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VHA Pharmacy Use in Veterans With Medicare Drug Coverage

The American Journal of Managed CareMarch 2009
Volume 15
Issue 3

Greater Medicare managed care benefit levels reduce both the likelihood and magnitude of Veterans Health Administration pharmacy use by Medicare dually enrolled veterans.


: To determine how Medicare benefits affect veterans’ use of Veterans Health Administration (VHA) pharmacy services.

Study Design

: Retrospective analysis of veterans dually enrolled in the Veterans Health Administration and Medicare healthcare systems.


: We used VHA and Medicare administrative data for calendar year 2002 to examine the effect of Medicare HMO pharmacy benefit levels on VHA pharmacy use.


: In 2002, 64% of the VHA and Medicare dually enrolled veterans in our study sample received medications from the VHA. Use of VHA pharmacy services varied monotonically by the level of pharmacy benefits among Medicare HMO enrollees, with veterans enrolled in plans with both low and high pharmacy benefit levels significantly less likely to use VHA pharmacy services than veterans in plans with no pharmacy benefits (odds ratios = .83 and .53, respectively, versus plans with no benefits). Among VHA pharmacy users, enrollment in plans with high levels of benefits was associated with significantly lower annual pharmacy costs than enrollment in plans with no benefits or enrollment in traditional Medicare.


: Our findings indicate that non-VHA pharmacy benefits affect both the likelihood and magnitude of VHA pharmacy use. This suggests that Medicare pharmacy coverage (Part D) may significantly reduce the demand for VHA pharmacy services, particularly in geographic regions previously underserved by Medicare managed care plans.

(Am J Manag Care. 2009;15(3):e1-e8)

To determine how Medicare benefits affect veterans’ use of Veterans Health Administration (VHA) pharmacy services, we did a retrospective analysis of veterans dually enrolled in the VHA and Medicare healthcare systems.

  • In 2002, 64% of VHA and Medicare-enrolled veterans (5% of all Medicare enrollees) received some or all of their medications from the VHA.
  • Medicare managed care plan pharmacy benefits appeared to reduce demand for VHA pharmacy services, with the effect on demand greatest in plans with the highest level of pharmacy benefits.
  • Medicare pharmacy coverage through Part D may significantly reduce the demand for VHA pharmacy services, particularly in geographic regions previously underserved by Medicare managed care plans.

The Veterans Health Administration (VHA) is the largest single purchaser of pharmaceuticals in the United States. Virtually all honorably discharged veterans are legally eligible to receive care under the VHA system. Veterans Health Administration eligibility rules determine the size of copayments and the specific services to be provided to eligible veterans.1

Copayments for prescriptions for veterans have historically been very low. Until 2002, the prescription copayment for veterans was $2 for each 30-day supply of medication; this copayment increased to $7 in February 2002 and to $8 in 2006.2 These low copayments have made the VHA an attractive source of pharmacy care for veterans.3 Research suggests that approximately 10% of VHA users come to the VHA primarily for pharmacy services,4 although the percentage of veterans who rely on the VHA as their primary pharmacy provider may be much higher.5

As an alternative source of care and pharmaceutical services, more than 50% of VHA users also are enrolled in Medicare, including more than 90% of those over the age of 65 years. In January 2006, Medicare implemented Medicare Part D as part of the Medicare Modernization Act (MMA). The MMA dramatically changed the health services environment in which the VHA has long operated. For the first time, Medicare is explicitly offering outpatient pharmacy coverage through Medicare prescription drug plans (PDPs), independent of the pharmacy benefits offered through Medicare managed care organizations, and has made PDPs (alone or in combination with managed care plans [MAPDPs]6) available across the United States.7

A recent survey of Medicare Part D enrollees indicated that, relative to Medicare beneficiaries who relied primarily on stand-alone PDPs or MA-PDPs, beneficiaries who relied on the VHA for pharmacy care reported lower out-of-pocket spending and were less likely to have delayed filling prescriptions due to cost.8 However, there is still little information to guide VHA policy makers on how Medicare pharmacy benefits might affect pharmacy expenditures within the VHA healthcare system, or on how Medicare plan benefits affect Medicare-enrolled veterans’ use of VHA pharmacy services. In the current study, we examined how Medicare HMO pharmacy benefit levels among veterans dually enrolled in the VHA and Medicare healthcare systems affected the likelihood and magnitude of VHA pharmacy use. Specifically, we addressed 2 questions:

1. Do greater Medicare health plan pharmacy benefits reduce the likelihood that veterans will use VHA pharmacy services?

2. Among veterans who do use VHA pharmacy services, do Medicare health plan pharmacy benefits reduce the magnitude of their use?


