Executive Summary

SUMMARY AND CONCLUSIONS

In 1998, the Congress (House Report 105-610) formally expressed concerns about the Department of Veteran's Affairs (VA) National Formulary. They are as follows:

Serious concerns have been raised about the impact of the VA's new National Formulary. The Committee has learned that the formulary prevents physicians from meeting the unique health care needs of individual veterans and is overly restrictive. To address these concerns, the Committee directs the VA to contract with the Institute of Medicine to conduct an independent analysis of the effects of the National Formulary on the quality of care.

Specifically, the study should be completed within 6 months and should provide the Committee with an estimate of potential costs to VA health care associated with the National Formulary for drugs, biologic products, devices, prosthetics and pharmaceutical treatment guidelines. The study should also include a comparison of the new VA formulary to private insurance formularies for drugs and devices and other government formularies, such as Medicaid.

This report was prepared by a committee appointed by the Institute of Medicine (IOM) in response to those concerns. The committee consisted of representatives from two veterans service organizations, the Disabled American Veterans and the Paralyzed Veterans of America; health professionals, including physicians and a nurse, experienced in clinical pharmacology or pharmacy and therapeutics activities; and pharmacists and others knowledgeable and experienced in the management and economics of pharmacy benefits. The committee met three times in Washington, D.C., for 5 days in all, and spent considerable additional time reviewing relevant literature, evaluating information from the



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DESCRIPTION AND ANALYSIS OF THE VA National Formulary Executive Summary SUMMARY AND CONCLUSIONS In 1998, the Congress (House Report 105-610) formally expressed concerns about the Department of Veteran's Affairs (VA) National Formulary. They are as follows: Serious concerns have been raised about the impact of the VA's new National Formulary. The Committee has learned that the formulary prevents physicians from meeting the unique health care needs of individual veterans and is overly restrictive. To address these concerns, the Committee directs the VA to contract with the Institute of Medicine to conduct an independent analysis of the effects of the National Formulary on the quality of care. Specifically, the study should be completed within 6 months and should provide the Committee with an estimate of potential costs to VA health care associated with the National Formulary for drugs, biologic products, devices, prosthetics and pharmaceutical treatment guidelines. The study should also include a comparison of the new VA formulary to private insurance formularies for drugs and devices and other government formularies, such as Medicaid. This report was prepared by a committee appointed by the Institute of Medicine (IOM) in response to those concerns. The committee consisted of representatives from two veterans service organizations, the Disabled American Veterans and the Paralyzed Veterans of America; health professionals, including physicians and a nurse, experienced in clinical pharmacology or pharmacy and therapeutics activities; and pharmacists and others knowledgeable and experienced in the management and economics of pharmacy benefits. The committee met three times in Washington, D.C., for 5 days in all, and spent considerable additional time reviewing relevant literature, evaluating information from the

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary VA, and assembling new data to prepare this report. Financial support for this work was provided by the Department of Veterans Affairs. The VA National Formulary, implemented in 1997, is a list of generic, brand name, and over-the-counter (OTC) drugs, devices, and supplies, that provides the basis for a uniform national entitlement to listed agents for all regions and facilities of the Veterans Health Administration (VHA). It also supports the prudent purchasing of drugs and drug products whose costs to the VHA escalated by almost 20% between FY 1998 and FY 1999. The National Formulary includes 22 separate regional (VISN, Veterans Integrated Service Network) and many local (VA medical center) formularies, which usually have more and different drug and supply listings than the mandatory national list. For the purposes of this report, the term “National Formulary” refers to the national drug list, the regional and local lists, and the “formulary system.” Formularies are routine (92.9% or more) in other health care systems, including hospitals, medical centers, managed care organizations, and Medicaid, among others. The formulary system consists of all the measures that the VHA employs to manage the use of agents on its lists. For example, in the case of the VA, a central directive required the establishment of a nonformulary exceptions process. Such a process entails regional and local procedures for access to drugs and supplies not on the national or other VA formularies. Systemwide drug class reviews are also performed in managing the National Formulary. Drug treatment guidelines are part of the National Formulary as well. The VA National Formulary is partially closed, that is, some drug classes are closed or subject to restrictions, limiting choice to certain preferred or 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. In this report, the IOM committee considered pharmaceuticals the primary issue and focused on them, not on devices or supplies. This report and its summary first respond to the congressional questions and resulting VA contract, and then lay out specific and important recommendations for improvement of the National Formulary. Restrictiveness Elements of restrictiveness examined in this report include formulary size and quality, coverage of drugs in different classes, timeliness of new drug additions, fairness and responsiveness of the nonformulary exceptions process, and sensitivity of therapeutic interchange policies and procedures, among others. These are central elements in the implementation and management of the National Formulary, and revision of policies and procedures governing them will represent significant changes. VA controls are compared to controls more commonly used in other systems including prior authorization, specific exclusions of

