Bloomberg News

McKesson Paid $226 Million in VA Spending Now Under Review

December 15, 2011

(Adds VA comment in seventh paragraph)

Dec. 15 (Bloomberg) -- The U.S. Veterans Affairs department changed its procedures after identifying “issues” with the way $226 million was spent last year in a contract with drug distributor McKesson Corp., an agency spokesman said.

Agency officials have since banned the use of the contract to buy “open market” goods, according to a Nov. 8 memo to purchasing officials. The VA allegedly made such buys without any contracts, potentially putting patients at risk of receiving ineffective or unsafe medicine, according to a letter to Veteran Affairs Secretary Eric Shinseki from U.S. Representative Joe Donnelly.

“Several months prior to receiving Congressman Donnelly’s letter, VA identified purchasing issues,” Josh Taylor, a VA spokesman, said in an e-mail. The agency “began taking immediate corrective actions,” he said.

The alleged use of the contract for unauthorized purchases is the subject of an investigation by Congress and the agency’s inspector general. McKesson is competing for the next version of the contract, which could be worth as much as $30 billion.

New Drug Contract

The new contract to supply the VA with pharmaceuticals is scheduled to be awarded by March and will “instill increased accountability and address pricing concerns to ensure that VA patients continue to receive the medications they need while also safeguarding taxpayer dollars,” Taylor, the VA spokesman, said.

Taylor said $226 million was spent on open market purchases last year, out of $4 billion spent with McKesson. He declined to explain what open market purchases means in the context of the VA memo, or say if there were contracts for those orders. The term typically refers to a purchase for which there is no pre- existing contract, said Larry Allen, president of Allen Federal Business Partners, a procurement consulting firm based in Arlington, Virginia.

All the items were received and paid for, and the VA requires suppliers to adhere to Food and Drug Administration standards, Taylor said.

In an Oct. 28 letter Donnelly, the top Democrat on the House Veterans’ Affairs Committee’s panel on oversight and investigations, asked Shinseki to explain how the agency could ensure drugs purchased without contracts met federal safety and efficacy standards and were bought at reasonable prices. Such unauthorized buying may have involved “billions of dollars” in spending over several years, the Indiana lawmaker wrote.

VA Investigation

The Veterans Affairs inspector general’s office is investigating the agency’s non-contract purchases through the McKesson agreement after meeting with Donnelly, said Maureen Regan, the counselor to Inspector General George Opfer.

The office also will review the agency’s use of a “fast pay” system, Regan said. That system provides discounts to the VA when payments are made to McKesson, the agency’s primary pharmaceutical supplier, within 48 hours of receiving the invoice.

Representative Bill Johnson, an Ohio Republican who leads the oversight and investigations subcommittee, said yesterday that he is “aware of the allegations.”

“There is already an ongoing investigation and we will take the appropriate measures, but at this time, I cannot provide further details,” Johnson said in an e-mail.

Buying drugs without a contract puts veterans at risk of receiving tainted or ineffective medicine because there’s no guarantee where the drugs came from or what ingredients were used in production, said Richard Weidman, the executive director for policy and government affairs for the Vietnam Veterans of America.

‘Chain of Custody’

“If you can’t show chain of custody, you can’t guarantee the elements in a drug are what you say they are,” Weidman said. “That’s how people have wound up dying.”

McKesson has been the VA’s sole medicine supplier for veterans’ hospitals and the department’s mail-order pharmacies since 2004.

Donnelly’s letter doesn’t accuse McKesson of wrongdoing. The letter sought information about whether supplies in addition to pharmaceuticals were purchased without a contract. It didn’t elaborate on the types of supplies.

McKesson’s contract expires in May, and the San Francisco- based medical supplier is competing with at least two companies, Cardinal Health Inc. and AmerisourceBergen Corp., to keep the business in a contract valued at as much as $30 billion.

Kris Fortner, a McKesson spokesman, declined to comment on the investigation but said McKesson is in compliance with the current VA contract. Barbara Brungess, a spokeswoman for AmerisourceBergen, declined to comment. Cardinal Health spokeswoman Debbie Mitchell didn’t respond to requests for comment.

--Editors: Jon Morgan, Joe Winski

To contact the reporter on this story: Kathleen Miller in Washington at kmiller01@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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