[Senate Hearing 107-631]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 107-631


                               BEFORE THE

                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                             JULY 24, 2001


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            JOHN D. ROCKEFELLER IV, West Virginia, Chairman

BOB GRAHAM, Florida                  ARLEN SPECTER, Pennsylvania
JAMES M. JEFFORDS, Vermont           STROM THURMOND, South Carolina
DANIEL K. AKAKA, Hawaii              FRANK H. MURKOWSKI, Alaska
PATTY MURRAY, Washington             LARRY E. CRAIG, Idaho
ZELL MILLER, Georgia                 TIM HUTCHINSON, Arkansas

                     William E. Brew, Chief Counsel

      William F. Tuerk, Minority Chief Counsel and Staff Director



                            C O N T E N T S


                             July 24, 2001


Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado, 
  prepared statement.............................................     3
Rockefeller, Hon. John D., IV, U.S. Senator from West Virginia, 
  prepared statement.............................................     2


Bascetta, Cynthia A., Director, Health Care, Veterans' Health 
  Care and Benefits Issues, U.S. General Accounting Office.......    34
    Prepared statement...........................................    36
Griffin, Richard J., Inspector General, Department of Veterans 
  Affairs........................................................    14
    Prepared statement...........................................    15
Herdman, Roger, M.D., Director, National Cancer Policy Board, 
  Institute of Medicine..........................................    42
    Prepared statement...........................................    44
Miller, Michael D., M.D., Consultant to the Pharmaceutical 
  Research and Manufacturers Association (PhRMA).................    48
    Prepared statement...........................................    51
Principi, Hon. Anthony J., Secretary, Department of Veterans 
  Affairs........................................................     6
    Prepared statement...........................................     9
    Response to written questions submitted by Hon. John D. 
      Rockefeller IV.............................................    12


Armstrong, Moe, on behalf of the National Alliance for the 
  Mentally Ill, prepared statement...............................    69
Garrick, Jacqueline, ACSW, CSW, CTS, Deputy Director, Health 
  Care, National Veterans Affairs and Rehabilitation Commission, 
  The American Legion, prepared statement........................    72
Hills, Richard W., Jr., President, Veterans Network for the 
  Mentally Ill, prepared statement...............................    75





                         TUESDAY, JULY 24, 2001

                                       U.S. Senate,
                            Committee on Veterans' Affairs,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:35 p.m., in 
room SR-418, Russell Senate Office Building, Hon. John D. 
Rockefeller IV (chairman of the committee) presiding.
    Present: Senators Rockefeller, Wellstone, Miller, Nelson, 
Specter, Campbell, and Craig.
    Chairman Rockefeller. I will make an opening statement and 
others are welcome to do that. The hearing will be called.
    I have spent most of my last several weeks to order 
negotiating prescription drug benefits for the non-VA 
population, and it is an unbelievably complicated, contentious, 
and sometimes rather ideological, sometimes theological 
subject. But some things are very clear, and let it be said 
here, Medicare beneficiaries need a prescription drug benefit. 
We have to come through one way or another.
    We have to come through, and we have to come through with a 
decent drug benefit, not just a drug benefit--but a decent drug 
benefit, which is all made the harder because of the tax cut 
bill which we have passed which has constrained what we can 
spend to an amount which may, in fact, not equate to a decent 
drug benefit--all of which we have to factor in as we look at 
it in the non-VA sector.
    The reason that the Medicare beneficiaries need it is 
because they are forced to choose between drugs and other human 
needs, which we hear about a lot. But there is another reason 
that we have to make sure that Medicare beneficiaries get 
prescription drugs and that is the reason which brings us here 
this afternoon--they need it because their lack of an 
affordable prescription drug benefit is, in fact, cutting into 
the services provided for our Nation's veterans. So the two are 
inextricably linked. What we don't do for one hurts the other, 
in this case, the veterans, hence this hearing.
    I don't think it will come as a surprise to the people in 
this room that there is substantial cost shifting going on 
here. While a drug benefit remains out of reach for many in 
Medicare, veterans over 65 years of age are turning now in 
extraordinarily increasing numbers to the VA for low-cost 
prescription drugs. These are the low-cost prescription drugs 
which some of us helped negotiate back in 1992 and it became a 
model of how you leverage volume for low cost. So as a result, 
the VA is incurring increasingly high expenditures.
    Others who raise concerns about the high cost of a Medicare 
drug benefit don't seem to understand that the government is 
already paying for the drugs of older patients in many cases. 
Veterans with other health care options are, in fact, coming in 
droves to the VA, many of them for the sole purpose of getting 
inexpensive prescription drugs. I do not blame them for that, 
but that is something that needs to be talked about.
    They tell VA doctors that they are not coming for VA care 
and they tell me that they are not coming for VA care. They are 
coming for low-cost prescription drugs. But, obviously, before 
a drug can be prescribed, a patient has to be examined, and, 
therefore, the VA physician has that responsibility and then 
only at that point can prescribe a drug. As a result, we 
sometimes end up with a duplication of health care services.
    So this cost shifting, together with an expensive tax cut, 
which I have already mentioned, has handcuffed us powerfully--
powerfully--and that means that the VA health care system is 
being and will be shortchanged. I have said that at earlier 
hearings. A byproduct of that could mean that enrollment for 
higher income veterans might be put at risk. I don't know if 
that is the case. I, and I think all members of this committee, 
don't want to see these veterans pushed out of the Department 
of Veterans Affairs. But at some point, we have got to deal 
with these problems.
    I will do everything in my power to make sure that VA has 
the resources to care for all veterans, regardless. We changed 
the eligibility status. When we change the eligibility status, 
we change the habits, the expectations of veterans of whatever 
age and income to be able to ask for service. But we must be 
concerned and note that there are very major problems.
    The veterans' health care system is under a financial 
attack. VA expenditures on prescription drugs have increased 
dramatically, as I have indicated.
    So now we are going to hear more about this this afternoon, 
because this is what our hearing is about, as well as what 
works and what doesn't work and what we might do in the area of 
cost containment, for example, for prescription drugs. We also 
have a proposal from the VA to increase the prescription drug 
copayment from $2, which folks are accustomed to paying, to $7. 
If you do the math, on certain kinds of incomes, that can 
become a burden, a very heavy burden in the State that I 
represent, in any event, and we need to learn more about that 
and the need for that and the thinking behind that. So these 
are serious issues that have spillover effects into other 
aspects of our health care systems. They will directly affect 
who gets to enroll for VA health care.
    [The prepared statement of Senator Rockefeller follows:]

 Prepared Statement of Hon. John D. Rockefeller IV, U.S. Senator From 
                             West Virginia

    Good afternoon. I've said it before in other forums, and I 
will say it here: Medicare beneficiaries need a prescription 
drug benefit. They need it because too many seniors are forced 
to choose between prescription drugs and other basic needs. But 
there is another reason Medicare beneficiaries need a drug 
benefit--a reason which brings us here today--they need it 
because their lack of affordable prescription drugs is cutting 
into services provided to our Nation's veterans.
    I don't think it will come as a surprise to the people in 
this room that there is substantial cost shifting going on 
here. While a drug benefit remains out of reach for many in 
Medicare, veterans over 65 years of age are turning to VA for 
low-cost prescription drugs in significant numbers. As a 
result, VA is incurring increasingly high expenditures. Others 
who raise concerns about the high cost of a Medicare drug 
benefit don't seem to understand that the government is already 
paying for drugs for older patients in many cases.
    Veterans with other health care options are coming in 
droves to VA--many of them for the sole purpose of getting 
inexpensive prescription drugs. They tell the VA doctors that 
they are not coming for VA care, and they have told me that. 
However, because VA rightly must examine each patient before 
dispensing medications, we end up with a duplication of health 
care services.
    This cost shifting, together with an expensive tax cut that 
has handcuffed us financially, means the VA health care system 
will be short changed. A byproduct of that could mean that 
enrollment for higher income veterans might be put at risk. I, 
and I think all members of this Committee, don't want to see 
these veterans pushed out of VA.
    I will do everything in my power to make sure that VA has 
the resources to care for all veterans who choose to come to 
VA. But we must be concerned and note that there are major 
problems. The veterans health care system is under financial 
attack. VA expenditures on prescription drugs have increased 
    We will hear more about that this afternoon, as well as 
what works and what doesn't work in the area of cost 
containment for prescription drugs. We also have a proposal 
from VA to increase the prescription drug copayment--from $2 to 
$7--and we need to learn more about that. These are serious 
issues with spillover to other health care systems. And they 
will directly affect who gets to enroll for VA health care.
    I'm very pleased to welcome our witnesses today, especially 
our distinguished VA Secretary, Anthony Principi, and the VA 
Inspector General, Richard Griffin. Your presence here today 
signals the seriousness of these issues. I look forward to 
hearing from you both. And I also appreciate the appearance of 
Dr. Garthwaite and Michael Slachta.

    Chairman Rockefeller. I am very pleased to welcome our 
witnesses today, especially our distinguished Secretary, 
Anthony Principi, and the VA Inspector General, Richard 
Griffin, and others I will introduce at the proper time.
    Having ended my statement, I would like to, in order, call 
upon Senator Campbell, Senator Miller, Senator Wellstone, and 
Senator Nelson.
    Senator Campbell. Mr. Chairman, I think I will just 
introduce my comments for the record. I have some questions to 
ask a little later, but do want to welcome Secretary Principi 
and the panel to be with us today.
    Chairman Rockefeller. Thank you, Senator.
    [The prepared statement of Senator Campbell follows:]

 Prepared Statement of Hon. Ben Nighthorse Campbell, U.S. Senator From 

    Thank you, Mr. Chairman. Thanks for holding today's hearing 
to discuss VA pharmaceutical issues that will affect 
prescription drug coverage for our veterans' community. And, I 
want to thank my friend Secretary Principi and his colleagues 
and the others who have come today to testify on these issues. 
I recognize the efforts the Secretary and the VA have made thus 
far in responding to the concerns of veterans.
    As I mentioned at last week's hearing on homeless veterans, 
I am concerned about the tight fiscal constraints faced by the 
VA in 2002. Even though most of the increase in discretionary 
funding will probably go to health care, I can only begin to 
guess how it will affect the overall quality of benefits and 
care received by our veterans. The current funding simply 
cannot provide for the level and quality of care that is needed 
in certain specialized programs like spinal cord injury.
    Mr. Chairman, I look forward to today's testimony regarding 
prescription drug coverage in the VA. The cost of prescription 
drugs has contributed to massive increases in the cost of 
health care in this country. And, now, with the aging of our 
population, there will be a corresponding increase in the need 
for multiple prescriptions. Even though the Veterans Health 
Care Act of 1992 limits the prices that drug manufacturers can 
charge the VA, those same dynamics will affect our veterans' 
    I want to commend the VA for its broad efforts to serve 
more veterans with limited resources. While the restructuring 
of the VA health care system that has taken place in the last 
few years has been an enormous task, it has seemed to make 
improvements in many regions throughout the country. I still 
think it is shameful that vets have to go to Mexico to buy 
medicine because they can't afford to buy at American 
    I look forward to working with the VA and with members of 
the committee as we look at ways to ensure each deserving 
veteran access to quality, affordable health care.
    Thank you, Mr. Chairman.

    Chairman Rockefeller. Senator Miller?
    Senator Miller. Thank you, Mr. Chairman. I just want to 
say, and I will have a question or two when we get to that 
part, but I just want to say how much we all appreciate the 
efforts that you and your staff continue to make on behalf of 
our Nation's veterans. I especially want to thank you for this 
prescription drug issue. That is an example of how you go about 
doing business.
    The increasing demand for prescription drugs by our 
veterans, we know must be appropriately addressed. I believe 
that you are committed to finding the best solution from a 
quality of service standpoint first and a value for the dollar 
standpoint second and I encourage you to continue to evaluate, 
improve the methods to find a way to dispense prescription 
drugs to our veterans and make sure that they receive the first 
class care and service that they deserve. Thank you, Mr. 
    Chairman Rockefeller. Senator Nelson, would you yield for a 
moment to Senator Specter, who has just come?
    Senator Nelson. Yes.
    Chairman Rockefeller. I would appreciate it very much.
    Senator Specter. Thank you very much, Mr. Chairman. Thank 
you for convening this hearing. The issue of prescription drugs 
is one of overwhelming importance. Having Secretary Principi 
here today and his distinguished supporting cast doubtless will 
shed special insights into this very serious problem and 
probably tell us how to solve it for seniors generally. So I am 
looking forward to the testimony on a matter of enormous 
    We all know how expensive the drugs are and we do know that 
our veteran population consists largely of men and women who 
have problems, many of them connected to the service that they 
worked for, some not provably so. Those expenses are 
overwhelming and it is a matter of highest priority that the 
Veterans Administration find an answer to provide the 
appropriate help and, as I say, perhaps insights into the 
problem for the community at large. Thank you, Mr. Chairman.
    Chairman Rockefeller. Thank you, Senator Specter.
    Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman. I, too, would like 
to thank the Secretary and your distinguished team for 
appearing before us today as we look at the phenomenon of new 
medicines that are available today that not only increase the 
likelihood of one's good health and longevity, but also are now 
in the process of accomplishing what previously could only be 
accomplished through surgery, that we are now doing so with 
less pain and sometimes at a lower cost. Sometimes the pain is 
more in the cost than it is in the condition.
    This was an outstanding accomplishment that Congress 
succeeded in extending the prescription drug coverage to all 
military retirees. Unfortunately, as we all know, those who 
have only Medicare still lack the kind of coverage that we are 
very fortunately extending to our military retirees. These 
beneficiaries are now having the opportunity to obtain their 
coverage for prescriptions through VA pharmacies and through 
the system. We must, of course, pay close attention to the cost 
not only to the government but the cost to the military 
    Later in the question period, I am going to raise a 
question about the copay and the amount that it was raised and 
the logic behind raising it from $2 to $7, but before I get to 
that, let me congratulate your folks for working very 
diligently to make sure that we are providing the right kind of 
prescription drug benefits to our retirees. I will question a 
little later how this is being accomplished in every instance.
    So thank you. I look forward to your answers and getting a 
better understanding of the issues that need to be addressed, 
not only with veterans but also it may be helpful to us as we 
look toward how to solve the problem of those who are uninsured 
through Medicare at the present time. Thank you.
    Chairman Rockefeller. Thank you, Senator Nelson.
    Senator Wellstone?
    Senator Wellstone. Thank you, Mr. Chairman. I know we want 
to get to the Secretary. Welcome, Mr. Secretary, and I will do 
this in 1 minute.
    I am also interested, Mr. Secretary and others, in exactly 
why $2 and $7 on copay. I also want to just associate myself 
with the comments of the chair to say, as we think about moving 
forward with this prescription drug benefit, there are two kind 
of facts that just kind of stare you in the face.
    One of them is that the VA health care system is under 
additional strain because there are people who are Medicare 
recipients who don't get the benefit and then come to the VA 
system. If we did a better job of really providing this benefit 
to people, I think that would take some of the strain or stress 
off of the VA health care system.
    And then the other point, Mr. Chairman, which I think is, 
frankly, very relevant to this discussion about how we are 
going to do it is we have a working model here in the VA system 
which says you can have cost containment and you can provide a 
good benefit to people. I think we ought to be serious about 
what kind of cost containment measures we are going to take as 
we hopefully extend this on to Medicare. VA, as far as I am 
concerned, presents one very compelling model about how we 
might do it, and I am done.
    Chairman Rockefeller. Thank you, Senator Wellstone.
    With that, I might also recognize--actually, Mr. Secretary, 
you appear to be both the IG and the Secretary at the same time 
because you have both cards directly in front of you----
    Chairman Rockefeller. So I want to separately introduce 
Richard Griffin----
    Mr. Principi. We wouldn't want that.
    Chairman Rockefeller [continuing]. And Michael Slachta, Tom 
Garthwaite, and John Ogden. Mr. Secretary, please.


    Mr. Principi. Thank you, Mr. Chairman, members of the 
committee. It is always a pleasure--most of the time--to be 
with you----
    Mr. Principi. This is an important hearing and I applaud 
you for holding this hearing on a very, very significant issue 
for VA and all of American health care. I agree with my friend 
from Minnesota that the VA could be a model for the private 
sector. I think we have learned a lot of important lessons.
    But the challenge is significant. In 1990, the 
pharmaceutical bill, just for products only, was $750 million. 
That is not the cost of administration, just $750 million to 
pay the tab to the companies for products that we purchased. 
Today, it is $2.5 billion and growing. In 1990, it was 6 
percent of our budget. Today, it is 12.5 percent of our budget, 
our medical care appropriation. So it is having a very, very 
significant impact on our system.
    I am proud that VA has taken some very, very significant 
steps over this period of time to improve our procurement, our 
management, and our storage of pharmaceuticals. I think these 
significant accomplishments would not have come about were it 
not for the leadership of our pharmacary service, John Ogden 
and his team under the leadership of Dr. Garthwaite. I think it 
is the best in this Nation. I think great strides have been 
made since the 1980's, through the 1990's, to control the cost 
of pharmaceuticals. Were these steps not taken, I am absolutely 
convinced we would have had to expend an additional half-
billion dollars or more were it not for these efforts.
    In the 1980's, we witnessed a significant increase in 
prescription workload and the expenditure for pharmaceuticals. 
The demand for the drugs was absolutely infinite as new drugs 
came online along with new treatment modalities at the time of 
finite budgets. The traditional ways and culture in the 
procurement and storage of VA pharmaceuticals needed to change.
    1988, I think, was the first significant step, and I 
remember it well. It was intravenous [IV] solutions and it was 
our first national contract for IV solutions. I recall some 
people saying it can't be done, it shouldn't be done, that 
doctors will leave the system. However, there was buy-in by the 
physicians and everyone else. As a result of that one national 
contract, in the first 3 years, VA saved $100 million that went 
to expand the reach of health care. Over the same period of 
time, from 1991 to the present time, we have saved significant 
money with that.
    The second important step that took place----
    Chairman Rockefeller. Mr. Secretary, what did they say to 
be negative about IV's? What did they say? I am fascinated by 
    Mr. Principi. Well, they just said that you needed to have 
four or five different manufacturers producing the IV 
solutions, that people were accustomed to using a certain type 
of IV solution, the way the product was packaged. Incredible 
arguments were being proposed to stop this national contract.
    But VA persisted and said this was the right thing to do. 
It would save us money. And the result was, it saved 
extraordinary amounts of money just for this one product alone. 
I think that began the process of looking at standardization 
and volume purchasing and committed use contracting. I think 
that has resulted in the $540 million or thereabouts that has 
been saved.
    I think the next important step that was taken back then 
was linking our VHA with our acquisition service. For all too 
long, there were big barriers between the people who procured 
the pharmaceuticals and the people in VHA who treated the 
patients. Well, those barriers came down and the treating 
physicians were part of establishing the national formulary and 
what kind of drugs we should be buying. I think linking the two 
has been an important milestone in the model that we have 
    Then you may remember, in 1990--I remember it well--a 
linkage was established between VA and Medicare pricing and VA 
pricing went up. But what happened shortly thereafter, in 1991, 
working with this committee in 1992, we delinked them in the 
legislation dealing with pharmaceutical pricing. As a result, 
VA pricing came down and we have been the beneficiaries of the 
work of this committee.
    So our business strategy, not clinical strategy but 
business strategy for managing pharmaceutical benefits within 
the VA is a simple one. Physician buy-in, leveraged national 
contracts are used whenever clinically possible in contracting 
for high-volume, high-cost pharmaceuticals.
    I mentioned that our utilization and expenditures has 
increased. In 1990, we were writing 56 million 30-day 
equivalent prescriptions. In 2001, we are up to 160 million 30-
day equivalent prescriptions. So you can see the dramatic 
increase in the number of people who have come to us seeking 
the pharmaceutical benefit and also the care associated with 
    The reasons for the increased utilization? 700,000 
additional veterans have come to us in the past 5 years. VA's 
shift from inpatient care to outpatient care, along with more 
aggressive therapy for common diseases among the VA population, 
medical inflation, and the introduction of new, more effective 
drug products, as well as brand products tending to be of 
higher cost than the generic products have all led to increased 
    Deterrent to the question you raised, Mr. Chairman, about 
the lack of a Medicare benefit on VA expenditures, the short 
answer is, yes, it has had an impact. Veterans who have dual 
eligibility or even triple eligibility--are Medicare eligible, 
VA eligible, and DoD eligible, will seek the best pharmacy 
package available, and VA clearly has the best program for 
pharmaceuticals. We have a low copayment. We don't have any 
enrollment fee. Therefore, I think veterans just tend to come 
to us.
    Now, if there was a Medicare pharmaceutical benefit, I 
think we would have to see what the nature of that benefit was 
as to whether it would depress demand in the VA. But again, 
ours is a very generous benefit, the way it should be, and the 
question of how much it will depress demand I really believe 
will depend directly on the nature of the benefit that the 
President and the Congress should agree to at some point.
    But we clearly are the recipients, if you will, of that 
workload because they have nowhere else to go. They simply have 
nowhere else to go.
    Let me talk about the copayments. We have proposed an 
increase in the copayment from $2 to $7 as Congress gave us the 
authority in the millennium health care legislation. The 
copayment hasn't been raised since 1990, when it was 
established at $2, and during the same period of time, as I 
have indicated, our pharmaceutical bill has grown over 200 
percent. Those dollars stay with VA. They don't go into the 
general treasury. So the increased collections will allow us to 
buy more pharmaceuticals for our Nation's veterans.
    I will add, however, that I have always believed that an 
increase in the copayment for pharmaceuticals should be looked 
at in conjunction with other copayments that we have. The 
copayment for outpatient care--I believe a $50 copayment for 
basic outpatient care is too high and that should be reduced. I 
am very hesitant to move forward with a copayment for 
pharmaceuticals that doesn't look at the other copayments that 
we charge our Nation's veterans to ensure that they are all 
reasonable and consistent and that they can afford the care 
that we provide.
    So, yes, I do believe it is warranted. The cost alone of 
administering our pharmaceutical benefit is about $7.28. Now, I 
have to question why that is so high. I think we need to bring 
down our administrative costs. But that doesn't take into 
account the $14.50. The average cost of every prescription we 
write is about $14.50, when you look at 160 million 30-day 
prescriptions and a $2.5 billion budget for pharmaceuticals. So 
we are paying $7.28 to administer this program, mail out the 
pharmaceuticals to veterans, and then the $2.5 billion to buy 
the drugs. So it is very, very costly.
    But I do believe the Department needs to look carefully at 
this outpatient visit, $50 to have your blood pressure checked 
or whatever, a basic exam. I think it should be tiered. I think 
preventive health care should be zero, a basic exam around $15 
or $20, in that range, and around $50 for a more complex visit 
that requires perhaps some testing. So I just wanted you to 
know, I am looking at both. I am not trying to say they should 
be linked, but I am very hesitant to go forward after the 
comment period with one without looking at the other.
    Just a quick word on DoD procurement. I think we have made 
great strides between VA and DoD in joint contracting. I have 
always believed that these two procurement systems should be 
consolidated, but not the clinical side of the house. Each 
should maintain their own formularies. But clearly, with 
respect to the procurement and the distribution of 
pharmaceuticals, medical/surgical equipment, and supplies, I 
believe all of us--veterans, military, and taxpayers--would be 
better served if we brought the sheer purchasing power of both 
of those systems under one roof, working jointly, in a joint 
type of command system. I think very, very significant savings 
could accrue, saving dollars that are needed to expand the 
reach of health care.
    With that, I will close, Mr. Chairman, and I will be more 
than happy to try to answer any questions you might have.
    [The prepared statement of Mr. Principi follows:]
 Prepared Statement of Hon. Anthony J. Principi, Secretary, Department 
                          of Veterans Affairs
    Mr. Chairman and Members of the Committee:
    I am pleased to have this opportunity to address the significant 
accomplishments that the Department of Veterans Affairs (VA) has made 
since 1988 towards effective and efficient management of 
    In the 1980's, VA officials recognized the need to direct 
significant attention to the cost and utilization of pharmaceuticals 
within the system. In that decade, several forces converged on VA and 
led us to build an infrastructure that allows VA to successfully manage 
pharmaceutical procurement and delivery. First, the 1980's witnessed a 
steadily increasing prescription workload and expenditures for 
pharmaceuticals. Second, the demand for drugs was infinite in an era of 
finite resources. Third, the tradition and culture in the procurement 
and storage of pharmaceuticals within VA was no longer contemporary.
    VA's pharmacy benefits management initiatives have resulted in 
significant enhancements in the quality, consistency, and cost 
effectiveness of pharmacy services provided to our patients. The 
attached chronology describes significant milestones since 1988.
  veterans health administration's (vha) pharmacy benefits management 
    The mission of VHA's PBM is to enhance the appropriate use of 
pharmaceuticals in the veteran population. The five major core 
functions of the PBM are (1) drug use management, (2) managing the 
distribution of drugs and related services, (3) managing the costs of 
pharmaceuticals, (4) outcomes research, and (5) education.
    The PBM facilitates VHA's National Formulary (VANF) Process through 
the use of a Medical Advisory Panel (MAP) and a committee representing 
each of the 22 Veterans Integrated Service Network (VISN) Formulary 
Committees. The MAP is composed of field-based practicing VA 
physicians, one Department of Defense physician, and a senior physician 
from VHA's Office of Quality and Performance. These two groups are the 
primary decision-makers concerning the drugs listed on the VANF and are 
also responsible for identifying and fostering the development of 
pharmacologic treatment guidelines that reflect best practices 
associated with treating a particular disease state and the 
dissemination of that information.
    The business strategy for managing pharmacy benefits within VA is a 
simple one. Leveraged national contracts are used whenever clinically 
possible in contracting for high-volume, high-cost pharmaceuticals. The 
process is clinically driven with a goal of standardization of product. 
The process is grass-roots in nature, is driven from the clinicians in 
the field, employs evidenced-based drug class reviews (including data 
in the VA population where it exists), and involves evaluating products 
and groups of products based on efficacy, outcomes, safety, compliance, 
VA patient needs, and pharmacy factors. VA has been very successful in 
these types of contracts and other similar contracting strategies. From 
1996 through February 2001, VA officials estimate $540 million in 
accumulated cost-avoidance from such contracts. As explained elsewhere 
in this statement, the average unit cost of outpatient prescriptions is 
not the key driver of increased expenditures. VA drug cost and 
utilization data show that the average cost per 30-day equivalent 
prescription in July 1999 was $12.68, increasing to only $13.48 in 
January 2001. An increased number of patients treated and the increased 
utilization of pharmaceuticals are the primary drivers of increased 
Utilization & Expenditures:
    Outpatient prescription workload increased from 56 million 
prescriptions in FY 1990 to an estimated 100 million prescriptions in 
FY 2001. While the 56 million figure for FY 1990 is predominantly 30-
day quantities, the 100 million figure for FY 2001 represents multi-
month prescriptions, which actually equate to approximately 160 million 
30-day prescriptions. Thus, over 11 years, the number of 30-day 
equivalent prescriptions has increased by almost 200 percent.
    Expenditures for pharmaceuticals for both outpatients and 
inpatients have increased from $715 million in FY 1990 to an estimated 
$2.5 billion in FY 2001. As a percent of VA's medical care 
appropriation, pharmaceuticals expenditures averaged 6 percent from FY 
1980 through FY 1995. Beginning in 1996, the percent has increased each 
year and will represent approximately 12.5 percent of the medical care 
appropriation in FY 2001. These percentages are less than those seen in 
health care organizations in the private sector even though the 
pharmacy benefit in VA is generally broader in scope than is the 
pharmacy benefit in most private sector plans.
    The reasons for the increased utilization of pharmaceuticals in VA 
include an increased number of patients served by VA (700,000 more 
patients in FY 2000 than in the four prior years); a shift from 
treating patients in the acute care setting of the hospital to 
ambulatory care with a focus on disease prevention and amelioration; 
more aggressive therapy for common diseases among the VA population 
(e.g., hyperlipidemia and diabetes); medical inflation; and the 
introduction of new and more effective drug products. More patients 
treated and the introduction of new drug products stand considerably 
above the other drivers as reasons for increased pharmaceutical 
utilization and expenditures.
    One example of the impact of a new therapy on VA expenditures is 
the drug imatinib (Gleevec). Imatinib is used in the 
treatment of Chronic Myeloid Leukemia (CML), which can occur at any 
age, but which more commonly affects middle-aged and older individuals. 
We have determined that there are currently 160 patients with this 
diagnosis enrolled in the VA healthcare system who potentially could be 
prescribed this medication. The estimated annual cost of treatment for 
patients receiving this therapy is between $20,000 and $30,000. Due to 
the high cost of the annual therapy, we plan to track the number of new 
patients who are being treated with this drug. In the absence of a 
Medicare drug benefit, eligible veterans over age 65 with a diagnosis 
of CML who have never accessed VA for medical care could be highly 
motivated to enroll in the VA health care system solely as a means to 
gain affordable access to imatinib.
Lack of Medicare Benefit and Impact on VA Expenditures:
    While it is difficult to quantify the impact on increased 
utilization and related expenditures for pharmaceuticals due to the 
lack of a Medicare drug benefit, VA staff report anecdotal cases where 
dual eligible veterans have chosen to access VA for the drug benefit 
that is a part of our overall health care system. A portion of these 
veterans indicate a desire to have VA serve as a pharmacy only. We do 
not believe that VA should only provide pharmacy services, nor do we 
believe Congress, in enacting provisions of title 38, contemplated that 
VA act only as a pharmacy. We believe that when such veterans become 
aware of the positive patient outcomes associated with VA's continuum 
of care delivery model and the safety and health risks inherent in a 
fragmented pharmacy-only benefit, they will want their care coordinated 
and managed by VA health providers. From a financial and clinical 
perspective, the important lesson learned from VA's experiences 
concerning pharmaceuticals is that effectiveness and efficiency can be 
achieved when the providers who treat patients are actively involved in 
formulary decisions; best clinical practices are employed; and volume-
based and committed-use contracting are used when clinically feasible.
VA/DoD Joint Pharmaceutical Activities:
    As of July 2001, VA and DoD have 46 Joint National Contracts, three 
Joint Blanket Purchase Agreements, 23 pending, and 29 proposed joint 
contracts. Additionally, VA currently has 52 unilateral contracts and 
DOD has six. Some of these contracts are for high volume/high dollar 
items and will be considered for joint contracting as they expire. VA 
and DOD have built the necessary clinical and logistic infrastructure 
to support ongoing joint contracting activities that will benefit 
taxpayers and most importantly, our nations veterans, active duty and 
dependent personnel. VA is committed to the goal of leveraging VA and 
DoD purchasing power whenever clinically feasible.
Pharmaceutical Copayment:
    The proposed increase to the medication co-payment was initiated 
after passage of Public Law 106-117, The Veterans Millennium Health 
Care Act. This law gave the Secretary of the Department of Veterans 
Affairs the authority to increase the medication co-payment amount. VA 
has proposed to increase the co-payment amount from $2.00 to $7.00 per 
30-day prescription supply with an annual cap of $840.00 for priority 2 
through 6 veterans. The proposed regulation was published in the 
Federal Register on July 16, 200, for the initial 60-day public comment 
period. We believe that the proposed medication co-payment is 
reasonable when compared to most medication co-payments levied in the 
private health care industry.
    Mr. Chairman, VA has many lessons to share in the area of drug 
contracting, drug utilization management, drug distribution and 
achieving positive outcomes from drug therapy. While significant 
milestones have been reached in achieving cost avoidance through 
contracting activities within VA and jointly with DOD, even greater 
cost avoidance has been achieved by identifying and encouraging best 
practices, developing and promulgating drug treatment guidelines and 
through recognizing the value of pharmaceuticals in the treatment of 
disease. It is gratifying to know that our cost avoidance efforts have 
been accomplished while improving the consistency of drug therapy 
across the VA health care system. As a result of our clinically driven, 
cost avoidance efforts, VA has been able to partially offset the cost 
of providing care to the large number of veterans enrolled in the VA 
health care system.
    In closing, one example illustrates our efforts to date. 
Specifically, the use of atypical anti-psychotics in treating mental 
health conditions has resulted in significant utilization and 
expenditures for these products. However, a significant number of 
veterans receiving treatment with these products lead productive lives, 
contribute to society by holding jobs, and experience fewer visits and 
hospital stays due to their underlying condition. The number of VA 
patients treated with atypical anti-psychotics has doubled from 35,000 
in October 1998 to approximately 70,000 in March 2001. The number of 
prescriptions dispensed for atypical anti-psychotics has increased from 
700,000 in FY 1999 to a level of 1.1 million annually in FY 2001.
    I am also pleased to report that VA mental health professionals are 
contributing to providing quality medical care at an affordable price 
in those instances where no medical consensus or evidence exists that 
one product has more clinical value than another. While prescribing 
decisions are made by VA psychiatrists based on individual patients' 
clinical needs, history of medication response and potential 
vulnerability to side effects, they do so with an eye towards cost-
effective therapy. VA's psychiatrists clearly recognize not only their 
commitment to patients and patient care, but also to their ethical 
mandate to recommend/prescribe the most cost-effective treatments, 
considering that some patients will respond to relatively less costly 
drugs, while others will require more costly drugs. Reliance on less 
costly drugs whenever practical frees up scarce resources, which can 
then be used when more costly therapy is necessary.
    I recently shared with you my concern that responsible prescribing 
guidelines for atypical anti-psychotics developed by VA practitioners 
were being mischaracterized as a barrier that would prevent physicians 
from prescribing drugs they believe will best meet patients' clinical 
needs. Opponents of VA's guidelines have unfairly portrayed them as 
preventing physicians from prescribing drugs they believe will best 
meet patients' clinical needs, i.e., they have referred to the 
guideline as a ``fail-first policy''. VA does not have a fail-first 
policy. Any inference that one exists is simply untrue. VA physicians 
are free to prescribe any medication included on the VA formulary. What 
is being inaccurately described as a fail-first policy is nothing more 
or less than sound, cost-effective, clinical decision-making, with a 
mechanism for beginning treatment with an effective, less expensive 
    Mr. Chairman, I believe VA is in the forefront of health care 
providers in integrating the provision of pharmaceuticals in its 
patient treatment programs. By placing first priority on patient needs; 
by emphasizing disease prevention; by implementing best clinical 
practices; by assessing validated evidence of a pharmaceutical 
product's effectiveness; and by employing national procurement 
strategies whenever clinically possible--VA is providing high quality 
care and doing so in a cost effective manner. We are proud of our 
successes and the contributions these efforts are making to the 
Nation's understanding of health care delivery.
    This completes my statement. I will be happy to respond to 
questions from the Committee.
   Attachment--Chronology of Significant Accomplishments in Pharmacy 
                  Benefits Management 1988 to present
    1988--National IV Solution Contract, VA's first large 
standardization contract.
    1989--Establishment of Veterans Health Administration (VHA) liaison 
with VA's National Acquisition Center.
    1990--Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) linked 
VA pricing to the best prices paid in the Medicaid program.
    1991--VHA established Drug and Pharmaceutical Product Management 
Working Group. VA developed the concept of Federal Pharmacy as it 
related to service delivery and contracting for pharmaceuticals.
    1992--Passage of Public Law 102-585, sections 601, 602, and 603 of 
which addressed the higher prices paid by VA and other government 
buyers as a result of OBRA '90. VA began the Consolidated Mail 
Outpatient Pharmacy (CMOP) pilot program.
    1993--Full conversion to the Pharmaceutical Prime Vendor drug 
distribution system.
    1994--Accelerating change: commitment of the USH as described in 
the Vision for Change. Full activation of VA's first automated CMOP 
    1995--Establishment of VHA's Pharmacy Benefits Management Strategic 
Healthcare Group.
    1996--Commercial Practice Initiative for National Contracts. Drug 
Treatment Guidelines in development.
    1997--Implementation of VA's National Formulary Process. Additional 
drug treatment guidelines developed.
    1998--VA/DOD Joint Procurement Activities. Establishment of the 
Federal Pharmacy Executive Steering Committee (FPESC). PBM database 
links prescription utilization to patients and providers. Enhanced PBM 
    1999--PBM received an award as a Finalist in the annual Rochester 
Institute of Technology/USA Today Quality Cup Competition for its 
overall contribution to quality movement. GAO published study ``VA 
HEALTHCARE: VA's Management of Drugs on Its National Formulary,'' GAO/
    2000--Institute of Medicine Report analyzes the VA National 
Formulary process (``Description and Analysis of the VA National 
    2001--Data mining capability of the PBM's national utilization 
database made available to all VISNs. GAO reports validate the VA 
National Formulary Process (``VA DRUG FORMULARY: Better Oversight Is 
Required, but Veterans Are Getting Needed Drugs,'' GAO-01-183; ``DOD 
and VA Pharmacy: Progress and Remaining Challenges in Jointly Buying 
and Mailing Out Drugs,'' GAO-01-588).
Response to Written Questions Submitted by Hon. John D. Rockefeller IV 
                         to Anthony J. Principi
    Question 1. It's clear how VA's increase to $7 for the drug co-
payment is being justified, when compared with benefits offered by 
private sector health plans. However, while $7 per prescription is less 
than what most Americans pay for their medications, the increase will 
certainly cause a hardship for many veterans. Were other amounts--or a 
sliding scale--considered? On what basis was the determination made to 
set the co-payment at $7?
    Answer. A work group within the Veterans Health Administration 
reviewed the co-payment structure for medication co-payments. The work 
group engaged the services of a contractor to perform a literature 
search on co-payments charged by the private sector. A review of the 
literature from 1996 showed that 96 percent of health maintenance 
organization (HMO) enrollees have a prescription co-payment ranging 
from $5 to $10 per prescription. The work group requested an update of 
these data, and the 2000 information showed that co-payment amounts 
were now ranging from $10-$15. This was due in part to new cost-sharing 
product designs and the rising cost of health care in general.
    Based on a review of industry standards, VA believes that the 
medication co-payment should be increased from $2 to $7. The $7 
medication co-payment is lower than or equal to most medication co-
payments charged by the private health care industry. The co-payment 
amount is a reasonable amount for the majority of medications 
dispensed. VA does recognize that veterans in certain priority groups 
may be in need of multiple medications. To try to minimize their out-
of-pocket expenses, VA is implementing an annual cap of $840 for 
veterans in priority groups 2-6. When the annual cap is met, the 
veteran will not be charged medication co-payments until the beginning 
of the next calendar year. VA is not implementing an annual cap for 
veterans enrolled in priority group 7. The final regulations for the 
medication co-payment were printed in the Federal Register on December 
6, 2001. The increase in the medication co-payment amount and the 
annual cap will be implemented on February 4, 2002.
    Question 2. The published regulation on the copayment increase 
states that VA incurs an average cost of more than $7 dollars to fill a 
prescription--and that's just the administrative cost of dispensing the 
prescription to the veteran, not the medication itself. States' 
dispensing fees under Medicaid average between $4 and $5, and they are 
even lower in the private sector. Why are VA's dispensing costs so high 
in comparison?
    Answer. The State dispensing fees cited above are payments made by 
State Medicaid programs to participating pharmacies and have never 
covered the actual dispensing costs of a prescription. There have been 
numerous lobbying efforts by State Pharmaceutical Associations to raise 
these dispensing fees to cover the actual cost of dispensing a 
prescription. Nationally, the American Pharmaceutical Association, the 
National Association of Chain Drugstores, and other associations also 
continue to lobby for changes.
    The $7.28 dispensing cost reported by VA for FY 2001 represents the 
personnel time to procure the drug, inventory costs, overhead such as 
lighting and maintenance, management and oversight, depreciation of 
equipment, and the pharmacist's time to actually dispense and consult 
with the patient. The cost of the drugs purchased by VA represents the 
actual purchase price and not the discounted AWP (average wholesale 
price) VA would have to pay if it purchased prescriptions through an 
insurance mechanism. Prescriptions provided in that manner would be 
substantially higher in cost than prescriptions provided directly by VA 
    Question 3. Congress authorized VA to increase the drug copayment 
and decrease the outpatient copayment from $50 to a more reasonable 
amount. Congress was quite clear about this, even recommending that VA 
not set a single copayment rate for outpatient care, but instead 
consider practices within the health care industry to differentiate 
between primary care and specialty clinic visits. While VA has produced 
the drug copayment regulations, the regulations on the outpatient 
copayment have not yet been published. Why weren't these copayment 
changes made concurrently?
    Answer. Interim final regulations to implement changes to the 
outpatient co-payment were published in the Federal Register on 
December 6, 2001, and were effective immediately. A three-tiered co-
payment structure is being implemented. The co-payment amount will be 
based upon the level of service provided (i.e., primary care versus 
specialty care). Even though the medication co-payment is being 
increased, VA believes that the reduced outpatient co-payment will 
partially offset this increased expense for our patients.
    Question 4. VA's decision to enroll category 7 veterans is made at 
the beginning of each fiscal year. What is your current thinking on 
cutting off enrollment for new Category 7 veterans?
    Answer. The Administration has determined to continue enrolling 
veterans in all priority groups during FY 2002.
    Question 5. Again and again, as the Committee addresses VA health 
care issues, the devolution of power to the health networks becomes a 
focal point. Problems with a lack of national oversight in the area of 
quality management and specialized services have already been 
highlighted. And the Institute of Medicine's (IOM) testimony 
recommended that the formulary structure should be ``recalibrated 
towards a more uniform national approach'' so as to cease further 
inequities in the local formularies.
    Please share your thoughts on the network structure generally and 
on the IOM recommendation specifically.
    Answer. The Veterans Integrated Service Network (VISN) structure 
was created in 1995. It integrates decentralization of daily operations 
with the opportunity to better align resources with local needs and 
improve service delivery. Nonetheless, given this flexibility to 
address local needs, other mechanisms assure that requirements of vital 
national programs are addressed equitably across the system. National 
Performance Measures and Monitors are developed to address such health 
care issues as patient safety, clinical practice guidelines, special 
emphasis programs (prosthetics, Spinal Cord Injury, etc.) and waiting 
times, to name just a few. The measures and monitors have identified 
goals and are clearly communicated to all networks at the beginning of 
each fiscal year. Furthermore a national committee reviews the measures 
and monitors on an annual basis to modify, add, or delete elements to 
assure that important health care issues are addressed and current.
    VA concurs with the recommendation of the IOM concerning a 
recalibration towards a more uniform approach to formulary management. 
With over 90 percent of all outpatient prescriptions written for items 
listed on the VA National Formulary (VANF), VA has made considerable 
progress since the inception of the VANF process in 1997. Prior to 
1997, the rate of variation across the formularies of the local VA 
medical facilities was much greater than in the current environment. 
While much progress has been made, VA will continue to refine the VANF 
process by directing that local formularies will no longer be 
authorized under the new VAN F policy directive. In addition, the new 
directive will outline specific procedures for adding new drugs to the 
VANF so that the potential for inter-VISN variation is greatly reduced. 
These policy changes and other changes concerning the consistent 
provision of prescribed medications for patients who relocate from one 
region of the country to another and new requirements for access to 
non-formulary drugs will help to reduce variability and ensure 
continuity of therapy for VA patients.

