 20mg           $1.92        $1.99     $2.00 
atorvastatin calcium 40mg           $2.07        $2.13     $2.15 
atorvastatin calcium 80mg           $2.06        $2.13     $2.14 
brimonidine tartrate 0.15%                                                 
solution                            $4.01        $4.10     $4.13     $4.18
bupropion (wellbutrin SR)                                                  
150mg                               $0.98        $1.01     $1.02     $1.02
carvedilol 25mg                     $0.97        $1.00     $1.01 
celecoxib 100mg                     $0.91        $0.85     $0.94 
celecoxib 200mg                     $1.53        $1.59     $1.40     $1.60 
cetirizine HCL 10mg                 $0.92        $0.95     $0.95     $0.95 
citalopram hydrobromide                                                    
20mg                                $1.18        $1.22     $1.22     $1.23
citalopram hydrobromide                                                    
40mg                                $1.17        $1.22     $1.22     $1.23
clopidogrel bisulfate 75mg          $2.19        $2.27     $2.26     $2.29 
diltiazem (tiazac) 240mg            $1.03        $0.98           
divalproex 250mg (delayed                                                  
release)                            $0.49        $0.51     $0.54     $0.52
donepezil hydrochloride                                          
10mg                                $2.20        $2.28           
donepezil hydrochloride                                          
5mg                                 $2.20        $2.27     $2.28 
efavirenz 600mg                     $8.00        $8.32           
epoetin alfa 10,000                                              
units/ml                           $51.97       $76.00           
estrogens, conjugated                                                      
0.625mg                             $0.42        $0.43     $0.44     $0.44
etanercept 25mg/vial               $85.53       $88.28    $88.94 
fexofenadine                                                     
60mg/pseudoephedrine 120mg          $0.78        $0.81     $0.81 
fexofenadine hydrochloride                                                 
180mg                               $1.35        $0.83     $0.84     $0.84
fexofenadine hydrochloride                                                 
60mg                                $0.77        $0.80     $0.79     $0.79
fluconazole 200mg                   $7.40                            $7.69 
fluticasone propionate                                                     
110mcg 120 dose inhaler            $41.83       $43.18    $43.48    $43.50
fluticasone propionate                                                     
220mcg 120 dose inhaler            $61.62       $63.59    $64.04    $64.07
fosinopril sodium 10mg              $0.36                  $0.49     $0.48 
fosinopril sodium 20mg              $0.31                  $0.45     $0.30 
fosinopril sodium 40mg              $0.30                  $0.49     $0.47 
gabapentin 300mg                    $0.74        $0.76     $0.77     $0.77 
gabapentin 600mg                    $1.48        $1.53     $1.54     $1.49 
insulin lispro 100                                                         
units/ml                           $30.37       $31.34              $31.58
insulin glargine 100                                                       
units/ml                           $24.74       $25.54    $25.72    $25.73
interferon beta-1a                                               
30mcg/vial                        $166.19      $171.53           
ipratropium bromide 18mcg                                                  
200 dose inhaler                   $16.63       $16.83    $16.94    $16.95
irbesartan 150mg                    $0.50        $0.51     $0.52     $0.78 
irbesartan 300mg                    $0.50        $0.51     $0.52     $0.61 
lamivudine 150mg                    $2.99        $3.09               $3.11 
lamivudine                                                                 
150mg/zidovudine 300mg              $6.44        $6.65               $6.70
lansoprazole 30mg                   $1.77        $0.64     $0.64     $0.64 
latanoprost 0.005%                                                         
solution                           $11.59        $7.09     $7.13    $10.07
lisinopril 20mg                     $0.10        $0.26     $0.57     $0.10 
meloxicam 15mg                      $0.94        $0.97     $0.97     $0.97 
mesalamine 400mg                    $0.53        $0.54     $0.55     $0.55 
mometasone furoate 50mcg                                                   
120 dose nasal inhaler/                                          
spray                              $23.55       $35.67    $35.92    $35.93
montelukast sodium 10mg             $1.63        $1.68     $1.69     $1.69 
montelukast sodium 5mg              $1.62        $1.68     $1.68     $1.70 
mycophenolate mofetil                                                      
250mg                               $1.53        $1.60               $1.60
nifedipine 30mg                     $0.33        $0.34     $0.35     $0.35 
omeprazole 20mg                     $0.39        $2.39               $2.41 
ortho tri-cyclen 28 pack           $11.62       $11.99           
ortho-cyclen 28 pack               $11.26       $11.63           
paroxetine hydrochloride                                                   
20mg                                $0.80        $1.33     $0.82     $0.83
paroxetine hydrochloride                                                   
40mg                                $0.88                  $0.89     $1.04
precision xtra (glucose)                                                   
test strip                          $0.31                  $0.32     $0.32
prempro 0.625mg/2.5mg, 28                                                  
pack                               $18.24       $11.85    $11.93    $11.76
rabeprazole 20mg                    $0.62        $0.64     $0.65     $0.65 
raloxifene hydrochloride                                         
60mg                                $1.44        $1.49     $1.50 
risperidone 1mg                     $1.72        $1.74     $1.72     $1.75 
rofecoxib 25mg                      $1.30        $1.37     $1.24     $1.45 
rosiglitazone maleate 8mg           $2.77        $2.12     $2.14     $2.14 
salmeterol 21mcg 120 dose                                                  
inhaler                            $42.35       $43.71    $44.02    $44.04
sertraline hydrochloride                                                   
100mg                               $1.19        $1.41     $1.42     $1.42
sertraline hydrochloride                                                   
50mg                                $1.15        $1.41     $1.42     $1.42
sildenafil citrate 100mg            $4.64        $5.54     $5.58     $5.59 
sildenafil citrate 50mg             $4.51        $5.47               $5.51 
simvastatin 10mg                    $0.25        $0.26     $0.26     $0.26 
simvastatin 20mg                    $0.43        $0.44     $0.44     $0.44 
simvastatin 40mg                    $0.64        $0.66     $0.67     $0.67 
simvastatin 80mg                    $0.87        $0.89     $0.90     $0.90 
sumatriptan succinate                                                      
6mg/0.5ml statdose                 $65.59                 $68.17    $68.21
sumatriptan succinate 50mg          $9.73        $4.44     $4.47 
tacrolimus 1mg                      $1.79        $1.85               $1.86 
tamoxifen citrate 10mg              $0.19        $0.68     $0.19     $0.19 
tamsulosin hydrochloride                                                   
0.4mg                               $1.08        $1.03     $1.04     $1.04
tenofovir disoproxil                                                       
fumarate 300mg                      $7.84        $8.09               $8.15
topiramate 100mg                    $1.93        $1.99               $2.01 
triamcinolone 100mcg 240                                                   
dose inhaler                       $36.79       $37.97    $38.24    $38.26
ursodiol 300mg                      $1.30        $1.24               $1.25 
venlafaxine hydrochloride                                                  
75mg                                $1.42        $1.47     $1.48     $1.48

