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

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The American Journal of Managed Care, February 2005, Volume 11, Issue 2

The Department of Veterans Affairs (VA) Pharmacy BenefitsManagement Strategic Healthcare Group (VA PBM) oversees theformulary for the entire VA system, which serves more than 4 millionveterans and provides more than 108 million prescriptions peryear. Since its establishment in 1995, the VA PBM has managedpharmaceuticals and pharmaceutical-related policies, includingdrug safety and efficacy evaluations, pharmacologic managementalgorithms, and criteria for drug use. These evidence-based practicespromote, optimize, and assist VA providers with the safe andappropriate use of pharmaceuticals while allowing for formularydecisions that can result in substantial cost savings. The VA PBMalso has utilized various contracting techniques to standardizegeneric agents as well as specific drugs and drug classes (eg, antihistamines,angiotensin-converting enzyme inhibitors, alphablockers,and 3-hydroxy-3-methylglutaryl coenzyme A reductaseinhibitors [statins]). These methods have enabled the VA to saveapproximately $1.5 billion since 1996 even as drug expenditurescontinued to rise from roughly $1 billion in fiscal year (FY) 1996 tomore than $3 billion in FY 2003. Furthermore, the VA PBM hasestablished an outcomes research section to undertake quality improvementand safety initiatives that ultimately monitor anddetermine the clinical impact of formulary decisions on the VA systemnationwide. The experiences of this pharmacy benefits program,including clinical and contracting processes/procedures andtheir impact on the VA healthcare system, are described.

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

Veterans'Health Care Eligibility

Reform Act of 1996.

Prescription drugs constitute a large percentage ofthe country's overall healthcare spending, as evidencedby double-digit growth rates in the last6 years.1 The continued escalation in prescriptionconsumption and spending has gained the attention ofpolicymakers, health plan sponsors, healthcare professionals,and patients. Many US citizens now receivepharmaceuticals through some form of pharmacy benefitsmanagement to help achieve cost-effective and high-qualitypharmaceutical care. The Department of VeteransAffairs (VA), an organization dedicated to improving thehealth of our nation's veterans, finds itself at the vanguardof this movement as it has the responsibility toprovide all "needed"care to enrolled patients underPublic Law 104-262, the The term "needed"carerefers to "services that will promote, preserve, and restorehealth?including treatment, procedures, supplies,and services,"which encompasses providing and dispensingpharmaceuticals.2

As a national healthcare organization, the VA offersa broad array of pharmacy benefits to its patient population(Table 1). And, like many other healthcare organizations,the VA has seen its pharmaceutical budget risedramatically in recent years. For example, drug expendituresin fiscal year (FY) 2003 increased to more than$3 billion from $1.5 billion in 1999 (Figure 1), largelydriven by rising enrollment of new patients in the VAsystem. The VA began a national pharmacy benefitsmanagement program in 1995 to reduce geographicvariability of access to pharmaceuticals across the system,improve the distribution of pharmaceutical agents,promote appropriate drug therapy, and reduce inventorycarrying and drug acquisition costs. This articledescribes the cornerstones of this pharmacy benefitsprogram. We address the question, posed in 1996 bySchulman and colleagues, of how to evaluate pharmacybenefits managers by making explicit the experiences,processes, and procedures that form the core of theVA's Pharmacy Benefits Management Strategic HealthcareGroup (VA PBM).3


Before 1995, 173 individual VA facilities managedtheir own pharmaceutical coverage policies via localpharmacy and therapeutics committees. The VA DrugProduct and Pharmaceuticals Management division,based in Hines, Illinois, managed and monitored drugusage and purchasing for those facilities, but had no utilizationoversight responsibilities. However, inSeptember 1995, Dr. Kenneth Kizer, the VA's formerUndersecretary for Health, established the VA PBM,directing it to establish a national formulary; managepharmaceutical costs, utilization, and related outcomes;and oversee pharmacologic guideline development ofcommon diseases within the VA system. To do so, clinicalpharmacists employed at the Drug Product andPharmaceuticals Management division headquarterscollaborated with a newly established consultative bodyof 11 field-based VA physicians and 1 physician fromthe Department of Defense. This group became the VAMedical Advisory Panel. This combined entity wouldlater evolve into the VA PBM.