    Chairman Rockefeller. In looking at my witness list here, 
Mr. Griffin, you were going to make some comments, also, were 
you not?
    Mr. Griffin. Yes, that is correct.
    Chairman Rockefeller. We look forward to those.


    Mr. Griffin. Mr. Chairman and members of the committee, I 
am here today to report on our audit of the Veterans Health 
Administration restrictions on filling privately written 
prescriptions. This issue was addressed in our audit report 
issued on December 20 of 2000.
    Full implementation of our recommended actions would 
provide the Department of Veterans Affairs with cost 
efficiencies by streamlining the process of providing privately 
written prescriptions for pharmaceuticals. Efficiencies would 
be gained by eliminating redundant medical examinations that 
cost the Department over $1.3 billion annually and reducing the 
overcrowding of some clinics.
    The Veterans Health Care Eligibility Reform Act of 1996 
required VA to enroll veterans annually according to seven 
priority groups. Once enrolled, all veterans, regardless of 
their priority grouping, have access to all of the health 
services in VA's basic medical benefits package, which includes 
prescription drugs and supplies.
    Priority group seven is comprised of veterans without 
compensable service-connected disabilities and with incomes 
above prescribed limits. These veterans are subject to a $2 
copayment for each 30-day supply of prescribed medications 
obtained from VA. Use of VA's prescription drug benefit 
provides these veterans with the opportunity to obtain 
prescriptions at a significantly lower cost, since their 
private insurance generally excludes this benefit.
    We assessed the extent that priority group seven veterans 
use pharmacy services from VISN 8 medical facilities for the 
sole or primary purpose of filling privately written 
prescriptions. To do so, we identified veterans who had at 
least one visit to a Network 8 facility during fiscal year 1999 
and at least four active prescriptions during that same year. 
We reviewed the records for a sample from this group and found 
that almost 90 percent had access to private non-VA health care 
or there was a clear statement in the medical record that their 
sole or primary reason for using the VA was to have private 
prescriptions filled.
    Based on the case review results, we estimated that in 
fiscal year 1999, 46,866 of the network's 52,570 priority group 
seven veterans had access to private non-VA health care and 
used VA health care services to have private prescriptions 
    VA regulations do not allow VA pharmacies to fill 
prescriptions issued by private physicians, except in limited 
circumstances, such as for veterans who are house-bound or are 
receiving Aid and Attendance benefits from VA. Veterans holding 
privately written prescriptions are scheduled for examinations 
by VHA staff physicians, who routinely duplicate tests that 
were already performed by the patient's private physician. 
Their prescriptions are then filled by the VHA pharmacy if the 
drugs are listed on VA's drug formulary. When not listed in the 
formulary, an alternative is issued in consultation with the 
private physician.
    Indirect costs of validating prescriptions written by 
private physicians include the staff and clinic time associated 
with completing the exams and any clinical tests that might be 
required. We estimated that VISN 8 spent almost $114 million in 
fiscal year 1999 following this process.
    VHA's process also adds to the already overcrowded 
conditions and extended waiting times that exist in some 
clinics. The managers and clinic staff we spoke with during the 
audit acknowledged that a more efficient and streamlined 
process was needed, but they were hampered due to the existing 
VA regulations that require a veteran to be under VA care in 
order to receive prescription drugs.
    We recommended that VA seek the statutory and regulatory 
authority to fill private prescriptions written for enrolled 
veterans and that appropriate quality assurance systems be 
implemented to ensure VA-filled prescriptions were appropriate 
and safe. The Under Secretary for Health deferred a decision 
and indicated that the issue needed to be considered by VHA's 
Leadership Board. At this time, the recommendation remains 
unresolved, pending the outcome of the board's deliberations 
and the Under Secretary's decision.
    This concludes my oral testimony. I would be pleased to 
answer any questions that you and your members might have.
    Chairman Rockefeller. Thank you, Mr. Griffin, very much.
    [The prepared statement of Mr. Griffin follows:]
Prepared Statement of Richard J. Griffin, Inspector General, Department 
                          of Veterans Affairs
    Mr. Chairman and Members of the committee, I am here today to 
report on our audit of the Veterans Health Administration (VHA) 
restrictions on filling privately written prescriptions. On December 
20, 2000 we issued an audit report to the Under Secretary for Health 
identifying opportunities to reduce the costs of providing 
prescriptions to priority group 7 veterans and make additional 
resources available for veterans healthcare.* Full implementation of 
our recommended action would provide the Department of Veterans Affairs 
(VA) with cost efficiencies exceeding $1.3 billion annually.
    * The report, Audit of Veterans Health Administration Pharmacy Co-
Payment Levels And Restrictions On Filling Privately Written 
Prescriptions For Priority Group 7 Veterans, is available on the VA 
Office of Audit web site at http://www.va.gov/oig/52/reports/
maillist.htm: List of Available Reports
    The streamlining of the process of re-writing privately written 
prescriptions for pharmaceuticals would reduce the overcrowding of some 
clinics. Further, many veterans would no longer need to experience the 
frustration of going through the process of scheduling exams and tests 
that frequently duplicates the examinations they received from their 
private physicians. During our audit we found that as many as 90 
percent of the priority group 7 veterans have access to private non-VA 
healthcare and use VA for the sole or primary purpose of filling 
privately written prescriptions.
          priority group 7 use of vha's pharmaceutical benefit
    The ``Veterans Health Care Eligibility Reform Act of 1996'' 
required VA to enroll veterans annually according to seven priority 
groups. Once enrolled, all veterans, regardless of their priority 
grouping, have access to all of the health services described in VA's 
basic Medical Benefits Package, which includes prescription drugs and 
supplies. Priority group 7 is comprised of veterans without compensable 
service-connected disabilities and with incomes above prescribed 
limits. These veterans are subject to a $2 co-payment for each 30-day 
supply of prescribed medications obtained from VA. With the low $2 co-
payment, most of the priority group 7 veterans in the Veterans 
Integrated Service Network (VISN) 8 used VA for the sole or primary 
purpose of filling prescriptions from their private physicians. Use of 
VA's prescription drug benefit provides these veterans with the 
opportunity to obtain prescriptions at a significantly lower cost since 
their private insurance generally excludes this benefit.
    To assess the extent that priority group 7 veterans used pharmacy 
services from VISN 8 medical facilities for the sole or primary purpose 
of filling privately written prescriptions, we identified veterans who 
had at least (i) one visit to a network facility during FY 1999 and 
(ii) four active prescriptions during that same year. We reviewed the 
records for a sample from this group and found that almost 90 percent 
had access to private non-VA health care and/or there was a clear 
statement in the medical record that their sole or primary reason for 
using VA was to have private prescriptions filled.
    Based on the case review results, we estimated in Fiscal Year (FY) 
1999 that 46,866 of the Network's 52,570 priority group 7 veterans had 
access to private non-VA healthcare and used VA healthcare services to 
have private prescriptions filled. We estimated that VHA-wide 361,698 
of the 405,718 priority group 7 veterans used VA health care services 
in FY 1999 to have their private prescriptions filled.
 the process used for filling priority group 7 veterans prescriptions 
              written by private physicians is inefficient
    VA regulations do not allow VA pharmacies to fill prescriptions 
issued by private physicians except in limited circumstances (e.g., for 
veterans who live in Alaska, are housebound or are receiving Aid and 
Attendance benefits from VA). However, we found that veterans holding 
privately written prescriptions are scheduled for medical examinations 
by VHA staff physicians who routinely review and approve the orders of 
the private physicians. These prescriptions are then filled by the VHA 
pharmacy if the drugs are listed in VA's drug formulary. When not 
listed in the formulary, a substitute or alternative is issued in 
consultation with the private physician. We found that the VA's medical 
examinations frequently duplicate tests and procedures that were 
already performed by the patient's private physician and were conducted 
to allow the VA physician to support a prescription that the patient 
had from his or her private physician.
    Indirect costs of re-writing private prescriptions include the 
staff and clinic time associated with completing the medical 
examinations and tests that allow VA physicians to re-issue the 
prescription. We estimated that VISN 8 spent almost $114 million in FY 
1999 following this process. Although some of the costs were recouped 
through billing veterans insurance companies for outpatient visits, the 
exact amount of the recoupment could not be determined because 
inpatient and outpatient collections were not separately identified by 
VHA. We estimated that VHA-wide as much as $1.33 billion would be spent 
in FY 2001 completing medical examinations and tests.
    In addition to the costs of performing the necessary examinations 
and tests needed to validate privately written prescriptions, VHA's 
process also adds to the already overcrowded conditions and extended 
waiting times that exist in some clinics. The managers and clinical 
staff we spoke with during the audit acknowledged that a more efficient 
and streamlined process was needed, but they were hampered due to the 
existing VA regulations that required the tests and examinations. We 
recommended that VA seek the statutory and regulatory authority to fill 
private prescriptions written for enrolled veterans and that 
appropriate quality assurance systems be implemented to ensure VA-
filled prescriptions were appropriate and safe. The Under Secretary for 
Health has indicated that VHA's National Leadership Board will consider 
this issue and deferred agreement with the recommendation. At this time 
the recommendation remains unresolved, pending the outcome of the 
Board's deliberations and the Under Secretary's decision.
    This concludes my testimony. I would be pleased to answer any 
questions that you and the members of the committee may have.

    Chairman Rockefeller. At a 1999 hearing, the then-Under 
Secretary for Health was asked if there was any indication that 
Medicare-eligible veterans were turning to the VA for 
prescription drugs, and at that time, 2 years ago, he answered, 
``I can't quantify it in precise dollars, but it is a generally 
recognized phenomena that it is occurring across the country 
and for very understandable reasons.'' He went on to say, ``I 
would expect that it is in the hundreds of millions of dollars 
in terms of range.''
    Mr. Secretary and Mr. Griffin, how would you update that, 
or Dr. Garthwaite, whoever.
    Dr. Garthwaite. I don't think we have any disagreement with 
Mr. Griffin's study, although I think VISN 8 is a tough one to 
extrapolate for the rest of the United States because of the 
rapidity of growth that we have seen in the number of veterans 
accessing the system down there. There are, I think, 40,000 new 
unique patients coming in just this year.
    Our challenge has been that we believe we are not allowed 
to just simply fill prescriptions and so we have tried to stay 
out of the pharmacy business. We also don't want to be 
competing against private pharmacies. We don't think that is 
our function, either. And we also believe we need to coordinate 
the care and concur with the prescriptions that these patients 
get from their non-VA providers. We do, however, believe 
strongly that the lack of coordination of benefits amongst the 
various Federal and private systems causes patients to 
experience a fair amount of confusion. The fact that they seek 
care from us is, as you said, totally understandable.
    Chairman Rockefeller. Which leads directly to my next 
question. If the VA were authorized to provide pharmaceuticals 
that had been prescribed by non-VA doctors, what do you think 
would be the condition and situation of the Department of 
Veterans Affairs 5 to 8 years from now?
    Mr. Principi. I believe that cost would dramatically rise. 
Obviously, I think a great many more veterans would come to the 
VA just to have their prescriptions filled, especially with our 
very efficient consolidated mail-out pharmacy program. You 
don't have to drive 100 miles to a VA medical center and wait 
for hours to have a prescription filled anymore. You can go 
once, and hopefully now with all the outpatient clinics close 
by they are very readily accessible, and get the first 
prescription filled locally, and then from that point on, they 
are mailed to your home. So I think it would increase it 
    But what concerns me more is that we have been effective in 
establishing a national formulary. I don't know how you would 
manage that if every provider or physician in America could 
write a prescription that would be filled by the VA and how you 
would manage how they would know what is on our national 
formulary. I think it would be a management challenge to 
control the formulary.
    Chairman Rockefeller. There would be some concern whether 
or not the VA would become a pharmacy?
    Mr. Principi. Well, we would become a pharmacy.
    Chairman Rockefeller. Yes.
    Mr. Principi. I don't think there is any question about it. 
I understand the sentiment from where the Inspector General is 
coming from. I just think it would be very, very difficult to 
manage and that we would, in fact, become a pharmacy.
    Mr. Griffin. Mr. Rockefeller, if I may----
    Chairman Rockefeller. Yes, sir?
    Mr. Griffin. If a person goes to Johns Hopkins and gets a 
prescription, they are free to take that to any pharmacy they 
want to go to and that pharmacist does not have another doctor 
validate that prescription. What we projected here on a 
national basis is $1.3 billion worth of medical care that is 
being spent, if you will, for this purpose which could be 
utilized to address more serious problems of other veterans.
    We are not supporting the concept of the VA as a pharmacy. 
What our report addresses is priority seven veterans and 
whether or not it makes sense to redo those examinations that 
are done by another doctor at the expense of other things that 
those health care providers could be doing.
    Chairman Rockefeller. And I understand that, and I thank 
you, sir.
    Just one more question before my time expires. 
Pharmaceuticals are very expensive no matter what, and getting 
more so. I would suppose so. It will be very interesting to see 
what we do in the non-VA prescription drug cost containment 
area. It is very controversial.
    But I know one of the things that you have been very good 
at in the VA is contracts for generic drugs. What is important 
about that is it is not just the lower cost that is important, 
it is also the quality that is important and we have to keep 
bearing that in mind.
    Now, I understand that for some time now, the VA has been 
attempting to contract for Clozapine, which is used to treat 
schizophrenia. Apparently, there appear to be delays related to 
protests which, understandably and predictably, come from those 
who don't want to see a generic used. I am concerned, however--
and that is not the VA's fault. The VA has nothing to do with 
that. But I am concerned that the VA may inadvertently be 
exacerbating the delay--I am not sure of that, but I am 
interested in that--even after protests are denied, by 
beginning the negotiations all over again. In other words, the 
VA starts the system up again. This question may be for the IG.
    My question is, No. 1, what is the reason, unless it is too 
specific a question, for the delay, and almost regardless of 
your answer, I would like to be able to get a white paper of 
some sort on that particular problem, because it foretells the 
    Mr. Ogden. This is a good example where protests, and I am 
not a contracting officer nor am I a contracting attorney, but 
this is a good example where the Federal procurement 
regulations can be used against us, so to speak. Your comment, 
Senator Rockefeller, about the possibility that we in VA might 
be not in favor, if you will, of a generic contract in the area 
of clozapine, I can tell you that, as you well know, our system 
is based on the use of generic drugs, and if we could use a 
generic clozapine, we would use it and we would have awarded 
the contract by now.
    But during the process of developing the contract 
solicitation and through the last couple of years, there have 
been a number of protests, but there has also been some 
evidence presented that the conversion from the branded 
product, a generic clozapine in some cases hasn't been 
successful. So our mental health professionals who work with us 
in evaluating this solicitation were a little hesitant to move 
forward at a point in time, but notwithstanding that, that is 
the primary reason, if you want to describe that we were not in 
favor of a generic, that is the primary reason. But we will 
award the generic contract if and when the General Accounting 
Office denies this latest protest, and assuming we don't have 
any other protests in the near future.
    Chairman Rockefeller. OK. If I could get something in 
writing on that, I would appreciate it very much.
    Senator Specter?
    Senator Specter. Thank you, Mr. Chairman.
    Mr. Secretary, financing prescription drugs is very costly. 
I need to ask you many questions but there is such a limited 
period of time that it may be advisable for you to supplement 
your responses. I am not going to be able to be here for the 
second round. I have other commitments and I will have to 
excuse myself.
    When you talk about the efficiencies of joint contracting 
by DoD and VA, what would be the projection on economies if 
Medicare was put into the mix? Wouldn't it be quite 
    Mr. Principi. I think it would probably increase our costs 
somewhat. I doubt we could sustain the discount levels that we 
receive if Medicare was consolidated with us.
    Senator Specter. Well, why would that be? The 
pharmaceutical companies are not selling to you at a loss at 
the present time, are they?
    Mr. Principi. No, but we get a significant discount. Let me 
ask the head of Pharmacy Service perhaps if he would have any 
estimates on how much we could save, or if not, I will provide 
it for the record.
    Mr. Ogden. If I understand your question correctly, if we 
included Medicare, DoD, and VA under the same umbrella and then 
subsequently went out and acquired contracts, what would be the 
impact, up or down, on the system, on our system, or even the 
DoD system? My sense is that we would see increased pricing for 
the Department of Veterans Affairs and the Department of 
Defense, and the reason I say that is because of past 
experience with OBRA 1990, et cetera, but also the Medicare 
market is huge, potentially huge out there, and a lot of those 
drug dollars, those expenditures for those drugs is already in 
the economy. So what you would in essence be doing would be to 
affect the bottom line of the pharmaceutical industry pretty 
significantly, because right now, the VA and DoD is about 3 
percent of the U.S. market.
    Senator Specter. That might be something that would lend 
itself to a good Congressional investigation, maybe from this 
committee. I know the costs are very high in the Medicare 
community, but it is a matter of straightforward logic that if 
there are greater quantities--the costs of pharmaceuticals are 
a very flexible item. We see all sorts of surprising practices.
    Pharmaceuticals are sold in Canada at a lower cost than 
here, and we have a tremendous controversy about people from 
the border States going into Canada to buy drugs. We have had 
quite a legislative battle on that. We have had the issue of 
pharmaceuticals for AIDS, where the pharmaceutical companies 
have made modifications in their prices.
    And the Medicare community may have, to some extent, a 
differing prescription demand, but I would like you to make a 
study of it, Mr. Ogden and Mr. Secretary, as to the impact, 
because the logic is all in favor of joint contracting. Just as 
you get a lower cost if DoD and VA get together, you ought to 
get a lowest cost if you add a third agency to the mix, 
Medicare. And there is enormous public concern and 
Congressional concern about the cost of pharmaceuticals.
    This all works into a very, very complex question about 
patent rights, and about patent extensions, and about orphan 
drugs--issues the pharmaceutical companies bring to the 
Judiciary Committee all the time. And then there is the issue 
of generic drugs, and the issue which we have talked about 
considerably as to Medicare subvention We have enormous budget 
battles every year about how much Medicare is going to get as 
opposed to how much the veterans are going to get. While it is 
true that we are taking money out of two pockets in the same 
pair of pants, still, those allocations need to be made. VA 
needs Medicare subvention.
    So what I would like to see done is an analysis as to the 
feasibility of the Veterans Administration getting a 
reimbursement from Medicare, which may have a better 
constituency when budget time comes around than we are able to 
get for the veterans. And I would like you to then carry over 
that analysis into pharmaceuticals and see what can be done--
perhaps a little jawboning, anatomically speaking--even a 
little arm twisting over prices when the Federal Government 
gets into prescription drug purchasing in a big way. I think we 
have got to get just a little bit tough here when we are going 
to be putting a lot of money into currency which will benefit 
the pharmaceutical companies.
    And then to throw in one more line--but just one more since 
the red light is now on--I raise the issue of NIH 
subsidization. NIH subsidizing drug companies--enormously, we 
have increased NIH funding from $12 billion to $20.5 billion 
and soon it will be $24 billion. So I think we can look to the 
pharmaceutical companies to pay a little attention to veterans 
and to Medicare and I would like to see us start off to get 
some answers to some pretty pointed questions.
    Mr. Principi. We will provide that for the record.
    [The information referred to follows:]
            Report to Congressional Requesters--August 2000
  PRESCRIPTION DRUGS--Expanding Access to Federal Prices Could Cause 
                 Other Price Changes (GAO/HEHS-00-118)
    AMP  average manufacturer price
    AWP  average wholesale price
    CBO  Congressional Budget Office
    DOD  Department of Defense
    FCP  federal ceiling price
    FSS  federal supply schedule
    GSA  General Services Administration
    HCFA  Health Care Financing Administration
    HMO  health maintenance organization
    HRSA  Health Resources and Services Administration
    OBRA  Omnibus Budget Reconciliation Act of 1990
    NFAMP  nonfederal average manufacturer price
    PHS  Public Health Service
    VA  Department of Veterans Affairs
                                                    August 7, 2000.
The Honorable Tom Bliley,
Committee on Commerce,
House of Representatives.