Appendix III: Components of Administrative Costs Appendix III: Components
of Administrative Costs

Table 4: Estimated Annual Administrative Cost for MTF Outpatient Refill
Operations

Naval Medical Center San Diego (estimates for fiscal                       
year 2002)                                           Estimated annual cost
Pharmacists and technicians                                       $928,661 
Equipment lease                                                   $192,000 
Supplies (including containers and labels)                         $81,623 
Other                                                
Courier contract                                                   $17,132 
Utilities                                                          $57,016 
Housekeeping                                                       $18,329 
Communications                                                     $30,429 
Information services                                               $23,507 
377th Medical Group, Kirtland Air Force Base (estimates for fiscal year
2003)                                                
Pharmacist and technicians                                        $275,308 
Equipment                                                          $25,922 
Supplies (including containers and labels)                          $1,671 
Other                                                
Utilities                                                           $1,747 
Custodial maintenance                                               $2,192 
Fire and police                                                       $312 
Darnall Army Community Hospital, Fort Hood (estimates for calendar year
2004)                                                
Pharmacy technicians                                              $588,482 
Equipment                                                          $75,028 
Supplies (including containers and labels)                         $33,671 
Other                                                
Utilities                                                          $12,000 
Administrative support                                             $24,500 
Total estimated annual cost of operations to                    $2,389,530 
dispense 1,036,549 refill prescriptions              
Average administrative cost to fill each                             $2.31 
prescription                                         

Source: GAO analysis of DOD data.

Note: See appendix I for how we obtained these estimates.

Table 5: Average Administrative Cost Per Prescription for VA CMOP, Fiscal
Years 2003 and 2004

                                        Average cost per prescription
                                 October 2002-June     July 2003- Fiscal year 
                                              2003 September 2003        2004 
Category                       Leavenworth CMOP    CMOP System CMOP System 
Personnel                                 $0.78          $0.72       $0.71 
General operation                         $0.44          $0.41       $0.42 
Inventory upgrades                        $0.12          $0.11       $0.06 
Information technology                                               $0.10 
upgrades                                                       
National initiatives                                                 $0.01 
Average administrative cost               $1.34          $1.24       $1.31 
to fill each prescription                                      
Mail                                      $1.02          $1.03       $1.04 
Total cost to deliver each                $2.36          $2.27       $2.35 
prescription                                                   

Source: VA.