We used national VHA and Medicare administrative files from calendar year (CY) 2002 to examine how Medicare HMO enrollment status and pharmacy benefit coverage affected VHA pharmacy use. Our analyses focused on veterans who were enrolled in the VHA and in Medicare for at least 1 month during CY 2002. Each beneficiary’s Medicare enrollment and demographic information were obtained from the Medicare denominator file records and merged with the VHA Enrollment file to identify veterans who were dually enrolled in the VHA and Medicare healthcare systems.

Medicare HMO Plan Enrollment

Health maintenance organization plans vary substantially in the level of pharmacy benefits offered. Thus, for each managed care—enrolled veteran, we classified benefit levels associated with his or her HMO contract number. Contract numbers were obtained from the Centers for Medicare&Medicaid Services’ Medicare Enrollment Database. Because multiple HMO plans or benefit packages are allowed within a contract’s service area, we used the strategy described in the Commonwealth Fund report Medicare Choice 1999-2001: An Analysis of Managed Care Plan Withdrawals and Trends in Benefits and Premiums9 to assign a “basic” plan for each managed care contract active in a particular county. The benefits associated with the basic plan were assigned to each beneficiary enrolled in that county.

Also following the Commonwealth scoring algorithm,9 Medicare HMO—enrolled veterans were assigned to subgroups based on whether their HMO offered no additional pharmacy benefits, a “low” level of benefits, or a “high” level of benefits. Low-benefit plans were those that either offered only generic medications or had a cap of $750 or less on either generic or brand name medications. High-benefit plans were those with benefit caps of greater than $750 for both generic and brand name medications.

Pharmacy Use

Veterans Health Administration pharmacy use data were obtained from the VHA Decision Support System, a national automated management information system that integrates data from clinical and financial systems for inpatient and outpatient care.10 The system creates an outpatient encounter for each day a patient fills a prescription, including all pharmacy costs for that day. For our analyses, encounters (costs) were aggregated within each person across the entire calendar year.

Access to Veterans Health Administration Medical Centers

The availability of Veterans Health Administration Medical Centers (VAMCs) was determined by recording the distance from the beneficiary’s zip code to the nearest VAMC or Community-Based Outpatient Clinic (CBOC). We also recorded VHA eligibility (priority code) from the VHA Enrollment file. We assigned a “home station” to all veterans to control for clustering and facility characteristics in our multivariate regressions. For VHA-Medicare dual enrollees who had any VHA pharmacy costs during the CY, the home station was where the majority of pharmacy services (according to cost) were obtained. Dual enrollees who did not use VHA pharmacy services were assigned to a home station based on proximity (ie, the closest VAMC). If their closest VHA facility was a CBOC, the VAMC associated with that CBOC was assigned as their home station.

Risk Adjustment

In our multivariable models, we adjusted for patients’ health status using the Centers for Medicare&Medicaid Services Hierarchical Condition Category (HCC) risk-adjustment model for community-dwelling populations.11 The model adjusts for diagnoses, age, sex, Medicaid eligibility, and original entitlement of Medicare (disability, end-stage renal disease, or Old Age and Survivor’s Insurance). The risk score was created for each patient by using International classification of Diseases, Ninth Revision codes from the VHA administrative data files for CY 2002.