The Honorable Michael Bilirakis,
Chairman, Subcommittee on Health and Environment,
Committee on Commerce,
House of Representatives.
    Federal departments and agencies can purchase prescription drugs at 
substantial discounts off market prices through the federal supply 
schedule (FSS) for pharmaceuticals. Administered by the Department of 
Veterans Affairs (VA), the FSS for pharmaceuticals is a list of 
products and their prices that are available to federal entities that 
purchase prescription drugs.\1\ During fiscal year 1999, federal 
purchasers spent over $2.75 billion on prescription drugs,\2\ about 
$1.5 billion of which was for drugs purchased from the FSS. Also, 
federal law guarantees substantial drug price discounts to state 
Medicaid programs and specific public health entities that receive 
federal assistance.
    \1\ The FSS may list the same drug in different dosage amounts and 
package sizes. Each listing is considered an individual item or 
    \2\ This total includes all FSS sales to federal purchasers, as 
well as non-FSS sales associated with contracts VA and the Department 
of Defense (DOD) have with drug manufacturers.
    As the Congress considers adding a prescription drug benefit to 
Medicare, there is increased interest in understanding the ways that 
government purchasers have controlled their costs for prescription 
drugs and whether these methods can be used to reduce prescription drug 
costs for Medicare beneficiaries. One proposal before the Congress 
would allow Medicare beneficiaries to purchase drugs from pharmacies at 
the same prices that are available to federal purchasers or state 
Medicaid programs. Because of your Interest in the issue of expanding 
Medicare beneficiaries' access to prescription drugs, you asked us to 
provide you with information on (1) the federal drug price discounts 
available to federal and nonfederal purchasers and the size of those 
discounts, and (2) the potential effects that extending such discounts 
to nonfederal purchasers may have on outpatient drug prices paid by 
federal and nonfederal purchasers.
    To address these issues, we obtained information on the drug 
purchasing methods and prices available to the federal departments and 
agencies that spend the most on prescription drugs--VA, DOD, and the 
Public Health Service (PHS). We also obtained information from the 
Health Care Financing Administration (HCFA) on the rebates state 
Medicaid programs receive through the Medicaid drug rebate program. In 
addition, we contacted officials of the Health Resources and Services 
Administration's (HRSA) Office of Drug Pricing to determine the drug 
price discounts available to public health entities that receive 
federal assistance.\3\ Further, we reviewed several studies relevant to 
the potential impact of expanding the availability of government drug 
price discounts to nonfederal purchasers. We conducted our study 
between December 1999 and June 2000 in accordance with generally 
accepted government auditing standards.
    \3\ The Office of Drug Pricing is now called the Office of Pharmacy 
                            results in brief
    Federal departments and agencies, state Medicaid programs, and 
numerous nonfederal public health entities have access to prescription 
drugs at substantially lower prices than many other purchasers. Federal 
entities can purchase drugs from the FSS at prices that are the same or 
lower than those drug manufacturers charge their most-favored private 
purchasers. Under federal law, drug manufacturers must list their 
brand-name drugs on the FSS to receive reimbursement for drugs covered 
by Medicaid.\4\ Manufacturers must also sell brand-name drugs listed on 
the FSS to four federal purchasers--VA, DOD, PHS, and the Coast Guard--
at a price at least 24 percent lower than the nonfederal average 
manufacturer price (NFAMP), a ceiling price that is lower than the FSS 
price for many drugs.\5\ In addition, VA has obtained some drug prices 
that are even lower than FSS prices through national contracts based on 
a competitive-bid process. On average, these contracts have resulted in 
prices that are about one-third lower than corresponding FSS prices. 
Federal law also specifies that state Medicaid programs and certain 
nonfederal purchasers can receive substantial discounts on prescription 
drug prices. Under the Omnibus Budget Reconciliation Act of 1990 
(OBRA), drug manufacturers must provide rebates to state Medicaid 
programs for their outpatient drugs in exchange for Medicaid 
coverage.\6\ For brand-name drugs, the minimum rebate is 15.1 percent 
of the average manufacturer price (AMP).\7\ During fiscal year 1999, 
the rebates state Medicaid programs collectively received amounted to 
about 19 percent of overall payments for prescription drugs. The Public 
Health Service Act also provides some nonfederal purchasers, such as 
community health centers and certain public hospitals, access to drug 
prices based on Medicaid rebates.
    \4\ See 38 U.S.C. sec. 8126, as added by the Veterans Health Care 
Act of 1992 (P.L. 102-585, sec. 603).
    \5\ The NFAMP is the weighted average price of each single form and 
dosage unit of a drug that is paid to a manufacturer by wholesalers for 
nonfederal purchasers, taking into account any cash discounts or 
similar price reductions.
    \6\ See P.L. 101-508, sec. 4401.
    \7\ The AMP is the weighted average price of each form and dosage 
unit of a drug that is paid to a manufacturer by wholesalers for drugs 
distributed to the retail pharmacy class of trade, taking into account 
cash discounts or similar price reductions. FSS prices and prices 
associated with direct sales to HMOs and hospitals are excluded from 
this calculation.
    Mandating that federal prices for outpatient prescription drugs be 
extended to a large group of purchasers, such as Medicare 
beneficiaries, could lower the prices they pay but raise prices for 
others. Such price changes could occur because drug manufacturers would 
be required to charge beneficiaries and federal purchasers the same 
prices. To protect their revenues, manufacturers could raise prices for 
federal purchasers. Furthermore, because federal prices are generally 
based on prices paid by nonfederal purchasers, manufacturers would have 
to raise prices to these purchasers in order to raise the federal 
prices. In particular, large private purchasers that tend to pay lower 
prices, such as health maintenance organizations (HMO) and other 
insurers, could see their prices rise. While it is not possible to 
predict the extent or timing of any changes in manufacturer pricing 
strategies if Medicare beneficiaries gained access to the same prices 
available to federal purchasers, the experience following 
implementation of a Medicaid rebate suggests that manufacturers would 
adjust prices quickly. The magnitude of these potential effects would 
vary by drug and would depend on a number of factors, including the 
relationship between the specific federal price extended to Medicare 
beneficiaries and the price paid by nonfederal purchasers, as well as 
the number of Medicare beneficiaries with access to the federal price.
    Prescription drug expenditures have increased substantially in 
recent years.\8\ From 1993 to 1998, prescription drug spending grew at 
an average rate of 12.4 percent per year, compared with a 5 percent 
average annual growth rate for health care expenditures overall. As a 
result, prescription drugs account for a growing share of total health 
care spending, rising from 5.6 percent in 1993 to 7.9 percent in 1998. 
This dramatic rise in drug outlays has occurred for a number of 
reasons, including greater utilization of drugs, the substitution of 
higher-priced new drugs for lower-priced existing ones, and more 
direct-to-consumer advertising of drugs by manufacturers.
    \8\ See Prescription Drugs: Increasing Medicare Beneficiary Access 
and Related Implications (GAO/T-HEHS/AIMD-00-100, Feb. 16, 2000). From 
1993 to 1998, national expenditures for prescription drugs grew from 
about $50.6 billion to about $90.6 billion.
    In the face of increasing drug expenditures, large purchasers 
attempt to control their drug costs, in part, by negotiating lower 
prices with manufacturers. Some purchasers deal directly with 
manufacturers while other purchasers have representatives that act on 
their behalf. For example, pharmacy benefit managers negotiate drug 
prices for many HMOs and insurers, while group purchasing organizations 
representing thousands of the nation's hospitals do the same. The 
leverage purchasers bring to negotiations is based largely on their 
ability to increase the volume used of a particular drug through 
mechanisms that influence physicians' prescribing and enrollees' 
purchasing practices. Using these mechanisms, they can offer 
manufacturers a larger volume of sales in exchange for bigger 
    To control which specific drug products they will purchase and the 
volume used, HMOs and other insurers frequently create a formulary. A 
formulary is a list of drugs, grouped by therapeutic class, that a 
purchaser prefers its physicians to prescribe because of the drugs' 
medical value and price. Because there are often similar products 
competing for a share of the market, the greater the purchaser's 
ability to determine which products it will include on its formulary, 
the more leverage the purchaser has to exact lower prices from 
manufacturers.\9\ The purchaser can influence utilization by 
encouraging physicians to prescribe lower-cost formulary drugs over 
both higher-cost formulary and nonformulary drugs. The purchaser may 
also provide financial incentives, such as reduced copayments, to 
encourage its health plan members to request that physicians prescribe 
lower-cost formulary drugs, including generics.\10\
    \9\ Competition can exist between brand-name drugs that are 
therapeutically equivalent, between brand-name drugs and generic 
substitutes, and between generic versions of the same drug. Brand-name 
or innovator drugs generally have a patent on their chemical 
formulation or on their manufacturing process. While under patent 
protection, they are called single-source drugs because only the 
company that holds the patent produces them. After the patent has 
expired, generic copies of the exact chemical formulation usually 
become available and the drugs are then referred to as multiple-source 
    \10\ Because generic drugs are not patented and can be copied by 
different manufacturers, they often face intense competition, which 
usually results in much lower prices than brand-name drugs.
   federal price discounts on prescription drugs are significant for 
                   federal and nonfederal purchasers
    Federal law enables the federal government to use its leverage as a 
large purchaser of prescription drugs to secure some of the lowest 
prices available for pharmaceuticals. Through the FSS and the Medicaid 
rebate programs, manufacturers must provide many of their drugs at 
significantly discounted prices in exchange for having their drugs 
covered by Medicaid. Federal law also sets a ceiling price on FSS 
brand-name drugs purchased by select federal purchasers and extends 
prices based on Medicaid rebates to many public health entities that 
receive federal assistance. In addition, VA has been able to obtain 
some prices even lower than FSS prices through national contracts with 
drug manufacturers that channel utilization to specific products.\11\ 
Table 1 describes various federal drug prices available to federal and 
nonfederal purchasers and their relationship to benchmark prices.
    \11\ VA refers to these as committed-use contracts.

                  Table 1: Pharmaceutical Pricing Terms
                   Price                             Definition
Retail price..............................  The price charged by retail
                                             pharmacies to individuals
                                             without insurance, known as
                                             ``cash-paying'' customers.
Average wholesale price (AWP).............  The average list price that
                                             a manufacturer suggests
                                             wholesalers charge
                                             pharmacies. AWP is
                                             typically less than the
                                             retail price, which will
                                             include the pharmacy's own
                                             price markup. AWP is
                                             referred to as a sticker
                                             price because it is not the
                                             actual price that large
                                             purchasers normally pay.
                                             For example, in a study of
                                             prices paid by retail
                                             pharmacies in 11 states,
                                             the average acquisition
                                             price was 18.3 percent
                                             below AWP.a Discounts for
                                             HMOs and other large
                                             purchasers can be even
                                             greater. AWP information is
                                             publicly available.
AMP.......................................  The average price paid to a
                                             manufacturer by wholesalers
                                             for drugs distributed to
                                             retail pharmacies. FSS
                                             prices and prices
                                             associated with direct
                                             sales to HMOs and hospitals
                                             are excluded. AMP was a
                                             benchmark created by OBRA
                                             in 1990 to use in
                                             determining Medicaid
                                             rebates and is not publicly
                                             available. The
                                             Congressional Budget Office
                                             (CBO) estimated AMP to be
                                             about 20 percent less than
                                             AWP for more than 200 drug
                                             products frequently
                                             purchased by Medicaid
NFAMP.....................................  The average price paid to a
                                             manufacturer by wholesalers
                                             for drugs distributed to
                                             nonfederal purchasers.
                                             NFAMP is not publicly
FSS.......................................  The price available to all
                                             federal purchasers for
                                             drugs listed on the FSS.
                                             FSS prices are intended to
                                             equal or better the prices
                                             manufacturers charge their
                                             ``most-favored'' nonfederal
                                             customers under comparable
                                             terms and conditions.
                                             Because terms and
                                             conditions can vary by
                                             drug, the most-favored
                                             customer price may not be
                                             the lowest price in the
                                             market. FSS prices are
                                             publicly available.
Federal ceiling price (FCP)...............  The maximum price
                                             manufacturers can charge
                                             for FSS-listed brand-name
                                             drugs to VA, DOD, PHS, and
                                             the Coast Guard, even if
                                             the FSS price is higher.
                                             FCP must be at least 24
                                             percent off NFAMP. FCP is
                                             not publicly available.
Medicaid rebate net price.................  The effective outpatient
                                             drug price after
                                             manufacturer rebates to
                                             state Medicaid programs.
                                             The basic rebate on brand-
                                             name drugs is the greater
                                             of 15.1 percent of the AMP
                                             or the difference between
                                             AMP and the lowest or
                                             ``best'' price the
                                             manufacturer charges any
                                             purchaser other than
                                             Medicaid. Rebates for
                                             generic drugs are 11
                                             percent of the AMP. Rebates
                                             are larger for brand-name
                                             drugs whose AMP increases
                                             exceed inflation in the
                                             consumer price index.
                                             Information on rebate
                                             amounts is publicly
                                             available; AMP and best
                                             price are not.
VA national contract price................  The price VA has obtained
                                             through competitive bids
                                             from manufacturers for
                                             select drugs in exchange
                                             for their inclusion on the
                                             VA formulary. Contract
                                             prices are publicly
a See Office of the Inspector General, Medicaid Pharmacy--Actual
  Acquisition Cost of Prescription Drug Products for Brand Name Drugs
  (Washington, D.C.: HHS, Apr. 1997).
b See CBO Papers: How the Medicaid Rebate on Prescription Drugs Affects
  Pricing in the Pharmaceutical Industry (Washington, D.C.: CBO, Jan.
  1996, p. 20).

FSS and Ceiling Prices
    The FSS for pharmaceuticals contains over 17,000 products available 
to federal departments, agencies, institutions, and several other 
entities, such as the District of Columbia, U.S. territorial 
governments, and numerous Native American tribal governments. VA is 
responsible for administering the FSS and is also the schedule's 
largest purchaser--about $1.2 billion in fiscal year 1999, representing 
almost 83 percent of all sales at FSS prices. According to VA, during 
fiscal year 1999, FSS drug sales totaled about $1.5 billion--about 1.1 
percent of domestic pharmaceutical sales.\12\
    \12\ According to IMS America, a private vendor of pharmaceutical 
information, in 1999 the U.S. pharmaceutical market totaled about 
$142.4 billion in sales, including sales to federal and nonfederal 
    Although manufacturers are not required to list their drug products 
on the FSS, they have financial incentives to do so despite the FSSs 
relatively low prices. Manufacturers are required to list their brand-
name products on the FSS if they wish to receive reimbursement for 
their drugs under the Medicaid program. Because Medicaid accounts for 
almost 10 percent of domestic pharmaceutical sales, a manufacturer 
could lose substantial revenues if it did not have access to this 
segment of the market.\13\ Also, because sales under the FSS represent 
only a small segment of the domestic pharmaceutical market, overall 
revenues are not greatly affected by offering these prices to federal 
customers. Furthermore, being on the FSS is significant to 
manufacturers because it enhances the likelihood that their products 
will be used in VA hospitals, where many of the nations' physicians 
receive part of their medical training.\14\
    \13\ According to HCFA, Medicaid payments minus rebates for 
prescription drugs for fiscal year 1999 totaled about $13.7 billion. 
This figure may slightly overstate the actual market represented by 
Medicaid sales because Medicaid payments to pharmacies may be greater 
than the actual amounts pharmacies pay for drugs.
    \14\ For further discussion of the FSS and how FSS prices are 
determined, see Drug Prices: Effects of Opening Federal Supply Schedule 
for Pharmaceuticals Are Uncertain (GAO/HEHS-97-60, June 11, 1997).
    FSS prices are based on the prices that drug manufacturers charge 
their ``most-favored'' private customers. Specifically, under General 
Services Administration (GSA) procurement regulations, the FSS price is 
intended to equal or better the price that the manufacturer offers its 
most-favored nonfederal customer under comparable terms and 
conditions.\15\ To help VA determine the most-favored customer price, 
manufacturers are required to provide VA information on price discounts 
and rebates offered to domestic customers and the terms and conditions 
involved, such as length of contract periods and ordering and delivery 
practices. GSA regulations recognize that because the terms and 
conditions of commercial sales vary, there may be legitimate reasons 
why the government does not always obtain the most-favored customer 
price. Hence, under the regulations, VA may accept a higher price if it 
determines that (1) the price offered to the government is fair and 
reasonable, and (2) awarding the contract is otherwise in the best 
interest of the government.
    \15\ See 48 C.F.R. sec. 538.270.
    VA and several other purchasers may actually pay a lower price than 
the listed FSS price for many drugs, under a provision of the Veterans 
Health Care Act of 1992.\16\ Specifically, in exchange for having their 
drugs covered by Medicaid, manufacturers must sell their brand-name 
drugs on the FSS to four federal purchasers--VA, DOD, PHS, and the 
Coast Guard--at a price that is no higher than 76 percent of the 
nonfederal average manufacturer price, known as the ``federal ceiling 
price'' or FCP. The FSS price for these drugs for other federal 
purchasers may be higher than this ceiling.
    \16\ See P.L. 102-585, sec. 603, codified at 38 U.S.C., sec. 8126. 
The provision covers innovator multiple-source drugs, insulin, and 
biological products such as vaccines and antitoxins. The provision does 
not cover noninnovator multiple-source or generic drugs.
    Most drug products covered under the Veterans Health Care Act have 
FSS prices that are slightly above their FCP. As of February 2000, the 
FSS prices for products covered under the act were, on average, almost 
8 percent above the FCR About 63 percent of the almost 6,300 products 
covered under the act \17\ had FSS prices that were above the FCP.\18\ 
For these products, the four purchasers protected under the act would 
pay only the FCP. About 14 percent of the products covered under the 
act had FSS prices equal to the FCP, and 23 percent had FSS prices that 
were below the FCP. When the FSS price was lower than the ceiling, it 
averaged almost 6 percent below the FCP.
    \17\ As of February 14, 2000, the FSS included 17,464 drug 
products; 6,274 were covered under the Veterans Health Care Act and 
11,190 were not covered. Noncovered products are generally generic 
drugs. VA estimates that about 70 percent of its drug expenditures for 
fiscal year 1999 were for drugs covered under the Act.
    \18\ About 69 percent of the covered drugs with FSS prices above 
the FCP had FSS prices that were only 1 percent or less above the 
    FSS prices can also be well below the average wholesale prices that 
manufacturers suggest wholesalers charge retail pharmacies.\19\ Recent 
FSS prices for 10 drugs commonly prescribed for the elderly were 
considerably lower than AWP (see table 2).
    \19\ Because AWP reflects prices charged the retail level of trade, 
it is typically higher than average manufacturer prices--AMP and 
NFAMP--which are charged at the wholesale level.

            Table 2: Prices for Select Prescription Drugs Commonly Used by the Elderly, February 2000
                                                                                                     between AWP
              Brand-name drug                   Therapeutic category         AWP a        FSS b        and FSS
                                                                           (dollars)    (dollars)      prices
Lanoxin...................................  Cardiac glycoside...........       $20.51       $10.05            51
Norvasc...................................  Calcium channel blocker            122.86        61.27            50
                                             (high blood pressure).
K-Dur 20..................................  Potassium replacement.......        49.98        23.73            53
Lipitor...................................  Cholesterol-lowering........       169.08       102.28            40
Lanoxin (different strength)..............  Cardiac glycoside...........        20.51        10.20            50
Prilosec..................................  Gastrointestinal............       119.57        58.73            51
Pepcid....................................  Gastrointestinal............        53.13        18.39            65
Glucophage................................  Oral antidiabetic...........        64.62        30.60            53
Fosamax...................................  Osteoporosis................        60.89        33.74            45
Synthrold.................................  Thyroid.....................        30.84        20.91            32
Note: These are the 10 most frequently prescribed drugs in the Pennsylvania Pharmaceutical Assistance Contract
  for the Elderly in 1999. Several of these drugs have generic versions.
a Medical Economics Company, Red Book February 2000 Update, vol. 19, no. 2 (Feb. 2000).
b Department of Veterans Affairs, Pharmacy Benefits Management Strategic Healthcare Group, http://www.vapbm.org
  (cited Feb. 14, 2000).

Prices Related to Medicaid Rebates
    Many entities that receive federal assistance also obtain 
significant drug discounts through federal laws. The most notable are 
state Medicaid programs, which receive discounts in the form of 
rebates. Under OBRA, as amended, drug manufacturers must provide all 
state Medicaid programs a rebate on outpatient prescription drugs in 
order to have them covered by Medicaid.\20\ For all brand-name 
products, the rebate is the greater of either 15.1 percent of AMP, or 
100 percent of the difference between the AMP and the manufacturer's 
best price. The best price is essentially the lowest price offered any 
domestic purchaser other than state Medicaid programs.\21\ Rebates for 
generic and over-the-counter drugs must be at least 11 percent of AMP. 
To protect against substantial price increases, an additional rebate is 
required for a brand-name product if its AMP increases more than the 
consumer price index, a measure of overall inflation. During fiscal 
year 1991, state Medicaid programs paid about $ 5.4 billion to 
pharmacies for prescription drugs and received about $553 million in 
rebates from manufacturers. By fiscal year 1999, drug payments had 
reached about $17 billion, with rebates in excess of $3.3 billion.\22\
    \20\ Rather than directly purchasing drugs, Medicaid reimburses 
pharmacies for drugs purchased by Medicaid beneficiaries. Based on a 
formula set by the state, pharmacies are reimbursed an amount to cover 
a drug product's ingredient cost, subject to HCFA upper limits, plus a 
dispensing fee.
    \21\ Some prices are excluded in the determination of best price, 
such as FSS prices, prices charged entities covered under the Veterans 
Health Care Act, prices to state pharmaceutical assistance programs, 
prices that are nominal in amount, and single-award contract prices 
charged any federal agency.
    \22\ Rebates in the earlier years of the rebate program were based 
on a different percentage of AMP. Also, according to HCFA officials, 
payments for fiscal year 1999 may be understated because states do not 
typically submit all payment data to HCFA by the end of the fiscal 
    Since 1992, federal law has also required drug manufacturers to 
offer certain nonfederal entities access to outpatient drugs at 
discounted prices as a condition for Medicaid coverage of their 
outpatient drugs.\23\ Specifically, under Section 340B of the Public 
Health Service Act,\24\ manufacturers must provide covered entities 
such drugs at or below a price equal to AMP reduced by the applicable 
Medicaid rebate percentage.\25\ Entities eligible for the price 
discount include hospitals that serve a disproportionate share of 
Medicaid recipients; community health centers; and health centers that 
serve migrant, homeless, public housing, and Native American 
populations.\26\ A recent study estimates that, during fiscal year 
1997, 1,075 entities purchased outpatient drugs at these discounts with 
a total net purchase amount between $893 million and $1.2 billion.\27\
    \23\ See Office of Drug Pricing, The Drug Pricing Program 
Established by Section 340B of the Public Health Service Act: 
Information Document (Washington, D.C., Feb. 1999). The Office of Drug 
Pricing (now called the Office of Pharmacy Affairs), which is within 
HRSAs Bureau of Primary Health Care, is responsible for administering 
the Section 340B program.
    \24\ As added by sec. 602 of the Veterans Health Care Act of 1992.
    \25\ The rebate percentage is the total per-unit Medicaid rebate 
during a calendar quarter divided by the AMP for the quarter. HRSXs 
Office of Drug Pricing indicates that the ceiling price does not exceed 
AMP minus 15.1 percent for brand-name drugs and 11 percent for generic 
and over-the-counter drugs. An additional rebate is required if any 
brand-name product's price exceeds the increase in the consumer price 
index for all items. In addition, covered entities must ensure that 
drugs are not double discounted--that is, that manufacturers do not pay 
a Medicaid rebate on drugs already sold to the entities at a discounted 
price under Section 340B.
    \26\ See P.L. 102-585, sec. 602.
    \27\ See An Analysis of Purchases, Savings and Participation in the 
PHS Drug Pricing Program (Mathematica Policy Research, Inc., 
Washington, D.C., Sep. 30, 1999).
VA Contract Prices
    VA has been able to obtain prices even lower than FSS prices 
through national contracts with manufacturers for select drugs. VA has 
obtained such prices because it seeks competitive bids from 
manufacturers for products that are therapeutically equivalent within 
specific drug classes.\28\ VA then contracts with those manufacturers 
whose products it believes provide the best value, based on both 
medical effectiveness and price, in exchange for including their 
products on VAs national formulary and committing to use the products 
throughout VAs health care system.\29\ According to VA officials, the 
winning bids in most cases are the lowest prices offered. During fiscal 
year 1999, VA purchases under national contracts totaled about $361.3 
million, or about 23 percent of its drug expenditures. By February 
2000, VA had 60 national contracts covering about 500 products.\30\ For 
the 308 products that had both a national contract price and an FSS 
price as of February 14, 2000, the national contract price was, on 
average, about 33 percent lower than the FSS price. Because national 
contract prices are lower than FSS prices, the price differences 
between national contract prices and AWP, in turn, can be quite large. 
For example, the national contract prices for three cholesterol-
lowering drugs that are among the top 50 drug products most commonly 
used by the elderly were, respectively, 70, 72, and 88 percent lower 
than AWP.\31\
    \28\ VA also negotiates what is known as ``blanket purchase 
agreements'' with many manufacturers to obtain prices that are lower 
than listed FSS prices if VA uses specific product amounts. These 
agreements differ from national committed-use contracts in that they 
are not competitively bid and most apply to specific VA purchasers, 
such as one or more VA hospitals. As of February 14, 2000, there were 
52 blanket purchase agreements in effect.
    \29\ See VA Health Care: VA? Management of Drugs on Its National 
Formulary (GAO/HEHS-00-34, Dec. 14, 1999).
    \30\ The contracts cover both brand-name and generic products and 
include some joint contracts with DOD.
    \31\ For additional information on VA national contracting 
practices and prices, see DOD and VA Health Care: Jointly Buying and 
Mailing Out Pharmaceuticals Could Save Millions of Dollars (GAO/T-HEHS-
00-121, May 25, 2000).
    federal mandates could raise drug prices for various purchasers
    Extending federal prices for outpatient prescription drugs to a 
large group of purchasers, such as Medicare beneficiaries, could lower 
the prices these purchasers pay, but could raise prices to federal and 
other purchasers. Drug manufacturers could respond to a mandate that 
they extend federal prices to a larger share of purchasers by adjusting 
their prices to others. The larger the group that would be newly 
entitled to receive a federal price, the greater the incentive for drug 
manufacturers to raise that price. The Medicaid rebate experience 
suggests how federal and nonfederal drug price discounts could change 
if Medicare beneficiaries had access to the same price discounts 
available to federal purchasers. Following enactment of the rebate 
program, discounts for outpatient drugs decreased significantly because 
manufacturers raised the prices they charged large private purchasers.
Potential Price Effects of Combining Market Segments
    Drug manufacturers have traditionally sold the same product at 
different prices to distinct groups or segments of purchasers, such as 
HMOs, private insurers, hospitals, and retail pharmacies. Manufacturers 
can segment the market In this manner because the purchasers who 
receive the lower prices do not, in turn, resell these products to 
other purchasers. As long as the groups remain independent in this way, 
manufacturers can tailor the price charged each group. This helps to 
explain why customers without drug coverage, or cash-paying customers, 
typically face higher prices at a retail pharmacy than HMOs or other 
large private purchasers pay.
    The prices that manufacturers establish for different groups depend 
on how price sensitive each group is-that is, the extent to which the 
group would change the amount of a product it buys if the price rises 
or falls. For example, HMOs are more price sensitive than retail 
pharmacies because HMOs exercise control over the particular products 
they purchase through the use of formularies and other mechanisms that 
influence physicians' prescribing practices. Conversely, retail 
pharmacies have limited ability to determine which drugs they must have 
available because physicians' prescribing practices are largely outside 
their influence. Retail pharmacies must, therefore, stock a wide range 
of drug products that meet the needs of all of their customers, 
regardless of changes in price for those products.
    If manufacturers were required to provide their drug products to 
both retail pharmacies and HMOs at the same prices, these two market 
segments would no longer be independent. Manufacturers would have to 
decide whether to provide retail pharmacies the same prices they have 
typically provided HMOs, or raise their prices to HMOs to minimize the 
negative impact on their profits. To assess the potential impact on 
profits, manufacturers would need to assess how much of their revenue 
they would lose by charging retail pharmacies the lower HMO prices, 
versus any losses in sales due to raising the prices to HMOs and other 
large private purchasers. Manufacturers would recognize that raising 
prices to these large purchasers could result in decreased sales. 
Manufacturers would likely temper their price changes depending on how 
price sensitive large purchasers were. If large purchasers were very 
price sensitive, sharply restricting their purchases as prices rose, 
manufacturers might restrain their price increases. If large purchasers 
were less price sensitive, manufacturers could raise prices more while 
experiencing the loss of fewer sales. The net result of requiring that 
retail pharmacies and large purchasers pay the same prices would likely 
be higher prices for those who had previously benefited from lower 
prices and lower prices for those who had not.
    Extending federal prices to a large group of purchasers, such as 
Medicare beneficiaries, could have similar pricing implications. Large 
groups of purchasers that pay very different prices based on their 
price sensitivity would be combined and manufacturers would be required 
to charge everyone in the enlarged combined group the same price. The 
magnitude of the price effects would depend considerably on which 
federal price was provided and the number of beneficiaries that would 
now purchase drugs at that federal price.\32\ For example, if the FSS 
price were extended to Medicare beneficiaries, the market segments that 
included FSS purchasers and cash-paying retail Medicare customers would 
be combined. In this case, the federal price would be based on prices 
paid by manufacturers' most-favored customers, and the volume of sales 
at the FSS price would be significantly larger than at present. 
Depending on the number of Medicare beneficiaries that would purchase 
their drugs at FSS prices, sales at FSS prices could be between 6 and 
20 times larger than the current level.\33\ How much manufacturers 
might charge would vary by product, depending considerably on whether 
there were competing products, as well as the price sensitivity of the 
manufacturers' other customers. However, for those products whose 
retail and most-favored customer prices were considerably different, 
manufacturers would have the incentive to charge a new price that would 
likely fall somewhere between the two to offset any reduction in 
revenues. In these cases, extending the FSS price to Medicare 
beneficiaries could result in important out-of-pocket savings, 
particularly for cash-paying beneficiaries.\34\ However, it could also 
raise the prices paid by private and federal purchasers, as increases 
in the prices manufacturers charged their best customers would, in 
turn, increase FSS prices.
    \32\ For further discussion of the potential effects of extending 
FSS prices to nonfederal purchasers, see GAO/HEHS-97-60 June 11, 1997).
    \33\ In 1996, Medicare beneficiaries with drug coverage spent an 
average of $769 on prescription drugs; beneficiaries without coverage 
spent an average of $463. If the approximate 12 million beneficiaries 
that lacked drug coverage had access to FSS prices and those prices 
were lower than the prices they would pay otherwise, it could increase 
the volume of drugs they would purchase. Therefore, if their drug 
spending at FSS prices increased to about the same amount as those with 
coverage, sales at FSS prices would be about $9.2 billion, or over six 
times greater than total FSS sales in fiscal year 1999. If all 39 
million beneficiaries had access to FSS prices and spent an annual 
average of $769 on drugs, FSS sales would be about $30 billion or about 
20 times greater than total FSS sales in fiscal year 1999. Based on 
data from the 1996 Medicare Current Beneficiary Survey. See J.A. Poisal 
and G.S. Chulis, ``Medicare Beneficiaries And Drug Coverage,'' Health 
Affairs (Mar./Apr. 2000), p. 252.
    \34\ Other beneficiaries with drug coverage, such as those enrolled 
in Medicare HMOs, may already receive drugs at discounted prices.
Medicaid Rebate Experience
    Federal efforts to provide state Medicaid programs discounts on 
prescription drugs demonstrate the potential price effects of mandating 
a federal price or discount that, in effect, combines purchasers from 
different market segments. Before the Medicaid rebate program was 
enacted, state Medicaid programs were paying near-retail prices for 
outpatient drugs, although collectively they were the largest single 
purchaser of prescription drugs. OBRA required that manufacturers 
provide rebates to state Medicaid programs on outpatient drugs based on 
the lowest prices they charged other purchasers. After the rebate 
program's enactment, the discounts that large private purchasers, such 
as HMOs and hospitals, received for many outpatient drugs dropped 
substantially.\35\ Within 2 years, we found that the average best-price 
discount for the drugs they purchased was no greater than 15.3 percent 
of AMP--about the mandated minimum rebate for Medicaid programs.\36\ 
This was confirmed by a CBO analysis that concluded that manufacturers 
were much less willing to give steep discounts to large purchasers when 
they had to give the same discounts to Medicaid.\37\
    \35\ See Medicaid: Changes in Best Price for Outpatient Drugs 
Purchased by HMOs and Hospitals (GAO/HEHS-94-194FS, Aug. 5, 1994). 
Also, see Medicaid: Changes in Drug Prices Paid by HMOs and Hospitals 
Since Enactment of Rebate Provisions (GAO/HRD-93-43, Jan. 15, 1993).
    \36\ This is average percentage that the best price was below the 
AMP The average best price discount decreased because the average best 
price increased faster than the AMP during the 2-year period.
    \37\ See CBO Papers: How the Medicaid Rebate on Prescription Drugs 
Affects Pricing in the Pharmaceutical Industry (Washington, D.C., Jan. 
1996). CBO also noted that many FSS prices increased significantly, 
perhaps because FSS prices were initially considered with private-
sector prices in calculating rebates. In 1992, in the Veterans Health 
Care Act, the Congress exempted all drug prices paid by federal 
entities from rebate calculations.
    By using its purchasing power, principally derived from the large 
purchases covered by the Medicaid program, the federal government 
obtains significantly discounted prices for prescription drugs from 
drug manufacturers for both federal and select nonfederal entities. 
Extending federal prices to Medicare beneficiaries could result in 
their paying less for drugs. However, these lower prices could come 
with a trade-off-federal and nonfederal purchasers might pay more if 
drug manufacturers raise prices to them to offset revenue losses 
resulting from extending federal prices to Medicare beneficiaries. The 
extent to which prices would change would vary by drug and would depend 
on many factors, including the number of Medicare beneficiaries 
affected, whether a drug had competition, and the price sensitivity of 
private purchasers. The decrease in price discounts following enactment 
of the Medicaid rebate program demonstrated the potential effects of 
reducing manufacturers' ability to differentiate among purchasers and 
charge some purchasers higher prices than others.
                       agency and other comments
    We obtained comments on the draft report from VA officials 
associated with pharmaceutical purchasing and pharmacy benefit 
management, including the Executive Director and Chief Operating 
Officer of the National Acquisition Center and the Chief Consultant for 
the Pharmacy Benefits Management Strategic Healthcare Group. We also 
obtained comments from two nationally known researchers on 
pharmaceutical pricing issues. The reviewers agreed with our findings 
and provided technical comments, which we have incorporated where 
    As agreed with your office, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days from the date of this letter. At that point, we will send 
copies to interested congressional committees and Members and agency 
officials, and will make copies available to others on request. If you 
or your staffs have any questions about this report, please call me, or 
John Hansen. Others who made major contributions to this report include 
Joel Hamilton, Elsie Picyk, and George Bogart.
                                           Laura A. Dummit,
     Associate Director, Health Financing and Public Health Issues.

