The National Academies of Sciences, Engineering and Medicine
Office of Congressional and government Affairs
At A Glance
: Pharmaceutical Issues in the Department of Veterans Affairs
: 07/24/2001
Session: 107th Congress (First Session)
: Roger C. Herdman

Study Director, VA Pharmacy Formulary Analysis Committee, Division of Health Care Services, and Director, National Cancer Policy Board, The Institute of Medicine, The National Academies

: Senate
: Committee on Veterans Affairs

Testimony of

Roger C. Herdman, M.D.
National Cancer Policy Board
The Institute of Medicine

On the Institute of Medicine Report
Description and Analysis of the VA National Formulary

Before the

Committee on Veterans Affairs
U.S. Senate

July 24, 2001


In June 2000 the Institute of Medicine’s (IOM) VA Pharmacy Formulary Analysis Committee (the committee) delivered to the Department of Veterans Affairs (VA) and to House and Senate committees, including the Senate Committee on Veterans Affairs, a report on the VA National Formulary which had been requested in 1998 by the House Appropriations Committee in House Report 105-610. The report responded to four concerns outlined in the House Report: the restrictiveness of the formulary, its effect on quality of care of veterans, its effect on costs to the VA, and a comparison to other public- and private-sector formularies. Senator Rockefeller, then ranking minority member of the Senate Committee on Veterans Affairs, aware of and interested in the IOM study, also at about that time asked the U. S. General Accounting Office (GAO) to look at related issues with the VA formulary. The IOM and GAO coordinated efforts to comply with these congressional requests. The IOM also received substantial cooperation and information from the Veterans Health Administration (VHA), especially the Pharmacy Benefits Management Strategic Healthcare Group (PBM). The IOM work was funded exclusively under a contract with the VA. The IOM committee was made up of experts from the private sector with extensive expertise and experience in medicine, epidemiology, pharmacology, pharmacy, pharmacy benefits and formulary management, nursing, managed care, health economics, and representatives from the Disabled American Veterans and the Paralyzed Veterans of America.

Although individual veterans health facilities have used formularies beginning 40 to 50 years ago, only in 1997 was the VA National Formulary implemented. It is a list of about 1,200 generic, brand name, and over-the-counter drugs, devices, and supplies that provides the basis for a uniform national entitlement for all regions and facilities of the VHA, including 22 VISN (regional) and many local formularies. The formulary system consists of all measures that the VHA employs to manage the use of agents on its lists, including a non-formulary exceptions process, drug class reviews, the use of pharmacy and therapeutics (P&T) committees, and drug treatment guidelines. The National Formulary is partially closed, that is, some drug classes are closed or subject to restrictions, limiting choice to certain preferred of committed-use agents as a way of supporting VA negotiations for lower drug prices and meeting VHA market share objectives. Generic prescribing, generic substitution and therapeutic interchange (that is, substitution of a formulary for a non-formulary drug within a drug class) are also employed in managing the formulary system. Although minimal copayments have been imposed on some classes of veterans, to date they have not been available as a practical formulary management strategy.


Restrictiveness: The IOM report first discussed whether the VA National Formulary was overly restrictive. According to the committee, if the formulary structure or formulary system controls deny or significantly delay access to drugs that, in the reasonable judgment of medical experts, are clinically indicated, then the VA formulary meets the definition of overly restrictive. Criteria of restrictiveness include: number of items on the formulary, number of closed classes, number of drugs in the closed classes, timeliness of addition of new drugs, responsiveness on the non-formulary exceptions process, sensitivity of therapeutic interchange policies to patient risks, OTC coverage, and generic substitution. Other limits might include: exclusion of drugs or drug classes, prescription quantity of number limits, high copayments, and prior approval policies, although these are often considered more in the nature of scope of benefit definitions. The committee found that, for the most part, the VA National Formulary compared well with formularies in the private or Medicaid sector. It was not overly restrictive, by informed medical judgment, in terms of overall coverage, conservative closure of classes and numbers of items in a closed class, OTC coverage, and generic substitution. Some problems were identified in non-formulary exceptions processes, therapeutic interchange, and timeliness of addition of newly FDA-approved drugs having to do with consistency across the VHA, national policies, and patient satisfaction, which will be referred to later under recommendations. The committee also reviewed what was known about physician and patient satisfaction related to the National Formulary as a possible indicator of restrictiveness. Although there was some evidence of dissatisfaction from VA complaint records and physician surveys, and although there were shortcomings in the quality of these data, in general they did not indicate high levels of specific complaints or dissatisfaction. The committee concluded that at the time the study was done, the VA National Formulary was not overly restrictive.

