Mr. Chairman and Members of the Subcommittee,

I am pleased to be here today to discuss the implementation of the Memorandum of Agreement (MOA) between the Department of Veterans Affairs (VA) and the Department of Defense (DoD) for the procurement of health care related commodities. I am accompanied today by John Ogden, Chief Consultant, Veterans Health Administration Pharmacy Benefits Management Strategic Healthcare Group (PBM/SHG); David Derr, Associate Deputy Assistant Secretary for Acquisitions; and Steven Thomas, Director, National Contract Service, whose programmatic responsibilities include VA’s administration of the MOA.

VA fully supports joint Federal health care acquisition activities as a means to improve the quality and efficiency of services provided to Federal beneficiaries and to reduce costs to the taxpayer. The DoD is our single largest sharing partner. We welcome opportunities to extend VA’s excellent health care commodity pricing, especially in pharmaceuticals, to the DoD, and to reduce unnecessary administrative overhead related to contracting activities.

VA is delegated by the General Services Administration (GSA) the responsibility to establish and administer the Federal Supply Schedule (FSS) contracts for health care related commodities for the Federal Government. The FSS Program is a multiple award schedule (MAS), with indefinite delivery-indefinite quantity (IDIQ) type contracts, which are national in scope and available for use to all Federal Agencies. Prices are negotiated with the goal of obtaining equal to or better than Most Favored Commercial Customer (MFC) prices. The established relationship is ensured for the life of the multiyear contract based on commercial market pricing trends. When using an FSS Schedule, the customer evaluates price lists and identifies the contractors that appear to offer the best overall value.

VA also administers Section 603 of the Veterans Health Care Act of 1992, which prescribes Master Agreements and Pharmaceutical Pricing Agreements with manufacturers that set Federal Ceiling Prices (FCP) for the four major Federal Agencies that procure pharmaceuticals (VA, DoD, portions of the Department of Health and Human Services, and the Coast Guard). Section 603 requires that the price of a "covered drug" not be more than 76 percent of the Non-Federal Average Manufacturer Price (Non-FAMP), and in some instances, VA obtains pricing lower than 76 percent of Non-FAMP. Covered drugs include single source drugs; innovator multiple source drugs and biological products (e.g., vaccines).

The VA Office of Acquisition and Materiel Management (OA&MM) has been working with VA’s PBM/SHG since 1995 to consolidate pharmaceutical requirements into separate, competed national contracts. VA estimates its cumulative savings in pharmaceutical expenditures to total $654 million since 1996, solely through the use of its national contracts.

The Defense Supply Center – Philadelphia (DSC-P), as part of the Defense Logistics Agency (DLA), procures medical supplies and equipment for the DoD. It also establishes distribution networks. DSC-P enters into Distribution and Pricing Agreements (DAPA) with manufacturers and distributors. These DAPAs are utilized as multi-source purchasing vehicles for DoD customers. For pharmaceuticals, the DAPA price is usually the statutory Section 603 price or the negotiated MFC price borrowed from the manufacturer’s FSS contract.

The Congressional Commission on Servicemembers and Veterans Transition Assistance (Transition Commission) Report recommended that Congress enact legislation to require "DoD and VA to establish a joint DoD/VA procurement office to purchase, in the most cost-effective manner possible, VA/DoD pharmaceuticals, as well as medical/surgical supplies and equipment." That report provided additional impetus to DoD’s and VA’s efforts to finalize the MOA which is designed to combine the purchasing power of the two Departments and eliminate redundancies. The MOA has two appendices--one dealing with pharmaceuticals, the second encompassing medical and surgical supplies. A third appendix, dealing with high-tech medical equipment, is under consideration.

The MOA has two main emphases pertaining to the pharmaceutical appendix, which is the focus of this testimony: (1) joint national procurement contracting; and (2) DAPA conversion to FSS. In accordance with the MOA, DAPAs are to be cancelled and FSS pharmaceutical contracts are to be used by DoD medical activities whenever the FSS price is equal to or less than the DAPA price. Savings from these efforts help both Departments reduce health care costs.

Joint contracting efforts pre-date the signing of the MOA. Since October 1998, VA and DoD have awarded eighteen joint national contracts. Through joint committed use volume contracts, VA and DoD have realized over $29 million in annual savings.

The Federal Pharmacy Executive Steering Committee (FPESC), made up of VA and DoD leadership, created a subgroup composed of representatives from VA’s National Acquisition Center (NAC), Veterans Health Administration’s PBM/SHG, DoD’s Pharmacoeconomic Center (PEC) and DSC-P. This subgroup meets quarterly to discuss future joint contracting activities. A running issues list currently identifies 40 future contracting initiatives, other witnesses will provide additional details about these joint contracting opportunities.

DAPA cancellation is to occur upon completion of successful negotiations of an FSS contract for a given item. The subsequent conversion to FSS contracts is critical because it combines identical medical related items, leverages volume to enhance our ability to negotiate better prices, eliminates duplication of contracting efforts, and broadens the product availability for both VA and DoD, while allowing the customer to select the product and pricing that best meets their needs. VA NAC and DSC-P staff agreed to work on existing FSS contracts with pharmaceuticals first. Pharmaceuticals were selected because of advanced data management capabilities and National Drug Codes (NDCs), which ease comparisons of drugs and pricing.

The procedure for converting DAPAs begins by VA contracting staff receiving DAPA pricing data from DSC-P. The difference between DAPA and VA FSS prices is usually the .5% cost recovery fee that is added onto raw FSS prices. Pursuant to GSA’s policy that FSS contracting be paid for through an industrial funding fee (IFF), VA adopted the fee at the level of .5% for the schedules it manages. (DSC-P places its cost recovery fee on the ultimate delivery invoices submitted by its pharmaceutical prime vendors.) VA staff then contacts contractors to inform them of the conversion process and begin negotiations to reduce their FSS prices by at least the amount of the .5 percent fee, so that DAPA and FSS prices become equal. VA staff electronically communicates the items and new pricing to DSC-P. DSC-P staff downloads the data into its DAPA Management System (DMS) and then cancels the DAPA.

As of May 8, 2000, VA has contacted all of its 255 contract holders. As a result of these VA contacts, 112 successful negotiations have been accomplished; 82 negotiations are pending and 61 contactors indicated an unwillingness to convert at this time. VA and DoD are in the process of again contacting these 61 contractors to encourage participation. During the same time period, DoD has placed into its DMS 82 conversions, and cancelled 43 DAPAs. Where DAPA items do not currently appear on FSS contracts, VA NAC staff will now begin contacting those vendors as well.

The joint procurement process is progressing smoothly with demonstrable results. The DAPA conversion process, however, has been more challenging. Most significantly, the inability to electronically interface VA and DoD’s data systems has hindered the process.

We are currently working with the DoD to resolve problems that arose in Fiscal Year 1999 due to these diverging business practices. VA and DoD have just agreed to establish an Information Technology (IT)/Business Process Group to improve the data systems interface. Weekly conference calls take place to support communications between VA and DoD. Standing reports and formal notes of each call are forwarded to stakeholders including the Government Accounting Office (GAO).

VA is confident that, with DoD’s cooperation and resolution of current challenges, a longstanding and beneficial relationship can evolve for the benefit of both the taxpayers and the patients that we serve.

VA remains committed to increasing joint Federal health care acquisition activities. We stand prepared to extend our expertise and further realize economies of scale by applying the Transition Commission’s Report recommendations to the procurement of medical/surgical supplies and equipment.

This concludes my statement. I will be pleased to answer any questions members of the Subcommittee may have.