    Senator Specter. Thank you, Mr. Secretary. Thank you, Mr. 
    Chairman Rockefeller. Thank you, Senator Specter.
    Senator Wellstone, in order of original appearance.
    Senator Wellstone. Thank you. Senator Specter, before you 
leave, I must say, that was a powerful line of questioning. I 
appreciate that.
    Senator Specter. Thank you. I am general counsel on the 
other side, Senator Wellstone. [Laughter.]
    Senator Wellstone. Just a couple of figures here to give 
this some context. The average Fortune 500 industry in the 
United States returned 4.5 percent profits as a percentage of 
revenue. The pharmaceutical industry returned this past year 
18.6 percent. The average Fortune 500 industry returned 3.3 
percent profits as a percentage of their assets. The 
pharmaceutical industry returned 17 percent. The average 
Fortune 500 industry returned 14.6 percent profits as a 
percentage of shareholders' equity. The pharmaceutical industry 
returned 29.4 percent. That is why this last year Forbes 
magazine, I think, said that the pharmaceutical industry had a, 
quote, ``Viagra'' kind of year when it came to profits.
    The reason I mention that is I do think that both sets of 
questions are very relevant. Let me ask you, Mr. Secretary, 
because Mr. Chairman, I almost think that part of the 
Secretary's testimony would be good for the Finance Committee. 
I really do.
    Chairman Rockefeller. Almost anything would help.
    Senator Wellstone. Almost anything would help. [Laughter.]
    You are on the committee. You said it, I didn't.
    This whole Federal Supply Schedule, the global budget that 
you have got, how key is it in keeping the costs down?
    Mr. Principi. I am sorry, sir?
    Senator Wellstone. The VA participates in this Federal 
Supply Schedule for pharmaceuticals, which is the global budget 
you set up. I just want to ask you, how important do you view 
this as in keeping VA's costs down for the prescription drug 
benefits that you are able to provide for the veterans?
    Mr. Principi. Oh, I think it is terribly important to keep 
the price down to negotiate these large-volume purchases and 
get them on the Federal Supply Schedule. Everyone benefits, not 
only VA, but I believe we do it for DoD, Indian Health Service, 
Public Health Service. So we are basically the authority, the 
agency that is the procurement agent for many, if not all, of 
the managed health care systems in the United States, including 
the Bureau of Prisons. So I think--and that has resulted in 
lower prices to our systems.
    Senator Wellstone. Yes. Well, I am not trying to be clever 
and I am not trying to get you into sort of the thick of all 
the fights, but the chairman has said, look, we are doing this 
hearing and part of it is because there is this relationship 
right now, which is you have got more people coming on from 
Medicare that are veterans that put a strain on this system 
because we don't have it as a part of Medicare, right?
    But the other connection, I think, is the way you do this, 
and what Senator Specter was saying is, gee, if we just give 
this industry a blank check, they will fill in the amount. If 
there is no cost containment, it will never be, Mr. Chairman, 
probably economically sustainable or politically sustainable. 
There is going to have to be some cost containment. And I am 
not making you take that position, but I am saying that I 
frankly think you have a model here that works and I think that 
there is no reason why it wouldn't be good for Medicare. There 
is no reason why for 40 million people who represent a pretty 
significant bargaining unit there shouldn't be some agreement.
    Just as Senator Specter said, or maybe Senator Rockefeller 
said this, the NIH, my gosh, the NIH does a ton of this 
research that helps these companies, and then they get the 
patents. Well, if these pharmaceutical companies, if they are 
going to get the patent, they ought to agree to charge the 
people in this country a reasonable price. The government is 
the one that did the research.
    So I think that we are just talking about, in a way, 
something that is fiscally responsible, and I, for one, would 
like to make the argument that you provide a model for where we 
should be heading with Medicare. I really believe that.
    One more thing--the light is yellow--the $2 to $7. I think 
what I heard you say in your testimony--I mean, obviously, it 
is not fun for you to make this recommendation. I mean, it is 
clear by facial expressions it is not what you want to do. In 
your testimony, and tell me if I am wrong, I thought you said 
you weren't sure how it would affect demand. Is that what you 
said? Or do you know, in terms of, especially as Senator 
Rockefeller was saying, on the low-income end. Do you have any 
sense as to what would happen here?
    Mr. Principi. I think we will depress demand somewhat. I 
still believe that at a $7 copayment for a 30-day prescription, 
we are still the most generous plan anywhere.
    Senator Wellstone. Absolutely.
    Mr. Principi. Again, with some plans, of course, you have 
an enrollment fee and you have deductibles and you might have a 
$5 copayment. But with ours, you don't pay any of the others 
and it is just a straight $7 copayment.
    We are always concerned about copayments. We want to make 
sure that veterans who need the drugs can get them, but we feel 
confident, very confident that with a $7 copayment--veterans 
will be able to obtain the drugs they need. Of course, service-
connected veterans are not included.
    Senator Wellstone. Right, and this is another reason why I 
would love to have you before the Finance Committee. You are 
struggling with this. Senator Rockefeller has been the one that 
is the leader. I have seen some of his quotes in the papers. We 
are talking about still a pretty significantly high premium, a 
50-percent copay, and yet not even doing that well on the 
catastrophic expenses, and there are a lot of people who aren't 
going to participate. Here, the Secretary is in anguish over $2 
to $7, and the Finance Committee might want to express a little 
bit more anguish over where they are heading.
    Chairman Rockefeller. No, we are anguishing, Senator 
Wellstone. [Laughter.]
    Senator Wellstone. You are.
    Chairman Rockefeller. We are just not progressing.
    Senator Wellstone. You might want to anguish and then 
    Chairman Rockefeller. That is a logical followup statement. 
And it is interesting, because you indicate the $2 to $7. We 
are working off the Breaux-Frist bill on one hand and the 
Gramm, what I call the Gramm-Rockefeller bill on the other 
hand, and if you take $318 billion under the Gramm bill, which 
we can't afford, the budget resolution doesn't allow for it, we 
have to go with a $52 premium, and obviously that won't stand. 
That is sticker shock and will never happen in this country. So 
you then have to pay down that money in order to lower the 
amount of the premium. As you do that, you are already taking a 
slim amount of drug benefit money and having to push that down 
    So the point that Senator Wellstone makes, that the $7 
compared to the----
    Mr. Principi. And if I could just add, before the Senator 
    Senator Wellstone. Yes, and I apologize.
    Mr. Principi [continuing]. Is the fact that we have put a 
cap on of $840.
    Chairman Rockefeller. Right.
    Mr. Principi. So if you are category two through six, $840 
is the most you will ever have to pay in a year. The category 
sevens, we did not put a cap on. So category one is no copay at 
all. Two through six, only up to $840 a year.
    Senator Wellstone. You are so far ahead of where most are.
    Chairman Rockefeller. Senator Nelson, and I want to say to 
Senator Craig, I well understand that you are here, thank you 
for coming, sir.
    Senator Craig. No, go right ahead. I just came to listen 
for a while.
    Chairman Rockefeller. Do you want to say a word?
    Senator Craig. No.
    Chairman Rockefeller. OK. Senator Nelson, I apologize to 
    Senator Nelson. Thank you, Mr. Chairman.
    As you are looking at your pharmaceutical program and 
providing the prescription drug benefits for the retirees, 
military retirees, as you look at that and you say that you are 
3 percent of the pharmaceutical market, is that what I think I 
heard you say?
    Mr. Ogden. Approximately.
    Senator Nelson. And you don't believe that the cost 
containment that you have been able to achieve to date could be 
extended mathematically or pro rata wise across as you try to 
effect some of the other 97 percent that wouldn't be included 
if we were trying to put together a purchasing group, if you 
will, or a contracting group to get a better price, is that 
because the cost containment you have achieved is probably a 
cost shift to the other 97 percent?
    Mr. Ogden. No----
    Senator Nelson. Not that I am being critical of that. I 
don't mean to be critical.
    Mr. Ogden. No. In fact, my comment to that is, we represent 
3 percent of the U.S. market and the efforts that we have 
effected and the pricing that we have received reflects that 3 
percent of the U.S. market. If Medicare, for example, is 40 
percent, just hypothetically, and you had States form 
consortiums and negotiate with the industry just like we 
negotiate with the industry, one would expect that you would 
see lower prices than we receive because the market share that 
would be in Medicare is much, much larger than what is in VA 
and DoD.
    So my comment was, my personal opinion is, I don't favor 
linking Medicare to VA and the rest of the DoD and Coast Guard, 
et cetera. I believe that in the Medicare program, through the 
use of consortiums and through the use of strategies such as we 
have employed in the context of managing drug utilization, that 
Medicare could, in fact, drive market share and receive 
excellent pricing, but it would require the kinds of actions 
that we have taken as opposed to just linking Medicare to 
current VA pricing. That was my comment.
    Senator Nelson. I think I now understand the distinction 
you were making. But wouldn't you be fearful if the 40-pound 
player versus a 3-pound player is now negotiating, that you 
wouldn't see a cost shift back to the VA and DoD?
    Mr. Ogden. It is possible.
    Senator Nelson. Because every time you press it down here, 
it comes up over here----
    Mr. Ogden. That is a very real possibility.
    Senator Nelson [continuing]. As long as the profits are 
going to continue to be at the level that they are right now, 
assuming that those would continue in the future. So it isn't 
as simple as we all would like to make it necessarily, but your 
experience, and you are to be congratulated, in my opinion, for 
what you have done for cost containment to try to bring down 
the costs to a rational level.
    You are in an insurance business and you have figured out a 
way to make it work by controlling the costs, because otherwise 
you are chasing rising costs and you will never get there. You 
will never catch up. Your expenses will either be driven up, or 
if you are in the business of charging a premium, as I think we 
will be with respect to Medicare, the premium will just 
continue to rise as you chase those rising prices.
    Mr. Principi. I think the fact is, we have a national 
problem in pharmaceutical costs. We have been talking today 
about Medicare, VA, DoD, and that we need to simply work 
together. The VA can't work in isolation. We need to work 
collaboratively with HHS and with DoD and the other health care 
providers. To the degree that we have learned some tough 
lessons and have applied them well and those lessons can be 
exported to other health care systems like HHS, then so be it. 
To the degree we can cooperate, we need to explore that.
    I don't want to see our costs go up, but I think we have a 
responsibility to address the national issues and the VA should 
be a player there.
    Senator Nelson. Indeed, Mr. Secretary, I think you need to 
be a player there, because as the other players play, you want 
to be a participant so that it doesn't shift your direction. In 
other words, it is going to be important that all the players 
be in the room to avoid having what could otherwise happen. The 
smaller percentage could end up carrying a larger share of the 
load as a shift.
    What we need to do is to find a way to achieve this without 
any significant cost shift to the American market. Now, maybe 
it will do something to the international market, but not to 
the U.S. market.
    I appreciate it very much, and you are to be, once again, 
congratulated. Perhaps the 3-percent will show the 40 percent 
the way, and I thank you very much.
    Mr. Principi. Thank you, sir.
    Senator Nelson. Thank you, Mr. Chairman.
    Chairman Rockefeller. Thank you, Senator Nelson.
    Let me just conclude this panel with my thanks to each and 
every one of you. It is, as you say, an overwhelming problem 
and an overwhelmingly complex one. It is stunning in the three 
or four or five times a week meetings that we have, and the 
meetings are just among Senate Republicans and Democrats on the 
Finance Committee, just getting into formularies and PBM's and 
private options and all the rest of it, it is mind-bogglingly 
    But what comes up at the end of the day is the fact that 
the total amount of money that we have to spend on all of this, 
which includes, incidentally, Medicare reform, is $300 billion. 
That is what is in the budget resolution. There arises the very 
real question, which, in fact, reflects on the future of the VA 
and how we are going to be burdened, so to speak, by those 
flocking to us. There is potentially an argument to be made 
that if you take, let us say, according to the current 
thinking, about $10 billion over 10 years for Medicare reform 
out of the $300 billion, then you have $290 billion left over 
10 years for prescription drugs.
    Granted, nobody in the non-VA world has prescription drugs 
at this point, that is, unless they are getting it under an 
employer's plan, but there is a real case to made that $290 
billion isn't going to do it. It is not going to be enough. So 
you have to either put on a premium, which is absolutely 
unsustainable politically and could never move in this place 
politically, or you have to cut it to the point where the drug 
money is insufficient. Drugs are going up, as has been pointed 
    I don't think you can do that to the American people. I 
don't think you can give them about a two-thirds drug benefit 
when their expectations are we are going to do it--and 
everybody ran on the idea we are going to do a prescription 
drug benefit. And if we don't, and there is that chance because 
agreement is so hard to reach, that is just going to increase 
the pressure on the VA, which I don't want to see, and neither 
do you.
    So we thank all of you gentlemen very, very much and 
appreciate your courtesy in being here. Thank you, Mr. 
    The second panel consists of Cynthia Bascetta, who is 
Director of Health Care for the Veterans' Health and Benefits 
Issues, U.S. General Accounting Office. If we could have some 
order in the room, I would appreciate it very much. She is 
accompanied by Walter Gembacz, who is the Assistant Director, 
Veterans' Health Care Issues. Also testifying will be Dr. Roger 
Herdman, who is Director of the National Cancer Policy Board, 
Institute of Medicine, and Dr. Michael Miller, who is a 
consultant to the Pharmaceutical Research and Manufacturers 
Association, PhRMA.
    We welcome all of you. I am going to ask Cynthia Bascetta 
to begin, but I am going to interrupt you in about 2\1/2\ 
minutes for a special purpose, but you go ahead.


    Ms. Bascetta. Mr. Chairman and members, thank you for 
asking us to discuss our work conducted at your request on VA's 
management and oversight of its national formulary. VA's 
national formulary is designed to improve the quality of care 
for veterans as well as better manage its rapidly escalating 
costs for pharmaceuticals, which as we all know is typical of 
the entire health care industry.
    My testimony is based on our review of formulary policies 
and practices in headquarters and VA's 22 networks, analysis of 
nationwide prescription data, three site visits, and our survey 
of 2,000 prescribers. In addition, we have included current 
information on the status of VA's actions to implement the 
recommendations we made this January.
    As we reported earlier this year, VA has made significant 
progress establishing its national formulary. Specifically, 
about 90 percent of outpatient prescriptions were for national 
formulary drugs. Moreover, both prescribers and veterans 
generally report having access to the drugs they need.
    Today, however, I would like to focus on our conclusion 
that VA needs to improve its oversight to fully achieve its 
standardization goal and to correct weaknesses in the waiver 
process for obtaining non-formulary drugs.
    My first point is that VA has not fully achieved its goal 
of a standardized drug benefit, that is, that veterans should 
have access to the same drugs regardless of which medical 
center they visit. Noncompliance with VA's formulary directive, 
as well as VA's own policy allowing the networks flexibility to 
meet local needs with appropriate oversight, have impeded VA's 
    Regarding compliance, we found that two of the three 
medical centers we visited in the spring of 2000 omitted 
national formulary drugs. One omitted 25 percent. The other 
omitted 13 percent. Together, nearly 450 drugs for high blood 
pressure, mental disorders, women's medical needs, cancer 
treatment, and digestive disorders were not available as 
formulary choices. As a result, physicians at these two medical 
centers had to obtain approval to write over 22,000 
prescriptions for drugs that should have been available without 
question. This wasted valuable clinical time and delayed 
patient treatment.
    Chairman Rockefeller. Ms. Bascetta, I am going to interrupt 
you at this time because I want all of us to pause for a 
moment. It was at precisely this minute 3 years ago that 
Officer Jacob Chestnut and Detective John Gibson of the U.S. 
Capitol Police were killed in the line of duty while trying to 
stop an intruder, so I think it would be appropriate for us to 
pay our respects in a moment of silence.
    [A moment of silence was observed.]
    Chairman Rockefeller. Thank you. Please proceed.
    Ms. Bascetta. Thank you. Regarding flexibility to 
supplement the national formulary locally, we found that VA 
lacked criteria for determining the appropriateness of the 
network's actions when adding drugs. As a result, the 
flexibility given to the networks, while critical to ensuring 
that the health care needs of all veterans are met, could erode 
standardization if not closely managed.
    During our review, all 22 networks added drugs not found on 
the national formulary, and they ranged from as few as five in 
one network to as many as 63 in another. In all, the networks 
added nearly 250 unique drugs.
    My second point is that VA also needs better oversight of 
access to non-formulary drugs. VA policy requires that each 
network implement a process for obtaining drugs for veterans 
whose needs cannot be met by the formulary. In addition, 
networks are required to track both approvals and denials of 
non-formulary drugs.However, we found weaknesses in their 
approval processes. For example, although 40 percent of 
prescribers we surveyed reported being able to obtain approvals 
in a few hours, or even minutes, the other 60 percent reported 
much longer times, an average of 9 days. Prescribers were 
almost equally divided in their views on the ease or difficulty 
of obtaining non-formulary drugs. About 32 percent said it was 
difficult, while 29 percent said it was easy. Most important, 
however, 15 of the 22 networks had not complied with national 
policy to track non-formulary requests. Twelve had tracked 
neither approvals nor denials, and three tracked only 
approvals. Consequently, VA does not know if its approved 
requests meet VA's national criteria or if denied requests are 
    Mr. Chairman, VA concurred with our conclusions and the 
recommendations we made to better achieve its standardization 
goal and to strengthen its oversight of the non-formulary 
process. While it is too early to tell how successful 
implementation will be, we are encouraged by the steps VA has 
taken and plans to take to implement our recommendations. We 
urge VA to issue its revised formulary directive, which is a 
significant improvement over current policy, as quickly as 
possible and to follow through with continuous oversight to 
ensure that veterans receive the pharmacy benefit in a well-
managed manner.
    This concludes my remarks and I would be happy to answer 
any questions that you might have.
    Chairman Rockefeller. Thank you very much, indeed.
    [The prepared statement of Ms. Bascetta follows:]
   Prepared Statement of Cynthia A. Bascetta, Director, Health Care, 
  Veterans' Health Care and Benefits Issues, U.S. General Accounting 
    Mr. Chairman and Members of the Committee:
    I am pleased to be here today to discuss the Department of Veterans 
Affairs (VA) management and oversight of its national drug formulary. 
VA's national formulary is intended, in part, to control costs and 
better ensure that veterans have access to the same drugs regardless of 
which VA medical center they visit. VA medical centers were directed to 
make all national formulary drugs available to prescribers health care 
providers who have VA prescription-writing privileges.\1\ To meet local 
patient needs, VA allows its 22 networks to add drugs to supplement the 
national formulary.\2\ VA also requires each network to establish an 
approval process for obtaining drugs not listed in its formulary.
    \1\ Veterans Health Administration's Directive 97-047, VA National 
Formulary Directive, Oct. 16, 1997.
    \2\ In 1995, VA began transforming its delivery and management of 
health care to expand access to care and increase efficiency. VA 
decentralize decisionmaking and budgeting authority to 22 regional 
Veterans Integrated Service Networks (VISN), which became responsible 
for managing all VA health care.
    My testimony addresses problems we identified in two recent reports 
regarding implementation and standardization of the formulary and the 
approval process for nonformulary drugs at each network.\3\ In 
conducting our work, we reviewed the formulary policies and activities 
of VA's headquarters and its 22 networks, analyzed nationwide VA 
prescription data, conducted site visits and interviewed VA officials 
at three medical centers located in three different networks, and 
surveyed 2,000 prescribers. We also updated this statement to reflect 
VA's most recent actions to implement our recommendations for improving 
its management and oversight.
    \3\ VA Health Care: VA's Management of Drugs on Its National 
Formulary (GAO/HEHS-00-34, Dec. 14, 1999) and VA Drug Formulary: Better 
Oversight Is Required, but Veterans Are Getting Needed Drugs (GAO-01-
183, Jan. 29, 2001).
    In summary, while VA has made significant progress establishing a 
national formulary that has generally met with prescribers' and 
patients' acceptance, VA's oversight has not been sufficient to fully 
ensure standardization of its drug benefit nationwide. In our January 
2001 report, we found that the three medical centers we visited were 
not in compliance with the national formulary. Specifically, two of 
three medical centers omitted more than 140 required national formulary 
drugs, and all three facilities inappropriately modified the national 
formulary list of required drugs for certain drug classes by adding or 
omitting some drugs. In addition, as VA policy allows, VISNs added 
drugs to supplement the national formulary ranging from 5 drugs at one 
VISN to 63 drugs at another. However, VA lacked criteria for 
determining the appropriateness of the actions networks took to add 
these drugs.
    In addition to problems standardizing the national formulary, we 
identified weaknesses in the nonformulary approval process. While the 
national formulary directive requires certain criteria for approving 
nonformulary drugs, it does not prescribe a specific nonformulary 
approval process. As a result, the processes health care providers must 
follow to obtain nonformulary drugs differ among VA facilities 
regarding how requests are made, who receives them, who approves them, 
and how long it takes to obtain approval. We found that the length of 
time to approve nonformulary drugs averages 9 days, but can be as short 
as a few minutes in some medical centers. In addition, some VISNs have 
not established processes to collect and analyze data on nonformulary 
requests. As a result, VA does not know if approved requests meet its 
established criteria or if denied requests are appropriate.
    In our January 2001 report, we made several recommendations to VA 
to improve its management and oversight of its national formulary. VA 
concurred with all of our recommendations and has taken, or plans to 
take, steps to implement them. Although these are clearly steps in the 
right direction, it is too early to tell how successful VA will be in 
establishing the continuous oversight needed to improve formulary 
    In fiscal year 2000, VA's pharmacy benefit provided approximately 
86 million prescriptions at a cost of approximately $2 billion or about 
12 percent of VA's total health care budget, compared to 6 percent of 
VA's total health care budget a decade ago. VA provides outpatient 
pharmacy services free to veterans receiving medications for treatment 
of service-connected conditions and to low-income veterans. Other 
veterans who have prescriptions filled by VA may be charged a copayment 
for each 30-day supply of medication.\4\
    \4\ Section 201 of the Veterans Millennium Health Care and Benefits 
Act (P.L. 106-117) authorized the Secretary of the Department of 
Veterans Affairs to prescribe regulations to increase the copayment for 
each 30-day supply of medication for outpatient treatment of non-
service-connected disabilities or conditions and to establish maximum 
monthly and maximum annual pharmaceutical copayments for veterans who 
have multiple outpatient prescriptions. In response, the Secretary has 
proposed regulations that, among other things, increases the copayment 
from $2 to $7. (Fed. Reg., Vol. 66, No. 136, July 16, 2001, pp. 36960-
    Like many health care organizations, VA uses several measures in an 
effort to improve quality of care and control pharmacy costs. These 
include (1) implementing a national formulary, which standardizes the 
list of drugs available; (2) developing clinical guidelines for 
prescribing drugs; and (3) using compliance programs, such as prior 
authorization, to encourage or require physicians to prescribe 
formulary drugs.
    VA medical centers individually began using formularies as early as 
1955 to manage their pharmacy inventories. However, it was not until 40 
years later in September 1995, that VA established a centralized group 
to manage its pharmacy benefit nationwide. In November 1995, when VISNs 
were established, VA's Under Secretary for Health directed each VISN to 
develop and implement a VISN-wide formulary. To develop their 
formularies, the VISNs generally combined existing medical center 
formularies and eliminated rarely prescribed drugs. In 1996, VA was 
required to improve veterans' access to care regardless of the region 
of the United States in which they live. As part of its response, VA 
implemented a national drug formulary on June 1, 1997, by combining the 
core set of drugs common to the newly developed VISN formularies. VA's 
formulary meets the Joint Commission for the Accreditation of Health 
Care Organizations' requirements for developing and maintaining an 
appropriate selection of medications for prescribers to use in treating 
their patient populations.
    VA's formulary lists more than 1,100 unique drugs in 254 drug 
classes groups of drugs similar in chemistry, method of action, or 
purpose of use. After performing reviews of drug classes representing 
the highest costs and volume of prescriptions, VA decided that some 
drugs in 4 of its 254 drug classes were therapeutically interchangeable 
that is, essentially equivalent in terms of efficacy, safety, and 
outcomes. This determination allowed VA to select one or more of these 
drugs for its formulary so that it could seek better prices through 
competitively bid committed-use contracts.\5\ Other therapeutically 
equivalent drugs in these classes were then excluded from the 
formulary. These four classes are known as ``closed'' classes. VA has 
not made clinical decisions regarding therapeutic interchange in the 
remaining 250 drug classes, and it does not limit the number of drugs 
that can be added to these classes. These are known as ``open'' 
    \5\ Under committed-use contracts, VA commits to using primarily 
the contract drug, instead of other therapeutically interchangeable 
drugs, to guarantee drug companies a high volume of use in exchange for 
lower prices.
    To manage its pharmacy benefit nationwide, VA established the 
Pharmacy Benefits Management Strategic Healthcare Group (PBM). PBM is 
responsible for managing the national formulary list, maintaining 
databases that reflect drug use, and monitoring the use of certain 
drugs. PBM also facilitates the addition and deletion of drugs on the 
national formulary on the basis of safety and efficacy data, determines 
which drugs are therapeutically interchangeable in order to purchase 
drugs through competitive bidding, and develops safeguards to protect 
veterans from the inappropriate use of certain drugs. VISN directors 
are responsible for implementing and monitoring compliance with the 
national formulary and ensuring that a nonformulary drug approval 
process is functioning at each of their medical centers. Although VISN 
and medical center directors are held accountable in annual performance 
agreements for meeting certain national and local goals, attaining 
formulary goals has not been part of their performance standards.
          national formulary standardization not yet achieved
    While VA has made significant progress in establishing a national 
formulary, its oversight has not been sufficient to ensure that it is 
fully achieving its national formulary goal of standardizing its drug 
benefit nationwide. In our January 2001 report, we found three factors 
that have impeded formulary standardization: (1) medical centers we 
visited omitted some national formulary drugs from their local 
formularies, (2) VISNs varied in the number of drugs they added to 
local formularies to supplement the national formulary without 
appropriate oversight, and (3) medical centers inappropriately added or 
deleted drugs in closed classes. Nevertheless, most prescribed drugs 
were on the national formulary, and prescribers and patients were 
generally satisfied with the national formulary.
    The first factor impeding standardization is that medical centers 
omitted some national formulary drugs from their local formularies. 
Almost 3 years after VA facilities were directed to make all national 
formulary drugs available locally, two of the three medical centers we 
visited in spring of 2000 omitted required drugs from the formularies 
used by their prescribers. At one medical center, about 25 percent (286 
drugs) of the national formulary drugs were not available as formulary 
choices. These included drugs used to treat high blood pressure, mental 
disorders, and women's medical needs. At the second medical center, 
about 13 percent (147 drugs) of the national formulary drugs were 
omitted, including drugs used to treat certain types of cancer and 
others used to treat stomach conditions.
    From October 1999 through March 2000, health care providers at 
these two medical centers had to obtain nonformulary drug approvals for 
over 22,000 prescriptions for drugs that should have been available 
without question because they are on the national formulary. Our 
analysis showed that at the first center, over 14,000 prescriptions 
were filled as nonformulary drugs for 91 drugs that should have been on 
the formulary.\6\ At the other medical center, over 8,000 prescriptions 
for 23 national formulary drugs were filled as nonformulary drugs. If 
the national formulary had been properly implemented at these medical 
centers, prescribers would not have had to use extra time to request 
and obtain nonformulary drug approvals for these drugs, and patients 
could have started treatment earlier.
    \6\ After our visit, we were informed by a pharmacy official that 
the medical center adopted the national formulary as its own on June 
30, 2000.
    The second factor impeding standardization is the wide variation in 
the number of drugs added by VISNs to their local formularies. VA's 
policy allowing VISNs to supplement the national formulary locally has 
the potential for conflicting with VA's goal of achieving 
standardization if it is not closely managed. From June 1997 through 
March 2000, the 22 VISNs added a total of 244 unique drugs to 
supplement the list of drugs on the national formulary. As figure 1 
shows, the number of drugs added by each VISN varies widely, ranging 
from as many as 63 to as few as 5. Adding drugs to supplement the 
national formulary is intended to allow VISNs to be responsive to the 
unique needs of their patients and to allow quicker formulary 
designation of new drugs approved by the Food and Drug Administration 
(FDA).\7\ VA officials have acknowledged that this variation affects 
standardization and told us they plan to address it. For example, PBM 
plans to more quickly review new drugs when approved by FDA to 
determine if they should be added to the national formulary.
    \7\ VA national formulary policy provides that a new drug must be 
on the market for a minimum of 1 year before it can be added to the 
national formulary.
Figure 1: Variation in Number of Unique Drugs VISNs Added to Supplement 
             VA's National Formulary, June 1997-March 2000 

Source: GAO analysis of PBM data.

