Pharmacy Benefits Management in the Veterans Health Administration: 1995 to 2003

Published Online: February 01, 2005
Mariscelle M. Sales, PharmD; Francesca E. Cunningham, PharmD; Peter A. Glassman, MBBS, Msc; Michael A. Valentino, RPh, MHSA; and Chester B. Good, MD, MPH

The Department of Veterans Affairs (VA) Pharmacy Benefits Management Strategic Healthcare Group (VA PBM) oversees the formulary for the entire VA system, which serves more than 4 million veterans and provides more than 108 million prescriptions per year. Since its establishment in 1995, the VA PBM has managed pharmaceuticals and pharmaceutical-related policies, including drug safety and efficacy evaluations, pharmacologic management algorithms, and criteria for drug use. These evidence-based practices promote, optimize, and assist VA providers with the safe and appropriate use of pharmaceuticals while allowing for formulary decisions that can result in substantial cost savings. The VA PBM also has utilized various contracting techniques to standardize generic agents as well as specific drugs and drug classes (eg, antihistamines, angiotensin-converting enzyme inhibitors, alphablockers, and 3-hydroxy-3-methylglutaryl coenzyme A reductase inhibitors [statins]). These methods have enabled the VA to save approximately $1.5 billion since 1996 even as drug expenditures continued to rise from roughly $1 billion in fiscal year (FY) 1996 to more than $3 billion in FY 2003. Furthermore, the VA PBM has established an outcomes research section to undertake quality improvement and safety initiatives that ultimately monitor and determine the clinical impact of formulary decisions on the VA system nationwide. The experiences of this pharmacy benefits program, including clinical and contracting processes/procedures and their impact on the VA healthcare system, are described.

(Am J Manag Care. 2005;11:104-112)

Prescription drugs constitute a large percentage of the country's overall healthcare spending, as evidenced by double-digit growth rates in the last 6 years.1 The continued escalation in prescription consumption and spending has gained the attention of policymakers, health plan sponsors, healthcare professionals, and patients. Many US citizens now receive pharmaceuticals through some form of pharmacy benefits management to help achieve cost-effective and high-quality pharmaceutical care. The Department of Veterans Affairs (VA), an organization dedicated to improving the health of our nation's veterans, finds itself at the vanguard of this movement as it has the responsibility to provide all "needed"care to enrolled patients under Public Law 104-262, the Veterans'Health Care Eligibility Reform Act of 1996. The term "needed"care refers to "services that will promote, preserve, and restore health?including treatment, procedures, supplies, and services,"which encompasses providing and dispensing pharmaceuticals.2

As a national healthcare organization, the VA offers a broad array of pharmacy benefits to its patient population (Table 1). And, like many other healthcare organizations, the VA has seen its pharmaceutical budget rise dramatically in recent years. For example, drug expenditures in fiscal year (FY) 2003 increased to more than $3 billion from $1.5 billion in 1999 (Figure 1), largely driven by rising enrollment of new patients in the VA system. The VA began a national pharmacy benefits management program in 1995 to reduce geographic variability of access to pharmaceuticals across the system, improve the distribution of pharmaceutical agents, promote appropriate drug therapy, and reduce inventory carrying and drug acquisition costs. This article describes the cornerstones of this pharmacy benefits program. We address the question, posed in 1996 by Schulman and colleagues, of how to evaluate pharmacy benefits managers by making explicit the experiences, processes, and procedures that form the core of the VA's Pharmacy Benefits Management Strategic Healthcare Group (VA PBM).3




Before 1995, 173 individual VA facilities managed their own pharmaceutical coverage policies via local pharmacy and therapeutics committees. The VA Drug Product and Pharmaceuticals Management division, based in Hines, Illinois, managed and monitored drug usage and purchasing for those facilities, but had no utilization oversight responsibilities. However, in September 1995, Dr. Kenneth Kizer, the VA's former Undersecretary for Health, established the VA PBM, directing it to establish a national formulary; manage pharmaceutical costs, utilization, and related outcomes; and oversee pharmacologic guideline development of common diseases within the VA system. To do so, clinical pharmacists employed at the Drug Product and Pharmaceuticals Management division headquarters collaborated with a newly established consultative body of 11 field-based VA physicians and 1 physician from the Department of Defense. This group became the VA Medical Advisory Panel. This combined entity would later evolve into the VA PBM.