Note: These costs are the average costs charged to DOD in fiscal years
2003 and 2004. Before July 2003, the VA charged DOD based on costs at the
Leavenworth CMOP. Beginning in July 2003, the VA charged based on the
average costs of all seven CMOP facilities. Costs of individual categories
may not add to totals due to rounding.

Appendix IV: Services and Costs of VA's CMOP and DOD's TRICARE Mail Order
Pharmacy Appendix IV: Services and Costs of VA's CMOP and DOD's TRICARE
Mail Order Pharmacy

                                                  DOD TRICARE Mail Order      
                          VA CMOP                 Pharmacy                    
Operated by            VA                      Express Scripts, Inc.       
Services provided      Under VA's system, the  Under DOD's system, the     
                          CMOP shares             TRICARE Mail Order Pharmacy 
                          responsibility for      handles the entire          
                          pharmacy services with  prescription-filling        
                          VA medical centers.     process, separate from      
                                                  pharmacies in DOD's         
                          The CMOP dispenses and  military treatment          
                          mails prescriptions. VA facilities.                 
                          medical centers provide                             
                          other services, such as In addition to dispensing   
                          verifying patients'     and mailing prescriptions,  
                          eligibility, providing  the TRICARE Mail Order      
                          customer service, or    Pharmacy conducts           
                          contacting providers    activities such as          
                          and patients when       verifying patients'         
                          necessary.              eligibility in DOD's        
                                                  computer system, providing  
                                                  customer service,           
                                                  contacting providers or     
                                                  patients for additional     
                                                  information when necessary, 
                                                  and converting paper        
                                                  prescriptions to electronic 
                                                  format.                     
Number of              77,876,597 (fiscal year 5,472,583 (March 2003       
prescriptions          2003)                   through February 2004)      
                                                  
                          87,968,560 (fiscal year 
                          2004)                   
Average administrative $2.24 per prescription  $10.66 which included       
cost per prescription  (fiscal year 2003)      $10.20 per prescription and 
                                                  an average of $0.46 per     
                          $2.35 per prescription  prescription for customer   
                          (fiscal year 2004)      service incentives (March   
                                                  2003 through February       
                                                  2004).                      
Estimated annual drug  $239 million            $265 million                
cost for 89                                    
high-expenditure                               
drugs, based on June                           
2004 prices and the                            
quantities dispensed                           
in the first year of                           
TRICARE Mail Order                             
Pharmacy operationa                            
Estimated drug cost    $107                    $118                        
per prescription for                           
same 89 drugs based on                         
estimated annual costa                         
Copayment              For VA patients, $7 for $3 generic; $9 brand for up 
                          up to 30 day supply.    to 90 day supply.           
                                                                              
                          DOD beneficiaries did   Active duty service members 
                          not pay a copayment or  do not pay copayments. DOD  
                          any other charge for    has established a new       
                          the drugs they received copayment of $22 per        
                          from the CMOP, the same prescription for drugs      
                          as if they had obtained designated "non-formulary." 
                          the drugs at an MTF.    As of April 27, 2005, DOD   
                                                  had designated three        
                          VA does not charge      non-formulary drugs that    
                          copayments for          are subject to the          
                          medications to treat    copayment.                  
                          service-connected       
                          conditions, nor does it 
                          assign copayments to    
                          veterans with           
                          service-connected       
                          conditions rated 50     
                          percent disabling or    
                          greater.                
Customer satisfaction  VA's fiscal year 2003   DOD conducted four surveys  
                          customer satisfaction   of TRICARE Mail Order       
                          surveys indicated that  Pharmacy beneficiaries for  
                          92 percent of all       the period of March 2003    
                          beneficiaries who       through February 2004.      
                          responded rated the     TRICARE Mail Order Pharmacy 
                          CMOP's services as      program satisfaction rates  
                          excellent or very good. for beneficiaries who       
                                                  responded ranged from 87    
                          In the same surveys, 97 percent in the first of the 
                          percent of DOD          surveys to 97 percent in    
                          beneficiaries who       the most recent of the four 
                          responded rated the     surveys.                    
                          CMOP's services as      
                          excellent or very good. 
Accuracy rate          VA reports that the     Express Scripts reports     
                          CMOP accuracy rate      that the TRICARE Mail Order 
                          exceeded 99.9 percent   Pharmacy accuracy rate      
                          for fiscal year 2003.   exceeded 99.9 percent for   
                                                  the period from March 2003  
                                                  through February 2004.      