    The third factor is that medical centers we visited inappropriately 
modified the national formulary list of drugs in the closed classes. 
Contrary to VA formulary policy, two of three medical centers added two 
different drugs to two of the four closed classes, and one facility did 
not make a drug in a closed class available. Moreover, the Institute of 
Medicine (IOM) found broad nonconformity at the VISN level.\8\ 
Specifically, IOM reported that 16 of the 22 VISNs modified the list of 
national formulary drugs for the closed classes.\9\ This also 
undermines VA's ability to achieve cost savings through its committed-
use contracts.
    \8\ In June 2000, IOM issued a report on the effect VA's national 
formulary has had on the cost and quality of VA health care, the 
restrictiveness of VA's national formulary, and how the national 
formulary compares with private and other government formularies. (IOM, 
Description and Analysis of the VA National Formulary [Washington, 
D.C.: IOM, June 2000].)
    \9\ IOM, Description and Analysis of the VA National Formulary, pp. 
    While VA has not yet fully achieved national formulary 
standardization, most prescribed drugs were on the national formulary. 
From October 1999 through March 2000, 90 percent of VA outpatient 
prescriptions were written for national formulary drugs. The percentage 
of national formulary drug prescriptions filled by individual VISNs 
varied slightly, from 89 percent to 92 percent. We found wider 
variation among medical centers within VISNs 84 percent to 96 percent.
    Of the remaining 10 percent of prescriptions filled systemwide, 
VA's national database could not distinguish between nonformulary drugs 
and drugs added to local formularies by VISNs and medical centers to 
supplement the national formulary. VA's PBM and the IOM estimate that 
drugs added to supplement the national formulary probably account for 
about 7 percent of all prescriptions filled, and nonformulary drugs 
account for approximately 3 percent of all prescriptions filled. VA 
officials told us that they are modifying the database to enable them 
to identify which drugs are added to supplement the national formulary 
and which are nonformulary. This will allow them to better oversee the 
balance between local needs and national standardization.
    Prescribers we surveyed reported they were generally satisfied with 
the national formulary. Seventy percent of VA prescribers in our survey 
reported that the formulary includes the drugs their patients need 
either to a ``great extent'' or to a ``very great extent.'' 
Approximately 27 percent reported that the formulary meets their 
patients' needs to a ``moderate extent,'' with 4 percent reporting that 
it meets their patients' needs to a lesser extent. No VA prescribers 
reported that the formulary meets their patients' needs to ``very 
little or no extent.'' This is consistent with IOM's conclusion that 
the VA formulary ``is not overly restrictive.''
    Veterans also appear satisfied with their ability to obtain the 
drugs they believe they need. At the VA medical centers we visited, 
patient advocates \10\ told us that veterans made very few complaints 
concerning their prescriptions. In its analysis of patient complaints, 
IOM found that less than one-half of 1 percent of veterans' complaints 
were related to drug access.\11\ IOM further reported that complaints 
involving specific identifiable drugs often involved drugs that are 
marketed directly to consumers, such as Viagra.\12\ Our review also 
indicated that the few prescription complaints made were often related 
to veterans trying to obtain ``lifestyle'' drugs or refusals by VA 
physicians and pharmacists to fill prescriptions written by non-VA 
health care providers.\13\ VA may fill prescriptions written by non-VA 
health care providers only under limited circumstances, for example, 
when the veteran is housebound and receives additional compensation 
because of a service-connected disability.\14\
    \10\ Patient advocates are VA employees who are responsible for 
receiving and acting on complaints from veterans.
    \11\ IOM obtained formulary-related complaints from a nationwide 
database of veteran complaints for over 90 percent of all VA facilities 
representing all 22 VISNs. IOM determined that only 2,385 of 570,937 
veteran complaints were attributed to the national formulary. No VISN 
had significantly more complaints than any other. (IOM, Description and 
Analysis of the VA National Formulary, p. 145.)
    \12\ Viagra (sildenafil), which is used to treat erectile 
dysfunction, is available within VA only through the nonformulary drug 
approval process.
    \13\ We asked prescribers in our survey how often in 1999 their 
patients asked them to rewrite prescriptions from non-VA prescribers so 
that they could be filled by VA. Thirty-one percent said ``often'' or 
``very often,'' 34 percent reported that it occurred ``occasionally,'' 
and 21 percent said ``seldom.'' Fourteen percent said that they never 
received such requests.
    \14\ See 38 U.S.C. Sec. 1712(d); 38 C.F.R. Sec. 17.96, and Op. VA 
Gen. Coun. 41-91 (1991).
       approval processes for nonformulary drugs have weaknesses
    While the national formulary directive requires certain criteria 
for approval of nonformulary drugs, it does not prescribe a specific 
nonformulary approval process. As a result, the processes health care 
providers must follow to obtain nonformulary drugs differ among VA 
facilities regarding how requests are made, who receives them, who 
approves them, and how long it takes to obtain approval. In addition, 
some VISNs have not established processes to collect and analyze data 
on nonformulary requests. As a result, VA does not know if approved 
requests meet its established criteria or if denied requests are 
    Both the people involved and the length of time to approve 
nonformulary drugs varied. The person who first receives a nonformulary 
drug approval request may not be the person who approves it. For 
example, 61 percent of prescribers reported that nonformulary drug 
requests must first be submitted to facility pharmacists, 14 percent 
said they must first be submitted to facility pharmacy and therapeutics 
(P&T) committees, and 8 percent said they must first be sent to service 
chiefs. In contrast, 31 percent of prescribers reported that facility 
pharmacists approve nonformulary drug requests, 26 percent said that 
facility P&T committees approve them, and 15 percent told us that 
facility chiefs of staff approve them. The remaining 28 percent 
reported that various other facility officials or members of the 
medical staff approve nonformulary drug requests. The time required to 
obtain approval for use of a nonformulary drug also varied depending on 
the local approval processes. The majority of prescribers we surveyed 
(60 percent) reported that it took an average of 9 days to obtain 
approval for use of nonformulary drugs.\15\ But many prescribers also 
reported that it took only a few hours (18 percent) or minutes (22 
percent) to obtain such approvals.
    \15\ In emergencies, exceptions are made to allow the patient to 
obtain the drug more quickly.
    During our medical center visits, we observed that some medical 
center approval processes are less expeditious than others. For 
example, to obtain approval to use a nonformulary drug in one facility 
we visited, prescribers were required to submit a request in writing to 
the P&T committee for its review and approval. Because the P&T 
committee met only once a month, the final approval to use the 
requested drug was sometimes delayed as long as 30 days. The requesting 
prescriber, however, could write a prescription for an immediate 30-day 
supply if the medication need was urgent.
    In contrast, another medical center we visited assigned a clinical 
pharmacist to work directly with health care providers to help with 
drug selection, establish dose levels, and facilitate the approval of 
nonformulary drugs. In that facility, clinical pharmacists were allowed 
to approve the use of nonformulary drugs. If a health care provider 
believed that a patient should be prescribed a nonformulary drug, the 
physician and pharmacist could consult at the point of care and make a 
final decision with virtually no delay.
    Prescribers we surveyed were almost equally divided on the ease or 
difficulty of getting nonformulary drug requests approved. (See table 

   Table 1: Ease of Obtaining Nonformulary Drug Approvals Reported by
                    Response categories                       reporting
``Easy'' or ``very easy''..................................           29
``About as easy as difficult''.............................           40
``Difficult'' or ``very difficult''........................           32
Note: Percentages do not total 100 because of rounding.
Source: GAO survey.

    Regardless of whether the nonformulary drug approval process was 
perceived as easy or difficult, the majority of prescribers told us 
that their requests were generally approved. According to our survey 
results, 65 percent of prescribers sought approval for nonformulary 
drugs in 1999. These prescribers reported that they made, on average, 
25 such requests (the median was 10 requests). We estimated that 84 
percent of all prescribers' nonformulary requests were approved.
    When a nonformulary drug request was disapproved, 60 percent of 
prescribers reported that they switched to a formulary drug. However, 
more than one-quarter of the prescribers who had nonformulary drug 
requests disapproved resubmitted their requests with additional 
    For patients moving from one location to another, the majority of 
prescribers we surveyed told us that they were more likely to convert 
VA patients who were on a nonformulary drug obtained at another VA 
facility to a formulary drug than to request approval for the 
nonformulary drug. (See table 2.)

      Table 2: Likelihood of Prescribers' Converting Patients From
     Nonformulary Drug Prescriptions to Formulary Drug Prescriptions
                    Response categories                       reporting
``Likely to convert'' or ``very likely to convert''........           64
``As likely to convert as to seek approval for the                    18
 nonformulary drug''.......................................
``Likely to seek approval for the nonformulary drug'' or              18
 ``very likely to seek approval of nonformulary drug''.....
Source: GAO survey.

    Contrary to the national formulary policy, not all VISNs have 
established a process for collecting and analyzing data on nonformulary 
requests at the VISN and local levels. Twelve of VA's 22 VISNs reported 
that they do not collect information on approved and denied 
nonformulary drug requests. Three VISNs reported that they collect 
information only on approved nonformulary drug requests, and seven 
reported that they collect information for both approved and denied 
requests. Such information could help VA officials to determine the 
extent to which nonformulary drugs are being requested and whether 
medical center processes for approving these requests meet established 
criteria. In its report, IOM noted that inadequate documentation on 
such matters could diminish confidence in the nonformulary process.
             plans for improving oversight are progressing
    We are encouraged by VA's actions, but it is too early to tell how 
successful it will be in addressing our recommendations for improving 
its management and oversight of the national formulary. To improve 
standardization of its formulary, we recommended that VA establish (1) 
a mechanism to ensure that VISN directors comply with VA's national 
formulary policy and (2) criteria that VISNs should use to determine 
the appropriateness of adding drugs to supplement the national 
formulary and monitor the VISNs' application of these criteria. VA's 
PBM has developed changes to its database that will provide comparative 
national data on VISN, nonformulary, and national formulary drug use. 
PBM also plans to share these data, including identification of 
outliers, with all 22 VISNs and coordinate with VISN formulary leaders 
to facilitate consistent compliance with national formulary policy. In 
addition, VA (1) drafted criteria for VISNs to use to determine the 
appropriateness of adding drugs to supplement the national formulary 
list, which it intends to include in a directive; (2) is developing a 
template for VISNs to document all VISN formulary additions; and (3) 
intends to review more quickly all new FDA-approved drugs for inclusion 
in the national formulary.
    To improve its nonformulary drug approval process, we recommended 
that (1) VA establish a process to ensure timely and appropriate 
decisions by medical centers and (2) veterans be allowed continued 
access to previously approved nonformulary drugs, regardless of where 
they seek care in VA's health care system. In addressing these 
recommendations, VA plans to incorporate into its revised formulary 
directive the fundamental steps that all medical centers must take in 
establishing and reporting their nonformulary activities. VA also plans 
to include in its revised formulary directive a specific requirement 
that approved nonformulary medications will continue if a veteran 
changes his or her care to a different VA facility.
    We also recommended that VA enforce existing requirements that 
VISNs collect and analyze the data needed to determine that 
nonformulary drug approval processes are implemented appropriately and 
effectively in their medical centers, including tracking both approved 
and denied requests. VA plans to establish steps for reporting its 
nonformulary approval activities. PBM has begun initial discussions 
with VA's Information Management Office about planning for the changes.
    Mr. Chairman, this concludes my prepared statement. I would be 
happy to answer any questions you or other members of the Committee may 

    Chairman Rockefeller. In fact, Dr. Herdman, I actually 
intended to call on you first, and I don't regret not calling 
on you first, but that was my intention, simply because you 
have the Institute of Medicine's report on these matters and I 
think it does make sense for you to give that overview, if you 
would be willing to do so, sir.


    Dr. Herdman. Thank you, Mr. Chairman. The Institute is very 
happy that you asked us to come and brief you on our report, a 
copy of which I think you have, but I will leave some copies 
for you.
    I am currently the Director of the National Cancer Policy 
Board, but as you know, Mr. Chairman, last year when we 
delivered our report to you and to the Veterans Administration, 
I was the director of that particular study. That study was 
ordered up by the Congress and paid for in its entirety by the 
VA and we were asked to look at four issues: The 
restrictiveness of the VA's national formulary, its effects on 
quality, its effects on cost, and a comparison of the national 
formulary with formularies in other private and public sector 
drug benefits.
    In general, the IOM committee that performed this report 
supported the VA national formulary, but pointed out some 
problems and made some recommendations for corrections of 
problems. I might say parenthetically that we were coordinating 
with the GAO insofar as their policies and procedures allow and 
that we are in general agreement with their findings.
    The committee found that a formulary is the continually 
revised list of pharmaceuticals selected for patient care. The 
history of formularies goes back over 200 years in this 
country, and almost all Americans are now covered by 
formularies. VA began using formularies along with other U.S. 
hospitals and encouraged by the JCAHO about 50 years ago, so 
formularies are not new. They have been for decades standard 
features of organized health care systems.
    The VA formulary is a list of about 1,200 drugs. It 
provides a uniform national entitlement, or intends to provide 
a uniform national entitlement to a selection of drugs 
reasonably comparable to that of other formularies and it 
restricts access to a small number of drug classes comprising 
about 15 percent of the dollar cost of the pharmacy benefit. 
That is, it is partially closed. By allowing choice among 
products and by its ability to influence market share in closed 
or preferred classes, the formulary allowed the health care 
system to present drug sellers with a price-sensitive demand 
and thereby to negotiate lower prices, and that is the point of 
the formulary.
    The IOM committee did not find convincing high-quality 
scientific studies or other persuasive evidence that 
formularies in general, or the VA national formulary 
specifically, have deleterious effects on the quality of care 
unless they had arbitrary controls or benefit restrictions that 
excluded medically necessary drugs or had limits on 
prescriptions or caps on volume or the like. The VA national 
formulary does not have such features and drugs that are not 
listed in closed classes are available by a non-formulary 
exceptions process, although, as Ms. Bascetta has pointed out, 
there are problems with that process.
    Specifically, the committee reviewed the elements of 
restrictiveness and those elements are listed in our report. I 
will summarize by just saying that we did not find that the 
VA's national formulary was overly restrictive, although as has 
been said here now several times, the non-formulary exceptions 
process was found to be inconsistent across the country without 
accurate reporting of results.
    We reviewed changes in six classes before and after the 
national formulary, from January 1995 to July 31, 1999. The VA 
has estimated that about $572 million was saved over that time 
period from their contracting and acquisitions process. That 
includes items that are not part of the national formulary. We 
estimated that over a slightly shorter time period, 
conservatively, $100 million was saved. This did not include 
one closed class, blanket purchase agreements or other missing 
data, and that represents substantial saving.
    With respect to quality, we reviewed a number of aspects of 
quality, primarily structural, and found that there was no 
noticeable effect on quality, although the data are not 
adequate to really make a strong case one way or the other.
    So we made a number of recommendations and I am going to 
briefly enumerate them. We recommended that the VA not wait, as 
they do now, or did then, for 1 year before considering new 
drugs approved by the FDA for addition to formularies. We 
recommended that the VA consider, as Ms. Bascetta has pointed 
out, the divergence of VISN, that is, regional and local 
formularies from each other and from the national formulary, 
and move toward more uniformity.
    And we recommended that the VA construct a policy on 
therapeutic interchange, that is, substitution of formulary 
drugs for non-formulary drugs that are prescribed, and make one 
that does not subject veterans to frequent changes from one 
drug to another when contracting or formulary changes are made.
    And we recommended in general that the formulary be 
continued and that the drugs in closed classes continue to be 
restricted and that the VA continue to negotiate prices, which 
they were doing, but that they collect better information, 
better data on their costs, patient-level data on inpatient, 
outpatient, and pharmacy costs, which would allow them to 
assess the impact on costs of the national formulary, and in 
particular to assess the impact of offsetting costs, shifting 
from various parts of the VA budget to other parts of the VA 
    I apologize for being a little bit over time, Mr. Chairman, 
but that concludes my report and I would be happy to answer any 
    Chairman Rockefeller. No, don't apologize. We have this 
weird system here based upon the concept that, somehow, if we 
have red, yellow, and green lights, that we become efficient. 
    I have never heard that word applied to either the Senate 
or any part in the Senate, so don't be embarrassed. But on the 
other hand, let me also say that all of your testimony is 
included in the record automatically, and the light is just a 
subtle reminder--we are thinking about having firecrackers and 
things go off, but we haven't reached that point yet.
    [The prepared statement of Dr. Herdman follows:]
 Prepared Statement of Roger Herdman, M.D., Director, National Cancer 
                  Policy Board, Institute of Medicine
    In June 2000 the Institute of Medicine's (IOM) VA Pharmacy 
Formulary Analysis Committee (the committee) delivered to the 
Department of Veterans Affairs (VA) and to House and Senate committees, 
including the Senate Committee on Veterans Affairs, a report on the VA 
National Formulary which had been requested in 1998 by the House 
Appropriations Committee in House Report 105-610. The report responded 
to four concerns outlined in the House Report: the restrictiveness of 
the formulary, its effect on quality of care of veterans, its effect on 
costs to the VA, and a comparison to other public- and private-sector 
formularies. Senator Rockefeller, then ranking minority member of the 
Senate Committee on Veterans Affairs, aware of and interested in the 
IOM study, also at about that time asked the U. S. General Accounting 
Office (GAO) to look at related issues with the VA formulary. The IOM 
and GAO coordinated efforts to comply with these congressional 
requests. The IOM also received substantial cooperation and information 
from the Veterans Health Administration (VHA), especially the Pharmacy 
Benefits Management Strategic Healthcare Group (PBM). The IOM work was 
funded exclusively under a contract with the VA. The IOM committee was 
made up of experts from the private sector with extensive expertise and 
experience in medicine, epidemiology, pharmacology, pharmacy, pharmacy 
benefits and formulary management, nursing, managed care, health 
economics, and representatives from the Disabled American Veterans and 
the Paralyzed Veterans of America.
    Although individual veterans health facilities have used 
formularies beginning 40 to 50 years ago, only in 1997 was the VA 
National Formulary implemented. It is a list of about 1,200 generic, 
brand name, and over-the-counter drugs, devices, and supplies that 
provides the basis for a uniform national entitlement for all regions 
and facilities of the VHA, including 22 VISN (regional) and many local 
formularies. The formulary system consists of all measures that the VHA 
employs to manage the use of agents on its lists, including a non-
formulary exceptions process, drug class reviews, the use of pharmacy 
and therapeutics (P&T) committees, and drug treatment guidelines. The 
National Formulary is partially closed, that is, some drug classes are 
closed or subject to restrictions, limiting choice to certain preferred 
of committed-use agents as a way of supporting VA negotiations for 
lower drug prices and meeting VHA market share objectives. Generic 
prescribing, generic substitution and therapeutic interchange (that is, 
substitution of a formulary for a non-formulary drug within a drug 
class) are also employed in managing the formulary system. Although 
minimal copayments have been imposed on some classes of veterans, to 
date they have not been available as a practical formulary management 
    Restrictiveness: The IOM report first discussed whether the VA 
National Formulary was overly restrictive. According to the committee, 
if the formulary structure or formulary system controls deny or 
significantly delay access to drugs that, in the reasonable judgment of 
medical experts, are clinically indicated, then the VA formulary meets 
the definition of overly restrictive. Criteria of restrictiveness 
include: number of items on the formulary, number of closed classes, 
number of drugs in the closed classes, timeliness of addition of new 
drugs, responsiveness on the non-formulary exceptions process, 
sensitivity of therapeutic interchange policies to patient risks, OTC 
coverage, and generic substitution. Other limits might include: 
exclusion of drugs or drug classes, prescription quantity of number 
limits, high copayments, and prior approval policies, although these 
are often considered more in the nature of scope of benefit 
definitions. The committee found that, for the most part, the VA 
National Formulary compared well with formularies in the private or 
Medicaid sector. It was not overly restrictive, by informed medical 
judgment, in terms of overall coverage, conservative closure of classes 
and numbers of items in a closed class, OTC coverage, and generic 
substitution. Some problems were identified in non-formulary exceptions 
processes, therapeutic interchange, and timeliness of addition of newly 
FDA-approved drugs having to do with consistency across the VHA, 
national policies, and patient satisfaction, which will be referred to 
later under recommendations. The committee also reviewed what was known 
about physician and patient satisfaction related to the National 
Formulary as a possible indicator of restrictiveness. Although there 
was some evidence of dissatisfaction from VA complaint records and 
physician surveys, and although there were shortcomings in the quality 
of these data, in general they did not indicate high levels of specific 
complaints or dissatisfaction. The committee concluded that at the time 
the study was done, the VA National Formulary was not overly 
    Costs: With the help of economists from the Harvard Medical School 
Department of Health Care Policy, the committee next examined the 
effect of the VA National Formulary on the cost of drugs to the VHA. In 
economic terms, the objective of the VA National Formulary is to make 
the demand for specific prescription drugs more responsive to price 
than might otherwise have been the case. Formularies increase a buyer's 
bargaining power, enabling buyers to be more aggressive in price 
negotiation. By excluding certain products or by shifting demand 
significantly between competing products, the buyer presents a seller 
with a more elastic, or price-responsive, demand, thereby inducing a 
lower price. The greater the ability to direct the volume of 
prescriptions between competing products, the more elastic the demand 
and the greater the bargaining power of the buyer. Of course, the buyer 
must be careful not to exclude medically necessary drugs or implement 
interchanges that cause risks to patients.
    As of February 2000, the VA claimed that the difference between 
actual expenditures on drugs and what would have been spent absent the 
National Formulary and other contracting activities from FY 1996 
through FY 2000 amounted to over $572 million. The IOM used a more 
conservative approach, which counted only savings from favorable price 
negotiations multiplied by drug use in six closed or preferred classes 
and did not include blanket purchase agreements, generic purchases 
under contract, bulk buying, and savings from patent expirations, among 
others. The IOM method also compared pre-National Formulary prices with 
post-National Formulary prices over a more limited time (from the date 
of class closure to opening or end of data in July 1999). Estimated 
savings approximated $100 million over about the first two years of the 
National Formulary, that is, about 3% of total pharmacy or 15% of the 
six closed and preferred class expenditures analyzed over that time 
period. The committee also explored changes in inpatient use associated 
with changes in the formulary. By the gross techniques used, no 
significant changes were observed. The committee concluded that the VA 
National Formulary was cost saving, probably generating savings of $100 
million over two years and did not appear to have any effect on 
hospital admissions for selected heart- or ulcer-related conditions.
    Quality: Quality of care is the degree to which health services for 
individuals and populations increase the likelihood of desired outcomes 
and are consistent with current professional knowledge. There are few 
data on anything except the structural characteristics of the VA 
National Formulary, and the committee found only very scanty data 
directly relating formulary elements to veterans' healthcare outcomes. 
Therefore, the committee looked predominantly at structural factors. 
These included clinical pharmacy services, local facility P&T 
committees, VISN formulary committees, the VA PBM and Medical Advisory 
Panel (MAP). The committee also examined the quality and availability 
of existing and newly FDA-approved drugs on the formulary, drug class 
reviews and therapeutic guidelines, the non-formulary process, 
therapeutic interchange policies, and drug utilization review. As noted 
earlier, the IOM noted no changes in hospital utilization as a result 
of the National Formulary, and existing (and often flawed) survey data 
did not persuasively indicate substantial levels of patient or 
physician dissatisfaction.
    There is some evidence that VHA pharmacy services and the 
performance of pharmacists in clinical roles have been strengthened and 
improved, and although this has been to some extent independent of the 
National Formulary, it probably has had a beneficial effect on quality 
of care. It is uncertain whether the implementation of the National 
Formulary has diminished the role of local P&T committees which could 
effect quality of prescribing in local facilities. VISN level formulary 
committees appear in some cases to be dominated by pharmacists raising 
the question of whether they emphasize pharmacy budgetary issues over 
quality of pharmaceutical care. The committee assessed the performance 
of the VA PBM and MAP by examining the quality of the formulary and 
formulary system. In general, no serious problems that could affect 
quality were observed, although recommendations (described later) were 
made in the areas of therapeutic interchange, non-formulary exceptions, 
and additions of newly FDA-approved drugs, among others. These might 
indicate some quality problems. In the opinion of the IOM committee, VA 
drug class reviews and therapeutic guidelines were of high professional 
quality and likely to have a good effect on quality of care. 
Unfortunately, identification and tracking of adverse drug events, 
which could be important indicators of quality effects, are so spotty 
and incomplete that they are not useful.
    The committee concluded that a completely firm and final answer to 
the question of quality would require scientifically sound evidence of 
formulary influences on quality of care that affect process of care and 
health outcomes of veterans, but there are no such epidemiological or 
other well-designed studies of the VHA. The absence of persuasive 
reports of substantial worsening of health outcomes in the medical 
literature attributable to a closed or partially closed formulary 
either for the VHA or for millions of covered lives in managed care 
(MCO) or private sector pharmacy benefit management organizations is 
not proof of no effect, although it is somewhat reassuring. Based on 
the available information and the committee's analysis, the committee 
concluded, therefore, that there is no reason to abandon the National 
Formulary and every reason to improve it.
    Comparisons: Almost all MCOs offer pharmacy benefits and have 
formularies which are closed or partially closed. In general, these 
formularies employ prior approvals, exclusions, and copayments which 
were not part of the VA National Formulary at the time of the IOM 
study. They also may use generic substitution and therapeutic 
interchange (although almost always only with permission of the 
prescriber). Medicaid formularies vary from state to state. They tend 
to be inclusive as only limited exclusions are allowed by law if drug 
companies want their drugs included and agree to sign rebate 
agreements. However, prior approvals are common and various other 
limits, such as prescription limits on quantity or frequency, may be 
used which are not part of the VA National Formulary. The DOD benefit, 
formularies, and formulary systems were in transition at the time of 
the IOM study. The DOD Basic Core Formulary, mail order formulary, and 
multiple treatment facility formularies were not comparable to the VA 
National Formulary and formulary system.
    In examining public and private sector formularies in comparison to 
the VHA, the committee concluded that some are more open, for example, 
Medicaid programs are required to offer all drugs on the Federal Supply 
Schedule that manufacturers list for rebates. Some are more 
restrictive. They require prior approvals and exclude some drugs. All 
are variable, some probably more so than the VA. Some controls that 
were not part of the VA system at the time of the study, such as 
relatively costly deductibles and copayments, may present real barriers 
to needed drugs, especially for low-income patients. These controls are 
part of DOD requirements for some eligibles or employed by some managed 
care plans. Other controls, such as generic substitution and 
therapeutic interchange are in common use in many systems. Overall, the 
committee concluded that the National Formulary's effects on quality 
are likely comparable to those of formularies in private and other 
public-sector programs.
    The IOM committee proposed nine recommendations.
    With respect to VA use of a National Formulary, the committee 
recommended that the VA should continue to close classes prudently and 
to practice generic substitution and therapeutic interchange of branded 
drugs to meet its particular quality and price objectives.
    With respect to management of the formulary, the VA should examine 
drugs newly approved by the FDA in a timely manner and abandon the 
fixed waiting period of one year before addition to the formulary. 
Drugs that provide significant improvement in treatment options should 
be given priority review.
    The balance between standardization and systemwide uniformity and 
deference to local autonomy and preferences in the VA National 
Formulary should be recalibrated towards a more uniform national 
approach before divergence or inconsistencies in the formularies (which 
sometimes exceed 100 drugs) and formulary systems increase further.
    Therapeutic interchange should be consistent in important practices 
and policies of notification and control. The VA should develop and 
implement a policy on the frequency and number of interchanges in long-
term drug therapy that can result from formulary or contract changes.
    Improvements in consistency and reporting of the non-formulary 
process should be made. The VHA should mount pilot tests of non-
formulary exceptions processes that increase responsiveness and 
physician and patient acceptance.
    The VHA should improve acceptance of the National Formulary by its 
stakeholders, including members of the health professionals and 
veterans, by, for example, representation in formulary discussions 
above the local P&T committee level, strengthened formulary committee 
participation by physicians, and a consistent policy of educating 
veterans about therapeutic interchanges and other formulary matters. 
Veteran consumers might be involved in input to the VHA, either in some 
advisory capacity, as is now required for the DOD Uniform Formulary, or 
as members of P&T or formulary committees.
    The VHA needs better information on formulary system functions and 
their effects to ensure good management of the National Formulary. The 
VHA should mount studies that illuminate quality implications of the 
National Formulary. Congress should support the collection of data to 
improve National Formulary management and well-designed programs to 
inform formulary and drug treatment performance, quality, and cost.
    With respect to effects on costs, the VHA should continue to make 
careful choices among drugs, based first on quality considerations, but 
with an understanding of cost implications, and should negotiate the 
best prices possible using the leverage of committed use and the 
ability to drive market share. The VHA should collect data to perform 
analyses addressing the question of offsetting expenditures and cost 
    In general, the IOM committee noted the extensive use of 
formularies in health care systems and supported specifically the VA 
National Formulary in concept and execution with some findings of 
problems and recommendations for needed improvements. At the conclusion 
of the study, the IOM provided some 100 copies of the report to the VA. 
The IOM committee met with the VA to explain the study and was led to 
believe then and subsequently that the VA was in agreement with many of 
the findings and recommendations and was moving forward with a process 
to implement changes consistent with the IOM report. The IOM has not 
monitored this process.

