Input:
	Introduction1

As the role of lawyers in most countries has evolved from advocates regulated by local courts and their rules to legal advisors for transactions in economic activities, the increase in cross-border provision of legal services led to the inclusion of such services in the trade agreements and negotiations under the WTO, over the objections of some countries. The scope of agreements under the WTO has expanded over the years to cover issues and sectors not traditionally considered to fall within trade laws and regulations through periodic multilateral negotiations that are called "rounds," the latest being the Doha Round. The commitments the United States has made and may make in current and future negotiations could affect domestic regulation of the legal profession, including ethical issues.

	Legal Services in the WTO

Legal services are classified as part of professional services, which in turn are under the business services sector covered by the General Agreement on Trade in Services (GATS), concluded as part of the Uruguay Round of the General Agreement in Tariffs and Trade that created the WTO. Under the GATS, WTO countries undertake obligations with regard to all service sectors, including most-favored-nation treatment (MFN) under GATS Article II; transparency under GATS Article III; the notice and publication of relevant domestic laws and measures; judicial or administrative review of domestic regulation under GATS Article VI(2); and recognition agreements under GATS Article VII.
In addition to the general obligations under the GATS, the United States included legal services in its schedule of commitments under the GATS; not all WTO countries included legal services in their schedules. Such schedules set forth specific additional obligations made by a WTO country with respect to specific service sectors, including any limitations or qualifications to obligations undertaken. These obligations include market access under GATS Article XVI, national treatment under GATS Article XVII, and any other additional commitments under GATS Article XVIII, including those regarding qualifications, standards or licensing matters. A schedule also summarizes obligations as they apply via four modes of supply—(1) cross-border supply, the ability of non-resident service suppliers to supply services cross-border into a WTO country; (2) consumption abroad, the ability of a WTO country's residents to buy services located in another WTO country; (3) commercial presence, the ability of foreign service suppliers to establish a branch or representative office in a WTO country, sometimes referred to as the right of establishment; and (4) movement of natural persons, the ability of foreign individuals to enter and stay in a WTO country's territory to supply a service. The U.S. schedule sets forth its obligations in terms of limitations and qualifications under the laws and/or rules governing the practice of law by foreign lawyers and foreign law firms in each of the States, the District of Columbia, the U.S. territories, and before certain federal agencies, such as patent prosecution before the U.S. Patent and Trademark Office (USPTO).
As part of the sectors subject to WTO negotiations in the Doha Round, legal services are potentially subject to changes. Indeed, several members have sought concessions from the United States regarding legal services. Such changes could affect the laws and rules governing foreign lawyers and foreign law firms in each of the 50-plus jurisdictions in the United States and the federal agencies. Such laws and rules comprise the bar admission of lawyers who are admitted to practice in a foreign jurisdiction or who are foreign nationals and the eligibility of foreign legal consultants and foreign firms to provide legal services in the United States. Rules regarding foreign legal consultants may address the applicability to such consultants of ethics rules and disciplinary procedures for attorneys.
The European Union, which together with the United States has the most active trade in legal services among WTO members, is seeking several new legal services concessions from the United States. One significant change sought by the European Union is to eliminate the requirement in the U.S. states and territories that qualified U.S. lawyers providing legal services must be "natural persons," not law firms or other organizational/corporate persons. This apparently is not a requirement in some other WTO countries. The EU and the United States also propose eliminating the U.S. requirement that an attorney admitted to the patent bar for the purpose of prosecuting a patent before the USPTO must be a U.S. citizen.
In addition, there has been consideration of whether disciplines (WTO parlance for certain guidelines) on domestic regulation in the legal services sector should be adopted and applied. This may be accomplished by negotiation of a discipline specific to legal services or by application of the existing Disciplines on Domestic Regulation in the Accountancy Sector to legal services. Under GATS Article VI(4), disciplines on domestic regulation are developed "[w]ith a view to ensuring that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services." Disciplines aim to ensure that requirements are not more burdensome than necessary to ensure quality of service and that licensing procedures are not per se restrictions on the supply of the service. After the accountancy disciplines were developed and adopted, there was active consideration and debate about whether they should be extended to legal services, which the International Bar Association recommended against.
Any substantive Doha Round concessions or any agreement to a legal services discipline by the United States would obligate it, under GATS Article I(3)(a), to take reasonable measures to ensure that each of its political subdivisions observes such agreements. This could pose federalism issues, since the rules governing practice in a state are a matter for the highest court of a state or for its legislature and not traditionally a matter for federal legislation or policy. The U.S. Trade Representative (USTR) does not make WTO commitments with which the United States is not in a position to comply. This is the reason the current schedule of commitments notes obligations in terms of which states have certain requirements, such as in-state residency for licensure. In accordance with §102 of the Uruguay Round Agreements Act (URAA), the USTR has consulted with several states concerning the negotiating position of the United States on legal services, apparently to consider what changes these states would be amenable to observing.
If the United States were to commit to liberalizing the rules for foreign lawyers or firms to provide legal services in the United States, any related complaint against the United States could be brought only by another WTO country and would be resolved through the WTO dispute settlement system. An individual foreign attorney or firm could not bring a complaint because disputes can only be brought by one WTO country against another WTO country. Nor could an individual attorney or firm bring a suit domestically for noncompliance with a WTO obligation. WTO agreements are not self-executing international agreements, so obligations under those agreements must be implemented through domestic legislation or other domestic measures. Section 102 of the Uruguay Round Agreements Act (URAA) provides that only the United States may bring an action to declare a state law invalid because it is inconsistent with an Uruguay Round agreement and that no private person may challenge a state or local law or other measure on the grounds that it is not consistent with an Uruguay Round agreement.