Costs: With the help of economists from the Harvard Medical School Department of Health Care Policy, the committee next examined the effect of the VA National Formulary on the cost of drugs to the VHA. In economic terms, the objective of the VA National Formulary is to make the demand for specific prescription drugs more responsive to price than might otherwise have been the case. Formularies increase a buyer’s bargaining power, enabling buyers to be more aggressive in price negotiation. By excluding certain products or by shifting demand significantly between competing products, the buyer presents a seller with a more elastic, or price-responsive, demand, thereby inducing a lower price. The greater the ability to direct the volume of prescriptions between competing products, the more elastic the demand and the greater the bargaining power of the buyer. Of course, the buyer must be careful not to exclude medically necessary drugs or implement interchanges that cause risks to patients.

As of February 2000, the VA claimed that the difference between actual expenditures on drugs and what would have been spent absent the National Formulary and other contracting activities from FY 1996 through FY 2000 amounted to over $572 million. The IOM used a more conservative approach, which counted only savings from favorable price negotiations multiplied by drug use in six closed or preferred classes and did not include blanket purchase agreements, generic purchases under contract, bulk buying, and savings from patent expirations, among others. The IOM method also compared pre-National Formulary prices with post-National Formulary prices over a more limited time (from the date of class closure to opening or end of data in July 1999). Estimated savings approximated $100 million over about the first two years of the National Formulary, that is, about 3% of total pharmacy or 15% of the six closed and preferred class expenditures analyzed over that time period. The committee also explored changes in inpatient use associated with changes in the formulary. By the gross techniques used, no significant changes were observed. The committee concluded that the VA National Formulary was cost saving, probably generating savings of $100 million over two years and did not appear to have any effect on hospital admissions for selected heart- or ulcer-related conditions.

Quality: Quality of care is the degree to which health services for individuals and populations increase the likelihood of desired outcomes and are consistent with current professional knowledge. There are few data on anything except the structural characteristics of the VA National Formulary, and the committee found only very scanty data directly relating formulary elements to veterans’ healthcare outcomes. Therefore, the committee looked predominantly at structural factors. These included clinical pharmacy services, local facility P&T committees, VISN formulary committees, the VA PBM and Medical Advisory Panel (MAP). The committee also examined the quality and availability of existing and newly FDA-approved drugs on the formulary, drug class reviews and therapeutic guidelines, the non-formulary process, therapeutic interchange policies, and drug utilization review. As noted earlier, the IOM noted no changes in hospital utilization as a result of the National Formulary, and existing (and often flawed) survey data did not persuasively indicate substantial levels of patient or physician dissatisfaction.

There is some evidence that VHA pharmacy services and the performance of pharmacists in clinical roles have been strengthened and improved, and although this has been to some extent independent of the National Formulary, it probably has had a beneficial effect on quality of care. It is uncertain whether the implementation of the National Formulary has diminished the role of local P&T committees which could effect quality of prescribing in local facilities. VISN level formulary committees appear in some cases to be dominated by pharmacists raising the question of whether they emphasize pharmacy budgetary issues over quality of pharmaceutical care. The committee assessed the performance of the VA PBM and MAP by examining the quality of the formulary and formulary system. In general, no serious problems that could affect quality were observed, although recommendations (described later) were made in the areas of therapeutic interchange, non-formulary exceptions, and additions of newly FDA-approved drugs, among others. These might indicate some quality problems. In the opinion of the IOM committee, VA drug class reviews and therapeutic guidelines were of high professional quality and likely to have a good effect on quality of care. Unfortunately, identification and tracking of adverse drug events, which could be important indicators of quality effects, are so spotty and incomplete that they are not useful.

The committee concluded that a completely firm and final answer to the question of quality would require scientifically sound evidence of formulary influences on quality of care that affect process of care and health outcomes of veterans, but there are no such epidemiological or other well-designed studies of the VHA. The absence of persuasive reports of substantial worsening of health outcomes in the medical literature attributable to a closed or partially closed formulary either for the VHA or for millions of covered lives in managed care (MCO) or private sector pharmacy benefit management organizations is not proof of no effect, although it is somewhat reassuring. Based on the available information and the committee’s analysis, the committee concluded, therefore, that there is no reason to abandon the National Formulary and every reason to improve it.