    Chairman Rockefeller. Dr. Miller, your presence here is 
very important and we welcome you, sir.


    Dr. Miller. Thank you, Mr. Chairman. I won't take your last 
statement to mean I can take 20 minutes.
    Mr. Chairman, I am honored to be here today to discuss the 
VA's management of pharmaceuticals and the IOM's and GAO's 
studies on this issue. I am currently a health policy and 
communications analyst, educator, and consultant and I work on 
issues related to the quality of health care and the 
development of new medical treatments. I have spent 
considerable time in the past examining the VA's national 
formulary policies and am currently a consultant for PhRMA, but 
I want to make it clear the views I am expressing today are my 
    There are three key points I would like to make. First, 
    Chairman Rockefeller. Now, I have got to understand this. 
You are here representing PhRMA, but your views represent your 
own views?
    Dr. Miller. I just want to make it clear that I am a 
consultant to PhRMA, in case somebody asks who my clients are.
    Chairman Rockefeller. A consultant to them, I see. OK.
    Dr. Miller. They are one of my major clients.
    Chairman Rockefeller. Then I apologize for my question.
    Dr. Miller. It is perfectly understandable.
    There are three key points I would like to make. First, the 
quality of care received by America's veterans should be the 
focus for assessing the VA's pharmacy programs. Second, 
veterans receiving care from the VHA are different from 
patients receiving care from private managed care plans or 
Medicaid programs. And third, although the VHA's pharmacy 
practices are often compared to those used by private managed 
care plans or State Medicaid programs, the VA as a Federal 
agency is different and is forced to operate differently. I 
will expand upon each of these areas and conclude with some 
thoughts about future directions.
    In discussing quality of health care, I prefer to focus in 
on the individual patient level. The VA's primer on outcomes 
states, ``Outcomes measures help bring the focus of the entire 
health care delivery system back to the patient. Rigorous and 
continuous evaluation of the process of care through outcomes 
measurements analysis will ultimately improve the quality of 
    In addition, the document called ``The Principles of a 
Sound Drug Formulary System,'' which was endorsed by the VA, 
``recognizes that patient care may be compromised if its 
formulary system is not optimally developed, organized, and 
administered.'' These statements taken together, form a good 
framework for thinking about VA's pharmaceutical policies.
    The IOM and the GAO have each done a good job in analyzing 
the VA's pharmacy systems. I would like to highlight some of 
their findings and comment on some of the limitations of their 
studies and the data that was available to them.
    As a component of outcomes measurement, the IOM found that 
hospitalizations for certain conditions did not change with the 
implementation of restrictions for medicines for these 
illnesses. However, the IOM's conclusions may be questioned, if 
it is believed, as has been discussed earlier, that the VA is 
seeing more and more patients who are only using the VA for 
limited services, such as Medicare beneficiaries who might seek 
prescription drugs.
    The IOM also found some problems with VA's therapeutic 
interchange practices, as Dr. Herdman just mentioned. I would 
like to note that VA's technology assessment program stated 
that such practices have ethical implications, and I believe 
that such system-wide clinical decisionmaking is both difficult 
and dangerous, particularly when the system, such as the VA, is 
structurally encumbered from responding rapidly to changing 
health care practices and needs. I believe this, in part, 
because of the FDA's specific efforts to identify adverse drug 
events from therapeutic interchanges for patients in private 
managed care plans.
    Further, while acknowledging that veterans are more ill 
than average and have some special health needs, the VA's 
dictum against newly approved medicines ignores the clinical 
value of new, innovative medicines. This VA practice again 
highlights my concern about making system-wide clinical 
policies and decisions without the treating physician truly 
being able to individualize care for a particular patient.
    Incentives for a VA physician to comply with the VA's 
formulary policies is another factor which may be affecting the 
quality of care for veterans. Although there appears to be very 
little analysis in this area and little data, because of the 
centralized nature of the VA's management and the fact that VA 
managers are attempting to monitor formulary compliance, as I 
believe the GAO commented upon in their study, there should be 
concerns about what incentives and disincentives VA physicians 
are facing in providing pharmaceutical care to veterans.
    Several surveys have also been conducted to assess the 
quality of the VA's pharmaceutical management systems. One 
study done by Yankelovich captured somewhat, the GAO, I think, 
used the term ``experiential data'' on patient outcomes, and 
they found that 23 percent of 418 VA physicians surveyed 
personally had had a patient that had experienced a negative 
outcome because of problems accessing medicines within the VA 
system. I find this to be of concern, particularly when it's 
combined with the IOM's finding that the VA patient safety 
event registry did ``not appear to be a reliable source for 
identifying adverse drug events.''
    Another worrisome finding is the VA's collection and 
analysis of data, as was discussed earlier, to assess outcomes 
concerning its national formulary system have been insufficient 
and their oversight in the area has not been comprehensive, nor 
integrated with other aspects of quality monitoring 
improvement. This contrasts with the VA's data showing 
utilization changes and cost savings. It is my belief that this 
difference in data collection reflects prioritizations within 
the VA management. Overall, the VA's pharmaceutical management 
practices could be viewed as a large experiment where only a 
few of the possible effects were chosen for monitoring and 
    Because the VA is often compared to the private sector, it 
is important to appreciate differences between veterans 
obtaining care in VA facilities and patients in private health 
plans. Basically, this comes down to two areas. The veterans 
receiving care at the VA are more ill than average, with 
greater needs for substance abuse and mental health treatments, 
and they need specialized services that the private health 
plans haven't generally developed in their systems.
    And second, because many veterans lack financial means, 
they do not have the other choices of health care that private 
patients have. The competitive model of private health plans 
includes financial-based incentives to use certain types of 
care, and this is not applicable to the VA.
    Just as the veteran patients are different than private 
sector patients, the veterans' health system operates very 
differently from private health plans. One striking example of 
these differences is the VA's ability to have pharmacists 
enforce therapeutic substitution policies and give veterans a 
medicine different from what their treating physician 
prescribed. Such practices, to the extent they are used to 
implement the VA's pharmaceutical policies, are very troubling. 
In fact, the VA-endorsed Principles of a Sound Drug Formulary 
System specifically states, ``Therapeutic substitution, the 
dispensing of therapeutic alternatives without the prescriber's 
approval, is illegal and should not be allowed.''
    In conclusion, the veterans' health system is different 
from other private health systems in its financing and 
structure and it is important----
    Chairman Rockefeller. Could you go over that last statement 
just again? I am just grateful there is not a stenographer 
handling your testimony, because you are moving quite quickly--
    Dr. Miller. I am sorry.
    Chairman Rockefeller. It is fine. We can all understand it. 
But could you go over the last one again----
    Dr. Miller. About the VA pharmacists dispensing a different 
    Chairman Rockefeller. Yes, that it should not be allowed, 
et cetera.
    Dr. Miller. Basically, this relates to State practice of 
pharmacy laws, and the VA as a Federal program is not subject 
to those State laws. That is my understanding of the operation 
of the system. There has been some documentation at local VA 
facilities where the directors have been----
    Chairman Rockefeller. But I thought you were saying 
something to the effect that--I had the feeling it was getting 
into patent extension or something of that sort, that you 
should not be able to do substitutes----
    Dr. Miller. The quote from ``The Principles of a Sound Drug 
Formulary System,'' which is a document endorsed by the VA as 
well as several other national organizations, like the AMA, 
Association of Health System Pharmacists, and I can read the 
quote again. It says, ``Therapeutic substitution, the 
dispension of therapeutic alternatives without the prescriber's 
approval, is illegal and should not be allowed,'' and that 
illegality refers to private sector pharmacies. The VA is not 
subject to those State laws because it is a Federal system.
    Chairman Rockefeller. That is interesting. I will get some 
comments on that afterwards. Excuse me. Go ahead.
    Dr. Miller. In conclusion, the VA is different than a 
private health system. It is an important component of the U.S. 
health system, filling a unique role in providing health care 
service to American veterans and training American physicians 
to practice medicine in a manner which many may carry outside 
of the VA system. Over 3 million veterans receive care from the 
VA, but these veterans are often more vulnerable, both 
clinically and economically than patients in private health 
plans who are protected by their ability to choose other health 
providers or treatments not preferred or offered by their 
health plans.
    To truly evaluate the effectiveness of a health system, and 
any proposed changes, clinical outcomes need to be the gold 
standard that are looked at. In evaluating health systems, it 
is important to look at four key areas: one, how access is 
provided for the health care services and the effects access 
limitations have on outcomes; two, how innovations are adopted 
by the system to improve outcomes; three, how many proposed 
changes fit into the vision of that system for the future; and 
four, what is the plan for getting from where the system is 
today to that envisioned in the future?
    Recognizing the unique characteristics and limitations of 
the veterans' health system, all these principles can be 
applied to it and its management of pharmaceutical access and 
    I thank the chair and welcome any comments. I apologize for 
going over.
    Chairman Rockefeller. No, it is OK. Thank you, Dr. Miller.
    [The prepared statement of Dr. Miller follows:]
   Prepared Statement of Michael D. Miller, M.D., Consultant to the 
     Pharmaceutical Research and Manufacturers Association (PhRMA)
    Mr. Chairman, Members of the Committee. I am honored and pleased to 
be here today to share some of my thoughts on the Veterans Health 
Administration's (VHA) management of pharmaceuticals and on the 
findings of the Institute of Medicines' \1\ and the General Accounting 
Office's \2\ studies of this issue. For the last year and a half I have 
been a health policy and communications Analyst, Consultant and 
Educator focusing on issues and projects related to the quality of 
healthcare and the development and use of new medical treatments. In 
this capacity I have given talks and participated in over 40 meetings 
across the country discussing these topics. I am currently a Consultant 
to the Pharmaceutical Research and Manufactures of America, the 
Association representing America's Research-based Pharmaceutical 
companies, but I want to make clear that the views I am expressing are 
my own.
    \1\ ``Description and Analysis of the VA National Formulary,'' IOM 
    \2\ ``VA Drug Formulary: Better Oversight Is Required, but Veterans 
Are Getting Needed Drugs,'' GAO-01-183
    It is important to remember that the current focus on the VA's 
National Formulary is due to the clinical and economic value of modern 
pharmaceuticals. Over the past 10-20 years pharmaceuticals have become 
a more important part of healthcare, and patients and providers are 
increasingly looking to pharmaceuticals as their preferred treatment 
option. Due to their clinical importance and value, providers and 
consumers of healthcare are also seeing a growing percentage of their 
healthcare spending going to pharmaceuticals. In sum, the 
pharmaceutical industry has succeeded in bringing many better treatment 
options to the bedside and the pharmacy shelf, but with this success 
has come increased scrutiny from those paying for healthcare services. 
The VHA is no exception, and as it has been reorganizing the Veterans 
Healthcare System, it has had to confront pharmaceutical management 
issues. Although much of the reorganization has been positive, such as 
expanding outpatient clinics, I believe that some of the clinical 
aspects of their management of pharmaceutical care have been 
problematic for veterans and the quality of their healthcare.\3\
    \3\ Part of the challenge of modern healthcare is integrating the 
management of all components and options of the healthcare delivery 
system. It is easier to manage each component--and its budget--
separately, but such an approach creates barriers for capitalizing on 
the benefits of new innovations, both in technology such as 
pharmaceuticals, and in processes for delivering care, such as disease 
management programs.
    There are three key points I would like to make: First, the quality 
of care received by America's veterans should be the focus for 
assessing the VHA's pharmacy programs. Second, veterans receiving care 
from the Veterans Healthcare System have significant differences from 
patients receiving care through private managed care plans or state 
Medicaid programs. Third, although the VHA's formulary and pharmacy 
practices are often compared to those employed by private managed care 
plans and state Medicaid agencies, the VHA, as a government program 
must operate differently, and it is limited in some of the ways it can 
deliver and manage the healthcare it delivers to veterans. I will 
expand upon each of these areas, and conclude with some thoughts about 
future directions.
                   quality of healthcare for veterans
    Quality in healthcare is often defined by different individuals and 
experts in a variety of ways. For example, the IOM asserted that 
healthcare quality ``can be assessed by examining the structure, 
process, and outcomes of delivery of care.'' Another frequently used 
measure of quality is patients' satisfaction, which is often measured 
as waiting times for both an appointment and within the healthcare 
    \4\ In July 1999 Testimony, the GAO found that ``Currently, the VA 
does not track information on primary and specialty clinic appointment 
waiting times.'' GAO/T-HEHS-99-158
    The definitions I prefer, focus on the individual patient. One such 
definition is, ``The right treatment for the right patient at the right 
time.'' Assessing quality at the individual patient level is 
encompassed through outcome measurements. As the VA's Primer on 
Outcomes states, ``Outcomes measurements help bring the focus of the 
entire health care delivery system back to the patient. Rigorous and 
continuous evaluation of the processes of care through outcomes 
measurement and analysis will ultimately improve the quality of care.'' 
\5\ The ``Principles of a Sound Drug Formulary System,'' which was 
endorsed by the VA, ``recognizes that patient care may be compromised 
if its formulary system is not optimally developed, organized and 
    \5\ ``Using Outcomes to Improve Health Care Decision Making,'' 
Zimmerman, Daley, Kizer and Feussner, VA and AHSR, 1997
    \6\ October 2000, ``Principles of a Sound Drug Formulary System,'' 
was endorsed by the VA's PBM, the AMA, the Academy of Managed Care 
Pharmacy, the Alliance of Community Health Plans, the American Society 
of Health-System Pharmacists, the National Business Coalition on 
Health, and the U.S. Pharmacopeia.
    As quality can be defined in many different ways, can it can also 
be analyzed in many different ways. The IOM and the GAO have each 
reviewed and analyzed the VHA's pharmacy system, and I would like to 
highlight some of their findings and comment upon some of the 
limitations of their studies. I will make these comments about the 
studies' findings and limitations not to criticize in any way the good 
work of the IOM or the GAO, but rather as a starting point to suggest 
approaches and promote thinking about future analyses of the Veterans 
Health System and VHA management because I strongly believe it is 
important to understand what we know--and what we don't know--in order 
to plan for future improvements.
    One of the worrisome findings in both the IOM and GAO studies is 
that the VA's activities in collecting and analyzing data to assess 
outcomes concerning its National Formulary system have been 
insufficient or lacking, and thus overall VHA's oversight in this area 
has not been comprehensive nor integrated with other aspects of quality 
monitoring and improvement. This contrasts both with the VA's Outcomes 
Primer statement that, ``Reliable data collection is necessary to 
develop strong evidence for health care decision making,'' and the VA's 
data showing utilization changes and cost savings. Although the IOM did 
try and assess the effects of these utilization changes on veterans' 
healthcare, they were restricted in their ability to do so by the VA's 
data limitations and because they were conducting a retrospective 
analysis rather than being able to evaluate the effects prospectively 
during implementation of the formulary policies.
    The IOM did find that hospitalizations for certain heart and ulcer 
conditions did not change with the implementation of restrictions for 
medicines for these illnesses. Such a finding is in some ways 
reassuring that the outcomes for patients with these conditions did not 
change. However, this conclusion could be questioned because, in part, 
it assumes that the percentage of veterans using the Veterans 
Healthcare System who have outside insurance coverage, such has 
Medicare, has not changed and similarly that veterans use of non-VA 
facilities has not changed. These assumptions, and hence the IOM's 
conclusion may be questioned in light of the GAO's 1999 finding that 
``several [VISN] directors commented that they are experiencing 
increased demand by veterans whose primary care is provided elsewhere 
but who obtain from the VA specialty care and services not covered by 
private insurance or Medicare.'' \7\ \8\
    \7\ GAO/T-HEHS-99-109
    \8\ It could be argued that if VA patients' use of private sector 
health facilities has not changed then the conclusion would be valid. 
However, the availability of emergency care differs between the VA and 
private health facilities, and thus if there were an increase in 
outside insurance coverage and acute adverse events, then the 
utilization of these non-VA health services might be expected to 
increase disproportionately.
    In addition, measuring inpatient admissions as a surrogate for 
outcomes would also miss adverse events treated in VA outpatient 
clinics, as well as in private outpatient settings. Given that the IOM 
also found that the VA's Patient Safety Event Registry ``does not 
appear to be a reliable source for identifying ADEs (Adverse Drug 
Events),'' this could be another factor complicating the evaluation of 
the effects of the VA's National Formulary and pharmacy policies on the 
quality of healthcare for veterans.\9\
    \9\ The VA endorsed, ``Principles of a Sound Drug Formulary 
System,'' calls for a formulary system that ``Provides for the 
monitoring, reporting, and analysis of adverse results of drug therapy 
(e.g., adverse drug reactions, medication errors) to continuously 
improve quality of care.
    Therefore, without measuring the utilization of healthcare services 
for individual patients both within and outside of the Veterans 
Healthcare System, it is uncertain how total utilization and outcomes 
have been affected by the VA's formulary policies.
    The IOM also found some problems with the VA's non-formulary 
exceptions process and therapeutic interchange practices. Both of these 
policies affect the individualized nature of clinical medicine. 
Although we would all like to believe that the practice of medicine is 
much more a science than an art, individual patient variation still 
plays a significant part in clinical care, and as the VA's Technical 
Advisory Panel concluded, population-based approaches to healthcare 
decision making and delivery, such as practiced by managed care plans 
and being adopted by the VA, have ethical implications.\10\ The 
changing nature of medicine--with new knowledge replacing old dictums--
also makes such system-wide clinical decision-making both difficult and 
dangerous, particularly when the system is structurally encumbered from 
changing rapidly.
    \10\ The VA's Technology Assessment Program 1996 report on issues 
related to transferring managed care principles to the VA stated that 
the following managed care principles were used by private health plans 
that would be appropriate ``models to the VA:
     care should be integrated throughout disease processes;
     resource use should be managed through the management of 
quality, i.e., by the management of variation;
     incentives should be aligned to the well-being of the 
enrolled population, not to the punishment of physicians for individual 
clinical decisions;
     the ethical impact of a population-based approach to 
health care decision making and delivery should be addressed through 
technology assessment.''
    Another challenge the VHA faces in making decisions about 
therapeutic interchange is the limitations of the data available to 
them about individual patient variability between medicines. The FDA 
only achieves such conclusion about the interchangeability of medicines 
for generic versions of already approved medicines based upon 
bioequivalency data--not for different chemical compounds. In fact, the 
FDA was so concerned about adverse drug events (ADEs) from therapeutic 
interchange in private health systems, that it specifically launched an 
effort looking for such ADEs through its MedWatch program.\11\
    \11\ System-wide therapeutic interchange policies are an example of 
a population-based approach to healthcare decision-making and delivery.
    Several other factors complicate the reliability of conclusions 
made when analyzing data about any group of medicines in a class. These 
     The different natures of the populations used in the 
individual studies;
     The reporting of group averages can often be misleading 
when trying to make efficacy comparisons; \12\ and
    \12\ For example, if two medicines have both been shown to be 
effective in treating a disease in 70% of patients in clinical trials, 
this may--or may not--mean they are comparable because each medicine 
may have a 70% likelihood of being effective in any given individual, 
but it's success or failure in an individual may not predict likelihood 
of the success of failure of the other medicine in the same patient. 
This is the situation for the SSRI class of medicines used to treat 
     If the study populations are less ill than the population 
which the conclusions are going to be applied to, then because of the 
greater disease burden in the real-life population, such as that seen 
at VA health centers, there is a greater possibility of adverse events 
due to the higher rates of concurrent diseases and medicines used.
    These factors all contribute to the different results produced in a 
clinical trial, where conditions and patients are closely monitored, 
versus what happens in real world clinical practice.\13\ The VA uses 
this argument, along with the veterans being more ill than average 
patients, for not making medicines readily available once they are 
approved by the FDA. Thus, the VA argues that the data on newly 
approved drugs is not sufficient to safely provide them to veterans, 
but it uses similar data to decide which medicines are therapeutically 
interchangeable. Further, acknowledging that veterans are more ill than 
average, and some have specialized health needs, the VA's dictum 
against newly approved medicines ignores the clinical value of 
innovative medicines. This knotted logic illustrates my concern about 
making system-wide clinical policies and decisions without the treating 
physician being able to truly individualize care for a particular 
patient.\14\ The incentives for VHA physicians to comply with the VHA's 
formulary policies and directives are another factor concerning the 
effects the VHA's formulary system has on the quality of care for 
veterans. Although there appears to be little analysis in this area, 
the centralized nature of the VHA's management, and because VHA local 
and regional managers are attempting to monitor formulary compliance, 
raises questions about what incentives and disincentives VHA physicians 
are facing in providing care to veterans.
    \13\ The VA's Outcomes Primer (1997) states, ``clinical 
epidemiologists have sought to establish ``real world'' effectiveness 
of diagnostic tests and treatments. These researchers have been 
concerned not only with the ``intervening'' variables that characterize 
disease status, but with the ``patient outcome'' variables that 
characterize patients' health status.''
    \14\ The VA asserts that individual physicians can obtain off-
formulary medicines for their patients when need, but the GAO in their 
January 2001 study found that 60% of the providers they surveyed said 
the average waiting time for non-formulary approvals was 9 days. GAO/
    How concerned should we be about these pharmaceutical limitations 
and practices for the individual veteran receiving healthcare from the 
VHA? The GAO found that 10 percent of prescriptions were for drugs in 
the VA's closed classes.\15\ \16\ How, many veterans this affects are 
unknown. The best way to determine this would be through a 
comprehensive, patient-based analysis of the utilization of the 
restricted drugs and classes in the VA's National Formulary.
    \15\ GAO December 1999 Study, ``VA Health Care: VA's Management of 
Drugs on Its National Formulary.''
    \16\ A 1998 analysis comparing IMS data and the medicines excluded 
from the VA's closed classes found that the VA's National Formulary 
excluded 12 of the 100 medicines most frequently prescribed in the 
private market. Since the list of 100 medicines included generic 
medicines, the percentage of excluded innovative medicines was greater 
than 12%, i.e. closer to 25%.
    Several surveys have also been conducted to assess the quality of 
the VHA's pharmaceutical management systems. Each of these surveys has 
its methodological problems and limitations. The IOM identified some of 
these in its review of both VHA's written survey and the telephone 
survey conducted by Yankelovich Partners. The GAO also conducted a mail 
survey for their January 2001 Report.\17\ The Yankelovich survey 
captured some ``experiential data''--to borrow a term from the GAO's 
lexicon--on actual patient outcomes: Their survey found that 23% of the 
418 VA physicians surveyed had personally had a patient experience a 
negative outcome because of problems accessing medicines within the 
VA's National Formulary system. I find this to be of concern, 
particularly when it is combined with the IOM's finding that as of the 
time of their survey, the VA's Patient Safety Event Registry did ``not 
appear to be a reliable source for identifying ADEs.''
    \17\ Of concern in the GAO survey was that they received responses 
from ``many prescribers'' who wrote only a few prescriptions, and thus 
the average findings may not reflect the experience of active 
    These conclusions are consistent with the GAO's and the IOM's 
findings that the VA's National Formulary system has been implemented 
without sufficient data collection and quality focused oversight tools 
in place. While the GAO in part focused on the problems the VA has in 
ensuring compliance with the National Formulary policies and 
``standardizations,'' I am much more concerned about the lack of data 
and oversight related to quality of care and outcomes measurements. The 
VA's National Formulary could be viewed as a large experiment where 
only a few of the possible effects were chosen for monitoring and 
analysis. Specifically, the VA has closely monitored and reported 
effects on utilization and costs, but the effects on quality of patient 
care--albeit much more difficult parameters to measure--have not 
received the nearly the same attention by the VA. (These same data 
inadequacies may also exist within many private health plans, and in 
the following sections I will discuss the implications of the 
differences between the VHA and other health systems.)
    The bottom line is that unless outcomes and adverse events are 
examined, changes can't be made to improve outcomes and avoid adverse 
events, and the effects on quality brought about by changes to the 
systems and processes will not be known until secondary and more 
significant adverse events become apparent. This is analogous to 
shaving your face in a fogged-up mirror. You may know that the blade 
needs to changed because you face feels rough or you find blood on your 
fingers, but wiping off the mirror and looking at what you are doing is 
certainly a both a quicker and cheaper solution in the long run because 
preventing adverse outcomes is better than treating them.
differences between va patients and patients in private health plan or 
    Although private health plans are often criticized for having the 
same lack of data collection priorities as described above, it is 
important to appreciate the differences between veterans obtaining care 
at VHA facilities and patients obtaining care at private health plans, 
and the implications this can have for the quality of healthcare 
veterans receive.
    Not only is the VA caring ``for a population that is 
disproportionately elderly and ill,'' \18\ \19\ \20\ but many also lack 
the economic resources to choose another option for their healthcare, 
i.e. they can't vote with their feet to see another doctor, and they 
can't afford to pay out-of-pocket for a medicine the VA won't provide 
for them. These differences between the Veterans Healthcare System's 
patient population and the population cared for through private health 
plans have significant implications for comparing their management 
    \18\ IOM Study--characterization in Committee Chair's Preface.
    \19\ 9 million Veterans are Medicare beneficiaries.
    \20\ Estimates of Hepatitis C prevalence among veterans were put at 
8-10 percent in 1999, (GAO/T-HEHS-99-158), and over 670,000 Veterans 
treated by the VA have mental illnesses, and 366,000 have a substance 
abuse diagnosis. (VA Testimony, 6/20/2001)
    \21\ Similarly, VA patients are very different from those covered 
by Medicaid. Simply put, the Medicaid patients are younger women and 
children, or elderly in long-term care settings, whereas the VA 
patients are predominantly male and elderly.
    Of course, an exception to statement that the veterans using the 
Veterans Healthcare System lack economic resources would be those 
veterans who are also Medicare beneficiaries, and are accessing the VA 
for benefits Medicare does not currently provide, i.e. pharmaceuticals. 
Within this group of patients, there are certainly individuals who can 
afford to purchase medicines not provided by the VA. This leads to a 
troubling practice that I call ``healthcare disintegration.'' By that I 
mean, the patient's team of healthcare providers is divided so not only 
may the patient be receiving prescriptions from more than one 
physician, but they are almost certainly having prescriptions filled by 
more than one pharmacist--who may not know what other medicines the 
other patient is taking.\22\
    \22\ I recently encountered this situation with a family friend 
with diabetes and cardiovascular conditions. The VA provides him with 
some of his medicines, and he obtains those the VA will not provide 
from the local pharmacy. Neither pharmacist knows or has records about 
all the medicines he is taking. This not only complicates his 
healthcare, potentially putting him at increased risk for drug-drug 
interactions, but it also undermines any analysis based solely upon VA 
data. This type of ``disintegration'' of the patient's healthcare team 
is also one of the hidden hazards of purchasing medicine via the 
Internet or from foreign sources.
    The significance of these clinical and economic factors is that 
systems for delivering healthcare, and of financial incentives for 
patients and providers, cannot always be readily transferred from the 
one system to another. In the clinical arena, delivery systems 
developed for private sector health systems may not fit the needs of 
patient populations with greater needs for mental health and substance 
abuse treatments. In the economic area, private health plans use 
financial incentives for patients and providers to use certain 
medicines, and the structure of these incentives have been evolving 
very rapidly over the last decade, from closed formularies to three 
tiered, to now four or even five tiered formularies. One interesting 
private sector health plan utilizes a program called 10-50-1000 to 
create financial incentives for patients and their physicians: A $10 
co-payment for preferred brand medicines, a 50% co-payment for a non-
preferred brand medicine, and an annual $1000 out-of-pocket cap. 
Another interesting facet of some private health plan formularies 
involves allowing a patient to pay a lower tier's co-payment amount if 
for medical reasons they cannot take the preferred medicine in that 
therapeutic class. The decision about this lower co-payment is made 
within the health plans local administration. Innovations like this are 
not possible within the Veterans Healthcare System because of its 
centralized decision-making structure and standardization, and the 
economic limitations of many VA patients.
      limitations of the va health system as a government program
    Although significant restructuring of the VA's Health System has 
occurred in the past several years, it still differs from private 
health systems in many ways, including:
     Limited flexibility in managing its annual budget because 
such a great percentage of it is committed to relatively fixed cost 
areas such as personnel and facilities; \23\
    \23\ ``VA's massive, aged infrastructure could be the biggest 
obstacle confronting VA's ongoing transformation efforts.'' GAO/T-HEHS-
     Limited flexibility in hiring or firing of personnel, and 
buying or selling buildings or land;
     Access to government monsopony benefits such as the 
Federal Supply Schedule prices for pharmaceuticals which already 
provides the VHA with procurement prices lower than those available in 
the private market;
     Regulatory procedures must frequently be followed to 
change policies and practices; and
     Limited ability to change the structure of benefits.
    In constant, private sector health plans are constrained by the 
terms of the contracts they have with patients, employers, and 
providers, as well as by some state and Federal laws. Specifically, as 
a Federal program, state laws do not bind the VA and thus it can bestow 
privileges on health care providers beyond what state laws would allow. 
For example, the VA is able to allow VA pharmacists to enforce 
therapeutic substitution policies, and give the veteran a medicine 
different from what their treating physician prescribed without a new 
prescription order from a physician. The VA endorsed ``Principles of a 
Sound Drug Formulary System'' specifically states that ``Therapeutic 
substitution, the dispending of therapeutic alternatives without the 
prescriber's approval, is illegal and should not be allowed.''
    Overall, private health plans have much greater flexibility than 
the VA, and each faces different directives and forces when working to 
respond to the challenges of a changing healthcare environment and 
evolutions in biomedical science. For example, because so much of the 
VA's budget it consumed by relatively fixed cost areas, in times of 
financial constraints, savings programs must be directed towards budget 
items that are not fixed, e.g. pharmaceuticals.\24\
    \24\ Pharmaceuticals represent the single largest component of 
these ``unfixed'' expenditures--even though within the VHA's overall 
spending, pharmaceuticals are very small compared to facilities and 
personnel costs. An analysis I conducted several years ago showed that 
65% of the VA's health budget was spent on inflexible 
expenditures such as personnel and facilities, while about 9% was spent 
on pharmaceuticals.
    These budgetary constraints drive the VA's decision making into 
silo or sector thinking and management. Private health plans, because 
of their greater structural and financial flexibility, can more easily 
integrate the management of all components of their health delivery 
system, and thus explicitly attempt to initiate practices which will 
produce cost savings in one area while knowingly increase costs in 
another area. For example, a large health plan instituted a disease 
management program for patients with congestive heart failure. After 
one year's experience with over 1,900 patients, they found they for 
these patients, hospitalization costs had decreased 78%, outpatient 
pharmaceutical spending had increased 60% ($243,000), with the net 
savings in caring for these patients totaling $9.3 million.\25\ In 
addition, this intervention produced better clinical outcomes, with the 
patients better able to perform activities of daily living, and their 
mortality rate was only 10 percent compared to an expected 25 percent. 
This type of integrated management is difficult for the VA because of 
it's data limitations, and so much of its spending is for fixed cost 
items and thus it cannot realize savings from such utilization 
    \25\ 1996 Year-Long Study of 1,915 Humana Members reported in 
``Managed Care Pharmacy,'' April 1998, pp 42-44
    \26\ In 1999, the GAO stated ``VA's data systems do not fully track 
treatment specific costs, making it difficult for VA to determine the 
exact cost savings it could realize by discontinuing care to some 
veterans or reducing benefits.'' GAO/T-HEHS-99-158
    Private health plans also have much greater flexibility in their 
arrangements with providers and with their patients. For example, 
health plans can relatively quickly, reorganize contracts with 
providers, reprioritize co-payments and deductibles payments due from 
patients, sell off assets and even change premium structures. Thus, 
they have much greater flexibility in managing financial constraints, 
and responding to the changing nature of clinical medicine by changing 
benefit designs and their structure for delivering healthcare.
    The Veterans Healthcare System is a unique component of the US 
healthcare system, serving an important role in providing healthcare 
services to America's veterans. Because of it's unique character, 
comparing the Veterans Healthcare System to other health systems must 
include a recognition of the differences between the VA and non-
governmental providers and financers of health care--both here in the 
US and in other countries.
    While the VHA provides healthcare to over 3 million US veterans 
each year, these individuals are not a representative sample of 
Americans, but rather they are predominantly male, older, have more 
healthcare problems and needs than average, and have lower financial 
resources. These last two points, while well known to VA observers, are 
important because together they mean that many of these patients are 
more vulnerable both clinically and economically than patients in 
private health plans who are protected by their ability to choose other 
health plans, or treatments not preferred nor offered by their health 
    To truly evaluate the effectiveness of a health system, and any 
changes being made to ``improve'' it, clinical outcomes are the gold 
standard. Recognizing the difficulty in measuring and analyzing data 
for clinical outcomes does not change their importance. Rather, it 
highlights the importance of examining whatever analyses are available, 
and asking what are the limitations of these analyses and what insight 
can they provide into the effects changes to any component of the 
health system may be having for actual clinical outcomes.
    Overall, because outcomes are the key goal, in evaluating any 
health system it is important to look at four key areas of structure 
and planning: 1. How access is provided to health care services and the 
effect access limits and practices have on clinical outcomes; 2. How 
innovations are adopted by the system to improve outcomes; 3. In 
planning for future improvements to a health system, what should this 
future looks like, i.e., what is the vision; and 4. What is the plan 
for getting to that envisioned future from where the system exists 
today. Recognizing its unique characteristics and limitations, all 
these principles can be applied to the Veterans Healthcare System, and 
its management of pharmaceutical access and delivery.

