DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals
Could Save Millions of Dollars (Testimony, 05/25/2000,
GAO/T-HEHS-00-121).

The Department of Veterans Affairs (VA) and Department of Defense (DOD)
are the largest direct federal drug purchasers, although their combined
purchases are less than two percent of total domestic drug sales. They
enjoy varying, but significant, discounts on their drug purchases, the
largest when they contract jointly to purchase the same drugs for their
systems and through their separate national contracts with drug makers.
However, their joint and separate contracting have been limited. Only
about 19 percent of VA and DOD combined drug purchases are made through
such contracts; most are made at far smaller discounts. If they could
jointly contract for most of the 30 drug classes that now make up about
two-thirds of their combined drug purchases, they could save hundreds of
millions of dollars annually. Obstacles to overcome include DOD's need
to develop a national drug formulary and the departments' need to
mitigate their institutional competitiveness and pursue such joint
actions as drug contracting. For example, DOD is considering
commercially contracting for its hospital pharmacies refills-by-mail
workloads, even though VA has a highly efficient system that could meet
DOD's needs and achieve savings in the process. Interventions may be
needed to mitigate agency rivalries.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-00-121
     TITLE:  DOD and VA Health Care: Jointly Buying and Mailing Out
	     Pharmaceuticals Could Save Millions of Dollars
      DATE:  05/25/2000
   SUBJECT:  Joint ventures
	     Pharmaceutical industry
	     Health care services
	     Health care cost control
	     Federal procurement
	     Procurement planning
	     Drugs
	     Interagency relations
	     Cost effectiveness analysis

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GAO/T-HEHS-00-121

For Release on Delivery Expected at 10: 00 a. m. Thursday, May 25, 2000

GAO/ T- HEHS- 00- 121

DOD AND VA HEALTH CARE

Jointly Buying and Mailing Out Pharmaceuticals Could Save Millions of
Dollars

Statement of Stephen P. Backhus, Director Veterans' Affairs and Military
Health Care Issues Health, Education, and Human Services Division Testimony

Before the Subcommittee on Oversight and Investigations, Committee on
Veterans' Affairs, House of Representatives

United States General Accounting Office

GAO

Page 1 GAO/ T- HEHS- 00- 121

Mr. Chairman and Members of the Committee: I am pleased to be here today to
discuss what the Departments of Veterans Affairs (VA) and Defense (DOD) have
done and what more they could do to reduce drug prices and dispensing costs.
In fiscal year 1999, VA and DOD together spent about $2.4 billion– or
about 2 percent of all domestic drug sales– for about 140 million
prescriptions for veterans, and for active duty and retired military and
their families. Recently, soaring drug costs have focused attention on the
merits of having the agencies procure their drugs jointly, and better manage
their pharmacy operations. The driving expectation is that, as the two
agencies buy more of a particular drug, their leverage- particularly under
competitively bid committed- use contracts- will permit them to exact
discounts from drug manufacturers. 1 Committed- use contracts establish a
fixed price for one or two products in a particular therapeutic class. In
exchange for a low price, the Departments commit to use the drugs to treat
patients in their health care systems. This commitment encourages the
prescribing and use of contract drugs and will also lead the Departments'
medical systems to treat their patients consistently. Medical necessity
would require that some patients be allowed to use alternate drugs.

At your request, my testimony focuses on the extent of joint DOD and VA drug
contracting thus far and the prospects for further contracting, as well as
for DOD using VA's consolidated mail outpatient pharmacy (CMOP) centers to
handle its hospital outpatient pharmacy refill workload that could be mailed
to beneficiaries. Also, I will briefly discuss the possible need for
measures to facilitate such joint actions to bring about further
improvements. As you know, our work is still underway and we plan to issue a
report to you and other requesters later this year.

In summary, by April 2000, VA and DOD had awarded 18 joint, national
committed- use contracts amounting to about 2 percent of their combined drug
expenditures. The joint contracts largely were due to a 1999 VA/ DOD
agreement to work toward combining their like medical supply needs. The

1 A health plan can exert considerable leverage in negotiating drug prices
when there is a choice among competing drugs that are therapeutically
equivalent and the plan can choose which one or ones to purchase. The plan
will have additional leverage based on its ability to influence the volume
used.

Generally, VA and DOD national committed- use contracts establish a fixed
price for one or two products in a particular therapeutic class for 1 year,
plus four 1- year option periods. By including the contracted drugs on their
respective national and basic core formularies, VA and DOD commit to use the
drugs to treat patients in their health care systems. The ability to offer a
high volume of use of a particular drug enables VA and DOD to obtain the
lowest prices from drug companies. DOD and VA Health Care: Jointly Buying
and

Mailing Out Pharmaceuticals Could Save Millions of Dollars

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 2 GAO/ T- HEHS- 00- 121

Departments also have separate national contracts amounting to about 17
percent of their combined expenditures. The remainder, or about 81 percent
of their combined expenditures, are for drugs they buy at negotiated,
noncompeted, supply schedule prices, at far smaller discounts than the
contracts afford.

While the drug discounts DOD and VA have gotten are impressive, only about
19 percent of their combined purchases are now made through the most cost-
effective mechanism- national, committed- use contracting with a supplier.
If DOD and VA could do most of their drug spending through such contracts,
preferably joint contracts, we estimate they could save from about $150
million to $300 million, or about 6 to 12 percent of their annual combined
drug spending. The Departments would need some time to clinically plan and
award the contracts to achieve this annual savings level. Of course, we
acknowledge the variability of drug market pricing and that drug makers may
have discount limits and may or may not choose to bid on such contracts.
However we believe such savings are possible based on existing data.

VA and DOD officials told us that the prospects for more joint contracting
are limited because their patient populations differ and their drug needs
vary widely. However, our analysis showed that about 30 high- dollar drug
classes now comprise about 66 percent of VA's and DOD's combined annual drug
purchases. 2 Each of the classes includes a number of therapeutically
interchangeable drugs such, that the classes could be jointly contracted.
The officials also told us that DOD lacks a national formulary (a list of
prescription drugs, grouped by therapeutic class, that are selected for
their medical value and price). 3 The lack of such a formularly limits DOD's
ability to enter into and thus commit to a particular drug's usage under
such contracts so that the higher discounts can be achieved. However, DOD
has met its usage commitments under its 18 joint contracts with VA and 5
separate contracts and, in our view, could continue awarding such cost-
effective contracts. Also, DOD recently was

2 For purposes of our analysis, we used the widely recognized AHFS
Pharmacologic- Therapeutic Classificationï¿½, which lists 204 classes of drugs
and related products in its AHFS Drug Informationï¿½ 2000edition.

3 A common technique used by health care system purchasers to help control
their prescription drug spending is to establish a formulary, which can be
used to reduce the number of products the purchaser will cover and to focus
their use. A formulary is a list of drugs, grouped by therapeutic class,
that the purchaser prefers its physicians to prescribe for patients. Drugs
are included on the formulary based on their medical value and price.