	Certain U.S. Rules Relating to Foreign Lawyers

The global nature of business, including legal services, and its continued growth has necessitated the consideration and adoption of rules concerning multijurisdictional practice of law. In 2007, 71 persons were licensed as foreign legal consultants in the United States across 16 jurisdictions. Twenty-nine jurisdictions have a rule permitting the licensing of foreign legal consultants. Some adopted a version of the ABA Model Rule on Foreign Legal Consultants (first approved in 1993, most recently revised in 2006), itself modeled on the New York rule first adopted in 1974. Others adopted their own rule differing significantly from the ABA Model Rule. The ABA Model Rule provides that foreign legal consultants may be licensed to provide certain legal services in a jurisdiction without an examination, if they are members in good standing in a recognized legal profession in a foreign country. They are not actually admitted as members of the bar in the host jurisdiction in the United States and are prohibited from providing certain services, such as appearing in court to represent a client or giving advice on U.S. law or a state law in the United States. Foreign legal consultants would be able to provide advice on the laws of their foreign home countries.
Additionally, five jurisdictions have rules that expressly refer to temporary practice by foreign lawyers, some similar to the ABA Model Rule for Temporary Practice by Foreign Lawyers (approved in 2002). This ABA Model Rule provides that foreign lawyers not admitted in a U.S. jurisdiction may provide legal services in that jurisdiction in certain circumstances, including, among others, where they are working with a lawyer admitted to practice in that jurisdiction or where they are advising clients with regard to legal proceedings in a foreign jurisdiction where they are admitted to practice.

	U.S. Ethical Implications

The WTO Secretariat has noted that WTO countries generally require foreign legal consultants to submit to the local code of ethics as a prerequisite to licensing in the host country. The WTO has observed that the legal profession does not consider this a major obstacle to trade in legal services. There are certain common principles shared by the national legal ethical codes, including rules on conflicts of interest, loyalty to the client, and confidentiality. The WTO has observed, for example, that the EU has developed a common legal ethics code applicable to some EU countries; the U.S., Japanese and European lawyers' professional associations have compared their ethical codes and found no serious differences; and a bilateral agreement exists between the ABA and its counterpart for England and Wales with regard to mutual recognition on matters such as ethical standards. However, the agreements of such associations are not binding on the U.S. jurisdictions whose courts or legislatures would implement such recognition in conjunction with the bar disciplinary authorities. Negotiations in the Doha Round of the WTO could help resolve ethical issues that have arisen in the cross-border provision of legal services.
The prohibition against the unauthorized practice of law is a basic tenet of U.S. legal ethics; therefore, any new agreement under WTO auspices that may affect the regulation of legal services providers admitted to the practice of law in a foreign jurisdiction could have implications for ethical compliance. However, U.S. legal ethics rules or codes have recognized that business demands and the mobility of society necessitate refraining from unreasonable territorial limitations. Any liberalizing of licensing requirements could facilitate the operations of law firms. ABA Opinion 01-423, dated September 21, 2001, found that U.S. law firms may include partners who are foreign lawyers, as long as the arrangement complies with U.S. and foreign law, and the foreigners are members of a recognized legal profession in the foreign jurisdiction. It cautioned that U.S. lawyers must avoid assisting in the unauthorized practice of law by foreign lawyers in the United States.
ABA Opinion 01-423 further noted that many countries recognize only a narrow attorney-client privilege. Some legal authorities cite the opinion in a European Union (EU) case, Australian Mining & Smelting Europe Ltd. v. Commission , as supporting the proposition that attorney-client privilege does not apply to attorneys not admitted to practice in the EU. In response, the ABA passed a resolution that attorney-client privilege should apply to non-European Union attorneys. In a more recent case, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v Commission , the EU Court of First Instance declined to consider whether the discriminatory non-recognition of privilege with respect to non-EU lawyers violated certain EU principles. A paper summarizing a discussion on Cross-Border Travel Traps: Protecting Client Confidences at the Frontier at the ABA Section of International Law 2007 Fall Meeting discusses the problems posed for U.S. attorneys by the narrower European view of profession privilege/confidentiality with regard to attorney-client communications.
With regard to disciplinary measures and proceedings, U.S. legal professional groups have submitted letters to the USTR supporting local disciplinary jurisdiction over foreign attorneys and disciplinary reciprocity with foreign jurisdictions in Doha Round negotiations.

