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The Honorable W. Scott Gould

The Honorable W. Scott Gould, Deputy Secretary of Veterans Affairs, U.S. Department of Veterans Affairs

Chairman Miller, Ranking Member Filner, and members of the Committee:  Thank you for the opportunity to appear before you today to discuss the Department of Veterans Affairs’ (VA) Pharmaceutical Prime Vendor (PPV) program and how we use the currently established contract to obtain pharmaceuticals for our Veterans. I am accompanied by Mr. John Gingrich, VA’s Chief of Staff, Mr. Glenn Haggstrom, Principal Executive Director for the Office of Acquisition and Logistics and Deputy Assistant Secretary Mr. Jan Frye, Mr. Steven Thomas the Director of National Contracting Service at the National Acquisition Center, Mr. Philip Matkovsky, the Assistant Deputy Under Secretary for Health for Administrative Operations within the Veterans Health Administration (VHA) and Mr. Mike Valentino, Chief consultant for Pharmacy Benefits Management Service. Seated behind me are Mr. Craig Robinson, Associate Deputy Assistant Secretary for National Healthcare Acquisitions and Ms. Phillipa Anderson from the Office of General Counsel.

Summary of Problem and Corrective Action:

VA acquires the majority of pharmaceutical products required through companies represented on the Federal Supply Schedule (FSS) and certified. Purchase and delivery of these pharmaceuticals is accomplished through a separate vehicle called the Pharmaceutical Prime Vendor or PPV contract.  This two-tiered approach is an industry best practice – gaining economies of scale to set prices for drugs and then contracting for logistics services to deliver them at point and time of need.  PPV provides a critical link in the supply chain among drug manufacturers, VA hospitals, and Veterans who need treatment.  The PPV contract was awarded competitively to McKesson Company in 2003.  VA’s first order under this contract was placed in May of 2004 and VA has used the contract continuously for the last eight years.

VA has policies and procedures that govern how purchases are made from the PPV contract. Since 2004, approximately 96 percent of the $30 billion has complied with all applicable law and regulation. However, approximately 4 percent occurred using an “open market” clause in the PPV contract, which was allowed under the contract, but which was to be used in accordance with all applicable procurement law and regulation.  VA did not follow all applicable law and regulation for these transactions.  These deficiencies were the responsibility of VA to identify and correct.

Once these deficiencies were elevated to senior managers in 2011, VA worked to develop a solution that would correct flaws in our internal processes and conform to regulation without preventing our Veterans from receiving necessary medications.  On November 8, 2011, VA ordered its employees to end purchases being made through this flawed process and replaced it with a process that conforms to applicable regulations.  Additionally, VA mandated training for employees authorized to place orders, placed qualified contracting officer representatives at the facility level to ensure compliance, and moved forward with a new Request For Proposal (RFP) for a replacement PPV contract that will not allow the mistakes of the past to be repeated.

At no time were our Veterans put at risk.  The pharmaceuticals purchased through PPV were FDA approved medications provided by McKesson Corporation, a distributor that provides these same pharmaceutical products to Wal-Mart, Target, RiteAid, Costco, CVS/Caremark, DukeHealth, Tenet, Omnicare, Aetna, and Cigna, among others.  The result of these corrective actions preserves VA’s access to necessary drugs and complies with all applicable law and regulation.  In this way, we will continue to provide our Veterans with high quality care, with their unique medical needs as our first priority.  

Acquisition Reform at VA

VA has improved the quality and cost of its acquisition system over the past three years.  In October 2008, VA established the Office of Acquisition, Logistics and Construction (OALC) to better address the many challenges in acquisition identified through internal studies, as well as recommendations from VA’s Office of Inspector General and the Government Accountability Office.  This new Office, reporting to the Deputy Secretary, resulted in the appointment of an Acting Chief Acquisitions Officer (CAO) whose main focus is to improve acquisition in the Department as specified in the Services Acquisition Reform Act (SARA).  Previously, the Department’s Chief Financial Officer was responsible for both business lines, which was contrary to the SARA requirements. 

The Secretary charged OALC to lead the Department’s acquisition transformation efforts by focusing on management information, improving management of the acquisition life cycle, improving the acquisition workforce, and leveraging technology to improve contracting outcomes.  VA has established the Senior Procurement Council and implemented metrics to measure critical contracting requirements, implemented an enterprise spend analysis process, established a risk management office to oversee the A-123 process, established a Supplier Relationship Management initiative to work with our suppliers to improve our contracting processes, provided training to ensure a professional acquisition workforce, and developed information technology (IT) systems to simplify and standardize how we implement contracting throughout the Department.

