VA Health Care: Opportunities to Reduce Outpatient Pharmacy Costs
(Testimony, 06/11/96, GAO/T-HEHS-96-162).

GAO discussed the Department of Veterans Affairs (VA) policies
concerning over-the-counter (OTC) medications, medical supplies, and
dietary supplements. GAO noted that: (1) VA pharmacies provide many OTC
medications; (2) VA pharmacies dispensed analgesics nearly 3 million
times in 1995; (3) some VA pharmacies restrict certain veterans from
receiving OTC products, as well as the quantity that they can receive;
(4) one-third of VA facilities reduced the number of OTC medication
available; (5) network directors are working to achieve a level of
consistency and cost-containment for VA facilities within their network;
(6) non-VA health plans make OTC products available to all beneficiaries
on a uniform basis; (7) these plans' coverage of OTC products are more
restrictive than most VA facilities coverage; (8) VA pharmacies
dispensed more than 15 million OTC products last year, at an estimated
cost of $165 million; (9) VA recovered 4 percent of its total dispensing
costs through veterans' copayments; (10) veterans medication costs
depended on the type of product and their eligibility status; and (11)
VA can reduce the resources it devotes to OTC medications by adhering to
statutory eligibility rules, dispensing OTC products more efficiently,
collecting copayments, reducing the number of OTC products available to
outpatients, and expanding copayment requirements.

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

 REPORTNUM:  T-HEHS-96-162
     TITLE:  VA Health Care: Opportunities to Reduce Outpatient Pharmacy 
             Costs
      DATE:  06/11/96
   SUBJECT:  Veterans
             Medical supplies
             Pharmaceutical industry
             Drugs
             Veterans benefits
             Health care cost control
             Health care facilities
             Veterans hospitals
             Medical services rates

             
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Cover
================================================================ COVER


Before the Subcommittee on Hospitals and Health Care, Committee on
Veterans' Affairs, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
Tuesday,
June 11, 1996

VA HEALTH CARE - OPPORTUNITIES TO
REDUCE OUTPATIENT PHARMACY COSTS

Statement of David P.  Baine, Director,
Health Care Delivery and Quality Issues
Health, Education, and Human Services Division

GAO/T-HEHS-96-162

GAO/HEHS-96-162T


(406112)


Abbreviations
=============================================================== ABBREV

  OTC - over-the-counter
  VA - Department of Veterans Affairs

VA HEALTH CARE:  OPPORTUNITIES TO
REDUCE OUTPATIENT PHARMACY COSTS
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss the Department of Veterans
Affairs' (VA) policies concerning its provision of medications,
medical supplies, and dietary supplements that are available to the
general public as over-the-counter (OTC) products in private outlets
nationwide. 

Under current law, two groups of medical products are available in
the U.S.  market:  one group has about 65,000 products that are safe
for consumers to use only as prescribed by a physician, the other
group has over 300,000 products that, according to the U.S.  Food and
Drug Administration standards, are safe for use on the basis of a
manufacturer's labeling alone.  Prescription products are available
only in licensed pharmacies, whereas other products are available
over the counter in a wide variety of settings.  OTC products are
generally for conditions where users can recognize their own symptoms
and levels of relief. 

VA allows its physicians to prescribe OTC products primarily because
VA physicians and others are concerned that veterans who need such
products may lack sufficient resources to purchase them and, as a
result, not use them.  VA requires prescriptions as a way to control
veterans' access to OTC products in VA pharmacies.  Last year, VA
physicians provided veterans with over 34 million prescriptions for
pharmaceuticals, including OTC products, to be used on an outpatient
basis.  VA's 165 pharmacies filled prescriptions more than 65 million
times, at a cost of almost $1 billion. 

In recent years, VA officials have testified that resources are not
sufficient to serve all veterans seeking care and that they expect
such shortages to worsen in future years.  Also, others have
expressed concerns about the operating costs of VA pharmacies. 
Specifically, some have questioned whether VA pharmacies' provision
of OTC products represents the most prudent and economical use of
VA's available resources. 

Based on these concerns, we have examined VA facilities' provision of
these products for veterans' use on an outpatient basis and compared
it with that of other health providers and insurers.  Also, we have
reviewed the financial aspects of VA's practices to reduce federal
expenditures.  My comments are based on information obtained from 149
VA pharmacies and discussions with officials in VA's 22 networks.\1
We also reviewed nationwide OTC product utilization data and obtained
information from several headquarters offices, including the Pharmacy
Service and the Medical Care Cost Recovery Office.  At VA's pharmacy
in Baltimore, we observed dispensing and copayment collection
practices; reviewed a wide range of records and documents; and
discussed VA's provision of OTC products with 20 physicians,
pharmacists, and administrators. 