    Chairman Rockefeller. Is Dr. Garthwaite still here?
    Mr. Ogden. No, Dr. Garthwaite left, but I am here.
    Chairman Rockefeller. You are here, that is right. John, 
you are here. The reason I wanted to know is because I think 
you used the percentage 23 percent----
    Dr. Miller. That was in the Yankelovich survey.
    Chairman Rockefeller. Yes, and that there was a bad result 
or a bad outcome or a less than desirable outcome. I have heard 
this used so much over the last number of years, and yet I have 
actually never heard it defined very well. Dr. Herdman, I might 
call on you and you can give us that, and you, John Ogden, if 
you care to.
    How does that break down? What is the meaning of either an 
overlapping or conflicting prescription, as opposed to simply 
taking the wrong ones, as opposed to computer mistakes, as 
opposed to the confusion at whatever magnitude? Let us take the 
23 percent for the moment, regardless of whether it is 13 or 
23, and let us take it and break it down as much as you can, as 
you understand the problem of misuse of prescriptions or 
overuse of prescriptions or conflicting use of prescriptions, 
or whatever. I do not ask for absolute accuracy. I ask for a 
sense, because I have heard this used so often and I have never 
heard it broken down properly.
    Dr. Miller. Mr. Chairman, would you like me to respond and 
explain the----
    Chairman Rockefeller. That would be fine, too.
    Dr. Miller. The number came out of a Yankelovich phone 
survey of VA physicians and reflected those physicians feeling 
that their patient had a negative outcome because of some 
limitation in----
    Chairman Rockefeller. No, I understand what was positive. 
What I am trying to get is underneath that, what the 
explanation might be.
    Dr. Miller. What those adverse events were?
    Chairman Rockefeller. What is it they observe? Where do 
they think these mistakes are made, et cetera?
    Dr. Herdman. The Yankelovich survey, if I could, Senator, 
is a survey basically of physicians' attitudes about a national 
formulary and what they are saying is they don't like it or 
they have trouble getting medications they need or their 
patients are suffering bad outcomes because the formulary----
    Chairman Rockefeller. All of which I understand, Dr. 
Herdman. I am just trying to get a sense of how, in a rough 
way, does that break down episodically? What are the causes of 
    Dr. Herdman. I don't think that the survey helps you find 
that. If you are thinking----
    Chairman Rockefeller. I know that. I understand that. I am 
trying to just----
    Dr. Herdman. I am not sure what the percent in various 
categories is--maybe John Ogden can help us with this--is of 
the various problems that you have in the pharmacy benefit or 
prescribing, whether the adverse events are allergies or the 
patient took the wrong dose or the physician prescribed the 
wrong dose or the pharmacist dispensed the wrong dose or there 
was an interaction between the drug that the patient was 
already on and the new drug that was prescribed. Those are an 
array of problems which can occur in a drug treatment 
situation. There are reports in literature about how those 
things, the numbers of those and the percents in the various 
categories, if that is what you are looking for.
    Dr. Miller. I think the VA has done a good job in reporting 
about their use of bar code and other things to prevent 
dispensing of the wrong medicine to the patient, which is one 
area where you can have a medical error resulting in an adverse 
    The other kinds of things that can happen, as Dr. Herdman 
said, you can get drug-drug interactions, and that brings up 
one concern that I have and it relates to Medicare, is some 
veterans may be getting some of their medicines from the VA and 
some of their medicines outside of the VA.
    Chairman Rockefeller. That is what I am trying to get at. 
John, do you have some----
    Mr. Ogden. I don't have any numbers on that, but I would 
say that is an accurate statement.
    Chairman Rockefeller. Do you have anything more you could 
add, into a microphone?
    Mr. Ogden. On that issue, or on the whole issue----
    Chairman Rockefeller. On that issue.
    Mr. Ogden. I would say that you probably have veterans who 
have those eligibilities, those dual or triple eligibilities, 
that do go to the different systems, and because the 
informatics capability external to VA, feeding into VA or 
interacting with VA, doesn't exist, that there is a possibility 
of drug-drug interactions in that situation.
    Chairman Rockefeller. And would that be because they would 
fear that they would run out, let us say, of a prescription and 
they wanted to make sure that they had enough for several 
months? Would that be----
    Mr. Ogden. I don't believe that----
    Chairman Rockefeller. Why would they----
    Mr. Ogden. Why they would shop, if you will?
    Chairman Rockefeller. Yes.
    Mr. Ogden. It could be convenience. It could be access, you 
know, where they happen to be at a point in time geographically 
in the country.
    Chairman Rockefeller. What percentage of bad outcomes can 
result in very serious health damage?
    Mr. Ogden. Well, I am not a physician----
    Chairman Rockefeller. In general terms. In general terms.
    Mr. Ogden. I don't think I am the person to answer that 
question, but drugs, in this country, drugs approved by the 
Food and Drug Administration are generally safe when taken as 
    Chairman Rockefeller. As prescribed.
    Mr. Ogden. How many adverse events occur because patients 
take drugs that----
    Chairman Rockefeller. Or take them on their own. I mean, 
there is the classic situation, and whenever I think about 
this, I think of retired coal miners, who average 78 to 80 
years old. You open up the medicine cabinet in their bathrooms 
and there may be 12 to 15 bottles of pills and they may take as 
many as 12 different kinds of pills a day. So inherent in 
that--and it is not a far reach from there to a veteran--is a 
tremendous capacity for confusion, the drug already having been 
dispensed, the little paper that comes in the bag that says 
what you can't mix it with, et cetera, already having been long 
since deposited in the trash can, you know, where these 
confusions come from.
    Mr. Ogden. Well, you absolutely make an excellent point. 
When you think about the VA, and Dr. Miller described the VA as 
being different, if, in our case, the veteran accesses the VA 
health care system for most of their medical care needs, which 
subsequently would include pharmaceuticals, those 
pharmaceuticals are in the VA automated medical records, so 
that screening is taking place.
    Chairman Rockefeller. Automatically?
    Mr. Ogden. Automatically. In the private sector, if you and 
I go down to the local drug store and present our prescription, 
they are screening your prescription, as well, but their screen 
only includes those prescriptions that you presented and 
subsequently received from that drug store. If a patient also 
utilizes another drug store 3 miles away or 5 miles away, that 
screening doesn't take place.
    So it does lend some credence to interconnectivity, and I 
appreciate the issue of patient confidentiality, but from a 
patient safety and quality of care perspective, there is an 
absolute need for patients, for people like you and I and our 
families, to choose a system, choose a pharmacy and stick with 
that pharmacy, because you can be reasonably assured, then, 
that those cross-checks are taking place, whether it is Giant, 
whether it is CVS, whether it is XYZ pharmacy.
    Dr. Herdman. There are, Senator, an enormous number of 
adverse drug events in this country every year for all the 
various reasons we have been talking about. It seems to me, 
that there is information to get at the numbers and reasons for 
those, the errors--I think there is a section in the IOM 
report, ``To Err is Human,'' a medical errors report. I am not 
sure staff has seen that. I would be happy to send you a copy, 
which describes some of this and ways in which people can avoid 
those drug errors.
    Ms. Bascetta. Mr. Chairman, I would----
    Chairman Rockefeller. You see, that is precisely the point. 
It is a syndrome we get into here in Washington, it seems to 
me, that we discuss things as we think they should be, and, 
indeed, as they often should be. But our discussing of it, even 
passing rules, regulations, or laws about it, doesn't 
necessarily project it any further than Bethesda, MD. I mean, 
it is of enormous concern to me.
    The point that you made--and I recognize this is off-point 
in some respects, but it is on-point as far as I am concerned--
that if you decide to go to a certain pharmacy, and I will just 
use my own example. I had three root canals taken on the same 
tooth. I was not particularly grateful for that experience, but 
I had to deal with it, and each time, I had to go get 
penicillin in case there was inflammation. In one case, I was 
going off to Japan, that kind of thing.
    And so I was, in effect--I have no particular allegiance to 
a pharmacy, and so it was almost a question of where I chose to 
stop. And in each case, where I chose to stop, I had to wait an 
hour because they tended to be large pharmacies with lots of 
people waiting, or in some cases large pharmacies with nobody 
waiting, in which case the 1-hour totally perplexed me----
    Chairman Rockefeller [continuing]. But the point was, I 
waited an hour, which I really don't have, although I am not 
important in that respect, but I did it. Well, that could have 
driven me to another pharmacy, couldn't it, where they would 
not have had any record of these previous root canals, 
whatever, and it is a very important point, and it is all 
assuming consumer sophistication. I think that my understanding 
of those things might be a little bit better, let us say, than 
some other people, so this is a huge problem.
    As I said, the suggestions that you have are exactly right. 
There is a wonderful article in today's Post by Dean Ornish, 
whom I happen to admire very much, about pace of life and what 
you eat and all the rest of it, and I am going to read it when 
I get home tonight. I do not know how many other people are 
going to read it. So what is written doesn't necessarily mean 
what people do. That is my point.
    Dr. Miller. Can I make one further comment, Senator?
    Chairman Rockefeller. Yes.
    Dr. Miller. The problem is only going to get worse as we 
develop more treatments to treat chronic diseases as our 
population ages, because the more medicines somebody takes, the 
more concomitant illnesses they have, the potential for drug-
drug interactions or just an adverse event from a single drug 
because of other illnesses increases.
    So, as Dr. Herdman said, to err is human. I think we need 
to take the perspective that health care is, by nature, a 
little bit messy. It is still as much art as it is science, 
which adds the complexity of trying to figure out what is the 
best thing to do for individual patients. However, part of the 
problem I have, and I understand the GAO's perspective, and the 
work it does, but standardization and uniformity are not always 
the best thing for quality of care. They may have value in a 
bureaucracy, in administration of things, but health care is a 
little different than just producing something where everything 
is the same, whether it is cars or pens or water glasses.
    Ms. Bascetta. Mr. Chairman?
    Chairman Rockefeller. You have your chance. Yes?
    Ms. Bascetta. As long as standardization is clinically 
driven, and I think John Ogden would agree that that is, in 
fact, the essential underpinnings of the VA's decisions, then 
it is appropriate. Of course, the other piece of that is you 
have to balance local needs and individual needs. That is why 
getting better oversight and control of the non-formulary 
process is so important to us.
    I would like to comment about the IOM study. I think that 
Mr. Herdman is exactly correct that there is data in there, 
although I think it is more heavily looking at inpatient 
problems with medication errors and adverse events. It won't 
help us today, but for the future, VA has a patient safety 
initiative that is quite extensive, and I know that what they 
are doing is they are collecting data on actual harm that has 
been done as a result of an error, or potential harm. Of 
course, there is much more in the potential harm area, 
fortunately, than in the actual harm area.
    They are finding that so many reports are coming in on 
medication errors that, in fact, rather than doing an analysis 
of each of those incidents, they are aggregating them and they 
are going to be looking at what the causes of those errors are. 
So I would hope that when they have had more experience with 
that data base and with that initiative, we will learn 
something that will be useful.
    Chairman Rockefeller. OK. I want to get back to basics for 
a moment again with you, Ms. Bascetta, and that is that you 
have looked at a lot of projects in the VA health care system. 
Again, I go to this cost shifting matter that I discussed with 
the earlier panel. If the price of pharmaceuticals continues to 
rise, as I think we all understand it will, what do you think 
will be the effect on the VA as a health care system in its 
efficacy for veterans?
    Ms. Bascetta. As the effect would similarly be on the 
entire health care system, what happens is that if you are 
going to have a fixed amount of resources to spend on health 
care, if one component, in this case, drugs, rises 
disproportionately, you are going to crowd out other services. 
You have a couple--that is the simple answer. I mean, you have 
a couple of options. You can offer a less generous benefit 
package to a larger number of people or you can cut back on the 
number of people that you can serve or you can look for more 
    Chairman Rockefeller. You see, that point has to be made 
very clearly, doesn't it----
    Ms. Bascetta. Yes, it does.
    Chairman Rockefeller [continuing]. Because this is a 
budgeted annual event, the VA health care system----
    Ms. Bascetta. That is correct.
    Chairman Rockefeller [continuing]. And if one thing goes 
up, something else has to come down.
    Ms. Bascetta. I think we have to be careful about 
oversimplifying, though, in the sense that there are lots of 
complicated analyses we could do to shed light on the problem. 
For example, we know that the priority seven veterans are 
coming in at a much higher rate than they were before 
eligibility reform. We credit the IG with coming up with the 
first quantitative information that supports the conventional 
wisdom that, in fact, they are coming for gap coverage.
    As Dr. Garthwaite said, I don't know if we can extrapolate 
from VISN 8, but VA could take its PBM data base and match it 
against its enrollment data base to see, in fact, what the 
costs are, what the utilization costs are for pharmaceuticals 
for the sevens, and they can also do it by age, to see what the 
Medicare-eligible proportion of the population is that is using 
those services. They might have to go into the medical records 
to check if that was the sole utilization of those 
beneficiaries. I am not sure.
    But it would be important to get a handle on that, and part 
of the reason that would be important is if sevens are, in 
fact, driving up disproportionately or in an absolute sense 
that proportion of the budget, then you might want to tailor a 
solution to that part of the population. You might want to see 
if you can raise copays there more if, in fact, the sevens have 
resources. There are other options that might become more 
evident as you further analyze the problem.
    Chairman Rockefeller. Thank you.
    Dr. Herdman, I want to ask you this. You mentioned in your 
testimony that the Medicaid formularies are more open, as you 
put it, than the VHA's formulary, because those formularies are 
required to offer all drugs on the FSS, the Federal Supply 
Schedule, that manufacturers list for rebates. Now, this 
strikes me as curious. The VA runs the formulary situation, but 
veterans don't have easy access to those drugs, while Medicaid 
beneficiaries do. So I am kind of curious, does this make 
sense? How does one analyze this?
    Dr. Herdman. Well, it is true that Medicaid is required to 
cover all the drugs which manufacturers list for rebates on the 
Federal Supply Schedule, and that is a lot of drugs. It is also 
true that they can exclude some drugs, as I am sure you know, 
the OBRA drugs, which is about 12 categories of drugs, so that 
those drugs aren't available under any circumstances unless a 
State chooses not to take that exclusion, and it is also true 
that Medicaid can enforce prior authorization for drugs, which 
does restrict access to the drugs that they choose to list as 
drugs that need prior authorization.
    And Medicaid programs also have a history, as I am sure you 
know, of other limits on drugs. For example, you can only have 
three prescriptions a month or three prescriptions over a 
certain time period, or a prescription can only have so many 
items in it or limits like that, which aren't based on medical 
necessity or any scientific or medical analysis of patient need 
or drug treatment science, they are just arbitrary limits to 
save costs. And generally, I think, the IOM found that they 
were counterproductive.
    So that describes the Medicaid program. The VA has, I think 
it is fair to say, a more restricted formulary in general 
because it lists overall, as you know, 1,200 items, but those 
items are not all drugs. Actually, more like 600 items, 
varying, depending on the VISN or facility, are probably 
actually separate individual pharmaceutical drug products. So 
it is more restrictive from that perspective.
    But unless you are in a closed or preferred class, I think 
it is fair to say, there is reasonable access. I appreciate Ms. 
Bascetta's point. We certainly agree with that, that some of 
the facilities, they do not stock all the drugs. They may be on 
the formulary, but they are not stocked or the formulary may 
vary and the adherence isn't perfect.
    But leaving that aside, unless you are in the closed or 
preferred classes, you have pretty good access to the drugs 
that are on the formulary and we thought, the IOM thought, that 
the formulary had a very reasonable array of drug products to 
cover the kinds of health conditions which veterans came in 
with. So that seemed fair enough.
    It is true that there are problems with the closed classes. 
Insofar as if you don't do well on the drug that is in the 
class, you have an adverse reaction, or there isn't a 
therapeutic alternate in that class really for you, or for any 
of a bunch of reasons that the VA itself lists, that you might 
not want to have the drug which is listed in the closed class. 
If the drug in the closed class or the preferred class or the 
committed use contract or the blanket purchase agreement or 
whatever, the restriction, is not the drug that you need and 
you are going to do well on, then you may have a problem and 
that is a restriction which, I think, often in Medicaid, you 
would not run into.
    So as the report said, at the end of the day, in some ways, 
the VA national formulary is more restrictive, and in some 
ways, it is less restrictive than comparison private sector or 
public sector formularies, and you have to take the 
    Chairman Rockefeller. I understand. I understand. I am 
going to ask three more questions, and I am not going to hold 
you beyond that. This is for you, Dr. Miller, and for you, Mr. 
Ogden, should you care to answer.
    My question has to do with a recent example of problem 
issues with therapeutic interchange, and anybody else can 
comment. Obviously, I welcome that. Isn't there an issue right 
now, in fact, with automatic substitution of drugs to treat 
mental health patients? I am getting at the atypical 
antipsychotics matter.
    Dr. Miller. I have heard that there are some problems in 
this area, but I don't have any specific evidence to cite at 
this time. Although I am not intimately familiar with the VA's 
current policies in that area, the atypical antipsychotics, and 
treatment issues for mental illnesses, is a very interesting 
area because these people are very sick and oftentimes have 
multilayered issues, if you will, oftentimes with accessing 
health care. So if there is a problem with their treatment, it 
can lead to problems of trust of the provider and the health 
system. So making them jump through more hoops to get what 
ultimately works for them could lead to problems for those 
    Mr. Ogden. I would care to comment if I could, please. 
There is no automatic substitution of the atypical 
antipsychotics in the VA health care system. The current VA 
National Formulary listing includes all of the atypical 
antipsychotics except for the brand new Pfizer product called 
Ziprasidone, which we are still developing. We have already 
developed the criteria for its use, but until more efficacy and 
safety data is available, we are not going to add it to the 
formulary right away.
    What we are talking about in the case of the atypical 
antipsychotics is--not me or Dr. Garthwaite, but what mental 
health professionals are talking about in the field is you have 
a class of drugs, in this case, the newer atypical 
antipsychotics, the novel antipsychotics, in which there is no 
scientific evidence nor consensus at this point in time that 
drug A is better than drug B is better than drug C.
    So what the field mental health professionals are 
contemplating and considering and, in fact, doing is in 
patients who have never been on an atypical antipsychotic or in 
patients who have had problems with the more traditional, the 
typical older antipsychotic drugs, what the mental health 
professionals are recommending is using an effective--or begin 
therapy with an effective, less expensive agent. That is what 
this is all about. It is not a fail-first policy. There is no 
fail-first policy. It is guidance that describes what I just 
explained to you.
    And let me read from three documents that I have from three 
different health entities in this Nation concerning this 
matter. One of them is dated May 7, 1998.

    From a clinical standpoint, there are credible arguments 
for using each of these two medications, that is, Olanzapine 
and Risperidone, in various circumstances. However, the current 
price difference is extraordinary and it would be irresponsible 
to prescribe Olanzapine before prescribing Risperidone in 
clinical situations where either agent might readily be used.

    That, in sum, is what we are talking about and what our 
mental health professionals are talking about in VA.
    Here is another health plan from the Commonwealth of 
Massachusetts. Their Department of Corrections in their 
formulary dated October of 2000 said:

    Risperidone is the preferred atypical antipsychotic because 
it is felt that there is a similar therapeutic equivalency 
amongst the class of novel agents and the use of Risperidone is 
generally more cost effective than either Olanzapine or 
Quetiapine at comparative therapeutic doses. New patients being 
started on an atypical antipsychotic agent should begin with a 
treatment trial on Risperidone.

    So that is the Commonwealth of Massachusetts, their 
Department of Corrections.
    And the last system is the Henry Ford Health System in 
Detroit. This is back in 1999 and it said:

    At our recent ambulatory pharmacy and therapeutics 
committee meeting, we reviewed the atypical antipsychotics and 
have chosen Risperidone for listing on the Henry Ford 
ambulatory care formulary. The decision was made after 
consideration of comparative efficacy, safety, and cost data 
for the atypical agents compared to each other in first 
generation intermediate to high-potency antipsychotics.

    So this kind of activity has been and is occurring in other 
health entities across the Nation. Again, we are not talking 
about therapeutic interchange of any patient who is on 
Olanzapine. That is not what we are talking about. What we are 
talking about is VA mental health professionals coming to 
similar conclusions as I read into the record by other health 
    So I think it is a responsible action by our mental health 
professionals and certainly one that our PBM group, the medical 
advisory panel and our VISN formulary leaders, support.
    Chairman Rockefeller. Thank you very much.
    Dr. Herdman, when we are confronted with a need for which 
we don't have the money, we start talking cost containment, and 
cost containment is terrific in the sense that you can, as we 
did in 1993, volume bargain or leverage the cost of 
prescription drugs down. On the other hand, it is the old 
argument about managed care versus, let us say, fee-for-service 
in Medicare or managed care under any circumstances.
    The argument, and I can remember in the Finance Committee, 
8 to 10 years ago, health professionals coming in and saying, 
managed care is going to get you savings, all right, for about 
2 years, but then it is going to stop and the cost of their 
doing business is going to approximately go up with the cost of 
other people's doing business, as indeed we have seen in the 
cost per capita cost increase of health care between the United 
States and Canada, even though they have a totally different 
and presumably less expensive system. The costs, at least up 
until recently, have risen at about the same level.
    So what I want to get from you and anybody else who would 
care to comment on this, particularly for the older, sicker 
population among our veterans, is is there a point at which 
cost containment in its broadest sense--not just the first 2 
years or the let us leverage volume, buy down the cost of 
prescription drugs stage--at which cost containment as a 
philosophy begins to wrongly intersect with the legitimate 
health care needs of a fragile population?
    Dr. Herdman. Well, I guess the answer is sure. Sure, there 
is such a point. The managed care example that you gave, I 
think, is true enough. The easy savings were taken, that is, 
the discounts from various kinds of providers and so on.
    When you implement a cost containment program, my 
experience with that goes back 30 years when I was in New York 
working for a Rockefeller, actually. We were doing work on the 
Medicaid program. When you implement a cost containment 
program, you are going to annoy people because they are not 
going to get what they want. And the trick is, I guess, to stay 
the course, first of all, and continue to annoy them and to 
continue to get the savings, but not to get to the point where, 
when you are not giving them what they want, you end up not 
giving them what they need, and that is very, very difficult.
    What happened in managed care, I think--this is an off-the-
cuff opinion--is that it became politically difficult to not 
give people what they wanted. I don't know. There was very 
little evidence--I am thinking of some other IOM reports--that 
they weren't getting what they needed, although, of course, you 
could cite examples of disasters, but those are all anecdotes, 
and always occur no matter what kind of a system you look at.
    So the answer to your question is, clearly, yes. Now, if 
you want to talk about the VA's national formulary and its drug 
benefit, the IOM, although it clearly pointed out some 
problems, as did GAO, and clearly thinks that there can be 
improvements, found by and large, that the system was based on 
good medicine and good science and was reasonably careful. 
Sure, they had problems with therapeutic interchange, and I 
think they are going to continue to have problems with 
therapeutic interchange. There is always that possibility, but 
by and large, the drug reviews were good, the therapeutic 
guidelines were good, and the system actually demonstrably did 
save money and so it allowed the VA to put the money elsewhere 
and, hopefully, deliver valuable services to veterans.
    We couldn't find, and here I emphasize over and over again 
the caveat that the data available to look at the quality issue 
are lousy or not there at all, but we couldn't find any 
evidence that there was an impact on the quality of care of 
veterans not getting what they actually needed.
    We did, I think you may recall--I don't know if I put it in 
my written testimony--that we did look, or actually the Harvard 
Department of Health Care Policy, which did the subcontract on 
costs, did look at the effect on inpatient hospital discharges 
for ulcer-related and heart-related conditions in the VA over 
the period before and after changes were made in the formulary 
to restrict closed classes of the proton pump inhibitors and 
the ACE inhibitors and various drugs which are used for heart 
conditions and for ulcer-related conditions and could not find 
any changes. I don't want to emphasize that particularly except 
to say that it just has to stand on its merits, which are not 
very great because it is a very crude study. But at least we 
tried to look.
    When we looked--and this is a long answer, I am sorry to 
keep going on--when we finally got through with all that, we 
said those kinds of studies are very important to get at the 
issue you are talking about, and what we need, we suggested--
recommended that the VA begin to collect information, cost 
information, expenditure information, utilization information, 
and outcome information which would help them and you decide 
whether they weren't getting what they needed, as opposed to 
what they wanted.
    Chairman Rockefeller. Comments?
    Ms. Bascetta. Yes. Back to our analysis of the non-
formulary process, which, as we pointed out, was the one that 
we were the most concerned about, there were a couple other 
questions that we asked physicians in our survey. I will remind 
you it was a survey of 2,000 physicians, so it is statistically 
valid and projectible to the universe of VA doctors.
    Only 63 of the 2,000 in the narrative portion of the survey 
told us about specific problems they had when they weren't able 
to get a non-formulary drug with a patient.
    Chairman Rockefeller. When they weren't able to do what?
    Ms. Bascetta. When they weren't able to get a non-formulary 
    Chairman Rockefeller. OK.
    Ms. Bascetta. Sixty-three patients is a lot if you are 1 of 
the 63 patients. But we took some comfort in knowing that we 
didn't have physicians running to us, telling us about all 
kinds of serious adverse events or adverse health outcomes. But 
they did note suboptimal control of symptoms, particularly with 
asthma, pain, and GI disturbances and lipid control. So they 
are not insignificant.
    They also told us that--33 percent of them told us that 
they didn't request a non-formulary waiver because they thought 
it would take too long, and 16 percent said that they didn't 
request a non-formulary waiver because they thought they would 
be denied. So to the extent that, in some locations, that 
process might have been a deterrent, we don't know. We don't 
have good information about what would have happened to the 
    I would also like to point out that one of the most 
frequent responses that we got from the physicians was that the 
patient went and got the non-formulary drug, if they couldn't 
get it from the VA, outside. That is, they paid for it out of 
their own pockets. We didn't ask this question. I wish we have 
the foresight to think about the priority sevens when we were 
doing the survey. But it makes me wonder if some of those 
veterans had come to VA solely for that benefit, and when they 
weren't able to get the specific drug that their private 
physician had recommended, they went back outside. That is a 
very interesting question, I think.
    Chairman Rockefeller. Thank you. Did you want to add 
    Dr. Miller. I did, Senator, just quickly. I think the 
effects on quality from cost containment have to be looked at 
systemwide. I want to underline Dr. Herdman's statement about 
the need for data to actually determine what is going on. 
Examples you can look at are the British health care system, 
where experts agree they have underfunded their public system 
and they use the safety valve of their private system to keep 
things going. In Canada, there is underfunding in certain 
areas, with the United States acting as their safety valve for 
people coming over here to get some specialized cancer 
treatments and things like that. So I think you have got to 
look comprehensively at what is going on in the system.
    One example of how this interplay can happen between access 
and cost containment and how people get what they pay for, more 
or less, is what we do in our country for substance abuse, 
which, I think, is a big issue for the veterans' population. 
Those patients, the low-income veterans, don't have that 
``safety valve'' that some patients have who can go elsewhere 
for their prescriptions. They can't afford to get it outside 
the VA. There is no ``safety valve'' for low-income veterans.
    Chairman Rockefeller. I want to thank all of you. I find 
these hearings very useful. It may not be so with all, who 
think there are too many questions or too detailed questions, 
but I think this is the way you ultimately learn issues, and 
very important issues affecting very important people.
    I have taken a lot of your time and I appreciate that and 
thank you very much. This hearing is in recess.
    [Whereupon, at 4:37 p.m., the committee was adjourned.]
                            A P P E N D I X