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 3 GAO/ T- HEHS- 00- 121

legislatively mandated to develop a national formulary and is now doing so.
4

Regarding DOD's possible use of VA's CMOPs to reduce dispensing costs, DOD
is currently exploring commercial contracts as a way to handle its hospital
outpatient pharmacy refill workload that could be mailed to beneficiaries.
Our work showed that VA's CMOPs now perform most of VA's drug refill
functions in a highly efficient, low- cost way. Also, based on VA
information, CMOPs would likely cost DOD less than a commercial mail-
service pharmacy and may save an estimated $45 million in current dispensing
costs. However, VA and DOD officials have had a number of discussions–
to date, to little effect– about using the CMOPs for DOD's refill
needs.

In this regard, DOD and VA officials told us that their differing missions
and cultures create rivalries, making it difficult for them to work together
on mutually beneficial tasks. Given the potential savings at stake through
joint contracting, through DOD possibly using the CMOPs, and through other
joint activities, we believe interventions by the Congress may be needed to
help bring about successful agency interactions.

My statement is based on work we did at VA and DOD from August 1999 to the
present date. We interviewed VA and DOD drug contracting, benefit
management, and mail pharmacy officials in Philadelphia, Pennsylvania; San
Antonio, Texas; Falls Church, Virginia; Hines, Illinois; Washington, D. C.;
Charleston, South Carolina; Leavenworth, Kansas; and Los Angeles,
California. We obtained and reviewed relevant reports, plans, interagency
agreements, and other related documents. We also interviewed academic and
private- sector experts in pharmacy benefit management and formulary and
mail pharmacy use.

We also analyzed VA and DOD fiscal year 1999 pharmaceutical prime vendor
data on $2.4 billion in purchases for veterans and military pharmacies. 5 We
grouped and ranked each drug by therapeutic class and

4 As required by the National Defense Authorization Act for Fiscal Year
2000, DOD is developing a national formulary. In a June 1998 report, we
recommended that DOD establish a national formulary for its pharmacy
programs. See Defense Health Care: Fully Integrated Pharmacy System Would
Improve Service and Cost- Effectiveness( GAO/ HEHS- 98- 176, June 12, 1998).

5 Under VA's and DOD's prime vendor process, a wholesaler buys drugs from a
variety of manufacturers and the inventory is stored in commercial
warehouses. A VA or DOD pharmacy orders the drugs from the prime vendor
using electronic ordering systems at prices pre- negotiated by either VA or
DOD. The prime vendor ships most items to the pharmacy the next day. Scope
and Methodology

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 4 GAO/ T- HEHS- 00- 121

the dollar- volume purchased. We engaged a consulting pharmacist and he and
we, in turn, consulted with other pharmaceutical experts, to review our
rankings and help identify classes with therapeutically equivalent drugs
that might be competitively contracted at lower costs. 6 Lastly, we
consulted with Congressional Budget Office (CBO) analysts on our estimating
methods and results.

The DOD and VA health care systems collectively comprise hundreds of
hospitals, clinics, and health- care facilities worldwide that provide
services to more than 12 million beneficiaries. In 1999, VA spent about
$15.5 billion for veterans' health care and DOD spent $16.2 billion for
active duty and retired military, and their families. Generally, DOD and VA
pharmacies allow their respective beneficiaries to obtain directly up to 90-
day supplies of free prescription drugs directly or by mail. 7

VA and DOD operate their hospital and clinic outpatient pharmacies and
formularies under different rules. VA has a national formulary, supplemented
by 22 regional formularies, that somewhat limits the availability of
nonformulary items and fills only prescriptions written by its own
providers. 8 DOD's hospitals and its national mail pharmacy maintain their
own separate formularies that restrict the drugs available to varying
degrees, but also fill prescriptions written by military and private
physicians. 9 DOD also has nationwide contractors that supplement its
hospital care and provide drugs at retail outlets with few restrictions on
drug choice. 10 Reflecting national trends, between 1995 and 1999, VA and

6 Dr. Peter M. Penna has had extensive professional experience in managed
care pharmacy operations. Most recently Vice- president of Managed Pharmacy
for Cigna HealthCare (a 6- million member managed care organization), Dr.
Penna is also a founding member and past president of the Academy of Managed
Care Pharmacy.

7 Some veterans have a $2 copayment for each 30- day supply from VA, while
some DOD beneficiaries have up to a $8 copayment for a 90- day supply
through the DOD mail program.

8 Currently, there are about 1,100 drugs and related items on the national
formulary. Drugs not on the national formulary may be available to veterans
through independent formularies maintained by VA's regional networks and
some medical centers. See VA Health Care: VA's Management of Drugs on Its
National Formulary( GAO/ HEHS- 00- 34, Dec. 14, 1999).

9 DOD has a basic core formulary policy that dictates a minimum of drugs to
be on all military pharmacies' formularies. Currently, there are 158 drugs
and drug devices on the basic core formulary. 10 The direct care system of
Army, Navy, and Air Force medical facilities is supplemented by DOD's
regional TRICARE managed care support contracts, under which retail pharmacy
benefits are provided to eligible military beneficiaries. TRICARE
contractors offer both network and non- network retail pharmacy services;
1999 retail pharmacy expenditures were $349 million. Background

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 5 GAO/ T- HEHS- 00- 121

DOD drug expenditures respectively rose about 75 percent and 63 percent,
while their health budgets rose 7 percent and 5 percent.

In 1999, VA and DOD purchased most of their drug supplies through their
separate drug supply schedules. VA administers the federal supply schedule
(FSS) for brand- name and generic drugs and has noncompetitive FSS contracts
with about 250 drug manufacturers covering over 17,000 products. In effect,
drug manufacturers are invited to negotiate and commit to product prices for
VA and other federal purchasers during the contract period. 11 DOD also has
its own distribution and pricing agreements (DAPA) with the same drug
manufacturers. The DAPAs also establish purchase prices for certain periods
based on negotiations with manufacturers. DAPA prices are generally the same
as FSS prices.

In 1999, VA and DOD pharmacies also purchased some drugs through national
fixed- price competitive contracts. Because these contracts are based on
competitive bids for products that are therapeutically or generically
equivalent to others on the market, VA and DOD can choose to purchase the
drugs with the lowest prices. As a result, the agencies achieve deeper
discounts than under FSS and DAPA. By mandating that the contracted drugs
are preferred over competing drugs and by not listing the competing drugs on
their formularies, VA and DOD can ensure greater use of the selected
manufacturers' drugs in their systems and, thus, get higher discounts from
suppliers. 12

Since 1996, the Congress has acted to urge VA and DOD to cooperate in
procuring and managing pharmaceuticals. A study mandated by the Veterans'
Benefits Improvements Act of 1996 (P. L. 104- 275) concluded that DOD and VA
should combine their market power to get better

11 The method VA uses to obtain FSS price discounts takes advantage of
“most- favored customer” discounts drug manufacturers have
negotiated in the private sector. Under procurement regulations, the FSS
price should generally represent the same discount off a drug's list price
that the manufacturer offers its most- favored nonfederal customer. FSS
prices are also affected by the Veterans Health Care Act of 1992, as amended
(P. L. 102- 585). The act requires drug manufacturers to sell brand- name
drugs covered by the act to four agencies– VA, DOD, the Public Health
Service, and the Coast Guard– at a minimum of 24 percent off the
nonfederal average manufacturer price, a level referred to as the federal
ceiling price. The FSS price may be higher or lower than the ceiling. If it
is higher, the protected purchasers pay no more than the ceiling price.

