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Audit of Defense Logistics Agency Troop Support Negotiation of Prices for the Pharmaceutical Prime Vendor–Global Program DODIG-2019-109

Audit

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Publicly released: August 13, 2019

Objective

We determined whether the Defense Logistics Agency (DLA) Troop Support could improve its negotiations of pharmaceutical prices.

Background

The DLA Troop Support Pharmaceutical Prime Vendor–Global program provides the global distribution of pharmaceuticals and related products directly to customers in the DoD and other Government agencies. The prime vendor provides the pharmaceuticals directly to the customer, eliminating the need for DLA Troop Support to manage large inventories of perishable pharmaceuticals.

The Defense Health Agency (DHA) supports the delivery of health care to 9.4 million uniformed service members and their families. The DHA maintained the Military Health System Data Repository of pharmaceutical insurance claim data including the pharmaceutical’s National Drug Code, which is a unique 11-digit number used to identify the pharmaceutical. The Military Health System Data Repository includes the amounts paid to retail pharmacies and quantities dispensed from both the DoD health care facilities and non-DoD sources, such as retail pharmacies, which are not subject to the Buy American or Trade Agreements Acts. We used the DHA data to calculate the median (middle) amount paid by the DoD, patients, and other health insurers for each pharmaceutical to compare to DLA Troop Support’s program prices.

Between November 13, 2014, and May 12, 2017, the DoD and other Government agencies ordered 20,675 different pharmaceutical National Drug Codes and related supplies valued at $5.1 billion from DLA Troop Support’s program. We identified 6,615 pharmaceutical National Drug Codes, with orders valued at $329.5 million, where the program price was higher than the median amount paid by the DoD, patients, and other health insurers for each prescription filled based on the DHA’s pricing data from the Military Health System Data Repository.

Findings

We determined that DLA Troop Support established prices for the Pharmaceutical Prime Vendor–Global program based on Government prices, such as the Veterans Affairs Federal Supply Schedule, or the prime vendor’s pricing agreements, which allowed the prime vendor to distribute the supplier’s products at an agreed-to price. DLA Troop Support officials compared the prices from the pharmaceutical prime vendor’s pricing agreements to the average wholesale price, which is an industry pharmaceutical pricing benchmark. We determined that additional pricing data were available from the DHA that DLA Troop Support could have used to assist with negotiating lower prices for some pharmaceuticals.

DLA Troop Support stated that its ability to obtain the prices in DHA’s pricing data was affected by the Buy American

Act and Trade Agreements Act, which limits potential sources of pharmaceuticals and reduces competition. The pharmaceutical prices from DHA’s pricing data were from retail pharmacies, which were not subject to the limitations of these Acts. Another limitation affecting DLA Troop Support’s ability to negotiate lower prices was that it could not guarantee sales to its suppliers with distribution and pricing agreements in exchange for quantity discounts or price breaks.

Because DLA Troop Support had to comply with the Acts, DLA Troop Support may not have been able to achieve the same prices as reflected in DHA’s pricing data. However, the DLA Troop Support could have used the pricing data from DHA to assist with negotiating lower prices for some pharmaceuticals in the program. Based on our calculations, DHA’s median amounts paid for the same quantity of pharmaceuticals were $137.1 million less than DLA Troop Support’s prices for the 6,615 pharmaceutical National Drug Codes.

Recommendations

We recommend that the DLA Director require the DLA Troop Support Commander to coordinate with the DHA to obtain pricing data from the Military Health System Data Repository and use the data to evaluate existing and future prices when negotiating pharmaceutical prices.

Management Comments and Our Response

Comments from the DLA Acquisition Deputy Director, responding for the DLA Director, addressed the specifics of the recommendation to coordinate with the DHA to obtain pricing data from the Military Health System Data Repository and to use the data to evaluate prices when negotiating pharmaceutical prices. The recommendation is resolved but will remain open until we verify that the DLA and DHA have signed a memorandum of agreement to officially establish their coordination.

Additionally, the Deputy Director stated that the DLA could not concur with the DoD OIG assertion that the Agency could achieve potential savings of $137 million by adopting the recommendation. We revised the report to clarify that we were not asserting the DLA could achieve potential savings of $137.1 million. The $137.1 million cited in the report is the difference between DLA Troop Support’s prices and DHA’s median amounts paid. The intent of the report was to highlight another source of pricing data that DLA Troop Support should consider when establishing pharmaceutical prices that could result in lower prices.

This report is a result of Project No. D2017-D000AH-0120.000