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Witness Testimony of Paul Flach, Vice President, Health Systems National Accounts McKesson Corporation

Good morning, Chairman Miller, Ranking Member Filner and Members of the Committee.  My name is Paul Flach, and I am Vice President of McKesson Health Systems, National Accounts, for McKesson Corporation. 

Mr. Chairman, before I begin today, I would like to say that my company appreciates the veterans who work for McKesson and feels both enormous pride and responsibility for our selection as the Pharmaceutical Prime Vendor to the Department of Veterans Affairs.  I know that all of you on this Committee and at the Department of Veterans Affairs are working hard for America’s veterans every day.  Thank you for your efforts.

For 179 years, McKesson has led the industry in the distribution of medicines and healthcare products.  Today, a Fortune 14 corporation, we deliver vital medicines, medical supplies, care management services, automation, and health information technology solutions that touch the lives of over 100 million patients in healthcare settings that include more than 25,000 retail pharmacies, 5,000 hospitals, 200,000 physician practices, and over 10,000 extended care facilities and 700 home care agencies.  In addition to the Department of Veterans Affairs, McKesson delivers medicines to the Department of Defense and other government facilities.  We are also one of the nation’s largest distributors of biotechnology and specialty pharmaceutical products and services for providers and patients.

Mr. Chairman, as you know, McKesson provided testimony on the Pharmaceutical Prime Vendor (PPV) contract before this Committee earlier this year.  We understand your oversight responsibility for the Department of Veterans Affairs and particularly as it relates to the PPV contract.  We recognize the importance of this contract to the VA’s healthcare system and, ultimately, to America’s veterans.  I am here today to provide the Committee with some additional information about the PPV contract as well as to answer your questions.

As the Department’s Pharmaceutical Prime Vendor since 2004, McKesson is proud to partner with the VA to provide pharmaceuticals to more than five million veterans and to continue delivering excellent quality and service to the VA.  Through the deep negative distribution fee in our contract with the VA, we have provided the Department with $526 million in savings over the VA’s prior PPV contract.  We have been able to do this while consistently exceeding the requirements of the contract and providing state of the art technology and unparalleled quality and value to the Department.

Pharmaceutical Purchasing Through McKesson

As the Pharmaceutical Prime Vendor, McKesson delivers pharmaceutical and certain medical/surgical products to more than 700 VA locations, including over 270 medical centers and seven consolidated mail order facilities (CMOPs).  

As our PPV contract requires, McKesson provides thousands of products to the VA at prices set under federal supply contracts which the VA has secured through direct negotiations with pharmaceutical manufacturers.  McKesson’s state of the art technology allows authorized VA buyers to purchase products through an electronic order entry system which drives them to the lowest priced item under a VA-negotiated contract.  If a contract product is out of stock, the system directs the buyer to the lowest priced generic equivalent product that is on a VA-negotiated contract. 

When an authorized VA buyer orders product by 6pm, it is delivered the next morning, thereby assisting the VA with inventory management and saving the Department millions of dollars in working capital.  McKesson has a dedicated “VA-only” customer service department.  Our accuracy in fulfilling orders is 99.9%.   Through the transparency afforded by our electronic ordering and inventory management systems, the VA can manage and track their inventory and has real-time access to invoice and ordering data.  Furthermore, McKesson holds the largest inventory of any pharmaceutical distributor to ensure our world-class service levels.  I am proud to say that we have consistently exceeded the PPV requirements for service and quality.

PPV Purchases Are Almost Exclusively VA-Negotiated Contract Products

The VA has successfully negotiated a significant number of contracts with manufacturers for the purchase of pharmaceuticals, which exceeds, by far, the number of pharmaceutical manufacturer contracts typically held by healthcare institutions within the private sector.   In April 2012, the VA purchased, through the PPV contract, 99.83% of its products under VA-negotiated contracts with manufacturers. 

There are circumstances, however, when contracted pharmaceuticals are in short supply or other critical medicines are needed to treat patients.   Purchases of pharmaceuticals that are not on contract are frequently referred to as “open market” purchases.  Stated simply, open market purchases are for products which are not subject to a contract price negotiated by the VA with the manufacturer.  We would like to emphasize that all pharmaceutical products purchased by the VA from McKesson, whether under VA “contract” or an “open market” item, have the required FDA approvals.

Purchases of open market products are a standard practice in the private sector.  In the private sector, for instance, 30-40% of the purchases made by hospital and institutional customers are for open market products. 

Dramatic Decline in Open Market Purchases

Since November, when the VA asked for our assistance, we have been working closely with them to restrict open market purchases under the PPV contract.  As a result of these efforts and other steps taken by the VA, open market purchases under the PPV contract have dramatically declined from less than 5% previously to less than 2.1% in November 2011 and then to 0.17% in April 2012. 

In collaboration with the VA last fall, we modified our online electronic ordering systems.  Open market items can no longer be viewed on the ordering screen by those who are placing an order under the PPV contract.  McKesson was given 48 hours to make this change, and we met the VA’s deadline. 

Additional Steps With the New Pharmaceutical Prime Vendor Contract

McKesson is preparing for the new PPV contract that will go into effect in August.  We will be enhancing our technology, beyond what is required, to meet the VA’s intention to restrict open market purchases.  Our systems are complex and must be able to process over a million line items on a daily basis.  We are making these enhancements judiciously because the VA relies on the timely delivery of the medications it orders to provide medical care for our nation’s veterans.

As part of developing this technology enhancement, we are building a “restrict and notify” component with plans for this functionality to be available later this fall.  If the VA attempts to order a pharmaceutical product from our distribution centers that would result in an open market purchase under the PPV contract, our system will automatically remove the item from the order and send a corresponding notification back to the VA.  This notice will alert the VA that we are not delivering the specified pharmaceutical product and enable it to identify alternatives to meet patient need on a timely basis.  

Conclusion

Mr. Chairman, in April, McKesson was selected by the VA to continue as the Pharmaceutical Prime Vendor.  The VA conducted a rigorous competition for this contract award.  We are honored to be selected again as the PPV and are committed to continue to deliver outstanding value and service to the VA and our veterans.

On behalf of McKesson, I want to thank the VA for the trust they continue to place in our performance, our people and our company.  McKesson is very proud of our unique ability to improve the delivery, cost efficiencies and quality of care for our nation’s veterans.  America’s veterans deserve the best healthcare, and McKesson is committed to a partnership that continually enhances the VA’s ability to provide critical services to the veterans they serve.

Mr. Chairman, thank you for the opportunity to appear here today.  I am happy to answer your questions.