In fiscal year  2003, VA spent about $26 billion to provide healthcare to 4.5 million  veterans. A national contract may also include requirements of  other federal agencies such as the Department of Defense. 1). In  fiscal year 2003, for example, VA medical center purchases represented  $3.9 billion, or over 63 percent, of the $6.2 billion in total sales from VA’s  schedule contracts. In fiscal year 2001, the VA Inspector General (IG) issued a report that  expressed significant concerns about the effectiveness of VA’s acquisition  system. Many VA Contracts Offer Favorable Prices and Savings, but VA Could Further Leverage Its Buying Power When Acquiring Healthcare Services

The FSS and national contracts that VA has awarded have resulted in more  favorable prices and yielded substantial savings. To strengthen its  bargaining position during FSS contract negotiations, VA has relied on  pre-award audits of vendors’ contract proposals and post-award audits of  vendors’ contract actions. Audits Have Helped VA Obtain Most Favored Customer Prices and Savings

To help ensure VA obtains most favored customer prices on FSS contracts  for medical products and services, VA’s Office of Inspector General  entered into a memorandum of understanding with VA’s Office of  Acquisition and Materiel Management to conduct pre-award and post- award audits of FSS contracts. According to VA  officials, VA’s pharmaceutical standardization program led to savings of  $394 million for 84 categories of drugs in fiscal year 2003. Second, VA consolidates its purchases of high-tech medical equipment to  achieve additional savings. According to VA  officials, this resulted in savings of $2 million. VA Has Potential for Additional Savings When Contracting for Healthcare Services

While the National Acquisition Center has actively looked for ways to  reduce the cost of pharmaceuticals and medical supplies and equipment, it  has not taken the same aggressive approach to negotiate more favorable  prices for healthcare services. Only  $66 million of these services were purchased from FSS contracts. Between fiscal years 1999 and 2003, total medical-center FSS purchases  more than doubled (see table 3). Although medical centers’ FSS purchases showed an increase between  fiscal year 1999 and 2001, the VA IG reported in May 2001 that medical  centers were often not using the VA contracts to purchase medical  products because medical centers were not required to buy from FSS and  national contracts. The VA IG estimated that over five years (the  typical life of national contracts) VA could save about $1.4 billion if  medical centers purchased medical products from FSS and national  contracts. There are two primary reasons why VA medical centers have not  purchased medical products from the best sources. VA Does Not Have Complete Information on the FSS Program Costs

To operate the FSS program, VA is supposed to identify all program costs  and charge a fee to its customers based on these costs. Currently, VA  charges FSS users a fee of 0.5 percent of sales to cover the cost of  operating the schedules program. Without knowing the full cost of administering the  program, VA has no assurance that the user fee accurately covers program  costs. Despite this accomplishment,  VA could achieve significantly more savings—through leveraging its  purchasing power to negotiate FSS and national contracts for healthcare  services used at VA’s 160 medical centers and through improved oversight  of medical center purchases. Specifically, we  recommend that the Secretary of the Department of Veterans Affairs    explore opportunities to use its buying power to obtain more favorable  prices for healthcare services,    strengthen oversight to ensure medical centers use FSS and national  contracts to get the best prices available, and  identify the complete cost of the FSS program and reassess its user fee to  determine if it needs to be adjusted. To identify opportunities to improve purchasing practices and increase  savings, we met with VA medical center procurement officials.
Why GAO Did This Study

The Department of Veterans Affairs (VA) provides healthcare to millions of veterans at VA's medical centers and healthcare facilities across the country. To support veterans, VA manages a Federal Supply Schedule (FSS) program and a national contract program. Both use VA's sizeable buying power to provide VA and other federal agencies discounts on medical products and services. To cover its costs in running the FSS program, VA charges its customers a user fee. Although sales through VA's FSS and national contracts totaled almost $7 billion in fiscal year 2003, concerns have been raised about the efficiency of these contract programs. GAO was asked to determine whether the FSS and national contracts have provided medical products at favorable prices and to identify opportunities to improve purchasing practices and increase savings. GAO was also asked to determine if VA's user fee is sufficient to cover program cost.

What GAO Found

The more than 1,200 FSS and 330 national contracts that VA has awarded have resulted in more competitive prices and have yielded substantial savings. VA has achieved these favorable prices and savings, in part, by exercising its audit rights and access to contractor data to pursue best prices aggressively for medical supplies and services. For example, pre-award audits of vendors' contract proposals and post-award audits of vendors' contract actions resulted in savings of about $240 million during fiscal years 1999 to 2003. VA has also taken steps to further leverage its buying power on widely used healthcare items--such as pharmaceuticals and high-tech medical equipment--through its national contracts. According to VA, its national pharmaceutical contracts have led to a cost avoidance of $394 million in fiscal year 2003. However, VA has not taken the same aggressive approach to negotiate more competitive prices for healthcare services, such as radiology. In fiscal year 2003, healthcare services totaled about $1.7 billion, yet VA facilities only purchased about $66 million through VA FSS contracts. Instead, most medical healthcare services are purchased through contracts that individual VA medical centers have negotiated, a process that may not provide the most favorable prices. VA could also realize additional savings through improved medical center purchasing practices. Despite increases in medical centers' FSS purchases--which more than doubled between fiscal years 1999 and 2003--medical centers have not always taken advantage of the best prices available through VA's contracts. For example, in fiscal year 2001, a VA Inspector General (IG) report stated that VA medical centers frequently purchased healthcare products from local sources, instead of from available FSS contracts. Although VA has since implemented policies and procedures that generally require its medical centers to purchase medical products and services through VA's contract programs, a more recent VA IG report found that medical centers continued to make purchases from local suppliers. The VA IG estimated that, with improved procurement practices at medical centers, VA could save about $1.4 billion over 5 years. However, ensuring VA medical centers comply with VA's purchasing policies and procedures will be a challenge for VA, in part, because its monitoring of purchases lacks adequate rigor. The user fee that VA collects on FSS purchases--0.5 percent of sales--is expected to approximate the program costs. VA, however, does not have complete information on the costs to administer the FSS program. Without this cost data, VA is unable to know whether it is charging an appropriate user fee.