Department of Veterans Affairs

Recommendations and Actions

DVA11: Phase Out and Close Supply Depots

Background

In fiscal year 1991, the Department of Veterans Affairs (VA) spent nearly $1.3 billion on drugs and pharmaceuticals, medical supplies, and nonperishable subsistence items, which were disbursed through a supply distribution system that cost the VA $138 million.(1) The VA operates three major supply depots and approximately 170 warehouses. In the past, the supply distribution system has stored relatively large inventories in both supply depots and at the medical centers to meet customer needs and has disbursed products in batches through various distribution channels.

VA has long benefited from deep discounts that were provided by manufacturers for volume procurements of their pharmaceuticals. By establishing ceiling prices for covered drugs, the Veterans Health Care Act of 1992 eliminated the pricing advantage for many drug products distributed through the depot system. At the same time, VA has successfully pilot-tested so-called just-in-time commercial distribution of federal supply schedule pharmaceuticals through prime vendor arrangements.(2) Just-in-time commercial distribution entails orders from the VA medical center, using centralized contracts, directly from the prime vendor; delivery is made directly to the medical center with no intervening handling in the VA distribution network.(3)

In January 1993, the VA established a task force to (1) examine the impact of the Veterans Health Care Act on the VA supply distribution system and supply fund, (2) determine the financial benefits of the act, and (3) develop a long-term distribution strategy for VA. After review of the existing depot distribution system, changes resulting from the new law, and full consideration of five long-term distribution strategies, the task force recommended that VA phase out the current depot system and make the transition to a commercial distribution system. The five strategies considered were:

--- reliance on downsized versions of the existing depots,

--- conversion to 12 regional distribution centers,

--- use of four regional service centers,

--- use of a commercial distribution system, and

--- use of a combination of the commercial approach and the retention of one national service center.

VA decided to use a commercial distribution system. Recent reports of the General Accounting Office tend to validate the approach selected by the VA.(4) VA Secretary Jesse Brown approved the recommended strategy on July 13, 1993, with implementation to follow notification to Congress.(5)

The availability of prime vendor commercial systems for pharmaceuticals has already proved to be efficient and is being implemented departmentwide.6 This program, coupled with the impact of the Veterans Health Care Act, will eliminate VA medical centers' needs for pharmaceuticals from the depots. Since drugs represent a substantial portion of depot revenues, it is no longer cost-effective to maintain the depots.

Action

The Department of Veterans Affairs should convert its existing centralized depot storage and distribution program to a commercial just-in-time delivery system.

The conversion to a just-in-time system will take about 18 to 24 months, as VA's depots are phased out and closed. VA will establish a multidisciplinary transition team to plan and monitor the conversion process. The Office of Acquisition and Material Management (OAMM) will ensure that continuity of supply support to VA medical centers is maintained and that the impact of the conversion on depot employees is minimized as much as possible. Every effort will be made to offer depot employees other positions within the department.

Implications

This initiative was identified and developed by VA, and the recommendation was adopted by Secretary Brown on July 13, 1993, subject to congressional notification.

Commercial distribution systems are cost effective, widely accepted in the health care industry, and have a proven record of just-in-time deliveries to customers.

Fiscal Impact

The phase-out and closure of the depots will occur over two fiscal years. The process will start in fiscal year 1994 and finish by the end of fiscal year 1995, with a reduction of 289 depot-related, full- time equivalent (FTE) employees.

As the current inventory in depots is sold to VA medical centers without replenishment, the VA Supply Fund will accumulate a surplus of approximately $89 million. If this surplus is transferred to the U.S. treasury, it would reduce the deficit by an equal amount.

This initiative will also reduce operating costs in the medical care system by approximately $17 million per year. It is expected that the Veterans Health Care Act, which establishes the ceiling prices for drugs, will reduce pharmaceutical costs. At this time, however, an estimate of these savings is uncertain. VA should continue to work on developing the savings estimates so that they can be reflected in the President's fiscal year 1995 budget.

 
 Budget Authority (BA) and Outlays (Dollars in Millions) 
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 Fiscal Year
            1994    1995    1996    1997    1998    1999    Total
            ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 BA             0.0   -11.0   -17.0   -17.0   -17.0   -17.0    -79.0
 
 Outlays   -45.0   -55.0   -17.0   -17.0   -17.0   -17.0   -168.0
 
 Change 
 in FTEs       0   -139     -289    -289    -289    -289     -289
 

Endnotes

1. Logistics Management Institute (LMI), Win-Win Supply--Distributed Network Alternatives for the Department of Veterans Affairs (Washington, D.C., September 1992), p. iii.

2. The federal supply schedule is a listing by the General Services Administration of authorized commercial vendors, distributed on a regular basis to federal agencies for use in acquisitions.

3. LMI, p. 2-18.

4. U.S. General Accounting Office (GAO), General Services Administration--Increased Direct Delivery of Supplies Could Save Millions, GAO/GGD-93-32 (Washington, D.C.: U.S. General Accounting Office [GAO], September 1992). See also U.S. General Accounting Office, DOD Food Inventory--Using Private Sector Practices Can Reduce Costs and Eliminate Problems, GAO/NSIAD-93-110 (Washington, D.C.: GAO, June 1993).

5. U.S. Department of Veterans Affairs, Department of Veterans Affairs Supply Fund Acquisition/Distribution Strategy (Washington, D.C., July 13, 1993). (Secretary Jesse Brown's decision document.)

6. Duvall, C. Dale, and Chris Figg, Prime Vendor As It Is Used in the Department of Veterans Affairs (Washington, D.C., March 23, 1993).

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