12 Case- by- case exceptions allow VA and DOD facilities to dispense
nonformulary products according to medical necessity.

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 6 GAO/ T- HEHS- 00- 121

pharmaceutical prices through committed- use contracts. 13 Further, the 1999
National Defense Authorization Act (P. L. 105- 261) directed the Departments
to jointly review and report on DOD's current methods for contracting for
and distributing drugs, and for dispensing drugs by mail. This review is
still under way with a report due 60 days after the review is completed.
Most recently, the Veterans Millennium Health Care and Benefits Act (P. L.
106- 117) requires VA and DOD to submit a joint report in July 2000 on how
joint pharmaceutical procurement can be enhanced and cost reductions
realized by fiscal year 2004.

Responding to congressional pressures and to rising drug costs and demands,
VA and DOD have taken steps to collaborate on drug procurement. Between
October 1998 and April 2000, VA and DOD awarded 18 joint national
pharmaceutical contracts– mostly for the generic drugs–
amounting to about $46 million for 1999. (See app. I). This amount is about
2 percent of the Departments' combined $2.4 billion drug spending. On
average, the discount below average wholesale price (AWP) on such drug
purchases has been about 94 percent overall – and about 85 percent for
the brand- name drugs for which there are no generic equivalents on the
market. 14 (See table 1). Agency officials told us their collaboration was
prompted by a VA and DOD executive council, along with the 1999 interagency
agreement. 15

Also, as of January 2000, VA and DOD respectively had 46 and 5 separate
national contracts that amount to $413 million, or 17 percent of their
combined drug spending. On average, the comparable discount for VA on such
drug purchases has been about 82 percent off AWP, and for DOD 68

13 VA also currently purchases drugs for the Indian Health Service and the
Federal Bureau of Prisons to support each agency's health- care mission. VA
has used national committed- use contracts for this purpose, distributing
the drugs to Indian Health Service and Bureau of Prison facilities through
its pharmaceutical prime vendor. In 1999, these agencies purchased about
$280 million in drugs from VA's prime vendor.

14 Discounts can be expressed in different ways including as a percentage
below a given benchmark, such as the AWP. The AWP for a product is an
average of the list prices that drug manufacturers suggest wholesalers
charge pharmacies.

15 Active since February 1998, the council coordinates health care matters
and oversees a variety of national initiatives. The executive council
consists of chief VA and DOD health officers, key deputies, and the surgeons
general from the Air Force, Army, and Navy. In May 1998 the council
chartered a Federal Pharmacy Executive Steering Committee to expand joint
clinical and economic evaluations to support contracts for high- dollar and
high- volume pharmaceuticals. The committee is comprised of VA and DOD chief
pharmacy benefit management officials and other clinical, contracting, and
financial management staff from each department. DOD/ VA Have

Awarded Some National Contracts But More Contracting Could Achieve
Substantial Savings

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 7 GAO/ T- HEHS- 00- 121

percent. The remaining 81 percent of DOD and VA combined drug expenditures
are for drugs bought through their negotiated, noncompeted supply schedule
and DAPA arrangements. On average, the discount below AWP on 33 of VA's and
37 of DOD's high dollar purchases in this category was about 58 percent.

Table 1: Average VA and DOD Joint Contract Drug Prices Versus Average
Wholesale Prices, as of March 2000 Contract product (selected strength and
package size) a Generic or brand

name VA/ DOD contract price (dollars) Average wholesale price

(AWP) b (dollars) Percent discount off AWP

Albuterol (0. 09 gm/ inhaler 17 gm) Generic $1.66 $21.50 92.3 Amantadine
(100 mg capsules, 100) generic 5.50 98.19 94.4 Capotenï¿½ (captopril) (12.5 mg
tabs, 100) Branded generic 1.17 90.84 98.7 Cimetidine (300 mg tabs, 100)
Generic 3.12 84.50 96.3 Fluocinonide (0.05% 15 gm topical) Generic 1.00 8.97
88.9

Gemfibrozil (600 mg tabs, 60) Generic 3.53 59.55 94.1 Levobunolol opthalmic
(0.25% sol, 5 ml) Generic 1.62 14.08 88.5

Nortriptyline (10 mg capsules, 100) Generic 1.83 38.65 95.3 Novolinï¿½ (human
insulin) (100 u/ ml, 10ml) Brand name 4.49 22.94 80.4 Prazosin (1 mg
capsules, 100) Generic 1.90 26.90 92.9

Ranitidine (150 mg tab, 500) Generic 13.57 740.00 98.2 Salsalate (500 mg
tab, 500) Generic 11.70 99.50 88.2 Tiazacï¿½ (diltiazem) (240 mg capsules,
100) Branded generic 27.00 158.48 83.0 Timopticï¿½ (timolol opthalmic
solution) (10 ml)

Brand name 1.94 27.07 92.8 Timoptic- XEï¿½ (timolol opthalmic gel) (5 ml)
Brand name 5.04 25.19 80.0 Trimoxï¿½ (amoxicillin) (250 mg capsules, 100)
Branded generic 2.65 23.89 88.9 Verapamil (120 mg tab, 100) Generic 12.99
86.21 84.9 Average discount 94.4

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 8 GAO/ T- HEHS- 00- 121 a Does not include the joint contract for
Habitrolï¿½ (nicotine patches), awarded April 2000.

b For contracted generics, we compared VA/ DOD contract prices with the AWPs
listed for those companies' generic products and their dosages and package
sizes.

Sources: AWP from Red Book: Pharmacy's Fundamental Reference March 2000
Update, (Medical Economics Company, Inc., Montvale, NJ) and GAO analysis.

If DOD and VA could purchase many more of their pharmaceuticals through
national, committed- use contracts– particularly joint
contracts– we estimate they could save substantial sums each year. Our
savings projections take into account the discounts VA and DOD have received
on their current national committed- use contracts.

To project the possible savings, we began by ranking DOD's and VA's drug
classes by combined dollar volume purchased. Our consultant identified 30
top- ranking classes that included one or more groups of therapeutically
equivalent drugs in each class and thus could be good candidates for
competitive, national contracting. The 30 classes represent about 66 percent
or $1.6 billion of DOD and VA combined 1999 drug expenditures. However, some
of the 30 classes would be easier to plan and contract for and have
potentially greater savings than others. Therefore, we divided the 30 drug
classes into 3 tiers, based largely on the expected level of difficulty the
agencies would have garnering clinical agreement on encouraging the
committed use of one or more drugs within the classes. (See app. II).