We assigned income level according to zip code, age (<65 years, >65 years), and race/ethnicity using the 5-digit zip Code Tabulation Area income data available in 2000 US Census Summary File 3. Veterans were classified as residing in metropolitan or nonmetropolitan counties using urban influence codes12 to group all 3141 counties in the United States according to the most recently revised federal definitions of metropolitan statistical areas (MSAs).13

The Medicare administrative files did not include an indicator for concurrent participation in the Medicaid program. However, we did classify veterans by whether they received state buy-in through Medicaid to offset their Medicare Part B premiums (Medicare state buy-in). This group included veterans who had their Part B premiums only paid or their Part B premiums and cost-sharing paid (eg, Specified Low-Income Medicare Beneficiaries [SLMBs] and Qualified Medicare Beneficiaries [QMBs], respectively), as well as veterans who received full Medicaid benefits in addition to being an SLMB or QMB enrollee.14

VHA Priority Levels

We grouped VHA enrollees into 3 sets of priority levels that broadly differentiated copayment levels and out-of-pocket maximums.15 These groupings are priority level 1, priority levels 2-6, and priority levels 7 and greater. Priority level 1 veterans generally had no copayments, while veterans with

priority levels of 7 or greater (7 ) paid the maximum VHA copayment of $7 ($2 prior to February 2002) for each of their VHA prescriptions.


We conducted all analyses using SAS version 9.1.2 (SAS Institute Inc, Cary, NC). We used a generalized-estimating-equations approach in our multivariable models of pharmacy use and costs to account for clustering of veterans within VAMCs. For our analysis of VHA pharmacy use, we performed a logistic regression using VHA pharmacy use versus no use as a binary outcome. For our analysis of total annual pharmacy cost, we used total cost as a continuous outcome measure. Because the distribution of pharmacy costs was asymmetric and highly skewed, we estimated a regression model assuming a gamma distribution for our outcome measure. This type of distribution has been shown to provide robust estimations in the presence of skewed data.16 Examination of the regression residuals indicated that our use of a gamma distribution was appropriate.


In CY 2002 there were 3.4 million dual VHA-Medicare enrollees. About half of all dual enrollees (52%) lived in areas with available Medicare managed care plans, with approximately 11% overall (22% of those living in HMO counties) actually enrolled in an HMO plan for all or part of CY 2002. Of the 388,633 veterans enrolled in HMO plans, 34% were in contracts whose basic plans did not offer pharmacy benefits, 51% had basic plans with low benefits, and 14% had basic plans with high benefits (Table 1).

Predictors of VHA Pharmacy Service Use

Approximately 64% of the 3.4 million Medicare-enrolled veterans (which accounted for 5% of all Medicare enrollees) received some or all of their medications from the VHA (Table 2). Nationally, the VHA pharmacy expenditures totaled $2.3 billion (or 68% of all VHA pharmacy costs) for providing pharmacy services to VHAMedicare dual users. Use of VHA pharmacy services varied monotonically by the level of pharmacy benefits among Medicare managed care enrollees (Table 2).

In our multivariable models, veterans enrolled in Medicare HMO plans with both low and high pharmacy benefit levels were significantly less likely to use VHA pharmacy services than veterans in HMO plans with no pharmacy benefits (Table 3; Figure 1).

Age, Medicare state buy-in, VHA priority level, and HCC risk score were the strongest predictors of VHA pharmacy use. VHA-Medicare enrolled veterans under the age of 65 years were the most likely to use VHA pharmacy services. When veterans younger than age 65 years are eligible for Medicare, it is primarily because they are classified as disabled, and are likely to have substantial healthcare needs. Most of our other covariates also were significant (Table 3). Women were less likely than men to use VHA pharmacy services, and the likelihood of VHA pharmacy use was lower among veterans residing in MSA counties, veterans with incomes of more than $20,000 per year, and veterans whose home VAMCs were teaching hospitals. Hispanic veterans were more likely to use VHA pharmacy services than either African American or white veterans. Surprisingly, distance to the closest VHA facility was not predictive of VHA pharmacy use in our multivariable model, possibly because of the heavy use of VHA mail-order pharmacy services, and because MSA status and HMO versus non-HMO county residence may have served as proxies for distance.

Predictors of Total VHA Pharmacy Costs Among VHA Pharmacy Users

Medicare managed care enrollees accounted for 8.9% of all VHA pharmacy costs attributable to Medicare-enrolled veterans. The average unadjusted cost to the VHA pharmacy service in CY 2002 for veterans enrolled in fee-for-service (FFS) plans and using VHA pharmacy services was substantially greater than the average cost for HMO enrollees (Table 2). Unadjusted costs for veterans living in areas not served by HMO plans were similar to those for FFS veterans.