We discussed the results of our work with the Chief of Pharmacy
Service as well as other VA officials.  We plan to provide you with a
report later this summer. 

In summary, all VA pharmacies provide medications and medical
supplies to veterans that are available over the counter through
other local outlets.  For example, VA pharmacies dispensed analgesics
such as aspirin and acetaminophen almost 3 million times in fiscal
year 1995.  In other outlets, these analgesics are available through
such OTC products as Excederin, Tylenol, Bayer Aspirin, Bufferin, and
Goody's Headache Powders. 

Each pharmacy offers a unique package of OTC products and some
restrict which veterans may receive OTC products or in what quantity
they may receive them.  About one-third of VA facilities should be
commended for taking actions to reduce the number of available OTC
products in recent years.  While others are considering reducing the
available number of OTC products, about one-half are reluctant to
take such steps.  Network directors, to their credit, are working to
achieve a level of consistency and cost-containment for facilities
within their networks. 

Unlike VA, other public or private health care plans cover few, if
any, OTC products for beneficiaries.  When covered, OTC products are
generally made available on a uniform basis to all beneficiaries. 
These plans' coverage of OTC products is more restrictive than all
but a few of VA's facilities. 

VA pharmacies dispensed OTC products more than 15 million times last
year, at an estimated cost of $165 million, including handling costs
of $48 million.  VA recovered an estimated $7 million through
veterans' copayments, or about 4 percent of its total dispensing
costs.  Individually, veteran's costs varied, depending on the type
of product and the veteran's eligibility status.  Although many
veterans shared a modest portion of the costs and some paid the full
cost, most veterans paid nothing. 

There are several ways that VA's resources devoted to the dispensing
of OTC products could be reduced or revenues from copayments could be
enhanced.  First, VA staff could more strictly adhere to statutory
eligibility rules.  Second, VA could more efficiently dispense OTC
products and collect copayments.  Third, VA facilities could further
reduce the number of OTC products available to veterans on an
outpatient basis.  Finally, the Congress could expand copayment
requirements. 


--------------------
\1 VA has 22 service networks, each consisting of between 5 and 12
facilities. 


   VA PHARMACIES PROVIDE AN
   ASSORTMENT OF OTC PRODUCTS
---------------------------------------------------------- Chapter 0:1

VA physicians prescribed OTC products for veterans more than 7
million times in fiscal year 1995, accounting for almost one-fifth of
all prescriptions.  VA pharmacies filled these OTC prescriptions over
15 million times, about one-fourth of all prescriptions filled. 

VA physicians prescribed more than 2,000 unique OTC products.  VA
pharmacies classify these products into three groups:  medications
such as antacids, medical supplies such as insulin syringes, and
dietary supplements such as Ensure.  Medications account for about 73
percent of the 15 million OTC prescriptions filled, medical supplies
for 26 percent, and dietary supplements for less than 1 percent. 


      VA FACILITIES LIMIT
      PHYSICIANS' PRESCRIPTION OF
      OTC PRODUCTS
-------------------------------------------------------- Chapter 0:1.1

VA's network and facility directors have considerable freedom in
developing operating policies, procedures, and practices for VA
physicians and pharmacies.  They and the pharmacies have taken a
number of different actions to limit the number of OTC products
available through the pharmacies and the quantity of products
veterans can receive.  However, little uniformity in the application
of limits is evident. 

In general, each facility has a Pharmacy and Therapeutics Committee
that decides which OTC products to provide based on product safety,
efficacy, and cost effectiveness.  These products are listed on a
formulary and VA physicians are generally to prescribe only these
products. 

Of the 2,000 unique OTC products dispensed systemwide, individual
pharmacies generally handled fewer than 480, with the number of OTC
products ranging between 160 and 940 products.  Medical supplies
account for the majority of unique products, with pharmacies
generally dispensing fewer than 10 types of dietary supplements. 
However, three facilities' formularies excluded dietary supplements. 

The volume of OTC products dispensed also varied among facilities. 
Overall, OTC products accounted for about 25 percent of all
prescriptions filled systemwide.  But OTC products represented
between 7 percent and 47 percent of all prescriptions dispensed at
individual facilities. 