Formulary decisions fall under the purview of 2 groups: the VA PBM and the Veterans Integrated Service Network (VISN) formulary leaders. The VISN formulary leaders manage the pharmacy benefit for VA's 21 regional care systems. Each VISN includes a variety of healthcare centers such as tertiary facilities, ambulatory- care centers, and associated community clinics. Each VISN's formulary committee collaborates with the pharmacy and therapeutics committees of its healthcare centers to allow for integrative, multilevel decision making. Thus, VISNs and local facilities can communicate and provide guidance to the VA PBM, and vice versa, on policies determining drug use within the VA system.

The VA PBM also collaborates with the VA National Acquisition Center for pharmaceutical contracting, establishes clinical guidelines for the VA and Department of Defense, develops criteria for use for new pharmaceutical agents, and maintains a nationwide pharmacy database of patient/provider-specific prescription utilization information for research purposes. We discuss the history and issues in development of each of these below.


The VA PBM created a VA national formulary to accomplish 2 main goals: to minimize interfacility variation in access to pharmaceuticals and to use VA buying power to leverage contract prices for drugs. These accomplishments occurred in steps. First, in 1996, each VISN established a regional formulary for its facilities, thereby reducing some variation in the pharmacy benefits package. Then, in 1997, the first national formulary was established by assimilating these VISN formularies into a unified list of drugs. This greater uniformity allowed access to the same VA pharmaceutical benefits nationwide. From a system standpoint, this standardization not only defined the core national pharmacy benefits package, but also provided leverage for bulk purchasing, and with that, contracting within drug classes when appropriate. However, to offset concerns about overly centralizing the process and thereby missing opportunities for VISNs to tailor their formularies to local needs, the VA national formulary policy allowed for VISNs to add (but not subtract) pharmaceuticals as needed to match the needs of local patients and resources. In July 2001, the system further evolved to eliminate local drug formularies.

Currently, the VA maintains the VA national formulary and VISN formularies. VISN formularies may list additional drugs and dosage forms not found on the VA national formulary, provided they do not conflict with the VA national formulary (ie, if a mandatory national standardization contract deems an entire VA national formulary drug class as "closed,"VISNs may not add noncontracted drugs to the VISN formulary). In addition, a VISN may not add a new molecular entity approved by the Food and Drug Administration (FDA) to its formulary until completion of a national review with specific authorization to do so provided by the VA PBM and VISN formulary leaders. Access to nonformulary drugs occurs locally by either national, VISN, or local criteria.

Standardizing the VA national formulary evoked scrutiny at first, not praise. Veteran, commercial, clinical, and patient advocacy groups expressed concerns about the VA's changes in formulary management. A series of hearings at the congressional level ensued, and in 1999 and 2000, the Senate and House Committees on Veteran Affairs each requested an outside review of the VA national formulary. The House requested an assessment by the US General Accounting Office (GAO), and the Senate by the National Academy of Sciences' Institute of Medicine. These assessments would determine the clinical and economic integrity of the VA national formulary and the formulary management process. Areas of focus included access to formulary and nonformulary drugs, an assessment of the "restrictiveness" of the VA national formulary compared with other government and nongovernment formularies, and the impact of the VA national formulary on the quality of care.

The Institute of Medicine report, released in 2001, concluded that the VA national formulary was not "overly restrictive"with respect to "formulary size and quality, coverage of drugs in different classes, timeliness of new drug additions, fairness and responsiveness of the nonformulary exceptions process, and sensitivity of therapeutic interchange policies and procedures."4,pp2-3 Per the Institute of Medicine report, from July 1997 through July 1999, only 0.4% (2385 out of 570 937) of all complaints to patient representatives about the VA involved a pharmacy issue.4

On the other hand, the Institute of Medicine found inconsistencies in nonformulary use and in guidance for instituting therapeutic interchanges. It also noted the lack of data, both within and external to the VA, measuring the impact of changes in utilization on quality of care and patient satisfaction. Thus, the Institute of Medicine recommended reducing inconsistencies across VISN formularies through more centralized management and by establishing a more timely assessment process for newly approved drugs. They further recommended more research initiatives to generate better data on the safety and efficacy of drug therapy represented on the VA national formulary.4 The VA largely agreed with the Institute of Medicine recommendations and had already begun to take steps to improve such shortcomings.

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