Output: This report provides a broad overview of the treatment of legal services under the World Trade Organization (WTO) agreements and its potential effect on laws and rules governing the provision of legal services by foreign lawyers in the United States and legal ethics rules.


Input:
	Background

As of June 30, 2001, Amex was the third-largest U.S. market in terms of the number of companies whose common stock it listed. With the common stock of 704 companies listed, Amex trailed only Nasdaq, which had 4,378 listings, and NYSE, which had 2,814 listings. Overall, about 98 percent of the common stocks listed on U.S. markets were listed on Amex, Nasdaq, or NYSE. The remaining markets had significantly fewer listings. For example, the fourth-largest market in terms of the number of companies listed was the Boston Stock Exchange, with 84 listings, 46 of which were also listed on Nasdaq.
In 1998, the National Association of Securities Dealers (NASD), which also owns and operates Nasdaq, purchased Amex. Although Amex retained its independence as an exchange, in July 1999 its equity listing program was moved from New York City to Gaithersburg, Maryland, and integrated with the Nasdaq listing program. In June 2000, NASD completed the first phase of its plan to restructure Nasdaq as a stand-alone stock-based organization. According to Amex officials, as a result of this restructuring, the Amex equity listing department began moving back to New York in November 2000, and the move was completed about 6 months later.
Under federal law and consistent with its responsibilities as an SRO, each U.S. market establishes and implements the rules that govern equity listings in its market with the intent of maintaining the quality of the markets and public confidence in them. In general, a company applies to have its stock listed for trading in a specific market, subject to that market’s rules. This process includes submitting an application for review, together with supporting information such as financial statements, a prospectus, a proxy statement, and relevant share distribution information. As part of making an initial listing decision, the market’s equity listing department reviews these submissions for compliance with its listing requirements and conducts background checks of company officers and other insiders. The equity listing department will also monitor companies for compliance with the market’s continued listing requirements and, in accordance with the market’s rules, will take action when these requirements are not met.
SEC’s oversight of a market’s equity listing requirements includes reviewing the SRO’s proposed rules to ensure that they are consistent with the requirements of the Securities and Exchange Act of 1934. These rules, which make up the market’s initial and continued equity listing guidelines or standards, must be approved by SEC and can be changed only with SEC’s approval. SEC also reviews the SRO’s listing decisions, either on appeal or by its own initiative, and SEC’s OCIE periodically inspects the SRO’s listing program to ensure compliance with the market’s listing requirements.

	Listing Requirements Have Generally Addressed the Same Factors, but Amex Has Not Required That All Quantitative Requirements Be Met

In all U.S. markets, quantitative and qualitative listing requirements for equities have generally addressed the same or similar factors. Two aspects of the quantitative listing requirements are noteworthy. First, the minimum thresholds for meeting them varied according to the characteristics of the companies the markets sought to attract. Second, initial listing requirements were generally higher than continued listing requirements. Qualitative listing requirements addressed corporate governance and other factors. The most significant difference between the equity listing requirements of Amex and those of other U.S. stock markets was that Amex was one of only two markets that retained the discretion to initially list companies that did not meet all of its quantitative requirements.