Also, among as many as 30 classes, the question becomes advisedly, which
should the agencies focus on first, next, and so forth. Thus, the tiers
represent the priority order in which we suggest DOD and VA perform clinical
reviews and pursue further joint contracts. The first tier are classes we
judged to be highly susceptible to competitive contracting, because the
competing drugs are widely held to be therapeutically equivalent and
providers and patients would more likely accept one or two drug choices per
class. Examples are the non- sedating antihistamines Claritinï¿½ versus
Allegraï¿½ and the angiotensin converting enzyme (ACE) inhibitors Prinivilï¿½,
Zestrilï¿½, Monoprilï¿½, Accuprilï¿½, and Vasotecï¿½. The second tier are classes
whose drugs' therapeutic equivalency is less widely accepted, or whose high
demand drugs are new and the older substitute drugs are less preferred by
physicians and patients. This tier of drug classes may require VA and DOD to
do much more clinical study to support joint contracting because the choices
would be tougher. Secondtier examples include the anti- migraines Amergeï¿½,
Imitrexï¿½, and Zomigï¿½ and such antidepressants as Celexaï¿½, Paxilï¿½, Prozacï¿½,
and Zoloftï¿½. The third tier are classes whose drugs' equivalencies are more
controversial, and thus providers and patients would likely be more
resistant if their Additional Use of Joint

National Contracting Could Save Millions of Dollars

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 9 GAO/ T- HEHS- 00- 121

pharmaceutical choice was restricted to just one or a few drugs in these
classes. Examples include the cephalosporins (anti- infectives) Ciproï¿½,
Floxinï¿½, Levaquinï¿½, and Tequinï¿½; and the anxiety and sleep disorder
(benzodiazepine) agents Ambienï¿½, Busparï¿½, and Sonataï¿½.

Further, our consultant identified a fourth group of high- dollar drug
classes that are the least susceptible now among the classes we identified
to competitive contracting. Nonetheless, given the rapid and continuing
introduction of new drugs on the market and the steady rise in drug costs,
we believe this group of drug classes should be closely monitored for future
joint contracting opportunities. The group includes six classes whose drugs'
therapeutic equivalencies are not now generally accepted. Also, at this time
serious and complex clinical issues exist regarding patient outcomes and
safety such that contracting for just one or a few drugs in the classes is
not now clinically feasible. One group example is the anticonvulsants
Depakoteï¿½, Dilantinï¿½, Klonapinï¿½, etc. We excluded this fourth group from our
savings projections.

As discussed, DOD and VA will face varying levels of difficulty in
attempting to clinically justify and contract for the 30 classes of drugs.
In addition to the degree of competition among drugs in a class,
manufacturers' pricing strategies can also play a significant role in the
discounts they are willing to offer the government. Nevertheless, we
hypothesized that if the agencies could achieve one- quarter of the savings
rate achieved by moving from the FSS to contracts, they would save about
$150 million or 6 percent of their combined expenditures annually. If they
could save 50 percent of that average savings, they would save about $300
million or 12 percent of such expenditures. (See table 2.) While some
savings would begin to accrue during the first year of this effort, maximum
savings would not be fully realized for several years because DOD and VA
will need time to clinically plan and award joint contracts for drug classes
in the tiers we have suggested.

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 10 GAO/ T- HEHS- 00- 121

Table 2: GAO's Estimate of Potential Savings from Expanded Joint Contracting

(Dollars in millions)

Agency 1999 purchases Purchases in 30 high- dollar

classes Noncontracted

purchases in 30 high- dollar

classes Estimated

savings– joint contracts a

VA $1,531.5 $996.7 $617.0 $91-$ 183 DOD $869.5 $590.7 $418.7 $56-$ 112

Totals $2,401.0 $1,587.4 $1,035.7 $147-$ 295

a Savings possible if agencies can achieve from one- quarter to one- half of
the savings rate achieved by moving from FSS to contracts.

Source: GAO analysis. Again it is important to emphasize that the amount of
savings is difficult to predict. We know that drug market pricing is highly
variable and that drug makers may have discount limits and can choose to bid
or not on competed contracts. Current DOD and VA joint contracts are mostly
on generic drugs and thus do not cover their highest- dollar or highest-
volume drugs. Because those contracts may have been easier to award than
would those for the classes we have identified, the savings rates may be
less with future contracts. In addition, certain offsetting costs may occur,
such as the administrative costs to handle increased requests to approve the
use of drugs other than those jointly contracted for. Nevertheless these
estimates suggest that significant savings are likely with even modest
increases in discounts.

Moreover, others have estimated significant savings should the Departments
leverage their buying power. In 1999, a commission established by the
Congress reported among other things on its review of the merits of VA and
DOD jointly buying drugs and other medical supplies. 16 The commission
estimated the agencies could save $1.9 billion cumulatively over five years,
or about $383 million per year, but did not separately estimate savings due
to joint pharmaceutical purchases. Since then, DOD and VA have had more
experience awarding joint and separate

16 In January 1999, the Congressional Commission on Servicemembers and
Veterans Transition Assistance issued a report and made numerous
recommendations to improve the effectiveness of programs providing benefits
and services to active duty military personnel and veterans.

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 11 GAO/ T- HEHS- 00- 121

contracts. Also, in a March 2000 report, the CBO estimated that the agencies
could save millions of dollars by further collaborating on their drug
pricing. CBO also reported that a major impediment to their jointly buying
drugs was their differing formularies. 17

VA and DOD officials generally agree that the best prices are available
through joint national contracts and that they have already made much
progress with the current joint contracts. They told us the prospects for
future joint contracts are limited because DOD lacks a comprehensive
national formulary. This limits DOD's ability to enter into and thus commit
to a particular drug's usage under such contracts. We agree this is a
serious limitation and in 1999, DOD was legislatively mandated to establish
a national formulary and is now in the process of doing so.

Moreover, DOD fully meets its drug usage commitments by mandating that the
drugs used in its hospital and national mail pharmacies be the ones
contracted for under the existing 18 joint contracts with VA and the 5
separate national contracts. Thus, we believe DOD should continue awarding
such cost- effective contracts. In our view, the prospects of greater joint
contracting with VA may help both agencies in refining their formularies
toward greater uniformity across the systems. This way, patients with
similar drug needs could be treated consistently and far greater savings
could be achieved than are now possible. Admittedly, both agencies need to
make more progress before this becomes a reality.

DOD and VA officials also told us their client populations differ
significantly and have different drug needs– from women and children
beneficiaries in DOD facilities to elderly veterans in VA facilities. We
found, however, that 8 of the top 10 high- dollar drug classes in each
department are the same. (See table 3). Further, retirees continue to
increase as a percentage of DOD's client load, creating drug demands
increasingly similar to VA's. And, 30 drug classes now consume about 66
percent of VA's and DOD's combined annual drug purchases– the
highdollar classes we are nominating for clinical reviews and joint
contracting opportunities.