In our multivariable model (Table 3; Figure 2), veterans enrolled in plans with high pharmacy benefit levels had total annual costs that were approximately 5% lower than those for veterans in HMO plans with no pharmacy benefits ($50 less), veterans enrolled in Medicare FFS ($63 less), or veterans living in counties not served by HMO plans ($67 less). Veterans with high HMO benefit levels also had lower costs than those in plans with low benefit levels ($35 less), but a post hoc comparison indicated that this difference was not statistically significant.


Our work shows that Medicare managed care plan pharmacy benefits may affect demand for VHA pharmacy services, with the effect on demand concentrated among enrollees in plans with the highest level of pharmacy benefits. In CY 2002, VHA-Medicare dually enrolled veterans enrolled in HMO plans with high levels of pharmacy benefits were less likely to use any VHA pharmacy services and had lower total pharmacy costs when they did use VHA pharmacy services. These associations were robust to adjustment for enabling and predisposing factors previously shown to affect VHA service use. In this study, we had information about levels of non-VHA pharmacy coverage among Medicare HMO enrollees only. If similar information had been available for Medicare FFS—enrolled veterans, we believe that we would have seen a similar pattern among veterans with differing levels of coverage from other forms of supplemental insurance.

Implementation of Medicare Part D has greatly increased the availability of non-VHA pharmacy services for Medicare beneficiaries. Geographic areas that have historically not had access to HMO plans, accounting for almost half of the VHA-Medicare dually enrolled population, now have access to stand-alone PDPs, as well as other Medicare managed care plans that include PDPs. At the end of the first official enrollment period in May 2006, enrollment in PDPs was widespread, with voluntary enrollment rates exceeding 15% in more than 90% of all US counties. Average enrollment rate across all US counties was about 30%.

When the Government Accountability Office estimated the cost of the new Medicare prescription drug benefit, they assumed that prior VHA pharmacy users would continue to use the VHA for their medications and that they would not switch to PDPs to any meaningful extent.17 However, veterans’ responses to Medicare Part D are unlikely to be that straightforward. Historically, VHA-using veterans have enrolled in available HMO plans at about the same rate as the general population. Their decisions to enroll (or not) in a Part D PDP are likely to be driven by their access to VHA care (eg, their priority category), the availability and benefit levels of the PDP plans, their income and demographic characteristics, and their history of VHA use.

Our analyses have several notable limitations. We did not have access to non-VHA pharmacy records. Now that Medicare Part D has become active, a centralized database of Medicare enrollees’ pharmacy utilization is expected to become available to researchers. We also did not have access to Medicare utilization records for Medicare HMO enrollees. As a consequence, our HCC severity score was calculated based solely on VHA utilization data and likely underestimates, and may introduce bias into, the true HCC severity scores for the veterans examined in this study. For example, HMO enrollees overall had an average of 2 fewer VHA diagnoses during the study period than FFS enrollees overall did (5.4 ± 7.6 diagnoses vs 7.5 ± 9.5 diagnoses, respectively) and were less likely to be in the highest HCC severity score category (16.2% vs 20.4%). Whether this reflects a true difference in health status or preferential use of non-VHA healthcare by HMO enrollees is unclear.

We used each veteran’s VHA priority level as a covariate to partially adjust for their level of access to VHA pharmacy services. VHA pharmacy access is a complex issue and is affected by a variety of factors, including overall extent of service-connected disability, income level, whether pharmacy care is specifically for a service-connected condition, prisoner-of-war status, and whether pharmacy care is for other specifically authorized conditions. These factors affect both the level of copayments and the out-of-pocket maximum veterans incur. Our 3 specific priority level groupings were chosen to broadly capture variability in VHA pharmacy access (see also Stroupe et al15), and successfully differentiated among all 3 groupings in terms of overall likelihood of use and total pharmacy cost among VHA pharmacy users (Table 3).

