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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 the activities we have undertaken to improve internal controls since we testified before this Committee on February 1, 2012.  I am accompanied today by Mr. John Gingrich, VA’s Chief of Staff; Mr. Glenn Haggstrom, Principal Executive Director for the Office of Acquisition, Logistics and Construction; Mr. Jan Frye, Deputy Assistant Secretary for Acquisition, Logistics and Construction; Mr. Steven Thomas, Director of National Contract Service at the National Acquisition Center; Mr. Philip Matkovsky, Assistant Deputy  Under Secretary for Health for Operations and Management for Administrative Operations, Veterans Health Administration (VHA); and Mr. Michael Valentino, Chief Consultant for Pharmacy Benefits Management Services, VHA.

When we testified before this Committee in February, we described how VA’s PPV system provides timely access to pharmaceuticals for Veterans with very favorable pricing for the Department and the American taxpayer.  In fiscal year (FY) 2011 alone, the PPV contract returned $225 million to VA through purchase discounts and provided significant additional service delivery benefits to VA.  We also described some of the problems we experienced with our execution of the PPV contract, specifically related to conformance with all applicable Federal procurement laws and regulations.  Today, I will describe the actions we have undertaken with the PPV program to improve conformance with procurement laws and regulations and the effect of these actions during the five month period between November 2011 and March 2012.  I will also describe the initiatives we will implement that will further improve our procurement compliance.


Initial concern about the PPV program grew from an internal review early in 2011 that revealed that four percent of our total PPV expenditures were unauthorized commitments.  An “unauthorized commitment” is any purchase of a pharmaceutical item from the PPV made by an individual without  the appropriate authority or made without following the proper procedures. This occurs when a Pharmacy Ordering Officer (OO)  orders an item that is not currently covered by a valid government contract.  VA has made procedural and systems changes that have significantly reduced the incidence of unauthorized commitments.  Today, the number of unauthorized commitments is less than 0.1 percent.

VA has continued its efforts since November 2011 to improve the PPV program in several key areas by: improving training and implementing systems and process changes; bringing unauthorized commitments into conformance with laws and regulations via a review and formal ratification process; increasing management oversight; and implementing personnel actions when necessary to hold individuals responsible for violating procedures.

Improving Training and Processes

VA has implemented procedural changes, reduced the number of authorized pharmacy ordering officers, provided repeated training, and increased management oversight to reduce unauthorized commitments.  As a result of these efforts, between September 2011 and March 2012, VA has reduced PPV unauthorized commitments from 70,309 in September 2011 to 434 in March 2012,  and reduced the number of employees making unauthorized commitments from 327 in November 2011 to 81 in March 2012.  The following graph shows the reduction in unauthorized commitments from September 2011 through March 2012.  In March 2012 there were approximately 490,000 line items ordered. Of the total, roughly 434 individual line items may have constituted unauthorized commitments. This reflects less than one-tenth of one percent of all items ordered in the month of March. Those orders were placed by 132 ordering officers. Of the 132 individuals, 81 individuals placed orders that were not due to either system or vendor errors.

NOTE : Individual User Data not collected for September or October 2011.

Ratifying Unauthorized Commitments

As I noted earlier, an unauthorized commitment is any purchase of a pharmaceutical item either made by an individual without warrant authority or made without following proper procedures. When a vendor has acted in good faith to provide VA with a good or service and VA has received that good or service, Federal Acquisition Regulation (FAR) provides a mechanism for that unauthorized commitment to be reviewed and retrospectively brought into conformance with the FAR. FAR Subpart 1.602-3 provides a policy for ratifying unauthorized commitments and restrictions for performing those ratifications.  VA has applied ratification processes to unauthorized commitments.  Unauthorized commitments that occurred before November 10, 2011 were determined by the Office of General Counsel as institutionally ratified.  Unauthorized commitments occurring after November 10, 2011 underwent a formal ratification process in accordance with the Federal Acquisition Regulation.  The approximately 434 unauthorized commitments that occurred in March are currently undergoing formal ratification.  These formal ratification actions bring the unauthorized commitments into conformance with the FAR.  It must be noted that, in addition to following the policy and restrictions of FAR Subpart 1.602-3, agencies are required to make positive efforts to minimize unauthorized commitments.  VA has undertaken significant efforts to minimize these unauthorized commitments.