Of note, fewer than 100 products were involved in more than 80
percent of the 15 million times that OTC products were dispensed. 
The most frequently dispensed OTC products include (1) medications
such as aspirin, acetaminophen, insulin, and stool softener; (2)
dietary supplements including Sustacal and Ensure; and (3) supplies
such as alcohol prep pads, lancets, and chemical test strips. 


      SOME FACILITIES RESTRICT OTC
      PRODUCTS TO CERTAIN VETERANS
-------------------------------------------------------- Chapter 0:1.2

Facilities have sometimes restricted physicians' prescriptions of OTC
products to veterans with certain conditions or within certain
eligibility categories.  For example, 115 facilities restricted
dietary supplements to veterans who required tube feedings or
received approval for the supplement from dieticians.  For medical
supplies, a facility provided certain supplies only to patients who
received them when hospitalized and another provided diapers only to
veterans with service-connected conditions.  One facility provided
OTC medications only to veterans with service-connected disabilities. 


      SOME FACILITIES RESTRICT
      QUANTITIES OF OTC PRODUCTS
-------------------------------------------------------- Chapter 0:1.3

Facilities have sometimes restricted the quantities of OTC products
that pharmacies may dispense.  Twenty-eight facilities had
restrictions, including limits on the quantity of OTC products
dispensed within prescribed time periods or the number of times a
prescription could be refilled.  For example, one facility restricted
cough syrup prescriptions to an 8-ounce bottle with one refill.  It
had similar quantity restrictions for 15 other OTC medications. 
Another facility had a no-refill policy for certain medical supplies,
such as diapers, underpads, and bandages. 


   OTHER HEALTH CARE PLANS PROVIDE
   FEW, IF ANY, OTC PRODUCTS TO
   BENEFICIARIES
---------------------------------------------------------- Chapter 0:2

The Department of Defense operates a health care system for military
beneficiaries, including active duty members, retired members, and
dependents.  This system provides a more restricted number of OTC
products than most VA facilities.  In 1992, Defense eliminated all
OTC products except for insulin from its formularies to control
costs.  However, more expensive prescription medications were being
substituted for some OTC medications that were no longer available. 
Subsequently, Defense reinstated a few products to its formularies to
alleviate such substitution.  All beneficiaries are eligible for OTC
products without a copayment. 

The Health Care Financing Administration directs the Medicare and
Medicaid programs that pay nonfederal health care providers for
medical care for target populations.  Unlike VA, Medicare does not
cover outpatient OTC medications for its beneficiaries.  Like VA,
Medicaid, at the option of the states, can cover OTC products for its
low-income beneficiaries.  The availability of OTC products varies by
state, ranging from very few to a substantial array of products. 

The Federal Employees Health Benefits program offers a range of
health insurance plans to federal employees and their dependents. 
The program requires plans to meet certain minimal standards, which
include prescription medications but no OTC products, except for
insulin and related supplies.  Blue Cross and Blue Shield and Kaiser
Permanente are two of the larger plans and they cover no OTC
products, other than insulin and related supplies.  Both plans
require beneficiary payments, with Kaiser charging $7 for each
prescription provided in its pharmacy and Blue Cross and Blue Shield
requiring a $50 deductible and 15 to 20 percent of individual
prescription costs, depending on whether the beneficiary has a high-
or low-option plan. 

Finally, most private health insurers generally exclude OTC products
as a benefit for participants, with a few exceptions such as insulin
and insulin syringes.  For example, the Group Health Cooperative of
Puget Sound, in Seattle, provides insulin with a $5 copayment but no
other OTC products.  Before 1995, the Group Health Cooperative of
Puget Sound did provide an OTC drug benefit.  However, it dropped the
OTC medication benefit because it found no other similar health plan
that provided this benefit. 


   FEDERAL RESOURCES FINANCE MOST
   OF VA'S OTC COSTS
---------------------------------------------------------- Chapter 0:3

Nationwide, VA pharmacies spent an estimated $117 million to purchase
OTC products and $48 million to dispense them to veterans in fiscal
year 1995.  Pharmacies spent about $85 million on medications, with
purchasing cost representing about two-thirds of total costs.  By
contrast, they spent about $74 million for medical supplies and $6
million on dietary supplements, with purchasing costs accounting for
most of these costs, as shown in figure 1. 

   Figure 1:  VA Nationwide
   Estimated OTC Expenses (Fiscal
   Year 1995)

   (See figure in printed
   edition.)