17 Budget Options for National Defense, Congressional Budget Office (March
2000).

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 12 GAO/ T- HEHS- 00- 121

Table 3: Matching VA and DOD Top- Ten Drug Classes in 1999 Drug class VA

ranking DOD ranking VA purchases a DOD

Purchases a Total VA/ DOD purchases a

Antivirals b 6 9 $72.7 $19.9 $92.7 Anticancer drugs c 10 10 38.7 17.0 55.7
Calcium channel blockers

5 4 80.2 40.1 120.3 ACE inhibitors 9 7 39.2 30.6 69.8 Antilipemics 2 1 117.5
78.2 195.7 Antidepressants 3 3 110.5 47.8 158.3 Miscellaneous
gastrointestinal agents

1 2 120.2 77.8 197.9 Antidiabetics– oral hypoglycemics 8 8 46.3 27.8
74.1

Totals $625.3 $339.2 $964.5

a In millions of dollars. b Excludes herpes drugs. c Excludes prostate
cancer drugs. Source: GAO analysis of VA and DOD information. The geographic
separation of the key DOD and VA pharmacy policy and procurement staff is a
complicating factor affecting joint contracting, according to DOD and VA
officials. DOD's Pharmacoeconomic Center is in San Antonio, Texas, and its
procurement staff are in Philadelphia, Pennsylvania. VA's counterpart
clinical and procurement groups are in Chicago, Illinois. Officials told us
this seriously hampers communication and working relationships among the
groups. We tend to agree; the organizations were created for separate
organizational functions and not the joint drug contracting that we believe
they need to diligently pursue in the future.

My second topic also illustrates how DOD and VA might collaborate to achieve
dispensing efficiencies in their pharmacy programs. DOD is currently
considering contracting with a private vendor to handle its hospital
outpatient pharmacy refill workload that could be mailed to beneficiaries.
One reason DOD is considering this is to free military hospital pharmacists
from the labor- intensive task of dispensing prescriptions so they can work
with patients and medical staff toward safer, more effective drug use.
Another reason is that DOD wants to DOD Should Consider

Using VA's Mail- Out Centers to Reduce Dispensing Costs for Refills

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 13 GAO/ T- HEHS- 00- 121

replace its current Merck- Medco contract with one that also covers retail
pharmacy services. In 1999, Merck- Medco filled and mailed about 1.3 million
prescriptions and provided other services. 18 In 1999, DOD beneficiaries
obtained 50 million prescriptions by visiting military pharmacies. An
estimated 45 percent of such prescriptions were refills. In fiscal year
1997, military pharmacies' dispensing costs, on average, were about $5.55
per prescription. 19 According to DOD officials, refill dispensing costs are
lower than the first- fill dispensing costs because screening for
eligibility and drug interactions need not be repeated. 20

In February 2000, DOD officials solicited comments from pharmacy benefit
management companies on whether they could dispense and mail refills for
prescriptions first filled at military pharmacies. 21 Cost proposals were
not solicited. The workload was estimated to be about 23 million
prescriptions annually. As of April 2000, DOD officials were reviewing the
comments received. Earlier, VA's CMOP and DOD officials had a number of
discussions about using CMOPs to meet DOD's refill needs. However, DOD has
not followed through on the idea.

VA estimates that its CMOPs have saved millions of dollars in dispensing
costs. 22 VA officials provided documentation supporting that 1999 CMOP

18 DOD pays Merck- Medco a dispensing fee of $9. 85 for each prescription
dispensed, but does not have to pay Merck- Medco for the cost of the drugs
(drugs for this program are supplied to Merck- Medco by the Defense Supply
Center Philadelphia through a prime vendor). The contract requires extensive
services, such as receiving paper prescriptions through the mail from
beneficiaries, verifying eligibility, and clinical drug utilization reviews
in addition to dispensing and mailing the prescription.

19 Dispensing costs do not include the actual cost of the drug, but rather
pharmacy personnel salaries, utilities, housekeeping, furniture, and other
equipment.

20 According to one estimate, refill costs are about 40 percent less than
first- fill costs.

21 In the private sector, pharmacy benefit managers (PBMs) administer
prescription drug coverage on behalf of health plan sponsors. PBMs provide
their customers with services such as formulary development and management,
retail pharmacy networks and mail service, claims processing, and drug
utilization review.

DOD asked the industry to submit comments on processing MTF refill requests
that would be transmitted electronically to a contractor's mail service
facility. The military pharmacy would have already screened for beneficiary
eligibility and clinical drug utilization review before the contractor would
receive any prescription. The contractor would not be responsible for
performing those tasks, but only for processing the refill (correct drug,
patient, and address) and mailing the prescription to the beneficiary.

22 Since 1994, VA has established seven CMOPs and expects to fill 50
million, or about 60 percent, of VA prescriptions in fiscal 2000. While
veterans can still elect to refill their prescriptions in person at VA
pharmacies, in 1999, 52 percent- or 40 million veterans'
prescriptions– were electronically sent from VA pharmacies to the
CMOPs for refills, which were mailed to the veterans.

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 14 GAO/ T- HEHS- 00- 121

refills cost VA pharmacies $1.87 per prescription to dispense, on average,
including $0.78, on average, for mailing costs. Because of the CMOPs'
growing workload, VA expects the dispensing costs to drop to $1.71 per
prescription this year. 23 CMOPs' low refill cost is largely due to its use
of automated technologies that enable each full- time employee to dispense
100,000 prescriptions annually compared to about 15, 000 prescriptions per
year dispensed by VA's pharmacy employees. By 2005, VA plans to finish
expanding the seven existing CMOPs and is also considering building another.
That way, about 75 percent or about 90 to 100 million VA prescriptions could
be filled by CMOPs.

DOD officials told us they are concerned whether the CMOPs could expand
production to handle about an added 23 million military pharmacy refill
prescriptions and whether VA would charge military pharmacies the same low
rates. DOD officials questioned the difficulties and costs faced in making
military pharmacy computer systems compatible with CMOPs' computer systems.
DOD officials told us that the ability to accurately and timely transfer
millions of DOD refill prescriptions electronically to CMOPs would be
critical to such a system. Finally, DOD officials told us that shifting
military pharmacy prescription workload to VA CMOPs would undercut medical
readiness by reducing their prime vendor sales market. 24 However, the same
concerns would be raised if a private contractor was engaged for this task.
Also, DOD's prime vendors could supply drugs to the CMOPs as they now do to
Merck- Medco.

VA officials told us they are aware of DOD's concerns and believe each can
be satisfactorily resolved. VA officials told us that, if need be, they
could expand CMOP production to accommodate about an added 23 million
military pharmacy prescriptions. As mentioned above, VA already plans to
double CMOP capacity at eight facilities by 2005 to dispense up to 100
million VA prescriptions per year. They pointed out that between 1996 and
2000, the CMOPs will have increased their prescription processing by 30
percent per year. VA officials told us they had discussed with DOD pilot
testing the use of the Charleston, South Carolina, CMOP with the nearby

23 In addition to drug costs, CMOPs generally charge the VA pharmacies
current operating costs, not fixed facility costs such as building and
equipping the automated CMOP facility. In fiscal year 2000, VA estimates
total CMOP operating costs to be $85 million ($ 35 million (mail); $33
million (salaries); and $17 million (utilities, lease, pharmacy and office
supplies, etc.).