For example, VA implemented a number of procedural changes that placed new management responsibilities on our field staff and required our staff to change how they use the PPV system.  To ensure staff members are adequately trained, VA has taken several important steps.  VA identified and designated a Contracting Officer Representative (COR) for each PPV ordering location.  The FAR and VA Acquisition Regulations (VAAR) require that CORs have separation of duties to prevent the same individual who places an order against the PPV contract from also receiving that order.  CORs were officially appointed in writing by the Administrative Contracting Officers (ACO) and have completed Federal Acquisition Certification (FAC-COR) Level I training.  This 8-hour training course requires a final exam that the student must pass with a score of 100 percent.  COR training completion is documented in VA’s Talent Management System.  The Office of Acquisition and Logistics (OAL) also has developed supplemental specialized COR training specific to the PPV contract.  The PPV specific training helps ensure that PPV CORs conduct their duties under the direction of the Procurement Contracting Officer (PCO) at the National Acquisition Center (NAC).  Currently, all 317 CORs have completed their training.

In addition, the Pharmacy Benefits Management (PBM) office developed several tools for use by its 984 Ordering Officers (OO) including a SharePoint page with daily reports from McKesson of unauthorized commitments. The purpose of these tools is to provide an additional means for OOs to monitor PPV purchases at a facility level.

Fast Pay Payment Reconciliation Training was provided to all Chiefs of Pharmacy on March 21, 2012, and all VISN Pharmacy Executives on March 27, 2012.  The training provided instruction on:  checking in; signing and dating pharmaceutical receipts; and, accurately reconciling invoices to ensure payments to the PPV are made only for drugs that have been received.

Approximately 81 OOs were identified who potentially made unauthorized commitments in March 2012.  VA provided targeted training to each of these individuals to manually check and ensure that unauthorized commitments are prevented. The training occurred on May 18th, 2012, for all OOs on duty and will be completed for the remaining OOs on the day they return to duty.

Increasing Management Oversight

VA also has strengthened oversight of PPV contract administration.  The NAC’s Procurement Contracting Officer (PCO) is now supported by ACOs and CORs.  The CORs monitor proper execution of the OOs’ responsibilities in accordance with the contract assigned to each PPV ordering location.  The CORs report contract administration issues to the ACOs.  A working group of ACOs, CORs, and other representatives are in the process of fine tuning the duties, responsibilities and communication processes for the ACOs and CORs to further improve the oversight function.  The Office of Acquisition, Logistics and Construction (OALC), the Office of the Under Secretary for Health, and the Pharmacy Benefits Management Service jointly monitor purchase data.

Implementing Personnel Actions

PPV Ordering Officers were required quickly to learn new ordering procedures for open-market pharmaceuticals.  VHA has employed a tiered approach beginning with training. If inappropriate ordering continues to occur after appropriate training is administered, counseling is given followed by administrative action, possible removal of delegated ordering authority or loss of employment.

 The individuals that made unauthorized commitments for pharmaceuticals were identified by location and name.  To date, no malicious intent was found, but network and facility management were apprised of all the named employees who had executed unauthorized commitments. This number was 342 individuals. All orders were reviewed by VA headquarters and network management staff, and, where appropriate, formal letters of counseling were issued to the individuals. In fact, as a result of this process of progressive discipline, one VA employee elected to resign rather than face disciplinary action.

Although it will be difficult to achieve a zero defect standard based on the volume of orders and human involvement, our goal remains compliance with the FAR.  Efforts to date have yielded significant results.  A preliminary review of the March data indicates that there are substantially fewer unauthorized commitments than during any previous month.  PPV ordering data will continue to be monitored.  We will take appropriate personnel actions where required.  The Under Secretary for Health and Principal Executive Director for OALC recently issued a joint memo to Veterans Integrated Service Network (VISN) directors, medical center directors, and designated PPV ordering officers.  The memo clearly reiterated the expectation that any improper ordering of non-contract items must cease.  It provided three additional opportunities for ordering officers to prevent unauthorized commitments, and confirmed that individual ordering officer delegations may be removed or suspended if unauthorized commitments continue. 

Expanding the Number of Drugs Under Contract

VA believes awarding additional contracts for VA’s known pharmaceutical requirements also will help resolve the majority of open market purchases and will help bring previously unauthorized commitments further into conformance with applicable laws and regulations.  VA has pursued two simultaneous approaches to increasing the number of drugs available under contract:  awarding a new PPV contract, and awarding additional contracts for pharmaceuticals.