Additionally, the National Acquisition Center (NAC), a major component of the VA Acquisition landscape, has an extensive program of instruction for ordering officers on what their responsibilities are and the limits of their authority.  The NAC provides this training to all ordering officers across VA and will provide refresher training to all personnel filling this role, since 2011.   

VA is working to ensure that all its contracting officers meet Federal Acquisition Certification standards by the end of Fiscal year 2012.  We are also focusing on institutionalizing program management practices across the Department.  A new Acquisition Executive Council serves as the advisory body for developing VA’s Acquisition Corps and will identify positions throughout the Department requiring program or project management certification. 

Within VHA, procurement staffs were reorganized under a new management line that provides management and oversight dedicated to improving procurement operations.  VHA completed its reorganization at the end of fiscal year (FY) 2011.  VHA, in partnership with OALC, recently appointed a seasoned “Federal Acquisition Certification in Contracting” (FAC-C) Level III procurement executive to serve as the leader for VHA’s procurement organization.  VHA has additionally recruited and hired experienced senior executives within the procurement organization.  Since February 2011, VHA has hired over 330 procurement professionals across the system, reducing the vacancy rate of 25 percent to 8 percent for trained and qualified procurement specialists.  In FY 2011 these changes helped VA avoid $1.1 billion in acquisition costs.

But despite these reforms, VA did not detect the problems with the PPV open market clause, in part because the process that was in place since 2004 had become routine.  Moreover, when properly applied, the PPV program provided a reliable, cost- effective and safe source of pharmaceuticals.  In the next section, we describe in greater detail how this happened.

Decision to Use PPV to Distribute Drugs More Efficiently and Effectively

In 1994, VA replaced its old “depot” distribution program with a new commercial distribution strategy to eliminate its warehousing system for storing and distributing drugs and supplies.  Under the old VA drug distribution system, drugs were ordered in bulk from centralized depots. Orders could take up to six weeks for delivery, inventory management was difficult and time consuming, and many needed medications were nearing their expiration dates by the time they were actually in the hands of VA pharmacy personnel.  In addition, there was as much as a 12 percent internal VA “up charge” for ordering and distributing these products.  VA facilities also purchased from other supply sources to supplement their requirements for items not available from the depots.

The health care industry moved away from this model of supply for pharmaceuticals, medical, environmental, and virtually all other items used in patient care to distribution contracts that provided just-in-time acquisition and inventory processes and efficient online systems for placing orders.  VA decided to do the same and entered into its first Pharmaceutical Prime Vendor contract in 1994. 

This model has been adopted by virtually every other major health care provider in both the private and public sectors and is regarded as a best commercial practice.  Other entities that use VA’s prime vendor contract include the Indian Health Service, the Bureau of Prisons, the U.S. State Department (Peace Corps), the U.S. Public Health Service, the Department of Homeland Security, and Howard University Hospital.  Authorized State Veterans Homes that have sharing agreements with VA facilities also are eligible to use the contract. 

The usual path a Federal agency uses to purchase supplies is to establish a contract that sets a fixed price for a particular good.  The Federal Acquisition Regulation (FAR) implementing the Competition in Contracting Act (CICA) defines the process for awarding and administering the contract, including the establishment of a fair and reasonable price for goods purchased.  VA is also required to comply with various other statutes, such as the Trade Agreements Act (TAA) and the Buy American Act (BAA).  These required terms and conditions are outlined in applicable clauses in the contract.  VA is required to follow these laws and regulations and did so in awarding the current PPV contract. 

The PPV program remains the most cost-effective solution to providing timely, cost-efficient, high quality health care products across the country.  It enables VA to get the medications VA provider’s need, when they need them.  The pharmaceutical prime vendor is required to follow FDA standards for product quality and patient safety. 

The Current PPV Contract

The current contract was competitively awarded to the McKesson Corporation on December 31, 2003, following the laws and regulations in the previous section.  The initial period of performance for this contract was May 10, 2004, through May 9, 2006.  The contract is currently in its last option period, and expires in May 2012. 

The contract provides drugs and supplies to VA and other government customers via 750-plus separate accounts, including State Veterans Homes, the Virgin Islands, Saipan, Puerto Rico, and Manila, Philippines.  This is accomplished through a seamless supply system that typically delivers drugs within 24 hours (often less) of order placement and offers VA a discount on all purchases.  Pricing for the majority of the pharmaceutical products distributed through the PPV is established through contracts (e.g., the Federal Supply Schedule (FSS), or national contracts) awarded by OALC as previously discussed.   