Formulary decisions fall under the purview of 2groups: the VA PBM and the Veterans Integrated ServiceNetwork (VISN) formulary leaders. The VISN formularyleaders manage the pharmacy benefit for VA's 21regional care systems. Each VISN includes a variety ofhealthcare centers such as tertiary facilities, ambulatory-care centers, and associated community clinics.Each VISN's formulary committee collaborates with thepharmacy and therapeutics committees of its healthcarecenters to allow for integrative, multilevel decisionmaking. Thus, VISNs and local facilities can communicateand provide guidance to the VA PBM, and viceversa, on policies determining drug use within the VAsystem.

The VA PBM also collaborates with the VA NationalAcquisition Center for pharmaceutical contracting,establishes clinical guidelines for the VA andDepartment of Defense, develops criteria for use fornew pharmaceutical agents, and maintains a nationwidepharmacy database of patient/provider-specificprescription utilization information for research purposes.We discuss the history and issues in developmentof each of these below.


The VA PBM created a VA national formulary toaccomplish 2 main goals: to minimize interfacility variationin access to pharmaceuticalsand to useVA buying power toleverage contract pricesfor drugs. These accomplishmentsoccurred insteps. First, in 1996,each VISN established aregional formulary for itsfacilities, thereby reducingsome variation in thepharmacy benefits package.Then, in 1997, thefirst national formularywas established byassimilating these VISNformularies into a unifiedlist of drugs. Thisgreater uniformityallowed access to thesame VA pharmaceuticalbenefits nationwide.From a system standpoint,this standardizationnot only defined thecore national pharmacybenefits package, butalso provided leveragefor bulk purchasing, andwith that, contractingwithin drug classes whenappropriate. However, to offset concerns about overlycentralizing the process and thereby missing opportunitiesfor VISNs to tailor their formularies to local needs,the VA national formulary policy allowed for VISNs toadd (but not subtract) pharmaceuticals as needed tomatch the needs of local patients and resources. In July2001, the system further evolved to eliminate local drugformularies.

Currently, the VA maintains the VA national formularyand VISN formularies. VISN formularies may list additionaldrugs and dosage forms not found on the VAnational formulary, provided they do not conflict with theVA national formulary (ie, if a mandatory national standardizationcontract deems an entire VA national formularydrug class as "closed,"VISNs may not addnoncontracted drugs to the VISN formulary). In addition,a VISN may not add a new molecular entity approved bythe Food and Drug Administration (FDA) to its formularyuntil completion of a national review with specificauthorization to do so provided by the VA PBM and VISNformulary leaders. Access to nonformulary drugs occurslocally by either national, VISN, or local criteria.

Standardizing the VA national formulary evokedscrutiny at first, not praise. Veteran, commercial, clinical,and patient advocacy groups expressed concernsabout the VA's changes in formulary management. Aseries of hearings at the congressional level ensued, andin 1999 and 2000, the Senate and House Committees onVeteran Affairs each requested an outside review of theVA national formulary. The House requested an assessmentby the US General Accounting Office (GAO), andthe Senate by the National Academy of Sciences'Institute of Medicine. These assessments would determinethe clinical and economic integrity of the VAnational formulary and the formulary managementprocess. Areas of focus included access to formularyand nonformulary drugs, an assessment of the "restrictiveness"of the VA national formulary compared withother government and nongovernment formularies, andthe impact of the VA national formulary on the qualityof care.

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

On the other hand, the Institute of Medicine foundinconsistencies in nonformulary use and in guidance forinstituting therapeutic interchanges. It also noted thelack of data, both within and external to the VA, measuringthe impact of changes in utilization on quality ofcare and patient satisfaction. Thus, the Institute ofMedicine recommended reducing inconsistenciesacross VISN formularies through more centralized managementand by establishing a more timely assessmentprocess for newly approved drugs. They further recommendedmore research initiatives to generate betterdata on the safety and efficacy of drug therapy representedon the VA national formulary.4 The VA largelyagreed with the Institute of Medicine recommendationsand had already begun to take steps to improve suchshortcomings.