Comparisons: Almost all MCOs offer pharmacy benefits and have formularies which are closed or partially closed. In general, these formularies employ prior approvals, exclusions, and copayments which were not part of the VA National Formulary at the time of the IOM study. They also may use generic substitution and therapeutic interchange (although almost always only with permission of the prescriber). Medicaid formularies vary from state to state. They tend to be inclusive as only limited exclusions are allowed by law if drug companies want their drugs included and agree to sign rebate agreements. However, prior approvals are common and various other limits, such as prescription limits on quantity or frequency, may be used which are not part of the VA National Formulary. The DOD benefit, formularies, and formulary systems were in transition at the time of the IOM study. The DOD Basic Core Formulary, mail order formulary, and multiple treatment facility formularies were not comparable to the VA National Formulary and formulary system.

In examining public and private sector formularies in comparison to the VHA, the committee concluded that some are more open, for example, Medicaid programs are required to offer all drugs on the Federal Supply Schedule that manufacturers list for rebates. Some are more restrictive. They require prior approvals and exclude some drugs. All are variable, some probably more so than the VA. Some controls that were not part of the VA system at the time of the study, such as relatively costly deductibles and copayments, may present real barriers to needed drugs, especially for low-income patients. These controls are part of DOD requirements for some eligibles or employed by some managed care plans. Other controls, such as generic substitution and therapeutic interchange are in common use in many systems. Overall, the committee concluded that the National Formulary’s effects on quality are likely comparable to those of formularies in private and other public-sector programs.


The IOM committee proposed nine recommendations.

With respect to VA use of a National Formulary, the committee recommended that the VA should continue to close classes prudently and to practice generic substitution and therapeutic interchange of branded drugs to meet its particular quality and price objectives.

With respect to management of the formulary, the VA should examine drugs newly approved by the FDA in a timely manner and abandon the fixed waiting period of one year before addition to the formulary. Drugs that provide significant improvement in treatment options should be given priority review.

The balance between standardization and systemwide uniformity and deference to local autonomy and preferences in the VA National Formulary should be recalibrated towards a more uniform national approach before divergence or inconsistencies in the formularies (which sometimes exceed 100 drugs) and formulary systems increase further.

Therapeutic interchange should be consistent in important practices and policies of notification and control. The VA should develop and implement a policy on the frequency and number of interchanges in long-term drug therapy that can result from formulary or contract changes.

Improvements in consistency and reporting of the non-formulary process should be made. The VHA should mount pilot tests of non-formulary exceptions processes that increase responsiveness and physician and patient acceptance.

The VHA should improve acceptance of the National Formulary by its stakeholders, including members of the health professionals and veterans, by, for example, representation in formulary discussions above the local P&T committee level, strengthened formulary committee participation by physicians, and a consistent policy of educating veterans about therapeutic interchanges and other formulary matters. Veteran consumers might be involved in input to the VHA, either in some advisory capacity, as is now required for the DOD Uniform Formulary, or as members of P&T or formulary committees.

The VHA needs better information on formulary system functions and their effects to ensure good management of the National Formulary. The VHA should mount studies that illuminate quality implications of the National Formulary. Congress should support the collection of data to improve National Formulary management and well-designed programs to inform formulary and drug treatment performance, quality, and cost.

With respect to effects on costs, the VHA should continue to make careful choices among drugs, based first on quality considerations, but with an understanding of cost implications, and should negotiate the best prices possible using the leverage of committed use and the ability to drive market share. The VHA should collect data to perform analyses addressing the question of offsetting expenditures and cost shifting.


In general, the IOM committee noted the extensive use of formularies in health care systems and supported specifically the VA National Formulary in concept and execution with some findings of problems and recommendations for needed improvements. At the conclusion of the study, the IOM provided some 100 copies of the report to the VA. The IOM committee met with the VA to explain the study and was led to believe then and subsequently that the VA was in agreement with many of the findings and recommendations and was moving forward with a process to implement changes consistent with the IOM report. The IOM has not monitored this process.