For HMO enrollees, we assigned the pharmacy benefit level associated with the basic plan for the veterans’ managed care contract. In cases where contracts offered multiple plans, this assignment may have underestimated the pharmacy benefits available to the enrolled veterans. This underestimation would likely reduce the differences among our HMO enrolled groups (ie, with high, low, and no pharmacy benefits), suggesting that our findings may be conservative.

Finally, our study is cross-sectional. Veterans who enroll in different types of Medicare plans may be fundamentally different in their illness burden or preferences for receiving care. We controlled for many individual characteristics in these analyses that previously were related both to veterans’ utilization of VHA care and their selection of healthcare plans. Consequently, we feel that the potential for bias in our analyses was ameliorated.

Despite these limitations, our work has immediate and significant relevance in the context of the recent major programmatic changes in Medicare. According to the 2006 Medicare Payment Advisory Commission report, Report to the Congress: Increasing the Value of Medicare,18 the majority of new PDP plans offered under Medicare Part D would have qualified as high-benefit plans using the definition in our analyses. Consequently, increased enrollment in PDPs by VHA-Medicare dual enrollees may have profound and immediate implications for the VHA pharmacy service. First, the availability of PDPs may significantly reduce the demand for VHA pharmacy services among current VHA users, as well as lessen the likelihood that current nonusers will turn to the VHA system as their provider of pharmacy care. On the other hand, a substantial percentage of veterans who do enroll in PDPs are likely to exceed the cap on the initial standard pharmacy benefit ($2250 for CY 2006). This is particularly likely to be true for veterans with complex medical conditions. These veterans will then become responsible for 100% of the next $2400 in their medication costs and will have a strong incentive to turn to the VHA for these pharmacy services. Alternatively, these veterans may be the VHA users most likely to split their pharmacy care, obtaining some medications from the VHA and the rest from their Medicare PDP, in order not to exceed their cap. Either of these cases affects the pattern and magnitude of VHA pharmacy use and may increase the potential for disjointed continuity of care. Further work is needed to examine the impact of the new Medicare coverage on actual medication use by veterans.

Author Affiliations: From the Division of Management, Policy, and Community Health (ROM), University of Texas School of Public Health, Houston; Baylor College of Medicine (LAP, JAD), Houston; the Michael E. DeBakey VHA Medical Center (LAP, JCH, JAD), Houston, TX; the School of Medicine (MMB), University of Miami, Miami, FL; the College of Pharmacy and Health Sciences (NIO), Texas Southern University, Houston; the Centers for Medicare & Medicaid Services (IIW), Baltimore, MD; and the College of Pharmacy (MLJ), University of Houston, Houston, TX.

Funding Sources: This research was supported by the Department of Veterans Affairs, Health Services Research and Development Service grants IIR 02-081, IIR 02-083, and HFP 90-020, and by National Institutes of Health grant R01 AG19284-01. Drs Davila and Johnson are career development awardees of the Department of Veterans Affairs Health Services Research and Development Service. Dr Byrne is a career development awardee of the National Cancer Institute. Dr Petersen is a Robert Wood Johnson Foundation Generalist Physician Faculty Scholar (grant 045444) and an American Heart Association Established Investigator Awardee (grant 0540043N).

The views expressed in this article are those of the authors and do not necessarily represent the views of the Department of Veterans Affairs.

Author Disclosure: The authors (ROM, LAP, JCH, JAD, MMB, NIO, IIW, MLJ) report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design (ROM, LAP, JCH, JAD, MMB, NIO, IIW, MLJ); acquisition of data (ROM, LAP, IIW); analysis and interpretation of data (ROM, LAP, JCH, JAD, MMB, NIO, MLJ); drafting of the manuscript (ROM, JCH, NIO); critical revision of the manuscript for important intellectual content (ROM, LAP, JAD, MMB, NIO, IIW, MLJ); statistical analysis (ROM, JCH); provision of study materials or patients (ROM); obtaining funding (ROM, LAP, MLJ); administrative, technical, or logistic support (ROM, LAP); and supervision (ROM).

Address correspondence to: Robert O. Morgan, PhD, Division of Management, Policy, and Community Health, University of Texas School of Public Health, 1200 Herman Pressler, Rm E-343, Houston, TX 77030. E-mail: robert.o.morgan@uth.tmc.edu.