The second study, conducted by the GAO, noted thatVA national formulary drugs accounted for 90% of outpatientprescriptions dispensed between October 1999and March 2000 and that the VA national formulary metveterans'needs. However, the GAO reported that localformularies did not always include drugs listed on theVA national formulary, that sites sometimes did not usepreferred drugs, and that a wide variation existed in thenumber of drugs added to VISN formularies (rangingfrom 5 to 63 over a 3-year period, from June 1997 toMarch 2000). The GAO also observed variations in nonformularywaiver procedures and in the time needed toprocess such requests. For example, per prescriber selfreports,the GAO found average approval times rangingfrom minutes (22%) to a few hours (18%) to more than1 week (60%). They concluded that the VA national formularysystem would benefit by having mechanisms toensure uniform access to similar drugs across the system,VISN compliance with designated drugs, andimproved nonformulary drug approval processes.5,6

In response to these reports, the VA PBM institutedseveral changes. First, the elimination of local facilityformularies helped reduce variance within individualVISNs. Thus, no additions or substitutions could occurwithout VISN approval. Second, to limit varianceacross VISNs in terms of adding new products, the VAPBM implemented a national review process for allnew molecular entities and any other drug deemedimportant for VA patient care. Third, to ensure a timelyreview of these new products, the VA PBM removedthe 1-year waiting period before consideration of anew product for formulary addition. Fourth, the VAPBM revised its nonformulary policy by requiringquarterly reports of nonformulary approval rates andaverage review time for such requests (with the goal ofa maximum 96-hour turnaround time for nonurgentrequests). Last, the VA PBM began to develop anexpanded research agenda to measure the effects ofthe VA national formulary on patient outcomes andsafety.


Standardization of pharmacy benefits through contractingallows for uniformity of generic and brandedproducts as well as price reductions due to bulk purchasing.Other benefits of standardization include easeof access and the ability to provide identical multisourcemedications from any VA pharmacy or consolidatedmail outpatient pharmacy, reducing the risk of patientconfusion resulting from different generic or brandedproducts. For instance, in the case of generics, facilitiesmay have dispensed different shapes, colors, and formulationsof pharmaceuticals depending on where patientssought care within the VA system. Moreover, pharmaceuticalstandardization improves drug inventoryprocesses and can reduce inventory management costs.

The most important and most contentious aspect ofcontracting lies in competitive bidding among brandedproducts within drug classes. Through competitive sourcing, and in collaboration with the National AcquisitionCenter, the VA PBM estimates that the VA achieved over$1.5 billion in total cost avoidance via national contractingefforts cumulatively from FY 1996 to FY 2003 (Figure1). This estimate has not been subjected to recent externalreview, though an earlier assessment by the Instituteof Medicine noted an approximate $100 million in savingsdue to closed and preferred drug classes from 1997through 1999.4 The Institute of Medicine also found thatcontract awards generally reduced pricing by 16% to41%.4 As an added benefit, renewable options for up to 4years have likely led to a reduction in the number of localtherapeutic switch programs, which occurred frequentlyin the past as companies tried to undercut each other'sprices in local VA markets.

Contracts have a compelling effect on adherence inthe VA. After awarding a national standardization contract,VISNs encourage providers to switch to the contractedagent if clinically appropriate. This, in turn, leadsto significant drug acquisition cost savings. As an example,after competitive bidding for proton pump inhibitorsin 2001, 95% of patients switched to the contractedagent within 6 months. Patients tolerated this switchwell, with only 5% needing another proton pumpinhibitor due to suboptimal response or intolerance.This therapeutic interchange generated more than $45million in cost savings in FY 2001. Table 2 lists examplesof individual drugs/drug classes under contract withinthe VA from FY 2000 until FY 2003 and correspondingcost avoidances and expenditures (in-house data, thePharmacy Benefit Management Strategic HealthcareGroup).

