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VA Can Reduce Laboratory Costs by $32 Million by Maximizing Volume Discounts and Establishing Lower Prices for Chemistry Tests

Report No.: 8R3-A01-101 Date: May 13, 1998
Office of Inspector General Washington DC 20420

Memorandum to the Under Secretary for Health (10) Audit ofCost-Per-Test Leases and Reagent Rental Contracts In Pathology and Laboratory Medicine Service 1. The Office of Inspector General conducted an audit of the Veterans Health Administration (VHA) Pathology and Laboratory Medicine Service’s use of vendorowned chemistry analyzers to perform laboratory tests. Under this type of procurement agreement, the vendor provides the medical center with clinicalchemistry analyzers and the medical center agrees to pay an agreed upon cost per test made on the analyzer or agrees to buy the necessary reagents to make the tests from the vendor. The audit was conducted to evaluate the cost effectiveness of this procurement practice. This is the fourth in a series of audits intended to provide an overall assessment as to whether pathology and laboratory services areprovided in the most economical and efficient manner. 2. Through the use of vendor owned chemistry analyzers, by mid-Fiscal Year (FY) 1997 many facilities in VHA’s Veterans Integrated Service Networks (VISNs) paid significantly lower prices for routine chemistry tests compared to prior years. We estimate that VHA achieved recurring annual savings of about $8 million, primarily through VISNdevelopment of blanket purchase agreements (BPAs) for groups of facilities to obtain volume-based discounts under cost-per-test leases. Comparative information on Department of Defense’s (DoD’s) program costs showed that DoD also achieved estimated cost savings of $5 million in FY 1997 through increased use of BPAs. 3. However, the audit showed that some VHA medical centers (VAMCs) did not participate inBPAs, and of those medical centers that used BPAs, most did not achieve the lowest prices possible. VAMCs also did not pay lower prices for non-routine tests in FY 1997 compared to prior years, paying a wide range of prices under reagent rental contracts and cost-per-test leases. In addition, VHA did not monitor the prices paid by the VAMCs, or survey DoD and non-federal hospitals for the pricesthey paid for both routine and non-routine tests. As a result, VHA was paying higher prices than some private hospitals for the same tests in lower volumes.


4. We concluded that VA could increase the cost savings achieved to date by an estimated $32 million annually by taking full advantage of its purchasing power to obtain chemistry tests at a lower cost. In addition, DoD couldpotentially save over $25 million by increasing its use of its purchasing power in conjunction with VHA medical facilities. 5. In addition to steps already taken by VISNs and DoD’s regions to significantly reduce costs associated with the use of vendor-owned equipment, VA could maximize its cost savings by taking the following actions: • Combine the numbers of tests made within a VISN and DoD region inthe same geographical area to achieve test volumes sufficient to obtain the vendors’ lowest volume-based discount rates. • Perform VISN-level cost studies that determine the most cost-effective configuration of equipment necessary to perform laboratory tests at all VA medical facilities in each VISN. • Make requests for proposals to vendors more uniform to enable more meaningful price comparisons. •Share pricing data between VISNs, DoD, and private healthcare organizations to assist VISNs in negotiating the most favorable rates possible. 6. We recommend that the Under Secretary for Health take action to: a. Advise VISNs of the benefit of all VA medical facilities with laboratories to participate in a single BPA, including nearby DoD facilities, in order to maximize the use of volume-based...
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