Purchasing and dispensing costs differ among the product categories
for two reasons.  First, VA physicians generally provide veterans
more prescriptions for medications than supplies, thereby causing
pharmacies to handle medications more often.  Second, ingredient
costs of medications are generally significantly lower than the cost
of medical supplies. 

VA recovered an estimated $7 million of these costs through veterans'
copayments.  By law, unless they meet statutory exemption criteria,
veterans are to pay $2 for each 30-day supply of OTC medications and
dietary supplements that VA provides.  Veterans' copayments are not
required for OTC products used to treat service-connected conditions. 
Also, veterans are exempt from the copayment requirement if they have
low incomes. 

Our analysis of veterans' copayments and pharmacy costs at VA's
Baltimore facility shows that copayments offset no more than 12
percent of costs for medications, dietary supplements, and medical
supplies, as shown in table 1. 



                          Table 1
          
          Comparison of Federal and Veteran Share
            of OTC Expenses, Baltimore Facility
                     (Fiscal Year 1995)

                                   Dietary
                    Medication  supplement   Medical  Tota
                             s           s  supplies     l
------------------  ----------  ----------  --------  ----
Federal funds              88%         99%      100%   93%
Veteran copayments         12%          1%        0%    7%
----------------------------------------------------------
Federal funds financed most of Baltimore's OTC product costs. 
Copayments collected cover a relatively small portion of these costs,
for several reasons.  First, the $2 copayment collected for a 30-day
supply represents only a portion of the ingredient, dispensing, and
collection costs of most OTC medications and dietary supplements. 
Second, copayments are not required for medical supplies.  Third,
most veterans receiving medications and dietary supplements are
exempted, and some nonexempt veterans do not pay copayments owed. 

For individual OTC products, veterans' medication copayments ranged
between 4 percent to more than 100 percent of VA's costs, depending
on the type of OTC product and the quantities dispensed.  For
example, a veteran's medication copayment of $6 for a 90-day supply
of an expensive product, such as the dietary supplement Ensure, may
cover less than 5 percent of VA's costs ($400).  By contrast, a
veteran's copayment of $6 for a 90-day supply of an inexpensive
medication, such as aspirin, may cover more than VA's total cost. 


   OPPORTUNITIES TO REDUCE FEDERAL
   EXPENDITURES
---------------------------------------------------------- Chapter 0:4

There is a variety of actions available that could help reduce the
level of federal resources devoted to the provision of OTC products. 
First, if VA eligibility rules were more strictly enforced, VA
pharmacies could dispense considerably fewer OTC products.  Also,
savings could be achieved through more efficient OTC dispensing and
copayment collection processes.  Finally, the Congress could expand
the copayment requirements to generate additional revenues. 


      FEDERAL EXPENDITURES COULD
      BE REDUCED THROUGH STRICTER
      APPLICATION OF ELIGIBILITY
      RULES
-------------------------------------------------------- Chapter 0:4.1

The Congress has limited VA's authority to provide outpatient medical
care to veterans.  Only veterans with service-connected conditions
rated at 50 percent or higher are eligible for comprehensive
outpatient care.  All veterans with service-connected conditions are
eligible for treatments related to those conditions; they are also
eligible for hospital-related care of nonservice-connected
conditions.  This includes only outpatient services needed to (1)
prepare for a hospital admission, (2) obviate the need for a hospital
admission, or (3) complete treatment begun during a hospital stay. 
Most veterans with no service-connected conditions are eligible only
for hospital-related outpatient care.  VA is required to assess a
veteran's eligibility for care based on the merits of his or her
unique situation each time that the veteran seeks care for a new
condition. 

We have identified many instances in which OTC products are used for
pre- and posthospitalization care.  For example, veterans received
OTC products, such as phosphate enemas, magnesium citrate, and prep
kits needed for barium enemas in preparation for colonoscopies and
other diagnostic tests.  Following hospital stays, veterans received
ostomy supplies after some surgeries, wound-care supplies, aspirin
for heart surgery or angioplasties, and decongestants after sinus
surgery. 

VA has broadly defined the statutory criteria relating to obviating
the need for hospitalization.  Guidance to facilities says that
eligibility determinations

     ".  .  .  shall be based on the physician's judgment that the
     medical services to be provided are necessary to evaluate or
     treat a disability that would normally require hospital
     admission, or which, if untreated, would reasonably be expected
     to require hospital care in the immediate future"

In other words, VA physicians must determine that a veteran would
likely need to be hospitalized soon if OTC products are not used. 