1. Department of Veterans Affairs. Federal Benefits for Veterans and Dependents. 1995 edition. Washington, DC: US Government Printing Office; 1995.

2. Office of Public Affairs, Department of Veterans Affairs. Administration seeks $70.8 billion for VHA in 2006. February 7, 2005. http://www1.va.gov/opa/pressrel/PressArtInternet.cfm?id=941. Accessed April 14, 2008.

3. Passman LJ, Garcia RE, Campbell L, Winter E. Elderly veterans receiving care at a Veterans Affairs Medical Center while enrolled in Medicare-financed HMOs. Is the taxpayer paying twice? J Gen Intern Med. 1997;12(4):247-249.

4. Zhu SC, Gardner JA, Hendricks A. How Many Enrollees Come to VA Just for Pharmacy? Health Care Financing & Economics Data Brief #2004-10. http://www.hcfe.research.va.gov/page.cfm?pg=6. Accessed August 12, 2008.

5. Morgan R. Individual-Level Factors Affecting Enrollment in Medicare Choice Plans and Use of VA Medical Care by Medicare Enrolled White, African American and Hispanic Veterans. Technical Report. Included in the final project report for the study, Medicare HMO Enrollment and VA Use by Minority and Low-Income Veterans (VHA HSR&D IIR 20-052). 2004.

6. Blumenthal D, Herdman R, eds; VA Pharmacy Formulary Analysis Committee, Division of Health Care Services. Descriptions and Analysis of the VA National Formulary. Washington, DC: National Academies Press; 2000. 7. Biles B, Dallek G, Nicholas LH. Medicare advantage: deja vu all over again? Health Aff (Millwood). 2004;Suppl Web Exclusives:W4-586-597.

8. Neuman P, Strollo MK, Guterman S, et al. Medicare prescription drug benefit progress report: findings from a 2006 national survey of seniors. Health Aff (Millwood). 2007;26(5):w630-643.

9. Achman L, Gold M. Medicare Choice 1999-2001: An Analysis of Managed Care Plan Withdrawals and Trends in Benefits and Premiums. Publication 497. New York: The Commonwealth Fund; February 2002.

10. VA Information Resource Center, US Department of Veterans Affairs. VHA Decision Support System (DSS)—Introduction. November 1, 2005. http://www.virec.research.va.gov/DataSourcesName/DSS/DSSintro.htm. Accessed November 7, 2005.

11. Pope GC, Kautter J, Ellis RP, et al. Risk adjustment of Medicare capitation payments using the CMS-HCC model. Health Care Financ Rev. 2004;25(4):119-141.

12. US Department of Agriculture, Economic Research Service. Measuring rurality: urban influence codes. 2003. http://www.ers.usda.gov/Briefing/Rurality/urbaninf/. Accessed April 28, 2008.

13. Executive Office of the President, Office of Management and Budget. OMB Bulletin No. 03-04. June 6, 2003. http://www.whitehouse.gov/omb/bulletins/b03-04.html. Accessed December 12, 2008.

14. Research Data Assistance Center. Researcher tools. http://www.resdac.umn.edu/Tools/TBs/TN-010_DualEligibles_508.PDF. Accessed March 5, 2009.

15. Stroupe KT, Smith BM, Lee TA, et al. Effect of increased copayments on pharmacy use in the Department of Veterans Affairs. Med Care. 2007;45(11):1090-1097.

16. Manning WG, Basu A, Mullahy J. Generalized modeling approaches to risk adjustment of skewed outcomes data. J Health Econ. 2005;24(3):465-488.

17. House Committee on Veterans Affairs. U.S. House of Representatives Report to the Committee on the Budget from the Committee on Veterans’ Affairs Submitted Pursuant to Section 301 of the Congressional Budget Act of 1974 on the Budget Proposed for Fiscal Year 2005. February 26, 2004. http://veterans.house.gov/documents/viewsfy05.pdf. Accessed April 28, 2008.

18. Medicare Payment Advisory Commission (MedPAC). Report to the Congress: Increasing the Value of Medicare. June 2006. http://www.medpac.gov/documents/jun06_entirereport.pdf. Accessed December 12, 2008.

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