Prepared Statement of Moe Armstrong on Behalf of the National Alliance 
                          for the Mentally Ill
    Chairman Rockefeller, and members of the Committee, I am Moe 
Armstrong of Cambridge, MA. I am pleased today to offer the views of 
the NAMI-National Alliance for the Mentally Ill on prescription drug 
issues in the Department of Veterans Affairs. I would like to direct my 
testimony to the important issue of prescription drugs for the 
treatment of severe mental illness.
    In addition to serving on the NAMI Board, I am a veteran myself. I 
served in Vietnam in 1966. I was decorated for bravery in combat with a 
Navy Commendation Medal with a Combat V. My life was to be a career 
soldier until I became mentally ill.
    Since the war, I have received mental health care and vocational 
rehabilitation services from the Veterans Administration. I went back 
to college and earned two masters degrees. I have worked in public 
mental health for almost fifteen years and have received many awards 
and acknowledgement from my service with the Massachusetts public 
mental health system. I also assist the Veterans Administration in 
setting up peer support groups in the North East region.
    My prescription benefit comes through the mental health care and 
primary medical care, which I still get from the Veterans 
Administration. Veteran's mental health and physical health issues are 
very severe due to the nature of serving in both combat and the 
service. I have sometimes thought that my one-year in Vietnam was like 
ten years in a job outside the service. Veterans need specialized and 
intensive care. We also deserve care equal to care outside the VA. Part 
of that care is receiving access to the best medication available.
    Having a major mental illness since the war means that I need good 
medication so that I can cool out. Once stable, I can do almost 
anything. I can go to school, go to work, and live in the community 
without excessive hospitalizations. Modern medications are almost a 
miracle. These new psychiatric medications are the best. They take away 
many of the psychiatric symptoms without downing out the person.
    I take this medication. This is the best that I have felt since the 
war. I want everyone to have access to this new medication and I want 
people to continue to have access to the new medications. If your life 
were in danger of falling apart from mental illness or a member of you 
family were in the situation of psychiatrically falling apart, I am 
sure that you also would want access to this new medication.
    I also currently serve as a member of the VA's Consumer Advisory 
Council on veterans with severe mental illness.
                              who is nami?
    NAMI is the nation's largest national organization, 220,000 members 
representing persons with serious brain disorders and their families. 
Through our 1,200 chapters and affiliates in all 50 states, we support 
education, outreach, advocacy and research on behalf of persons with 
serious brain disorders such as schizophrenia, manic depressive 
illness, major depression, severe anxiety disorders and major mental 
illnesses affecting children.
    Mr. Chairman, for too long severe mental illness has been shrouded 
in stigma and discrimination. These illnesses have been misunderstood, 
feared, hidden, and often ignored by science. Only in the last decade 
have we seen the first real hope for people with these brain disorders 
through pioneering research that has uncovered both biological 
underpinnings for these brain disorders and treatments that work.
    Today, I would like to urge the Committee to continue to monitor 
progress on implementation of restrictive drug formularies by VISNs 
that cover psychotropic medications. NAMI's Veterans Committee 
continues to hear reports of veterans with mental illness not getting 
access to the newest and most effective atypical anti-psychotic 
medications. Specifically, NAMI strongly objects to any treatment 
directive that would interfere with the clinician's choice of the best 
medication for each patient based on that individual patient's clinical 
needs. While cost is an appropriate consideration, it should be only 
one factor in medication choice and must not be allowed to be the 
primary consideration in choosing a medication to treat severe mental 
illness. The VA's Committee on Severely and Chronically Mentally Ill 
veterans reports that currently 17% of VA's total pharmacy budget is 
spent on psychotropic medications, however there is great variance in 
the use of the newest and most effective medications which have been 
proven effective in treating schizophrenia. NAMI feels strongly that 
veterans with mental illness deserve full access to the newest and most 
effective medications.
    NAMI would like to thank you and the members of this Committee who 
have questioned the VA on the development of treatment guidelines for 
schizophrenia. The VA has heard from both members in the Senate and the 
House regarding veterans having access to the newest and best 
treatments for their illness. Secretary Principi responded to these 
concerns and NAMI was reassured to see the following statements in his 
response letter and accompanying fact sheet of July 10, sent to several 
concerned members of Congress:
     ``. . . I can assure you that the recommendations under 
development will continue to place clinician assessment of patient 
needs as the first consideration in the prescription of antipsychotic 
     ``The proposed guideline and existing VISN guidelines 
assume the selection of atypical antipsychotic therapy must and will be 
based on physicians' assessment of clinical circumstances and patient 
     ``. . . no patients who are currently being effectively 
treated with an atypical antipsychotic will have their medications 
changed as a result of the proposed guidelines.''
     ``. . . the proposed guidelines do not restrict a treating 
physician from prescribing any specific atypical antipsychotic that may 
best meet a patient's needs, based on the physician's clinical 
     ``Atypical antipsychotic prescribing will continue to be 
driven by clinical needs of patients as determined by their treating 
    Mr. Chairman, unfortunately, actual events have not been 
reassuring. Although in theory the central role of clinical judgment is 
recognized in the draft guidelines, in practice there is ample evidence 
that the VA's schizophrenia guidelines are focused on cost-cutting 
rather than optimal clinical care. As NAMI feared, some parts of the 
Veterans Administration are implementing pharmacy guidelines in a way 
that is inconsistent with the letter sent by the Secretary, 
inconsistent with the draft guidelines, and most importantly, 
inconsistent with good evidence-based clinical care for our Nation's 
veterans. Policies are being implemented that do not serve the best 
interests of our Nation's veterans.
    Cost containment of the atypical antipsychotic drugs appears to 
have become an overriding goal of some VA behavioral health programs, 
even though the cost of antipsychotic medications are overall less than 
15% of the cost of treating the illness in most health care settings. 
NAMI's Veterans Committee members and staff have received reports that 
cost-control efforts have resulted in the following unacceptable 
     Patients stabilized on the more costly atypical during an 
inpatient stay have been switched to a less expensive product soon 
after discharge, in direct contrast to VA assurances.
     Physicians' prescribing of the more costly atypical has 
been actively discouraged, both formally and informally. Pharmacists 
have called physicians to ask that they change their prescriptions to a 
less costly drug to comply with the ``guidelines.''
     Specific plans have been outlined to monitor physician 
practices, to assure that the more costly medication is prescribed less 
often, and to punish those who continue to prescribe the medication, 
believing it represents the best alternative for their particular 
    Unfortunately, many of these instances have been documented 
informally, in part because VA staff report some concern about possible 
reprisals if they are publicly associated with these disclosures. 
Fortunately for our advocacy cause, one of the VA service chiefs was 
indiscrete enough to put his enforcement plan into writing.
    This type of enforcement of ``compliance with guidelines'' is 
common but is usually more subtle and informal--and thus more difficult 
to document. Mr. Chairman, I believe you will agree that this program 
of forcing compliance through quantitative goals included in a 
physician's performance review is chilling. This sort of single-minded 
attention to cost-savings without regard for the clinical well-being of 
the individual veteran is exactly the kind of ``guideline 
implementation'' we have seen in the past and feared would accompany 
these new VA ``guidelines.'' Our fears appear to be well-founded.
    NAMI endorses basing treatment on the available scientific evidence 
and on the needs of the individual veteran. Research, and guidelines 
based on this research, call for most patients with schizophrenia to 
receive atypical antipsychotics. Although there is little evidence of 
overall group differences in effects on psychotic symptoms, there is 
ample evidence that these atypical antipsychotic agents differ from one 
another in biological effects and in side effects. There is ample 
clinical experience to suggest that individual patients may respond to 
one atypical medication but not another. Thus, clinical judgement plays 
a vital role in the selection of the most appropriate medication for a 
particular individual.
    However, the fundamental purpose of the proposed VA guidelines is 
not guidance in selecting the best medication for a particular 
veteran--rather, the fundamental purpose is to reduce pharmacy costs by 
producing a shift to prescribing less costly atypical antipsychotic 
drugs. Such a shift in prescribing could be justified if the atypical 
antipsychotics were in fact equivalent and interchangeable. As noted 
above, they are not.
    The VA states that ``there is no valid medical evidence of the 
value of one drug over another in managing a disorder.'' In fact, there 
is ample evidence of substantial side effect differences among the 
medications, a vital consideration in the management of schizophrenia 
and in promoting adherence to treatment.
    Mr. Chairman, the VA also states that ``a number of private and 
public health care organizations are, in fact, using prioritization 
systems for the atypical antipsychotic medications similar to those 
proposed by VA.'' It is possible that some HMOs and some isolated 
programs may do so, but we would be interested to know which states and 
which major health insurance programs do this. In the public sector, we 
are not aware of any state that has implemented the type of restrictive 
guidelines that VA is proposing. Florida, Oregon, Kentucky, Hawaii, 
Missouri, Tennessee and Arizona have implemented preferred drug lists 
but exempt mental health drugs. Texas has implemented the Texas 
Medication Algorithm Project (TMAP) which supports open access to all 
atypical antipsychotic medications that are effective for treatment of 
a specific disorder. Within the algorithm, TMAP does not favor one 
specific medication over another. It is clinical judgement and patient 
preference and acceptance that determine the choice. The state of Texas 
follows TMAP and uses medication cost as a basis for choice only if 
there is no clinical reason to prefer one drug over another.
    In most private healthcare plans, tiered co-pays are commonly used 
rather than restricting access to atypical medications. We know of no 
private plan that has implemented a restrictive policy that requires a 
patient to utilize the type of ``step therapy'' that VA is proposing 
for the use of atypical antipsychotics, and would be interested in any 
that could be identified.
    In any case, the existence of isolated instances does not justify a 
wide-ranging VA policy. Within the past two years, isolated Medicaid 
and VA programs have proposed putting patients back on conventional 
antipsychotics, complete with a markedly increased risk of tardive 
dyskinesia. I believe we would all agree that these proposals were 
irresponsible and possibly unethical. The fact that someone interested 
in cutting costs will propose a plan does not make it right.
    NAMI understands the VA's concerns about the pricing of 
pharmaceuticals and the VA's desire to pressure the manufacturer of the 
more costly antipsychotic to lower the price. But we find it utterly 
unacceptable for the VA to drag our Nation's veterans with severe 
mental illnesses into the middle of contractual issues and to use the 
veterans as leverage to lower acquisition costs.
    NAMI believes that these guidelines should be suspended until there 
are better data to examine the complex issues of comparative efficacy, 
effectiveness, cost-effectiveness, and side effects. NAMI strongly 
urges this Committee to suspend this VA policy as applied to 
antipsychotic medications and to stop the promulgation of any new 
schizophrenia treatment guidelines until the National Institute of 
Mental Health presents the results of the Clinical Anti-Psychotic 
Trials of Intervention Effectiveness Project, which will look at the 
atypical antipsychotic medications and the advantages of one medication 
over another. At the very least, they should be suspended until the VA 
develops adequate controls over the implementation of guidelines to 
assure that clinician judgment regarding choice of medications is 
respected in practice as well as in theory. In particular, it is 
evident there would need to be, at a minimum:
     a directive forbidding the collection and use of 
individual physician prescribing profiles
     a directive forbidding the introduction of cost-
containment criteria into performance reviews
     a formal monitoring program to examine all instances in 
which a less expensive medication is substituted for a more expensive 
medication to assure that stable patients are not switched
     a formal program by which violations of these directives 
by overzealous pharmacy or behavioral science managers could be 
reported without fear of reprisal
    These constraints will help assure that treatment decisions are 
made by the veteran and the clinician, with the individual veteran's 
interests being the first and foremost concern.
    We know we share a commitment to providing our veterans with the 
best available treatment for their illnesses and look forward to 
continued discussions about the best ways to assure optimal, effective, 
and cost-effective care.
    Mr. Chairman, on behalf of NAMI 220,000 members, 1,200 affiliates, 
and the members of the NAMI Veterans Committee, I would like to thank 
you for the opportunity to share our views on prescription drug issues 
in the Department of Veterans Affairs.
   Prepared Statement of Jacqueline Garrick, ACSW, CSW, CTS, Deputy 
  Director, Health Care, National Veterans Affairs and Rehabilitation 
                    Commission, The American Legion
    Mr. Chairman and Members of the Committee:
    The American Legion appreciates the opportunity to provide its 
insights and experiences in dealing with the VA formulary and the 
prescription drug benefit provided.
    The scientific advances in medicine have been miraculous! People 
are living healthier and longer lives due to the availability of 
technology and science. Screening and testing allows physicians to 
identify illnesses and diseases in their early stages and treatment 
protocols are becoming more sophisticated and targeted. Disease, pain, 
complications, side effects, and death are being mitigated. Medication 
continues to play a vital role in these advancements. The availability 
of pharmaceutical products, however, has become a major focus of 
debate. Issues range from ethical considerations, cost, demand, and 
availability. VA has not been immune, especially about its formulary 
and prescribing practices.
    Last year, the Institute of Medicine (IOM) released a study, 
Description and Analysis of the VA National Formulary, to capture the 
challenges VA, the single largest purchaser of pharmaceuticals in 
America, faces as it attempts to optimize its approach in providing 
quality care to veterans. The American Legion applauds the breadth and 
depth of this analysis and shares concerns over restrictiveness, 
therapeutic interchange and generic substitutions, physician 
satisfaction and patient compliance.
    The American Legion clearly understands the need for a formulary. 
Formularies offer pharmacological evidence-based treatment guidelines 
in conjunction with the ability to negotiate price using its leverage 
to drive market share. Formularies are commonplace in today's 
healthcare market. Managed care organizations, private hospitals and 
state Medicaid programs all rely on them. There is documentation that 
VA has relied on a formulary process since 1955. However, with the 
advent of the Veterans Integrated Service Networks (VISNs) and the 
Veterans Equitable Resource Allocation (VERA) methodology, the issue of 
pharmaceutical management has received heightened attention.
    Veterans are very concerned about their access to pharmaceuticals 
and the quality of life they know they can attain through medication 
management. The IOM stated that only 0.4 percent of veterans complained 
about access to medication (based on data from patient advocates and 
the /Veterans of Foreign Wars.) However, in a recent American Legion VA 
Local User Evaluation (VALUE) survey, it found that veterans were 
concerned about pharmaceutical access 88 percent of the time.
    The greatest impact on the VA formulary system has been the fixed 
budget appropriation from Congress. It has forced VA to become more 
cost efficient and make more budget-driven decisions across the board. 
In its attempt to reduce duplication, streamline operations and cut 
costs, The American Legion believes that, in some areas, VA has gone 
too far. VA had estimated its FY 2000 pharmaceutical budget to be 15 
percent. However, only 12 percent was spent nationally, with some 
VISN's significantly less than that (about nine percent).
    Pharmaceutical purchasing and Hepatitis C Virus are the only two 
areas in which VA under spent from its projected budget. In spite of 
the fact that pharmaceutical prices are rising and research is costly, 
VA spent less money on treating veterans with medication than it could 
have done. The American Legion attributes this to the restrictive 
nature of the formulary and the complicated procedure to use non-
formulary medications.
    Although IOM's report concluded ``The VA National Formulary is not 
overly restrictive.'' (IOM, 2000) The report did make several 
recommendations for changes, which included increased monitoring of 
generic substitutions and therapeutic interchanges, improve timeliness 
in adding newly approved FDA drugs to the formulary, improve non-
formulary processes, provide education on formulary practices to 
veterans, and to continue the formulary based on quality practices and 
cost efficiency. The American Legion supports these recommendations, 
however believes IOM did not fully consider some of the problems 
associated with the formulary, and several other problem areas were not 
discussed in this report.
    First, The American Legion notes that not enough attention was 
given to the off formulary process. During its site visits to VA 
facilities, physicians who report on the punitive nature and fear of 
poor performance evaluations they will get if they go off formulary too 
often confront The American Legion. Contrary to the position of VA 
Central Office, physicians do not feel free to use their best judgment 
in prescribing medication for their patients. The American Legion hears 
this complaint from providers all across the VA system and believes it 
is an unintended consequence of the non-formulary process. In addition, 
physicians describe this process as complicated and time consuming, 
which acts as a disincentive to do it.
    In recent months, The American Legion has been involved with a 
serious discussion over an algorithm from VISN 22 (Law, Magcale 2001) 
that calls for patients to ``fail first' with a ``documented adverse 
event'' on an anti-psychotic medication before the next drug in that 
class can be used. The American Legion strongly holds that physicians 
must be able to prescribe medication that is in the best interest of 
their patients without the fear of poor performance evaluations and 
disciplinary actions. Doctors, in a working relationship with their 
patients are the best and most cost efficient treatment asset the VA 
has. Properly trained and well supported, physicians and other 
providers make decisions in the best interest of the patient and should 
not be second-guessed by administrators and financial officers. 
``Getting it right the first time'' is truly the best approach to 
medicine. Restrictions that require patients to fail are immoral and 
inhumane. The American Legion recognizes that these pharmaceuticals can 
be expensive, but are not nearly as expensive as prolonged inpatient 
stays, incarceration, or rehabilitation can be. The American Legion is 
aware that the House VA, HUD and Independent Agencies appropriations 
bill for FY 2002 calls for VA to ``immediately suspend the fail first 
policy as applied to anti-psychotic medications'' and is grateful to 
the committee for its intervention. The American Legion hopes that this 
directive will be applied to all drug classes and not just to the anti-
    The American Legion is also concerned about VA's use of generic 
substitutions and therapeutic interchanges. Although IOM does conclude 
that these practices are acceptable, it does note that ``pharmaceutical 
equivalents may not always have the same therapeutic effect or safety 
profile.'' Other factors, such as compounding technology, 
bioavailability, and patient acceptance or compliance, may be 
important.'' (IOM 2000) Although the generic drugs are more economical, 
they are not as widely available as the brand name drugs (only about 
half of the brand name drugs have a generic version).
    The greater concern, here, however is that the substitutes, as IOM 
points out, may not be as effective or safe. Medication that does not 
work costs more in the long run and results in additional clinic 
visits, testing, and hospitalization, not to mention the pain and 
suffering the veteran experiences. The American Legion strongly 
recommends that the efficacy and safety profiles of these drugs be a 
higher weighted criterion for selection than simple up front cost. The 
ultimate cost of ineffectiveness and adverse events are too high a 
price for the veteran to pay.
    The American Legion views therapeutic interchanges in the same 
light as generic substitutions. Veterans should not be subject to 
changes in their prescriptions each year when VA renegotiates contracts 
with the pharmaceutical companies. Patients, whose condition has become 
stabilized, should not be forced to change medication it in order for 
VA to save money. This can result in non-compliance or compliance 
confusion, adverse events, and/or negative side effects for the 
veteran. For the most part, the VA patient has a more complex medical 
profile than does the patient enrolled in managed care in the private 
sector and can not be equally compared. Therapeutic interchanges do not 
contain the same, chemically identical, active ingredients and the 
American Medical Association (AMA) describes them as ``not 
pharmaceutical equivalents.'' (AMA, 1997) This difference in a complex 
and frail patient who is already on multiple medications and receives 
various treatments increases the patient's risk for treatment failure.
    A secondary issue to therapeutic interchanges is, how they are 
being made? IOM finds that ``therapeutic interchanges usually means 
that a specific prescriber approval exists before dispensing except in 
settings where exchange according to a collaborative practice agreement 
or a preapproved policy and protocol is practical and has been accepted 
by prescribers.'' The American Legion has not found this to always be 
the case and that there can be confusion between the prescriber, the 
pharmacy and the patient. In focus groups conducted by The American 
Legion, a primary complaint from patients is that they get a 
prescription from their provider that they then take to the pharmacy, 
which will not fill the prescription because it is not on the formulary 
or they get a different drug. If they complain to the pharmacist, they 
are sent back to the clinic to discuss it with the prescriber, who by 
now, is seeing another patient. If they wait, the prescriber will 
change the prescription or contact the pharmacy on behalf of the 
patient and then will send the veteran back to the pharmacy. At any 
point in this frustrating scenario, the ailing veteran will feel too 
dejected and angered to continue and will depart the VA with no 
medication, returning when symptoms have worsened. The veteran is 
labeled as non-compliant and not seen as a candidate for newer 
treatment or research protocols.
    IOM's report and VA leadership consistently recommends those issues 
surrounding patient's compliance and physician expertise is inherent in 
the education and training provided. The American Legion is a strong 
proponent of this concept and is in the process of launching its own 
patient and provider educational series, which is its Teamed for Health 
Campaign. This initiative will bring together the Department of Health 
and Human Services, (HHS) VA and industry to produce educational 
materials that The American Legion can distribute to its membership, VA 
users, and Medicare beneficiaries to improve the health status of those 
patients. Provider information will also be included in this initiative 
in order to keep physicians up to date on the latest research and 
treatment protocols. The American Legion sees this effort as a means of 
improving patient compliance and assisting in medication management, 
while improving best practice trends in VA and with HHS providers.
    In another related matter, The American Legion has concerns over 
VA's Consolidated Mail Out Pharmacy (CMOP) system. Since 1999, CMOP 
service has been available nationwide to VHA's 22 VISNs. The program is 
currently running at maximum capacity with an estimated 61.3 million 
prescriptions annually. This production level has reached or exceeded 
the workload design of each of the CMOP facilities. Consequently, there 
are significant physical plant issues within the system. A prime 
example of this is the CMOP located at the Greater Los Angles Health 
Care System (GLAHCS). Established in a retrofitted warehouse on the 
grounds of the Brentwood Campus, annual production was originally 
designed at the level of 2.5 million prescriptions. In 2000, production 
was increased to 4.5 million prescriptions.
    However, the building is poorly configured, limiting the capacity 
and efficiency of the operation. Additionally, the equipment frequently 
breakdowns, and the first-generation automated system (installed in 
1994) is currently so old that parts are hard to get. The newest 
generation of dispensing equipment could nearly double the ratio of 
prescriptions dispensed to patients per worker. Clearly, new space and 
equipment are needed.
    Overall, CMOP's program has no ability to respond to emergent need. 
Moreover, CMOP lacks the capacity to meet projected increases in 
workloads for FY 2002. There is no capacity for initiatives with other 
federal agencies beyond limited pilots. Solutions include:
     Expanding space and equipment at five CMOPs to new 
standard models.
     Replacing the two oldest CMOPs .
     Constructing additional CMOP facilities.
    These are essential initiatives if CMOP's system hopes to be 
effective in its crucial role in the delivery of pharmaceutical 
services to America's veterans and their dependents.
    In conclusion, The American Legion believes VA under spent on its 
pharmaceutical purchases as a result of a budget-driven philosophy that 
is clouding the intention of a formulary and is not always allowing for 
best practices to prevail. Restrictions, substitutions and interchanges 
need to be better monitored and carefully accounted for when utilized. 
Well-educated and well-supported providers are key to successful 
treatment and their clinical expertise and judgment should drive 
prescription practices for their patient population. Each veteran must 
be assured that they are getting the best possible care that not only 
the VA has to offer, but that the industry overall has available.
    Mr. Chairman and Members of the Committee The American Legion is 
again grateful for this opportunity to present to you its experiences, 
and other comments in the intricacies of medication management within 
VA and concludes its statement.
   Prepared Statement of Richard W. Hills, Jr., President, Veterans 
                      Network for the Mentally Ill
    Mr. Chairman and Members of the Committee:
    I am Dick Hills from Greenville, South Carolina. I am pleased today 
to offer the views of the Veterans Network for the Mentally Ill (VET 
NET) on the restrictions placed on select medications within the 
Department of Veterans Administration (VA) to the Senate Veterans' 
Affairs Committee.
    I am a Vietnam Veteran who has come to view the devastating affects 
mental illness can have on both an individual and the individual's 
family, and the hope of recovery offered by the newer medications.
    From a variety of vantage points, I have been part of the 
psychiatric community for the past 33 years. I have worked the wards as 
a psychiatric Aide at the Bangor State Hospital and in the front office 
as President and Chairman of the Board of Directors of Chestnut Hill 
Psychiatric Hospital in Travelers Rest, South Carolina.
    This professional direction and advocacy activities are the result 
of personal life events. After four years in the Air Force, while 
attending graduate school on the G.I. Bill at Boston University, my 
first wife, in whose care I am still involved, was brutally raped and 
consequently suffered from sever chronic mental illness. As a result of 
this illness, she spent more than 20 year in a locked psychiatric 
hospital, a large part of that time in a psychotic state locked in a 
seclusion room. Today, after failing on medications for years, 
Clozaril, the first of the new atypical antipsychotic medications, has 
been instrumental in her recovery. She now lives in her own house with 
her pet dog and even has her own riding lawn mower. In addition to my 
first wife, I also am involved with my son who is currently treated 
with Risperdal.
    As both a family member and as a professional, I have served on a 
variety of committees and boards over the years including Past Co-
Chairman of the NAMI Veterans' Committee [currently the Veterans 
Network for the Mentally Ill], the Consumer Liaison Council of the 
Committee on Care of Severely Chronically Mentally Ill Veterans, The 
Task Force for the Revision of the Veterans Affairs Mental Health 
Manual, The (National Alliance for the Mentally Ill (NAMI) Finance 
Committee, Past Chairman of the Coalition of Networks and Councils of 
NAMI, South Carolina Department of Mental Health State Planning 
Council, Board of Directors NAMI of South Carolina, Board of Directors 
Greenville, South Carolina Alliance for the Mentally Ill to name a few.
  guidelines restricting the use of atypical antipsychotic medications
    Guidelines that include fail first restrictions, or exclude newer 
agents such as Geodon, work to administer medications. The practice of 
medicine is both and art and a science.
    Moreover, each veteran is an individual, and each individual reacts 
differently to each medication. For this reason, law requires that only 
properly licensed physicians prescribe medications for individual 
patients whom they have examined and whose symptoms they have 
    Cover letters and/or other documents make it clear that the intent 
of these guidelines is to save money. It is well known and accepted 
that cost can most effectively be reduced by successful patient 
recovery. Psychiatric medication should only be used as one part of a 
comprehensive treatment plan. Ongoing evaluation and monitoring by a 
physician is essential. Psychiatrists receive extensive training beyond 
medical school to enable them to make these decisions. Such guidelines 
actively restrict access to important medications and may delay and/or 
hinder successful recovery and thus increase cost at the expense of the 
patient's well being.
    The VET NET does encourage, however, guidelines or policy which 
would call for all mental health professionals employed by and who 
contract with the VA, to become familiar with, including ongoing 
training, the use of all atypical antipsychotic medications including 
Clozaril, Risperdal, Zyprexa, Seroquil, and Geodon.
      additional restricting of the atypical clozaril by protocols
    A study recently published by the VA states, ``Clozapine use 
deserves special scrutiny, as clozapine is the only antipsychotic agent 
proven effective in patients with refractory schizophrenia. In the VA, 
just 2.7% of veterans with schizophrenia received clozapine in FY00. 
This is surprisingly low rate of prescription, given that 20-25% of 
patients with schizophrenia are refractory to treatment with other 
    With the VA serving close to 200,000 patients with psychosis, over 
102,000 with a diagnosis of schizophrenia, it is estimated that in 2000 
between 17,600 to as many as 47,200 remained prisoners in their 
psychotic mind as a result of not receiving clozapine.
    Considering that death from suicide among schizophrenic patients is 
9% to 13%, the restrictive use of clozapine (which has a proven ability 
to reduce suicide and suicidal attempts), pose a real and measurable 
risk to life.
    Low use of this agent is due to a VA wide protocol, which makes 
access difficult by requiring the submission of a multi page 
application for pre-approval before a patient may be started on the 
drug. The restricting effect of this protocol is compounded by the 
resulting lack of experience with the agent created by the restrictions 
and the stigma of danger that the special protocol implies. This 
protocol was appropriate when clozaril was the only atypical on the 
market and use of this new class of drug was unknown. Today, however, 
there are four other atypical agents available, and atypical use is 
common with approximately 70% of VA patients with schizophrenia 
receiving an atypical medication. Such a complex protocol is not 
required for any of the newer atypical agents and is unseen elsewhere 
in the country.
    With this in mind, we recommend that barriers to the use of 
Clozaril be reviewed with the hope of eliminated or streamlining this 
protocol and improving access and utilization of this unique drug.
        restriction of psyciatric medications to older veterans
    The VET NET encourages the committee to take the steps necessary to 
insure that veterans being treated in other areas of the VA such as 
nursing homes, residential beds, or on an outpatient basses be properly 
screened and when appropriate have access to the most effective 
medications under the supervision of a properly trained psychiatrist. 
Mentally ill geriatric patients are frequently overlooked simply as a 
result of age or frailty. We expect our seniors to experience some 
effects of dementure as they become older, and do not think of this 
population as suffering from treatable biological mental illness. A 
report of the Surgeon General, however, shows that at least 10 to 20 
percent of widows and widowers succumb to clinical depression in the 
year following their spouse's death. Moreover, it has been estimated 
that 75% of individuals being treated for Alzheimer's disease are not 
receiving any of the available medications for that illness.
    In addition, the uncontrolled closure of beds has resulted in an 
acute shortage of psychiatric beds in many areas of the county. As a 
result, many mentally ill veterans who would otherwise be in an acute 
psychiatric bed are placed in nursing home or residential beds intended 
for older patients. A recent VA study showed that utilization of VA 
nursing home beds for psychiatric patients had increased from 3.1% in 
1999 to 4.4% in 2000. This data not only confirms the presence of these 
patients, but also shows that this problem is expanding.
    All of our veterans have earned and deserve access to the most 
effective medications available and to have them administer by properly 
trained individuals. We ask that psychiatric care is offered though-out 
the VA long-term care units under the supervision of individual's 
appropriately trained in psychiatry and who have unrestricted access to 
the newer, more effective medications.
    This concludes my statement. Thank you for asking us to present 
views on this important issue and for your concern for our nations 
deserving mentally ill veterans.