Some OTC products may be used to obviate the need for hospital care. 
For example, diabetic veterans use insulin to control their blood
sugar, spinal cord and Parkinson's patients use stool softeners to
alleviate fecal impaction, veterans suffering renal failure use
sodium bicarbonate tablets to balance their electrolytes, and
veterans who have suffered heart attacks or strokes use aspirin to
prevent secondary occurrences. 

However, whether many veterans' conditions would require
hospitalization in the immediate future without the use of other OTC
products is not clear.  Such products include antacids for heartburn,
skin preparation products for dry skin, acetaminophen for arthritis
pain, and cough medications for common colds.  Given that VA
pharmacies filled prescriptions for such products over 2 million
times last year, VA facilities may have the opportunity to achieve
significant cost reductions if eligibility rules are more strictly
enforced. 


      VA'S COSTS COULD BE REDUCED
      THROUGH INCREASED EFFICIENCY
-------------------------------------------------------- Chapter 0:4.2

VA pharmacies could more efficiently dispense OTC products by
reducing the number of times staff handle these items or restricting
mail service.  VA facilities could also reduce costs by collecting
medication copayments at the time of dispensing. 


         REDUCE OTC PRODUCT
         HANDLING COSTS
------------------------------------------------------ Chapter 0:4.2.1

VA pharmacies could significantly reduce their OTC product dispensing
costs of $48 million by providing more economical quantities of
medications and supplies.  Dispensing larger quantities would reduce
the number of times that VA pharmacists fill prescriptions for OTC
products, saving about $3 each time the products would have otherwise
been dispensed. 

As previously discussed, VA physicians generally prescribe OTC
products to treat acute or chronic conditions or prevent future
illness.  Prescriptions for acute conditions are generally for
periods of 30 days or less.  However, OTC products used for chronic
or preventative situations are generally prescribed for longer
periods.  For example, in fiscal year 1995, about 1,800 veterans
received aspirin at the Baltimore pharmacy in quantities sufficient
for at least 6 months. 

VA allows pharmacies to dispense most OTC products in quantities
sufficient for a 90-day supply.  However, 15 pharmacies currently
dispense OTC products in 30-day or 60-day supplies.  Moreover,
limiting pharmacies to dispensing a 90-day supply is uneconomical for
certain high-volume OTC products used to treat chronic conditions or
prevent illness. 

OTC products used to treat chronic conditions or prevent illnesses
seem to provide opportunities to reduce dispensing costs.  For
example, we estimate that VA's Baltimore pharmacy could have saved
over $8,000 in dispensing costs if it dispensed 180-day supplies of
aspirin to certain veterans in fiscal year 1995.  Assuming a
prescribed usage of 1 tablet a day, this supply level of 180 tablets
would be more consistent with the quantities available in local
outlets, which generally range between 100 and 500 tablets. 


         REDUCE OTC MAILING COSTS
------------------------------------------------------ Chapter 0:4.2.2

VA pharmacies could reduce dispensing costs by restricting the
availability of mail service to certain situations or requiring
veterans to pay shipping charges.  Last year, VA pharmacies spent
about $7.5 million mailing OTC products to veterans. 

VA pharmacies generally encourage veterans to use mail service when
having most prescriptions for OTC products refilled.  Almost all
pharmacies mail OTC products, and mail service was used for almost 60
percent of the 15 million times that OTC products were dispensed last
year.  Some pharmacies have already transferred most of their OTC
prescription refills to VA's new regional mail service pharmacies and
others will do so when additional regional pharmacies become
operational. 

While mailing costs vary, they can be particularly costly for liquid
items or items that are dispensed in large packages or for long
periods.  For example, one facility reported that mailing a
prescription of liquid antacids from the pharmacy costs $2.88 and
mailing a case of adult diapers costs $17.49.  Mailing costs for a
year's supply of diapers could exceed $200.  Some VA facilities cited
high mailing costs as one of the principal reasons for eliminating
OTC products from their formularies. 

Several facilities have attempted to reduce mailing costs by
prohibiting the mailing of certain OTC products, such as cases of
liquid dietary supplements and diapers.  In addition, some facilities
reported switching from liquid products to powders to reduce the
weight--and associated mailing costs--for particular OTC products. 