24 The Defense Supply Center Philadelphia's operations are funded by
surcharges on its prime vendor sales to military pharmacies. The revenue is
also used to fund DOD- wide medical materiel planning and readiness to
respond worldwide military deployments and related missions. DOD's Concerns
About

CMOPs Seem Resolvable

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 15 GAO/ T- HEHS- 00- 121

Navy pharmacy at Camp Lejeune, North Carolina. They said the pilot would
enable both parties to assess any computer system concerns and provide a
basis to estimate the costs and benefits of such a permanent arrangement.
However, DOD has not yet pursued the idea.

CMOPs appear to be a cost- competitive option for DOD to meet its military
prescription refills- by- mail requirements. Also, their use by DOD would be
compatible with legislation to promote more cost effective use of DOD and VA
medical resources and the more efficient delivery of care. 25 Specifically
the legislation authorizes VA and DOD medical facilities to become partners
and enter into sharing agreements to buy, sell, and barter medical and
support services. Based on data provided by VA moreover, we estimate that
CMOPs would likely charge military pharmacies, on average, about $2.10 per
prescription. 26 This would cut the average military pharmacy refill
dispensing costs almost in half, resulting in annual cost savings of about
$45 million. To provide enough capacity for DOD's added 23 million
prescriptions, VA would have to build or lease and equip the equivalent of
two new CMOPs. We asked several commercial mail service pharmacies what
dispensing fee they might charge military pharmacies to handle 23 million
military refill prescriptions. The companies told us they likely would
charge between $5 and $20 per prescription. Thus, in addition to considering
commercial contractors, we believe DOD should give serious consideration to
using VA CMOPs to handle their hospital pharmacies refills- by- mail
workloads.

DOD and VA officials told us that their differing missions and cultures have
created rivalries that make it difficult for them to act together on
mutually beneficial tasks. We believe, however, ways can and must be found
to bring about successful agency relationships where one organization seeks
to help the other and both benefit.

To illustrate the difficulties, last year's interagency agreement provided
that the departments would work together, although without a deadline, to
cancel DOD's DAPAs with drug companies by converting them to VA's equal or
lower FSS prices. As discussed above, VA and DOD have differing

25 The VA and DOD Health Resources Sharing and Emergency Operations Act
(Sharing Act) (P. L. 97174, 96 Stat. 70). See VA and Defense Health Care:
Evolving Health Care Systems Require Rethinking of Resource Sharing
Strategies( GAO/ HEHS- 00- 52, May 17, 2000).

26 This would include an estimated $1. 71 (salaries, mail, utilities, and
other operating costs), $0.20 (other VA overhead costs), and $0. 17
(building and equipment depreciation). DOD and VA Rivalries

May Necessitate Interventions to Facilitate Joint Actions

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 16 GAO/ T- HEHS- 00- 121

price arrangements with many of the same companies. By converting the DAPAs,
some small economies would follow and both agencies would pay the same FSS
prices to drug makers. As of April, however, only about 43 of the 248 extant
DAPAs have been converted. Moreover, serious disagreements between the
agencies' procurement groups have soured relations and the process may be in
jeopardy. In short, the conversion exercise may have raised the agencies'
apparent antagonism toward one another to an even greater level.

Given the potential savings from joint contracting and possibly from DOD
using the CMOPs, we believe the Congress may need to intervene to help bring
about successful agency interactions. Such actions could include assigning
the agencies a deadline to complete clinical reviews and joint contracting
on the selected high- dollar drug classes. Another might be to establish an
independent board to review VA's and DOD's progress toward these objectives.
We plan in our final report to more fully address such possible courses of
action.

Nationally, prescription drug spending is increasing by about 12 percent per
year– twice as fast as the general health care spending rate. However,
large pharmaceutical users can realize huge price discounts by contracting
with drug makers to use therapeutically acceptable drug brands within their
health systems.

VA and DOD are the largest direct federal drug purchasers, though their
combined purchases are less than 2 percent of total domestic drug sales. The
Departments already enjoy varying, though significant, discounts on their
drug purchases. Their largest discounts have occurred when they contracted
jointly to purchase the same drugs for their systems and through their
separate national contracts with drug makers. However, the joint and
separate contracting has been limited. Only about 19 percent of DOD and VA
combined drug purchases are made through such contracts. Most of their drug
purchases are made at far smaller discounts. If the agencies could jointly
contract for most of 30 drug classes that now make up about 66 percent of
their combined drug purchases, we estimate they could save hundreds of
millions of dollars annually.

There are obstacles to overcome before joint contracting and other joint
activities can be routinely and vigorously pursued, including DOD's need to
develop a national drug formulary. In the interim, DOD can build upon its
successful performance under its current national contracts and continue
seeking to award such contracts. In addition, the Departments need to
mitigate their institutional competitiveness and steadfastly pursue
Conclusions

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars

Page 17 GAO/ T- HEHS- 00- 121

such joint actions as drug contracting. For example, DOD is considering
commercially contracting for its hospital pharmacies refills- by- mail
workloads, even though VA has available a highly efficient system that could
meet DOD's needs and achieve savings in the process. Our concern is that
agency rivalries could keep DOD from also seriously considering, as it is
commercial vendors, the use of VA's CMOPs to handle its prescription drug
refill needs.

In the end, interventions may be needed to facilitate effective agency
interactions on these issues. Mr. Chairman, this concludes my prepared
statement. I will be happy to answer questions you or other Subcommittee
members may have.

For more information regarding this testimony, please call Stephen P.
Backhus at (202) 512- 7101. Key contributors include Daniel M. Brier,
Carolyn R. Kirby, Lawrence L. Moore, Allan C. Richardson, and Richard J.
Wade. GAO Contacts and

Acknowledgments

Page 18 GAO/ T- HEHS- 00- 121

Product Class (use) Manufacturer Award date Contracting agency Anti-
infective agents

Trimoxï¿½ (amoxicillin) Penicillins (antibiotic)

Apothecon July 6, 1999 VA Amantadine Antivirals

(influenza) Invamed, Inc. August 8, 1999 VA

Autonomic drugs

Albuterol inhaler Inhaled bronchodilators (asthma)

Warrick Pharmaceuticals

October 2, 1998 DOD Habitrolï¿½ (nicotine patch)

Miscellaneous autonomic (smoking cessation)

Novartis April 20, 2000 DOD

Cardiovascular drugs

Tiazacï¿½ (diltiazem) Calcium channel blockers (high blood pressure)

Forrest Labs November 12, 1998 VA Verapamil Calcium channel

blockers (high blood pressure)

Zenith/ Goldline December 1, 1999 VA Capotenï¿½ (captopril) ACE inhibitors

(high blood pressure)

Bristol- Myers Squibb, Apothecon

September 1, 1999 VA Gemfibrozil Antilipemics

(cholesterol reducer)

Warner Chilcott December 8, 1999 VA Prazosin Hypotensive

agents (high blood pressure)

Zenith/ Goldline October 7, 1999 VA

Central nervous system agents

Salsalate Nonsteroidal anti inflammatory agents (arthritis)