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary drugs or drug classes, and volume or quantity limits. Basic formulary and formulary system limitations of drugs in health care systems are identified. New data on restrictions in private health care formularies and formulary systems were collected for the IOM by the Academy of Managed Care Pharmacy. The VA National Formulary is not as inclusive as many Medicaid formularies, but it rarely designates drugs or drug classes as absolutely excluded or requires prior authorization of drugs as Medicaid and managed care formulary systems frequently do, nor does it impose absolute limits on numbers of prescriptions as some Medicaid formularies have done, or tiered copayments as is often the practice in managed care. The IOM committee concluded that the VA National Formulary is not overly restrictive. In some respects it is more, but in many respects less, restrictive than other public or private formularies. The committee has identified deficiencies in the implementation and management of the National Formulary and recommended changes. Cost The IOM examined VA aggregate outpatient drag use data by VISN by month for FY 1994 through FY 1999 for six drug classes that had been closed or preferred at some point by the National Formulary (omitting the luteinizing hormone-releasing hormone [LHRH] class for which data were lacking) and for eight other classes that had remained open. Person-level data were not available to support comparisons of spending for inpatients, outpatients, and pharmacy, or analyses of cost shifting and spending in various budgets associated with implementation of the National Formulary. With some gaps, average VA drug purchase price data were available by VISN by month. To arrive at expenditures for each drug, these prices were multiplied by units used. Using other data on total system users, age and other demographic factors, as well as various statistical and analytical techniques, attempts were made, within the limits of the data provided, to control for variables that might distort estimates of VHA pharmacy expenditures. For 2 years before and after implementation of the National Formulary, VA inpatient discharges for diagnoses of conditions likely to be affected by changes in treatment with drugs in closed or preferred classes were examined. The IOM assessment of cost savings associated with the VA National Formulary was limited to six drug classes and was very conservative. A recent, higher VA estimate was based on a longer time and inclusion of a wider scope and number of activities and policies. The IOM committee found that the VA National Formulary was associated with substantial changes in utilization, prices, and market share of drugs in closed and preferred classes compared to drugs in open classes. Savings in pharmacy expenditures approaching $100 million over the approximately 2-year time span since formulary implementation have probably been realized. This figure is about 15% of the six analyzed drug class expenditures over those 2 years. An exploratory analysis of the distribution of inpatient discharges for illnesses treatable by two closed drug classes did not

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary reveal an association with National Formulary changes in the status of members of those classes. Quality Quality of health care can be assessed by examining the structure, process, and outcomes of delivery of care. The committee reviewed a number of structural elements of the VA National Formulary that might affect quality of care, such as pharmacist programs, VA regional and local pharmacy and therapeutics (P&T) committees, the VA pharmacy benefits management (PBM) group, drug class reviews, and treatment guidelines, among others. The quality of these elements was generally reassuring. Because of inconsistencies across the VA and lack of information, judgments of the quality of other structural elements were not so reassuring. For example, problems, including national inconsistency, inaccurate reporting, and variable implementation, among others, were identified in the nonformulary exceptions and therapeutic interchange programs and in other areas that could affect quality of care. The IOM committee found almost no data relating the implementation and management of the National Formulary to the quality of the process and outcomes of veterans' care. The National Formulary affects the utilization of drugs in the treatment of veterans, but provides no evidence that would allow an assessment of how utilization changes affect quality. Such data are also scarce in the private sector. The VA has initiated programs to identify quality of outcomes, such as adverse drug events. Electronic prescribing or bar coding systems that contribute to adverse drug event control have also been initiated. These programs are not elements of the National Formulary. As noted in Chapter 3 of this report, the committee did not find changes in the distribution of hospital discharges for illnesses treatable by two of the closed drug classes comparing the 2 years before and after National Formulary implementation. The lack of any increase in hospitalizations for such conditions was somewhat reassuring, although these are crude analyses. The VA does not systematically collect other outcomes data, such as patient satisfaction. The committee found that veterans' complaints about the National Formulary comprised 0.4% of all complaints to the formal patient advocate reporting system, although one independent survey also identified complaints regarding inadequacy of information provided during therapeutic interchanges. The committee found, based on the scarce quality data available, that there was no reason to abandon the National Formulary. As a national system, the VA also has a responsibility to provide better data on quality issues in drug treatment and formulary operations with carefully designed and implemented health services research. Comparisons Using data from a variety of sources, including a survey of managed care organizations (MCOs) and PBMs carried out by the Academy of Managed Care