         STREAMLINING COPAYMENT
         COLLECTIONS
------------------------------------------------------ Chapter 0:4.2.3

A third way to reduce federal costs is to streamline copayments for
OTC products.  VA primarily bills veterans for copayments, unlike
other providers who generally require copayments to be made at the
time that the products are dispensed.  For OTC products dispensed to
veterans in fiscal year 1995, VA's Baltimore pharmacy collected about
75 percent of the value of the copayments billed.  The other 25
percent remained unpaid 5 months past the end of the fiscal year. 
The veterans who had not paid for these products had not applied for
waivers and, as a result, VA officials view them as able to pay. 

VA facilities incur additional administrative costs to prepare and
mail bills for copayments related to OTC products.  VA facilities
generally send an initial bill and three follow-up bills to veterans
who are delinquent in paying.  However, because of the relatively
small outstanding balance for most veterans, VA officials told us
that they are reluctant to continue contacting nonpayers or pursue
legal or other actions to collect these debts.  By law, VA has the
option of not providing OTC products if a veteran refuses to make a
medication copayment at the time the product is dispensed.  VA
officials, however, told us that it is not their policy to withhold
OTC products from nonpayers for this reason. 

Administrative costs are significant in relation to the total
copayment collections.  A VA-sponsored study estimated that VA
facilities spend about 38 cents for every $1 collected to prepare
medication copayment bills, mail them, and resolve questions.  If the
Baltimore facility's costs approximate this rate, it incurred an
estimated $26,000 to collect $67,000 for OTC products in fiscal year
1995.  In addition, about 25 percent of the medication copayments
that were billed have gone unpaid and would have required additional
costs to resolve.  Collecting the copayment at the time a product is
dispensed could eliminate most administrative costs and increase
revenues. 


      VA COULD INCREASE
      RESTRICTIONS ON OTC PRODUCTS
-------------------------------------------------------- Chapter 0:4.3

VA facilities could adopt less generous policies for OTC products,
which would be more consistent with other health plans.  This could
be achieved by adopting such costs containment measures as (1)
limiting OTC products available, (2) restricting veterans eligibility
for OTC products, or (3) limiting quantities dispensed. 

As previously discussed, each hospital offers a unique assortment of
OTC products.  For example, the most generous OTC product benefit
packages contain about 285 medications, 514 medical supplies, and 14
dietary supplements.  By contrast, the least generous packages
include about 124 medications, 114 medical supplies, and 4 dietary
supplements. 

Over the last 3 years, 45 pharmacies have reduced the number of OTC
products available to veterans.  The most commonly removed OTC
products are medications, such as soaps, skin lotions, and laxatives;
dietary supplements, such as Ensure, multiple vitamins, and mineral
supplements; and medical supplies, such as ostomy products and
chemical test strips. 

As part of VA's ongoing reorganization, the 22 network directors have
developed an unduplicated inventory of OTC products dispensed by
facilities operating in the network.  In general, each network's
formulary more closely approximates the more generous OTC product
benefit packages available in each network rather than the less
generous package.  Some network directors plan to review their
formularies to identify products that could be removed. 

Recently, 58 facilities told us that they are considering removing
some OTC products from their formularies.  Most are examining fewer
than 10 products, although the number of products under review ranges
between 1 and 205.  Products most commonly mentioned include dietary
supplements, antacids, diapers, aspirin, and acetaminophen.  Ninety
facilities are not contemplating changes at this time. 

Interestingly, wide disagreement exists about VA's provision of OTC
products on an outpatient basis.  For example, 22 facilities
suggested that all OTC products should be eliminated.  By contrast,
57 suggested that all OTC products should remain available.  The
other 70 facilities provided no opinion regarding whether OTC
products should be kept or eliminated. 

Many facilities pointed out that eliminating all OTC products could
result in greater costs for VA health care.  This is because some OTC
products are relatively cheap or they help prevent significant health
problems that could be expensive for VA facilities to ultimately
treat.  Also, facilities said that physicians may substitute
higher-cost prescription medications in place of certain OTC products
that would no longer be available. 

Facilities reported 21 OTC products, which, if removed from their
formularies, would result in greater costs to VA.  Those most
frequently mentioned were aspirin, acetaminophen, antacids, and
insulin.  These facilities also reported that 14 of the 21 products
had prescription substitutes.  These include aspirin, acetaminophen,
and antacids (insulin has no prescription substitute). 

While 45 facilities removed OTC products during the last 3 years,
only 6 of them said that they reinstated some 20 products on their
formularies.  One facility stated that although it is commonly
believed that limiting OTC medications would result in a higher use
of more expensive prescription medications, it had not found this to
be true at its facility. 