Source: GAO analysis of DOD and VA data.

aTo estimate drug prices for the two programs, we selected the 100 drugs
with the highest total costs dispensed during the first year of the
TRICARE Mail Order Pharmacy (March 2003-February 2004). Next, we obtained
June 2004 prices for these drugs for the CMOP and the TRICARE Mail Order
Pharmacy. We eliminated 11 drugs from our comparison because prices were
unavailable or due to inconsistencies in the data that we could not
explain. For each of the remaining 89 drugs, we adjusted for differences
in DOD's and VA's drug data, such as unit measurement differences. To
estimate annual costs for the drugs in our comparison, we multiplied the
June 2004 DOD and VA unit prices by the number of units ordered for each
drug during the first year of the TRICARE Mail Order Pharmacy, from March
2003 to February 2004. For more information on our scope and methodology,
see app. I. CMOP and TRICARE Mail Order Pharmacy drug prices can differ
for a number of reasons, including separate contracts or other agreements
with manufacturers, different prime vendor discounts negotiated by DOD and
VA, and different DOD and VA fees for procuring drugs.

Appendix V: Comments from the Department of Veterans Affairs Appendix V:
Comments from the Department of Veterans Affairs

Appendix VI: Comments from the Department of Defense Appendix VI: Comments
from the Department of Defense

(290368)

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www.gao.gov/cgi-bin/getrpt? GAO-05-555 .

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and methodology, click on the link above.

For more information, contact Cynthia A. Bascetta at (202) 512-7101.

Highlights of GAO-05-555 , a report to the Chairman, Subcommittee on
Oversight and Investigations, Committee on Veterans' Affairs, House of
Representatives

June 2005

MAIL ORDER PHARMACIES

DOD's Use of VA's Mail Pharmacy Could Produce Savings and Other Benefits

There has been long-standing congressional interest in whether the
Department of Defense (DOD) could use the Department of Veterans Affairs
(VA) Consolidated Mail Outpatient Pharmacy (CMOP) system as a
cost-effective alternative to beneficiaries picking up outpatient refill
prescriptions at DOD military treatment facilities (MTF). To evaluate this
possibility, DOD and VA conducted a pilot program in fiscal year 2003 in
which a VA CMOP provided outpatient pharmaceutical refill services to DOD
beneficiaries served through three MTFs. GAO was asked to estimate cost
savings that could be achieved if DOD used VA's CMOP instead of MTF
pharmacies for outpatient refill prescriptions, and what other benefits
were achieved at the three pilot sites.

To estimate potential cost savings and determine what other benefits were
achieved, GAO reviewed pilot and pharmacy program documentation and
interviewed DOD and VA officials responsible for purchasing and dispensing
drugs. GAO also compared drug and administrative costs of dispensing
outpatient refills through the fiscal year 2003 pilot program with the
costs of dispensing the refills at the three DOD MTFs that participated in
the pilot.

DOD could achieve savings if it used VA's CMOP to dispense its outpatient
refill prescriptions by taking advantage of VA's generally lower drug
prices. Based on the drugs dispensed through the pilot, GAO estimated that
the three MTFs that participated in the CMOP pilot program in fiscal year
2003 could have saved about $1.39 per prescription in drug costs, or a
total of about $1.5 million, if the MTFs moved all their refill
prescriptions to the CMOP. However, while DOD saved money on drug costs at
the pilot MTFs, these savings were offset because DOD paid administrative
costs for refill operations twice-first to pay VA for the administrative
costs charged by the CMOP and second to maintain outpatient pharmacy
refill operations at the MTFs. Consequently, achieving savings would
require closing MTF outpatient pharmacy refill operations to offset CMOP
administrative expenses.

In addition to demonstrating that financial savings are possible, the
pilot produced nonmonetary benefits. MTF officials reported benefits such
as reduced automobile traffic congestion and shorter pharmacy waiting
times because many civilian beneficiaries at the pilot sites no longer
came to MTFs to pick up refill prescriptions. Further, DOD beneficiaries
who participated in the pilot program reported satisfaction with the
CMOP's accurate and timely distribution of pharmaceuticals.

There are other potential cost implications for DOD if it decides to close
MTF outpatient refill pharmacies and move the workload to the VA CMOP.
Because DOD beneficiaries are allowed to choose among various options for
obtaining drugs, they would be able to obtain their drugs from retail
pharmacies and DOD's mail order pharmacy instead of the CMOP. These
options, however, are more costly for DOD than having beneficiaries obtain
their drugs from the CMOP. Consequently, if DOD closes the outpatient
refill pharmacies at the pilot sites with the expectation that
beneficiaries would use the CMOP and they did not, DOD's costs could
increase. Any cost increases will challenge DOD to find more efficient
ways to manage its pharmacy benefits program, such as by encouraging
beneficiaries to choose the most cost-effective options for where they
obtain their drugs.

We provided a draft of this report to VA and DOD for comment. VA said that
it concurred with the draft report and DOD said that it was technically
accurate but neither explicitly concurred nor nonconcurred.
*** End of document. ***