The VA utilizes contracting techniques other thancompetitive bidding to reduce prices. First, the federalsupply schedule limits by law the price of brand nameproducts to 76% of the nonfederal average manufacturer'sprice. Secondly, the VA PBM works closely with theNational Acquisition Center to negotiate performance-basedincentive agreements (where the VA and themanufacturer directly negotiate a price reduction) andto establish generic multisource contracts. This hassaved at least $572 million from FY 1996 through FY2000 when comparing actual expenditures with estimatedexpenditures.4

Through careful competitive bidding, performance-basedagreements, and other cost-saving measures (eg,promoting use of generic drugs when possible), theaverage acquisition cost per 30-day supply of drugs hasremained relatively steady (ranging between $13.00and $14.50 since FY 1999) compared with the averageyearly percent increase in VA pharmaceutical expendituresover the past 5 years (Figure 1 and Figure2). Drivers of drug costs in VA include increased numbersof users, drug cost inflation, utilization of new andmore expensive drugs, and an increase in the intensityof treatment for certain diseases and conditions (eg,diabetes, hypertension, hyperlipidemia). Despite thepresence of these cost-augmenting factors, the VA hasdemonstrated the ability to stay within its fixed budgetand direct savings to local VA medical centers for alternatepatient care functions. This opportunity providesincentive for local compliance with national contractingdecisions.

Competitive bidding and the subsequent closing ofselected drug classes can strain the VA's relationshipswith pharmaceutical manufacturers, who sometimesonly reluctantly accept the "all-or-nothing"concept ofdoing business across the VA. Indeed, since the competitivebidding program began in 1996, in nearly all of thesolicitations VA has attempted, 1 or more manufacturershave invoked their right under the federal acquisitionregulations to protest the solicitation, particularly if theyhave a sizable share of the market basket. The GAOadjudicates these protests and, to date, has ruled in favorof the VA in all cases. As protests can slow the process,the VA PBM takes this into account in the solicitation-planningstages. The VA has observed an increasingnumber of nuisance protests filed by manufacturers whoultimately choose to submit noncompetitive bids for VAcontracts. Additionally, some of these companiesattempt to delay or derail the contracting process by lobbyingformulary decision makers, patient advocacygroups, and congressional staff. Thus, legal and/or lobbyingactivity has become an expected occurrence in theVA's formulary management planning.


A primary objective addressed by the VA PBMentailed developing pharmacologic management guidelinesfor the most prevalent and most costly diseasestates observed in the VA population.7 Over time, however,other entities within VA and the Department ofDefense have assumed these tasks, with VA PBM clinicians(physicians and pharmacists) taking on eithercentral or peripheral roles in this larger process. Sincethat transition has occurred, the VA PBM has focusedmore on evidence-based drug monographs for specificpharmaceuticals or drug classes and on developingappropriate criteria for use for various formulary andnonformulary agents.7 These clinical documents andalgorithms of drug use rely on a consistent evidence-basedapproach that takes into account published clinicaltrials and careful cost-effectiveness analyses so thatwhen peer-reviewed by the Medical Advisory Panel,VISN formulary leaders, and field-based experts (therapeutic advisory groups), decisions do not depend ondrug acquisition costs alone and may even favor use ofhigher cost pharmaceuticals where evidence supportsbetter patient outcomes. The finalized drug and disease-state policies, together with utilization statisticsfrom its national prescription utilization database,assist the VA in advancing its national purchasingpower to contract for quality drug products at competitiveprices and to help ensure equal access to specificdrugs for specific conditions.


In 1996, Schulman et al stated that "pharmaceuticalbenefits managers rarely do original research on theclinical effectiveness of products before considering theproducts for inclusion in a formulary. These organizationscannot track the effect of their interventions onoverall health outcomes?and cannot link patients'medical claims data to prescription drug information."3,pp3,12 The VA PBM recognized the need for formalassessment of its activities, and dedicated resourcesand personnel for this purpose. The VA has placed ahigh degree of importance on computer technology andcreating an integrated computerized medical record foreach patient. Most outcomes assessment addressesquality-improvement and patient safety initiativesusing a pharmacy database developed by the VA PBM.This patient/provider-specific database includes informationon all outpatient drugs dispensed from any VApharmacy and provides a detailed profile of medications,dosing, quantities, and drug costs. Prescriptionuse can be tracked on a macro (national, VISN, or facility)or micro (individual patient and provider) level.Further, when required, merging this data with largerVA administrative and clinical databases can providefurther information such as diagnosis, hospitalization,comorbidity, and laboratory data. In addition, the VAPBM utilizes ProClarity®‚Professional data managementsoftware (version 5.0, ProClarity Corporation,Boise, Idaho) to create views of relational pharmacydatabases, allowing quick queries of data on selectedpharmaceuticals for questions requiring urgentresponses.