As OTC products are removed from formularies, veterans will have to
obtain the products elsewhere.  To facilitate this, some VA
facilities reported that they are using VA's Canteen Service to
provide OTC products that have been eliminated from their
formularies.  The Canteen Service operates stores in almost every VA
facility to sell a variety of items, including some OTC products. 
For example, the Baltimore pharmacy has asked its Canteen Service
store to stock about 13 OTC products that were recently eliminated
from its formulary.  The Baltimore pharmacy has already shifted most
of its dispensing of dietary supplements to the store. 

VA Canteen Service stores do not use federal funds to operate and
generally provide items at a discount, in large part because they do
not have the expense of advertising.  By allowing these stores to
dispense OTC products, VA may reduce both dispensing and ingredient
costs for its pharmacies.  At the same time, VA's Canteen Service
stores can provide many veterans with a convenient and possibly less
costly option for obtaining these products than would be available
through other local outlets. 


      EXPANDING VETERANS'
      COPAYMENTS FOR OTC PRODUCTS
      WOULD ENHANCE REVENUES
-------------------------------------------------------- Chapter 0:4.4

The Congress could reduce the federal share of VA pharmacies' costs
for filling veterans' OTC prescriptions by expanding copayment
requirements.  This could be achieved through (1) tightening
exemption criteria, (2) requiring copayments for medical supplies, or
(3) raising the copayment amount.  Unlike VA, other health plans'
copayment requirements generally apply equally to all beneficiaries
and for all covered products. 

As previously discussed, veterans' copayments cover only 7 percent of
the Baltimore pharmacy's OTC costs.  If the copayment remains at $2
for each 30-day supply, changes that expand the number of veterans
required to make a copayment could increase veterans' share up to 31
percent and thereby reduce the Baltimore pharmacy's share to 69
percent.  A copayment of about $9 would be needed to achieve a
comparable sharing rate if existing exemptions are maintained. 


         RESTRICTING OTC COPAYMENT
         EXEMPTIONS
------------------------------------------------------ Chapter 0:4.4.1

When the Congress established medication copayments in 1990, veterans
with service-connected disabilities rated at 50 percent or higher
were exempt for any condition as were other veterans who receive
medications for service-connected conditions.  In 1992, the Congress
exempted veterans from the copayment requirement for
nonservice-connected conditions if their income was below prescribed
thresholds. 

Service-connected veterans received about one-third of the 116,000
prescriptions filled at the Baltimore pharmacy.  Of these, almost
one-half had ratings of 50 percent or higher.  Veterans without
service-connected conditions received the remaining two-thirds and
about one-half of these veterans were exempt because of income below
the statutory threshold.  VA officials told us that while some
low-income veterans may have difficulties with copayments, most
veterans did not seem to have such a problem before the 1992
enactment of the low-income exemption. 

The Baltimore pharmacy could have recovered an additional 7 percent
of its costs if all veterans without service-connected conditions
were required to make copayments for OTC products; and an additional
11 percent of its costs if veterans were required to make copayments
for OTC products provided for service-connected and
nonservice-connected conditions. 

Last month, VA's General Counsel recommended that VA facilities
should use a more restrictive income threshold, as required by the
1992 low-income exemption.  Earlier, we had informed VA's Counsel
that facilities were inappropriately using the higher
aid-and-attendance pension rate rather than the lower regular pension
rate.  Using the lower rate should allow the Baltimore facility, as
well as other facilities, to collect large amounts of copayments from
veterans who would not otherwise have been charged. 


         REQUIRING OTC COPAYMENTS
         FOR MEDICAL SUPPLIES
------------------------------------------------------ Chapter 0:4.4.2

When the Congress established a copayment requirement for medications
and dietary supplements in 1990, it did not include a requirement for
medical supplies.  VA officials told us that they know of no reason
why medical supplies should be treated differently from other product
categories in terms of copayments.  Moreover, the legislative history
of this 1990 action offers no explanation for why a copayment for
medical supplies was not included. 

Nationwide, VA pharmacies dispensed medical supplies about 4 million
times to veterans in 1995, including about 36,000 times at the
Baltimore pharmacy.  Baltimore provided most supplies for 30 days or
fewer, generally preceding or following a VA hospital stay.  Many,
however, were provided for longer-term conditions, including diabetic
and ostomy supplies or diapers for those suffering from incontinence. 

We estimate that the Baltimore facility could have recovered an
additional 6 percent of its OTC product costs in fiscal year 1995 if
veterans were required to make copayments for medical supplies used
to treat nonservice-connected conditions. 