Able February 1, 2000 VA Nortriptyline Antidepressants Teva

Pharmaceuticals August 31, 1999 VA

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

Timopticï¿½ (timolol opthalmic solution)

Miscellaneous EENT (antiglaucoma)

Alcon Laboratories November 26, 1999 VA Timoptic- XEï¿½ (timolol opthalmic
gel)

Miscellaneous EENT (anti glaucoma)

Merck & Co. November 26, 1999 VA Levobunolol Miscellaneous

EENT (antiglaucoma)

Bausch & Lomb November 26, 1999 VA

Appendix I

Joint VA and DOD National Pharmaceutical Contracts as of April 2000

Appendix I Joint VA and DOD National Pharmaceutical Contracts as of April
2000

Page 19 GAO/ T- HEHS- 00- 121

Product Class (use) Manufacturer Award date Contracting agency
Gastrointestinal agents

Cimetidine Miscellaneous (H2 receptor antagonists) (ulcers, esophageal
reflux)

Sidmak Labs October 2, 1998 VA Ranitidine Miscellaneous

(H2 receptor antagonists) (ulcers, esophageal reflux)

Geneva Pharmaceuticals

October 2, 1998 VA

Hormones and synthetic substitutes

Novolinï¿½ (human insulin)

Antidiabetic agents (insulin)

Novo Nordisk Pharmaceuticals

October 1, 1999 DOD

Skin and mucous membrane agents

Fluocinonide Anti- inflammatory agents (topical corticosteroid)

Teva Pharmaceuticals

August 3, 1999 VA

Sources: VA and DOD.

Page 20 GAO/ T- HEHS- 00- 121

The table below lists the high- dollar classes that could be candidates for
VA and DOD joint drug class reviews and committed- use contracting. Based on
the judgments of our consultant and other private sector pharmacists, the
drugs in the different classes have varying degrees of clinical acceptance
on therapeutic interchangeability and different priorities with respect to
additional VA and DOD joint contracting.

Class Selected brand- name products

VA and DOD pharmacy prime vendor purchases (1999)

Suggested priority, joint contracting

Current status of all brandname and generic drug contracts (April 2000)

Antihistamine drugs ($ 48.0) a

Antihistamines (particularly nonsedating) Allegraï¿½

Claritinï¿½ $48.0 First VA– promethazine

Anti- infective agents ($ 223.5) a

Antifungals (particularly agents used for fungal infections of the toenails)

Lamisilï¿½ Sporonoxï¿½ $29.4 First FSS or DAPA prices only

Cephalosporins (particularly oral) Ceftinï¿½

Cefzilï¿½ Cedaxï¿½ Lorabidï¿½ Omnicefï¿½ Supraxï¿½

$18.7 Second VA– Zolicefï¿½ Injection VA– cephalexin VA–
ceftazidime

Penicillins Augmentinï¿½ Unasynï¿½ Zosynï¿½

$28.7 Third VA– Penicillin V- Kï¿½ VA– dicloxacillin Joint–
Trimoxï¿½ Macrolides (particularly newer, potent agents)

Biaxinï¿½ Zithromaxï¿½ $19.9 Second FSS or DAPA prices only

Quinolones Aveloxï¿½ Ciproï¿½ Floxinï¿½ Levaquinï¿½ Tequinï¿½

$29.5 Third FSS or DAPA prices only Antivirals (herpes virus) (Particularly
generics or generic prices on Valtrexï¿½, branded generic of acyclovir)

Valtrexï¿½ Zoviraxï¿½ $4.7 Second Joint contract pending– acyclovir

Antivirals (AIDS virus) Combivirï¿½ Crixivanï¿½ Epivirï¿½ Sustivaï¿½ Viraceptï¿½

$92.7 Closely monitor FSS orDAPA prices only

Antineoplastic (cancer) agents ($ 88.2) a

Antineoplastics (prostate cancer) Lupronï¿½

Zoladexï¿½ $32.5 Third VA– Zoladexï¿½

Appendix II

Proposed High- Dollar Drug Classes for Joint VA– DOD National
Contracting

Appendix II Proposed High- Dollar Drug Classes for Joint VA– DOD
National Contracting

Page 21 GAO/ T- HEHS- 00- 121

Class Selected brand- name products

VA and DOD pharmacy prime vendor purchases (1999)

Suggested priority, joint contracting

Current status of all brandname and generic drug contracts (April 2000)

Antineoplastics (other cancers) (particularly Casodexï¿½ versus Eulexinï¿½; as
the science of antineoplastics changes, new contracting opportunities may
arise)

Casodexï¿½ Eulexinï¿½ Nolvadexï¿½ Tamoxifenï¿½ Taxolï¿½

$55.7 Closely monitor FSS orDAPA prices only

Autonomic (regulates autonomous nervous system) drugs ($ 87.3) a

Antiparkinson drugs Mirapexï¿½ Requipï¿½ $14.4 Closely monitor VA–
Trihexidyl- 2ï¿½

VA– benzotropine mesylate VA– carbidopa/ Levodopa
Antimuscarinics (inhaled drugs for asthma and related diseases) (particurly
generic versions of Atroventï¿½)

Atroventï¿½ Combiventï¿½ $38.4 Third FSS or DAPA prices only

Sympathomimetic adrenergic agents (beta agonist i nhalers used to treat
acute asthma)

Proventilï¿½ Ventolinï¿½ Xopenexï¿½

$34.4 First Joint– albuterol inhaler

Blood formation and coagulation ($ 99.2) a

Anticoagulants (to prevent clotting) (particularly generic warfarin
(Coumadinï¿½) and also heparin/ low molecular weight heparins)

Coumadinï¿½ Plavixï¿½ Lovenoxï¿½ (heparin)

$50.5 Second FSS or DAPA prices only Hematopoetic agents (blood building for
AIDS, chemotherapy, kidney dialysis)

Epogenï¿½ Procritï¿½ $48.7 Second FSS or DAPA prices only

Cardiovascular drugs ($ 421.7) a

Antiarrhythmics Cardaroneï¿½ Paceroneï¿½ Rhythmolï¿½

$15.4 Closely monitor Joint contract pending – amiodarone

ACE Inhibitors and ACE IIs (to treat high blood pressure)

Accuprilï¿½ Lotensinï¿½ Monoprilï¿½ Prinivilï¿½ Vasotecï¿½ Zestrilï¿½ Atacandï¿½ Avaproï¿½
Cozaarï¿½ Diovanï¿½ Hyzaarï¿½ Micardisï¿½

$69.8 First Joint– Capotenï¿½ VA– Monoprilï¿½ VA– Prinivilï¿½
DOD– Zestrilï¿½

Beta blockers (to treat high blood pressure, migraines, arrythmias, etc.)
(particularly widely available generics)

Coregï¿½ Normodyneï¿½ $20.4 Second VA– atenolol

VA– metoprolol VA– pindolol

Appendix II Proposed High- Dollar Drug Classes for Joint VA– DOD
National Contracting