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary Pharmacy, this report compares, somewhat favorably, the VA National Formulary with private-sector and Medicaid formularies and formulary systems. These comparisons are used primarily to assess the restrictiveness and quality of the National Formulary. The task is complicated because there are multiple and highly variable private-sector and Medicaid formularies and because there is variability among VISNs in VA formularies and formulary systems. In Chapter 5, the committee collected and discussed private-sector formularies, formulary systems, and specific formulary lists, although such lists are constantly changing and evolving. In that chapter, data on every state's Medicaid formulary are also discussed. With the understanding that recent legislation will cause changes, the committee briefly compared the Department of Defense (DOD) Basic Core Formulary and formulary systems as well. VA, public-sector, and private-sector formularies variably select from an array of different controls or restrictions. These comparisons supported the committee's conclusion that the National Formulary is not overly restrictive and that its effects on quality are likely comparable to those of formularies in private and other public-sector programs. Recommendations With respect to VA use of a National Formulary, the IOM committee finds: The VA National Formulary and formulary system that enable the VHA to make quality choices among drugs and negotiate favorable prices should bc maintained. The National Formulary 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. Formularies (scientifically constructed lists of drugs and drug products) and formulary systems (how these lists are managed) are essential and traditional components of the cost and quality management of the pharmacy benefits of modern public and private health care systems. In many ways, the VHA is similar to those health care systems, and the need to prudently manage its pharmacy benefit may be even more urgent than in other systems given the VA's fixed overall budget. Thoughtful use of controls on drug use defines careful management of a formulary. The committee assessed how these controls were employed in the VA and in Medicaid and managed care. Compared to Medicaid, the VA National Formulary lists fewer drugs in some classes, limits the addition of new drugs, and requires therapeutic interchange. However, the VA does not designate some drugs or drug classes as excluded, require prior approvals, or impose limits on numbers of prescriptions. The restrictions or controls in Medicaid are aimed at limiting the use of expensive drugs or limiting or excluding drugs or classes of drugs that are subject to abuse or prescribed for cosmetic, life-style, or other than significant disease

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary related indications. Price discounts or rebates are already determined for Medicaid by federal law. Compared to managed care, the VA National Formulary also often lists fewer drugs in some classes or one drug choice in closed classes and imposes a fixed waiting period for adding new drugs, but it does not require prior approval, charge relatively costly copayments, or exclude categories of drugs or individual drugs. The objectives of restrictions or controls in managed care are similar to those of the VA National Formulary. They are designed to direct prescribing to ward lower-cost or preferred drugs and to drive market share in support of favorable price negotiations. Although the Federal Supply Schedule sets ceiling prices for most brand name drugs for the VA, these prices and the prices for generic and OTC drugs can still be negotiated downward. In settings without the Federal Supply Schedule, and where members make copayments, controls will differ. Below, the IOM committee recommends improvements in the ways the VA National Formulary is managed. With respect to managing the VA National Formulary, the IOM committee finds that improvements are necessary: The VA National Formulary should examine drugs newly approved by the Food and Drug Administration (FDA) in a timely manner and abandon the blanket policy of a fixed waiting period. Drugs that provide significant improvement in treatment options should be given priority review and serious consideration for the National Formulary based on assessments of merit by physician staffs and review committees. With rare exceptions, VA National Formulary policy requires a wait of 1 year before addition of new FDA-approved drugs. This policy is inconsistent with FDA descriptions of these drugs, especially 1P priority drugs, as significant new therapies. Evidence is lacking that conclusive data will be gathered and published to significantly improve assessment of new drugs within the first year after market entry. The committee could find no clear justification for one federal agency adding a year to the approval process of another federal agency statutorily charged with assessing the safety and efficacy of new drugs. The policies on drug additions in public and private-sector formularies examined by the committee are less restrictive than those of the VA National Formulary. 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.