Within the VA, the VA PBM has spearheaded nationwidemonitoring and management of clinical pharmacyand pharmacy-related patient outcomes. The VA PBM'soutcomes research group designs formal research evaluationslooking at safety, appropriateness of use, effectiveness,and cost-effectiveness of prescription drugs inthe veteran population for retrospective, real-time, andprospective analyses. The VA PBM, along with other VAresearchers, have published several efforts in thisregard, as the following examples illustrate.8-20

First, the VA PBM registry system tracks pharmaceuticalagents that have a suspected or identified safetyconcern. Several features of the VA provide auniquely powerful and sensitive laboratory environmentfor conducting postmarketing surveillance activities.The VA essentially mirrors a closed, staff-modelhealth maintenance organization that provides continuouscare for a large cohort of patients with significantburden of illness; members stay in the plan for extendedperiods of time (often decades); medication use ishigh, reflective of the sicker population; and centraltracking of all medications by the VA PBM allows it tofollow trends as well as track adverse outcomes.

Furthermore, quality-improvement projects such asdatabase reviews and appropriateness-of-use evaluationscapture and quantify the present state of drug interactions,drug switching patterns, inappropriate and indiscriminateuse of agents, drug-induced adverse events,treatment diagnoses, related diagnoses, medicationcompliance, and geographic variation in the utilizationof medications.7 Several of the quality-improvementdatabase reviews began as patient safety initiatives.These and other projects formed the foundation for, andwill continue under, a new patient safety center ofinquiry known as the VA Center for Medication Safety, ajoint project funded for 3 years by the VA's NationalCenter for Patient Safety and the VA PBM.


As a corollary to its ability to monitor drug utilization,the VA PBM has formalized processes to improvepatient safety by utilizing educational tools and continuedmonitoring to ensure appropriate use. In additionto the standard educational tools, the VA PBM's Website ( improves access tonational directives on drug use, pharmacotherapeuticguidance, medication safety topics, and other pharmacotherapeuticinformation specific to the system.These resources increase the quality of care by directlycommunicating information to providers. This informationis updated on an as-needed basis as newinformation become available in published, peer-reviewedliterature.

For cases where concomitant therapy has resultedin adverse interactions and clinical sequelae, the VAPBM has taken the initiative to intervene at theprovider level by forwarding information letters to prescribers through the VISN formulary committees.Several interactions have been addressed, including (1)concomitant use of selective serotonin reuptakeinhibitors with codeine, where the former maydecrease the metabolism of codeine to morphine byinhibiting cytochrome P-450 2D6, thereby decreasingits therapeutic benefit21-23; (2) the potential interactionsbetween protease inhibitors and the hydroxymethylglutarylcoenzyme-A reductase inhibitors(statins) lovastatin and simvastatin, where proteaseinhibitors may inhibit statin metabolism, leading tohigher drug concentrations and, possibly, an increasedrisk for myopathy and rhabdomyolysis24-31; and (3) thecombination of statins and fibrates, which has thepotential to induce rhabdomyolysis and death.32-37Next, in monitoring new drugs used increasinglythroughout the VA system, the VA PBM conducted ananalysis on ziprasidone, an atypical antipsychotic,which can cause potential cardiovascular risks throughprolonged QTc intervals, especially in patients whohave cardiovascular disease, use concomitant drugsthat can prolong QTc, or take drugs that inhibit themetabolism of ziprasidone.38-49 The evaluation trackedpatients with a diagnosis of schizophrenia and lookedat histories of cardiovascular disease, antipsychoticswitching patterns, discontinuation rates of ziprasidone,and concomitant use with contraindicated medications.The VA PBM also initiated a database reviewof oxycodone, a drug with abuse potential. Resultsprompted the VA PBM to develop national criteria foruse as well as an employee education program, and toinstitute an automated system to periodically reviewpatients who obtained a prescription for any formulationof oxycodone nationwide.