Page 22 GAO/ T- HEHS- 00- 121

Class Selected brand- name products

VA and DOD pharmacy prime vendor purchases (1999)

Suggested priority, joint contracting

Current status of all brandname and generic drug contracts (April 2000)

Calcium channel blockers (to treat high blood pressure) Cardeneï¿½

Dilacorï¿½ Norvascï¿½ Plendilï¿½ Tiazacï¿½ (diltiazem) Adalat CCï¿½ Procardia- XLï¿½

$120.3 First Joint– Tiazacï¿½ Joint– verapamil VA– Adalat
CCï¿½ VA– diltiazem VA– nifedipine

Antilipemic drugs (to lower cholesterol) (particularly Hmg- CoA reductase
inhibitors)

Baycolï¿½ Lescolï¿½ Lipitorï¿½ Mevacorï¿½ Pravacholï¿½ Zocorï¿½

$195.7 First DOD– Baycol DOD– Zocor VA– Mevacor VA–
Zocor

Central nervous system agents ($ 447. 5) a

Nonsteroidal anti- inflammatory agents (NSAIDs) (used to treat arthritis,
relieve pain) (particularly newer COXII agents and continue joint
contracting on older NSAIDs)

Celebrexï¿½ Vioxxï¿½ $33.1 Second Joint– salsalate

Joint contract pending– tolmetin Joint contract pending– aproxen
VA– ibuprofen VA– indomethacin VA– naproxen VA–
sulindac Opiate agonists (painkillers) Duragesicï¿½

Oxycontinï¿½ $33.2 Third FSS or DAPA prices only Anticonvulsants (used to
treat a variety of convulsive disorders, such as epilepsy, also pain,
migraine, and attention deficit disorder)

Depakoteï¿½ Dilantinï¿½ Klonapinï¿½ Lamictalï¿½ Neurontinï¿½ Progestamateï¿½

$72.6 Closely monitor FSS orDAPA prices only Antidepressants (particularly
selective serotonin reuptake inhibitors and continue joint contracting on
generics)

Celexaï¿½ Effexorï¿½ Luvoxï¿½ Paxilï¿½ Prozacï¿½ Remeronï¿½ Zoloftï¿½

$158.3 Second Joint– nortriptyline VA– amitriptyline VA–
amitriptyline/ Perphenazine VA– amoxapine VA– desipramine
VA– imipramine VA– trazadone Antipsychotic agents (used to treat
schizophrenia and other psychiatric disorders)

Risperdalï¿½ Seroquelï¿½ Zyprexaï¿½

$97.7 Third VA– chlorpromazine VA– haloperidol VA–
fluphenazine VA– perphenazine VA– thiothexine VA–
trifluoperazine Benzodiazepines (sedative and other anti- anxiety agents)
Ambienï¿½

BuSparï¿½ Xanaxï¿½

$37.3 Third VA– Seraxï¿½ Migraine drugs (particularly the generally
newer migraine agents)

Amergeï¿½ Imitrexï¿½ Maxaltï¿½ Zomigï¿½

$15.3 Second FSS or DAPA prices only

Appendix II Proposed High- Dollar Drug Classes for Joint VA– DOD
National Contracting

Page 23 GAO/ T- HEHS- 00- 121

Diagnostic agents ($ 40.2) a

Diabetes (used to test blood glucose levels)

Accu- Chekï¿½ Advantageï¿½ One Touchï¿½ Precision Q- I- Dï¿½

$40.2 Second FSS or DAPA prices only

Gastrointestinal (GI) drugs ($ 197.9) a

Miscellaneous GI drugs (for ulcers, esophageal reflux) (particularly proton
pump inhibitors and continue joint contracting of generic H2 receptor
antagonists)

Aciphexï¿½ Prilosecï¿½ Prevacidï¿½ Protonixï¿½

$197.9 First Joint– cimetidine Joint– ranitidine VA–
Prevacidï¿½ VA– metoclopramide DOD– Prilosecï¿½

Hormones and synthetic substitutes ($ 142.1) a

Bronchial steroids (for asthma) AeroBidï¿½

Azmacortï¿½ Becloventï¿½ Floventï¿½ Pulmicortï¿½ Vancerilï¿½

$19.8 First FSS or DAPA prices only Nasal steroids (for allergies, sinus
congestion)

Beconaseï¿½ Flonaseï¿½ Nasacortï¿½ Nasonexï¿½ Vancenaseï¿½

$16.0 Second VA– Vancenaseï¿½ Oral contraceptives (birth control)

Desogenï¿½ Lo- Ovralï¿½ Ortho- Ceptï¿½ Ortho- Cyclenï¿½ Ortho- Novumï¿½ Norinylï¿½

$16.2 Second FSS or DAPA prices only Estrogens (osteoporosis prevention,
menopause symptoms) (particularly patches and oral agents)

Climaraï¿½ Vivelleï¿½ EstraTabï¿½ Premarinï¿½ Premproï¿½

$16.0 Third Joint contract pending Antidiabetic agents (particularly newer
agents for non- insulin dependent diabetes in the fast evolving
“glitazones” market)

Actosï¿½ Avandiaï¿½ $74.1 First VA– glyburide

Serums, toxoids, vaccines ($ 42.6) a

Vaccines (Several companies make the bulk of these products, with
significant overlap. Several such products could be consolidated for
contracting purposes.)

Diptheria/ pertussis/ tetanus Hemophilus B Hepatitus A Hepatitus B Influenza
Measles/ mumps/ Rubella Pneumococcal Tetanus Varicella

$42.6 3 rd DOD– Vaqtaï¿½ (for hepatitus A)

Appendix II Proposed High- Dollar Drug Classes for Joint VA– DOD
National Contracting

Page 24 GAO/ T- HEHS- 00- 121

Unclassified therapeutic agents ($ 28. 5) a

Immunosuppressives (antirejection drugs used for transplant patients)

Cellceptï¿½ Prografï¿½ Neoralï¿½ Sandimmuneï¿½

$28.5 Closely monitor FSS orDAPA prices only

a All dollars in millions. Source: GAO analysis of VA and DOD information.

After performing drug class reviews to determine that some brand- name drugs
in a class are therapeutically interchangeable, VA can use its national
formulary and DOD its basic core formulary policies to encourage use of the
drugs. This enables them to obtain better prices for the drugs through
competitive bidding aimed at closing– or partially closing– a
class to contracted drugs only. The closed class– or its particular
segment that is partially closed– usually contains brand name drugs
that have a high volume of use or are high cost. To close a class, VA and
DOD evaluate the clinical evidence to determine whether a class' brand- name
drugs are basically equivalent in terms of efficacy, safety, and outcomes
and thus generally have the same therapeutic effect. Once VA and DOD decide
to close a class, the drugs determined to be therapeutically interchangeable
are referred for contracting purposes to either the National Acquisition
Center or the Defense Supply Center Philadelphia. Also, VA and DOD may
solicit separate national committed- use contracts to get lower prices on
generic drugs, but in those cases drug class reviews are not needed since
the competing products are chemically and therapeutically alike.

(101630)

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