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary Formulary differences among VISNs and local facilities and the National Formulary are slowly increasing. VISN and local formulary systems are not obliged to wait before evaluating and adding new FDA-approved drugs to their formularies, and many do not. If many VISNs add a new entry, it makes sense for the national system to give that drug serious consideration. In one case, more than 80% of VISNs added a new FDA-approved drug, which was then rejected for the National Formulary. Additions of drugs already on the market to VISN and local formularies outstrip additions to the National Formulary in diversity and number as well. There are also differences in therapeutic interchange and nonformulary exceptions policies and procedures. Differences among VISNs have implications for equal access to medications by veterans. Provision of equal access and consistent systemwide management must be balanced against local and regional freedom to innovate and responsiveness to local differences in standards of care. Therapeutic interchange is a necessary element of formulary management and price negotiation, but veterans and their physicians should expect consistency in important practices of interchange among therapeutic alternates and in 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. The VHA has no policy on therapeutic interchange, except that it is a local responsibility. Scientific evaluation of the medical appropriateness, implementation, and monitoring of therapeutic interchanges should be an explicit element of drug class reviews. National standards are needed on educating and informing physicians and veterans, and protecting at-risk patients—for example, those who are stable on an existing prescription, are on multiple drugs, have significant comorbidities, or have problems with potentially compromised physiological handling of drugs. System-wide compliance with these standards should be assured. The National Formulary restrictions on a drug may change as may committed-use contracts or blanket purchase agreements that have led to interchanges. Since the VA National Formulary is in its early stages, changes in the drugs with volume commitments have not yet become a problem, but the VA has not evaluated the frequency or number of interchanges that are acceptable in the care of a veteran on long-term drug treatment in such instances. Therapeutic interchange standards should go hand in hand with an improved nonformulary exceptions process. Improvements in consistency and reporting of the nonformulary process should be made. The VHA should mount pilot tests of nonformulary exceptions processes that increase responsiveness and physician and patient acceptance.

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary The nonformulary exceptions process is often informal and unrecorded in VHA national statistics, making it difficult to evaluate the process and to design improvements. Examinations of nonformulary request forms and anecdotal reports suggest that processes for obtaining nonformulary drugs differ across the VHA, as do associated delays and administrative burdens that in some cases may be problematic. A nonformulary exceptions process that is simple, fair, reasonable, and consistently applied could alleviate perceptions of restricted access to drugs, limited additions of new drugs, and dissatisfaction with therapeutic interchange. The focus should be on smooth and timely access, not barriers to needed drugs. The nonformulary process is an integral part of the National Formulary. It has important effects on many elements of the formulary and formulary system. Therefore, it, too, should be a uniform national entitlement. The relevant VHA directive (97-047) is not sufficient assurance of this. The VHA should improve acceptance of the National Formulary by its stakeholders, including members of the health professions and veterans. Improving acceptance might include 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 VA on the National Formulary, either in some advisory capacity, as is now required for the DOD Uniform Formulary, or as members of P&T or formulary committees. The IOM committee examined satisfaction with, or acceptance of, the National Formulary from both the physician and patient perspective. Physician satisfaction with, and participation in, the VA National Formulary and formulary system are not optimal as suggested by surveys and anecdotal data on complaints: 4 of 22 VISN committees have a majority of physicians, 5 VISN formulary committees have proportionately few or, in 1 case (VISN 6), no physicians. VISN committee pharmacist membership averages 52% and physician membership, 44%. The balance on many of these higher-level committees could be perceived to favor pharmacy budget priorities over prescriber views on medical factors in drug treatment. Veteran complaints about access to drugs are relatively infrequent, amounting to 0.4% or less of all complaints to patient advocates or the Veterans of Foreign Wars. This indicates an apparent tolerance of the formulary system by veterans or suggests that dissatisfaction does not rise to the level of significant representation through the advocate reporting system. Nevertheless, there is evidence from a large multicenter survey of reactions to therapeutic interchange that some veterans do not feel adequately informed about some aspects of the formulary system. The committee notes that the Congress has required formal consumer input to the new DOD Uniform Formulary.