         RAISING THE OTC COPAYMENT
         AMOUNT
------------------------------------------------------ Chapter 0:4.4.3

The Baltimore facility would need to charge a higher copayment to
recover a larger share of its OTC product costs, if the exemptions
and collection rates remain unchanged.  For example, recoveries could
be raised from 7 percent to 32 percent if the legislatively
established copayment amount were $9 for a 30-day supply.  However,
if some changes are made to the exemptions, this target share could
be achieved with a smaller increase in the copayment rate, as shown
in table 2. 



                                Table 2
                
                  Estimated Copayment Recoveries as a
                Percent of the Baltimore Facility's OTC
                   Costs ($1.1 million) for Different
                 Exemption Options and Copayment Rates
                           (Fiscal Year 1995)


Options                             $2      $3      $5      $7      $9
------------------------------  ------  ------  ------  ------  ------
Existing exemptions                 7%     11%     18%     25%     32%
Veterans with nonservice-          14%     22%     36%     51%     65%
 connected conditions (before
 1992)
Veterans with nonservice-          20%     30%     50%     70%     90%
 connected conditions
 (includes medical supplies)
All veterans (includes medical     31%     47%     78%    109%    140%
 supplies and veterans with
 service-connected conditions)
----------------------------------------------------------------------

   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:5

Most VA facilities offer an OTC product benefits package that is more
generous than other health plans.  In addition, VA facilities provide
other features, such as free OTC product mail service and deferred
credit for copayments owed, that are not commonly available in other
plans.  As a result, VA facilities have devoted significant resources
to the provision of OTC products, which other plans have elected not
to spend. 

VA facilities could reduce their pharmacy costs if existing
eligibility criteria are more strictly administered for OTC products. 
Less than half of the veterans receiving outpatient care have
service-connected conditions.  Thus, most veterans must meet the pre-
and posthospitalization or obviating-the-need criterion.  In our
view, many veterans may be receiving OTC products for
nonservice-connected conditions unrelated to a VA hospital stay or
potential hospitalization.  Toward this end, VA may need to provide
better guidance to facilities to achieve an effective and consistent
use of OTC products within its existing statutory authority. 

VA should be commended for instructing network directors to
consolidate formularies.  This action, which is currently in
progress, has not yet achieved an adequate level of consistency or
cost-containment systemwide because the networks current formularies
approximate the more generous coverage of OTC products.  Moreover,
some networks are allowing facilities to have less generous coverage
of OTC products than these networks' formularies.  This will likely
maintain the uneven availability of OTC products. 

Given the disagreement among networks and facilities regarding the
provision of OTC products, additional guidance may be needed to
ensure that veterans have a consistent level of access to OTC
products systemwide.  In light of concerns about potential resource
shortages at some facilities, tailoring the availability of OTC
products to be more in line with those less generous facilities would
seem desirable.  This would essentially limit OTC products to those
most directly related to VA hospitalizations or those considered most
essential to obviate the need for hospitalization, such as insulin
for diabetic veterans. 

VA facilities could also reduce their costs if they restructured OTC
product dispensing and copayment collection processes.  In general,
most facilities handle OTC products too many times, mail products too
often, and allow veterans to delay copayments too frequently. 
Although, some facilities have adopted measures to operate more
efficiently, all facilities could benefit by doing so. 

Expanding veteran's share of the costs would also help to reduce
federal resource needs.  This could be achieved by expanding
copayment requirements to include medical supplies, reducing the
income threshold for veterans with nonservice-connected conditions,
or increasing the amount of copayment required.  In addition to
enhancing revenues, such changes could also act as important
incentives for veterans to only obtain the OTC products from VA
facilities that they expect to use. 

Finally, VA facilities have developed ways to provide OTC products to
veterans outside their pharmacies at costs lower than they are
available through other local outlets.  Some facilities have had
success using the Canteen Service stores to stock and sell OTC
products that the facilities had removed from their formularies. 
This seems to provide a reasonable alternative to providing OTC
products to veterans through VA pharmacies. 


-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my statement.  I will be happy to
answer any questions that you or other Members may have. 


   CONTRIBUTORS
---------------------------------------------------------- Chapter 0:6

For more information, please call Paul Reynolds, Assistant Director,
at (202) 512-7109.  Walter Gembacz, Mike O'Dell, Mark Trapani, Paul
Wright, Deena El-Attar, and Joan Vogel also contributed to the
preparation of this statement. 


*** End of document. ***