Moreover, the VA PBM conducts drug use evaluationsto analyze adverse drug events, assess compliancewith predetermined criteria and standards of practice,and estimate related pharmaceutical costs.7 An exampleof a drug use evaluation completed by the VA PBMevaluated the clinical impact of a systemwide switchfrom troglitazone to rosiglitazone or pioglitazone withrespect to potential exacerbation of congestive heartfailure or hepatotoxicity after the market withdrawal oftroglitazone.11 This project further evolved into thedevelopment and implementation of the nationwide VAThiazolidinedione Registry, which monitor rates andrelative risk of adverse outcomes such as congestiveheart failure, hepatotoxicity, hyperlipidemia, and mortalityin the VA diabetic patient population. (Other registriesand safety outcomes projects include theAntipsychotic and Diabetes Outcomes Study, theFluoroquinolone Glycemia Safety Study, and theLeflunomide Registry.)

The VA PBM performed a drug use evaluation toinvestigate rabeprazole therapy after a systemwidetherapeutic interchange from lansoprazole. The resultsrevealed that many patients switched to rabeprazolediscontinued therapy because of symptom recurrencedue to inadequate titration of rabeprazole doses,demonstrating the need for provider education. Inanother national drug use evaluation, the VA PBMassessed the appropriate use of tamsulosin for benignprostatic hypertrophy. Results showed provider noncompliancewith national criteria, manifested byunnecessary and increased utilization of this agent,which prompted the VA PBM to implement a formalprovider education process.10


The VA formulary system differs from other governmentaland private formulary systems. First, VA is anational healthcare system with a standardized prescriptionbenefit that VISNs can expand to meet localneeds. In other managed care settings like Medicaid,formularies and drug access vary due to specific contractsnegotiated between each state and the plans.4The VA national formulary may list fewer therapeuticalternatives within drug classes or may close classes to1 preferred drug. However, VANF does not excludesome drugs/classes or restrict prescriptions amounts ormedication quantities. By contrast, Medicaid limits theuse of costly, potentially abusive, cosmetic, and/or"lifestyle"drugs.4 In addition, veterans utilizing theprescription benefit within the VA do not pay out ofpocket for prescription drugs prescribed by VA physiciansif receiving treatment for a service-connectedinjury or ailment. Otherwise, copayments are small($7.00 per 30-day supply) and limited to non-service-connectedtreatment. In comparison, pharmacy benefitplans in the private sector often have tieredcopayments.


The VA PBM has made significant progress in efficientlymanaging the clinical, economic, and pharmacy-related outcomes of patients; evaluating andendorsing the appropriate use of pharmacotherapies;ensuring the availability of drug products and supplies;and controlling the cost of pharmaceuticals. As a federalorganization, the VA has faced unique challenges inthe development of its PBM (eg, interaction with media,politicians, and other special interest groups). In ourexperience, success in this environment has dependedon multidisciplinary cooperation of medical and pharmacyexperts, reliance on evidence to guide decisionsand provide accurate responses to patients and otherstakeholders, focused competitive bidding to encouragethe most cost-effective use of pharmacy expenditures,and willingness to continually evaluate the success orfailure of our program. We encourage other pharmacybenefit management groups to evaluate their programs,and share information with the academic community.


We are grateful for the assistance of Suzanne Lenz, RPh, John R.Nowak, RPh, and Joseph J. Canzolino, RPh.

From the Pharmacy Benefits Management Strategic Healthcare Group, Department ofVeterans Affairs, Hines, Ill (MMS, FEC, MAV); the Department of Pharmacy Practice,University of Illinois at Chicago, Ill (FEC); the VA Greater Los Angeles-West LA, and theDepartment of Medicine, David Geffen School of Medicine, University of California, LosAngeles, Calif (PAG); and the VA Pittsburgh Healthcare System and the Departments ofPharmacy and Medicine, University of Pittsburgh, Pa (CBG).

Address correspondence to: Mariscelle M. Sales, PharmD, Department of VeteransAffairs, PBM/SHG (119D), 1st Ave, 1 Blk N of Cermak Rd, Bldg 37, Room 139, Hines, IL60141. E-mail:

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