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary With respect to quality of care, the IOM committee finds the following: Recommendations to assure quality are found under other related headings in this section. Although the VHA reports improvements in ensuring and assessing quality of veterans' health care in general, convincing reassurance regarding quality effects of the VA National Formulary requires data relating formulary and formulary system elements to veterans' health outcomes. With rare exceptions, such data are not available for either process or outcomes. On the positive side, the IOM committee did not identify drugs or combination drug products of questionable quality on the national list. The formulary appears to include numbers and varieties of drugs reasonably similar to other private and public-sector formularies. The quality of drag class reviews and guidelines is comparable to that in other systems. The VA has invested in expanded pharmacy programs with patient education and treatment monitoring activities, refleeting similar effective private-sector programs. The VA PBM, Medical Advisory Panel, and VISN Formulary Leaders Committees manage the VA National Formulary through scientifically appropriate drug class reviews and guidelines that focus on the quality of drug treatment for veterans. With respect to management and quality-of-care information, the IOM committee finds: As the manager of a national program, the VHA needs improved information on formulary system functions and their effects to ensure good management of the National Formulary. The VHA should also meet its responsibility to mount studies that illuminate quality implications of the VA National Formulary and formulary system. 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. Adequate medical data are an important structural guarantee of quality. The management of the National Formulary and formulary system depends on good data concerning system functions. Managers need to know the details of the nonformulary process and various restrictions and their effects. Patient-level drag tracking data can help to assess therapeutic interchanges. These and other reliable data on drug prices, utilization, and offsetting costs can help in assessing budgetary effects of the National Formulary. Deficiencies in data sets such as these were noted by the committee and are discussed in subsequent chapters of this report. Although the committee appreciates the difficulty and cost of collecting patient care data to make quality assessments and recognizes that programs to do so are infrequent and incomplete in the private sector, improvements in VA data that assess particular programs are needed. Data on adverse drug events or reac

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DESCRIPTION AND ANALYSIS OF THE VA National Formulary tions are insufficient to compare the VHA with other large health care systems. Data from drug utilization review (DUR) programs are collected almost exclusively at the local level and do not focus on National Formulary issues. Some promising VISN programs to enforce treatment guidelines have been implemented recently, and VISNs are beginning DURs relating to VISN formulary issues. There are few VHA attempts to design and carry out studies of the effects of therapeutic interchanges in suitably randomized, blinded, and monitored groups of patients in sufficient numbers to achieve statistical significance. An analysis of nonformulary use or an experimental approach to identifying outcomes of denials would be of value beyond the VHA. The need for studies that define this national program was noted elsewhere. With respect to effects on costs, the IOM committee finds: 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. Continuation of the VA National Formulary is justified on the basis of cost savings, especially in the absence of data on adverse quality effects. The closed and other classes with national committed-use contracts account for about 15% or more of the projected $2 billion in VHA drug expenditures in FY 2000, an annual expenditure of $300 million or more. The VA National Formulary and formulary system enable choice and volume commitments among members of restricted classes. This has resulted in 16 to 41% price reductions from manufacturers. The National Formulary and formulary system have been shown to have substantial, statistically significant effects on VA drug use, prices, and market share and to generate notable savings in closed-class outpatient pharmacy expenditures per outpatient veteran user by a conservative analysis. The VA employs other prudent purchasing practices such as blanket purchase agreements, generic contracts, and bulk purchases. These provide valuable additional economies. At present, the VHA cannot provide cost and utilization data to allow a rigorous exploration of, or any conclusions about, potential off-setting of costs from the pharmacy budget to other VHA health care budgets. The committee performed an analysis of changes in inpatient discharges using available information, but this was not definitive. Absent the National Formulary, the VA would lose the ability to select drugs and negotiate price differentials below the Federal Supply Schedule—differentials that have probably produced aggregate savings approximating $100 million —and VHA drug costs would presumably escalate by this amount leading to equivalent reductions in other VHA services to veterans.