The contract statement of work (SOW) requires the PPV to supply and distribute drugs, pharmaceuticals, and certain other items that are dispensed through pharmacies.  The source of these items are labeled in a web portal provided by McKesson to denote the various contract vehicles under which the pharmaceuticals are offered including, for example, FSS, VA national contracts, Basic Ordering Agreements, and various other Federal contracts. 

The current contract also enables VA to order, through the PPV distributor, supplies that are not identified on any Federal contract in order to avoid a disruption where a needed drug cannot be obtained for a Vetaran.  This is referred to as the “open market clause.”  The current PPV contract states “…the PPV may be requested by the customer to supply and distribute open market drug/pharmaceutical products/items/units on their behalf.”  The contract also stipulates that the appropriate user will have followed applicable procurement laws and regulations when using this clause.  This enabled VA to establish additional contracts for drugs not currently under a Federal contact available through the PPV.  These contracts were to be put in place by warranted contracting officers using Federal and Department regulations.  The term “open market” means that the drug was not purchased under any existing Federal contracts currently available to the PPV.  While the open market items that were acquired through the PPV were ordered through the same commercial online ordering system as contracted items and were sourced by the PPV contractor, these FDA- approved medications were not available on a VA contract.  This does not mean the medications purchased were unsafe or were purchased from unreliable sources; it means only that it was purchased without a valid contract in place.  This is where the improper use of the PPV contract occurred and the ordering process broke down.

Illustrative Example

In an effort to explain how non-contract items were ordered in the past, the following exhibit provides a view of what the ordering officer sees on the McKesson ordering system.  In this screenshot, a user has searched for Cisplatin, a chemotherapy drug used to treat carcinomas, sarcomas, lymphomas, and germ cell tumors.  Cisplatin is administered intravenously and is considered a critical drug for cancer treatment.  In the scenario shown below, the PPV ordering system returned all matching items in a list.  This list displays whether stock is available for the item in the column called “DC_Qty.”  The search return also displays the unit cost for the item in the column called “Unit_Price.”  The column identified as “Cust_Cntrct_Type” identifies whether an item is on contract.  In the search results, the system shows that none of the contract quotes for Cisplatin that are available on an FSS contract have stock available to order. However, the item is clearly available from another source.  It is understandable that for many years, a GS-5 pharmacy specialist, motivated by a desire to maintain a continuous supply of drugs for patients and when confronted with the choice of ordering an open market item or doing without, would have chosen the open market item.

What is not readily apparent from the information presented in the PPV portal or adequately explained in the training that VA ordering officers received, is that in order for these orders to be fulfilled, they would have to by purchased off-contract.  This expedient choice would have conformed with the FAR had the ordering officer held a valid warrant and  established a contract using appropriate procurement and payment methods.  The correct approach for performing the order above would have been to engage a warranted contracting officer to acquire the needed items under a contract and use the appropriate procurement methods. 

Corrective Action

VA has implemented a process to make open market procurements in accordance with the FAR. VA will further improve the structure of the follow-on PPV contract to ensure from the onset that only medications available under Federal contract are viewable on the electronic catalogue from which ordering officers place their requirements.  There will be no option for ordering officers to obtain non-contract supplies.  In addition, improved training will be provided for ordering officers.

The new contract will preserve the ability to get needed drugs that the PPV has provided VA since its inception and the health and safety of Veterans will not be at risk.  But it will be provided through a FAR-compliant mechanism to obtain medications not on a Federal contract. 

We expect to have this new contract awarded by the end of March 2012.  Because this contract has not yet been awarded, we are limited in the information we may discuss at this time.  But we assure you, the new contract will address VA’s requirements while conforming to the FAR.  We will inform Congress of the details once we have awarded a new PPV contract. 


The failure to properly use and oversee the administration of the open market clause of this contract represents a breakdown in our system of management and accountability.  We emphasize that this was a procedural breakdown, that it in no way compromised Veterans safety and affected

not more than 4 percent of total pharmaceutical purchases since 2004.  We have taken steps to eliminate this possibility now, and we are working to reduce the potential for other errors in the future by more closely managing orders under the PPV contract, while still ensuring our Veterans and their families receive the medications they need. 

Mr. Chairman, thank you for the opportunity to discuss this issue on the record.  We have been entrusted with the responsibility to effectively administer and oversee health care for Veterans and their families, and to do so responsibly using the resources appropriated by Congress.  My colleagues and I are prepared to answer your questions.