The New PPV Contract

There will always be pharmaceutical needs of Veterans that are not fully met by existing government contracts.  VA will need to retain FAR compliant purchasing flexibility to meet Veterans’ needs. The new PPV contract does not include open market purchasing, but does include a mechanism to reduce the need for open market items.  The mechanism is termed Wholesale Acquisition Cost (WAC) Based Priced Generics (WBPG), which results in PPV contract pricing for generic drugs that have a published WAC, a National Drug Code (NDC), and are Trade Agreement Act (TAA) compliant.  The WBPG items are last in the priority of purchasing after all other government contract vehicles are exhausted.  VA’s policy for obtaining drugs not available through any contract will be to either:  procure them through the Government Purchase Card program if the dollar value of the purchase is no more than $3,000; or have a warranted contracting officer execute the procurement using the streamlined acquisition procedures allowed by the Federal Acquisition Regulation.

Looking forward, a new PPV contract was competitively awarded to the McKesson Corporation on April 10, 2012, following all applicable procurement laws and regulations.  The contract allows for a 120-day implementation period which ends on August 10, 2012.  The initial period of performance for this contract will be from

August 10, 2012 through August 9, 2014.  The contract has three 2-year renewal options.   A bridge contract covering the period May 10, 2012, (when the current PPV contract expired) through August 9, 2012, was recently awarded to provide continuity of access to pharmaceuticals.

Like the previous contract, this new contract provides drugs and supplies to VA and other government agency customers to over 750 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 provides VA a discount on all purchases.  Pricing for the majority of the pharmaceutical products distributed through the PPV is established through other contracts (e.g., the Federal Supply Schedule (FSS), or national contracts) awarded by OALC.   Unlike the previous contract, the new one places many formerly open market drugs under contract at the WBPG price, which was determined by a warranted contracting officer to be fair and reasonable.  This single change in the new contract will resolve the vast majority of the concerns with the previous contract.

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, and that any inadvertent orders placed are not delivered by the PPV.  There will be no option for OOs to obtain non-contract supplies under the contract.  In addition, improved training will continue to be provided for ordering officers as the need arises.

Using a Federal Acquisition Regulation compliant mechanism that was not included in the previous contract, the new contract will preserve the ability to get needed drugs from the PPV.  The health and safety of Veterans will not be put at risk with the new sourcing methodology. 

On May 17, 2012, VA’s Office of the Inspector General (OIG) issued its report entitled, “Review of the Controls for the Pharmaceutical Prime Vendor Fast Pay System.”  The report concluded that the Fast Pay system provided timely payments to vendors and that VA paid accurate prices, but that inadequate controls were in place to ensure timely correction of improper payments and to reduce the risk of program fraud or abuse.  VA has concurred with the report and the Action Plan to address the OIG recommendations is underway.

We look forward to the results of the second OIG review of PPV, which will provide additional information on the underlying causes of the unauthorized commitments and the magnitude of those purchases.  We will quickly address any actionable findings to improve our pharmaceutical procurement processes.

Awarding Additional Contracts for Pharmaceuticals 

The long-term plan to reduce the need for open market items is to increase the number of items on government contracts.  There are currently 87 national contracts in place, and VA has 48 additional procurement requests in process for solicitation and award.  VA, in collaboration with its partners in the Department of Defense, Indian Health Service, and other Federal agencies, will continue to identify drugs or drug classes suitable for national contracting.


VA staff members have worked diligently and conscientiously to provide needed pharmaceuticals to our Veterans where and when they are needed. We have also worked to ensure that applicable laws and regulations are being followed.  Our frontline staff have proven their commitment to serve Veterans, by learning new procedures, changing their use of the PPV system, and collectively reaching current performance in excess of 99.9 percent.  Our procurement staffs have instituted ratification processes that ensure any unauthorized commitments subsequently conform to the FAR.  VA managers continue to monitor performance and provide oversight for the current PPV contract.  VA has lowered the number of OOs in the system and increased the numbers of drugs on contract without increasing outages.  Where educational efforts to prevent unauthorized commitments were unsuccessful, VA has taken and will continue to take appropriate personnel action.  Again, the PPV ordering problems largely were procedural breakdowns that affected a small volume of pharmaceutical purchases and in no way compromised Veterans’ safety.       

Mr. Chairman, thank you for the opportunity to discuss on the record what actions we have accomplished, as well as the remaining work that needs to be accomplished as we transition to the new PPV contract in August 2012.  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.