		Quantitative Listing Requirements Generally Addressed the Same Factors, Although Minimum Thresholds Varied

Amex’s quantitative initial listing guidelines for equities have generally addressed factors that are the same as or similar to those addressed by the initial listing standards of the other U.S. stock markets, including factors such as minimum share price, stockholders’ equity, income, market value of publicly held shares, and number of shareholders. However, the minimum thresholds for meeting the requirements of each market have varied to reflect the differences in the characteristics—such as size—of the companies that each market targeted for listing. For example, Amex has marketed itself as a niche market designed to give growth companies access to capital and to the markets. A company could qualify for initial listing on Amex under one of two alternatives. Under both alternatives, a company was required to have a minimum share price of $3 and minimum stockholders’ equity of $4 million (see table 1). In addition, under one alternative, a company could qualify for listing with no pretax income, a minimum market value of publicly held shares of $15 million, and a 2-year operating history. Under the other alternative, a company was required to have minimum pretax income of $750,000, either in the latest fiscal year or in 2 of the most recent 3 fiscal years, and a minimum market value of publicly held shares of $3 million.
The Nasdaq SmallCap Market focused on smaller companies that were generally similar in size to those listed on Amex, and its listing standards and minimum thresholds were similar to Amex’s. To be eligible for listing on the Nasdaq SmallCap Market, a company was required to have, among other things, a minimum share price of $4, a minimum market value of publicly held shares of $5 million, a 1-year operating history, and either a minimum net income of $750,000 in the latest fiscal year or in 2 of the most recent 3 fiscal years, or $5 million of stockholders’ equity. Alternatively, if the company did not meet the operating history, income, or equity requirements, the minimum market value of all shares was required to be $50 million.
In contrast to Amex and the Nasdaq SmallCap Market, the Nasdaq National Market and NYSE targeted larger companies, and their listing standards had higher minimum thresholds. For example, the Nasdaq National Market required in part that listing companies have a minimum of $1 million in pretax income in the latest fiscal year or in 2 of the 3 most recent fiscal years, along with a minimum market value of publicly held shares of $8 million, depending on the listing alternative. In comparison, NYSE required a company to have, among other things, a minimum total pretax income of $6.5 million for the most recent 3 years and a minimum market value of publicly held shares of $60 million or $100 million, depending on the listing alternative.
The quantitative continued listing requirements (the minimum thresholds that listed companies must maintain to continue to be listed) were generally lower than those for the initial listing requirements (see table 1). For example, although Amex’s initial listing guidelines required, under one alternative, that a company have at least $4 million of stockholders’ equity and $750,000 in pretax income, a company could remain in compliance with the continued listing guidelines even if it had losses in 3 of the last 4 years (beginning with its listing date), provided that it maintained $4 million in stockholders’ equity. Such differences between initial and continued listing requirements were typical of all the U.S. markets.

		Qualitative Listing Requirements Have Addressed Corporate Governance and Other Factors

The qualitative listing requirements for equities in all U.S. markets addressed corporate governance requirements as well as various other factors. Corporate governance requirements are generally concerned with the independence of corporate management and boards of directors, as well as with the involvement of shareholders in corporate affairs. These requirements address such factors as conflicts of interest by corporate insiders, the composition of the audit committee, shareholder approval of certain corporate actions, annual meetings of shareholders, the solicitation of proxies, and the distribution of annual reports.
U.S. markets may also consider various other qualitative factors when considering a company for listing. These factors are inherently subjective and are not subject to comparison among markets. For example, Amex’s guidelines stated that even though a company may meet all of the exchange’s quantitative requirements, it may not be eligible for listing if it produces a single product or line of products, engages in a single service, or sells products or services to a limited number of companies. In addition, in making a listing decision, Amex would consider such qualitative factors as the nature of a company’s business, the market for its products, the reputation of its management, and the history or recorded pattern of its growth, as well as the company’s financial integrity, demonstrated earning power, and future outlook.

		Amex Retained the Discretion to List Companies That Did Not Meet Its Quantitative Guidelines

Although all U.S. markets had rules giving them the discretion to apply additional or more stringent requirements in making an initial or continued listing decision, only Amex and Nasdaq retained the discretion to initially list companies that did not meet their quantitative requirements. The Amex listing guidelines stated that the exchange’s quantitative guidelines are considered in evaluating listing eligibility but that other factors are also considered. As a result, Amex might approve a listing application even if the company did not meet all the exchange’s quantitative guidelines. Amex believed that it was important for the exchange to retain discretion to approve securities for initial listing that did not fully satisfy each of its quantitative requirements because it would be impossible to include every relevant factor in the guidelines, especially in an evolving marketplace.

	Amex Did Not Agree to OCIE’s Recommendations on Listing Requirements and Public Disclosures

As of September 7, 2001, Amex had not agreed to implement OCIE’s recommendations related to the exchange’s use of its discretion in making listing decisions. Amex was unwilling to relinquish its discretionary authority or to modify its stock symbols to address OCIE’s concerns. OCIE officials told us that if these recommendations were not addressed, OCIE would include them among the open significant recommendations that are to be reported annually to the SEC Commissioners.

		OCIE Recommendations Addressing Amex’s Use of Its Discretion Remained Open

OCIE reported in April 2001 that the Amex listing department was generally thorough in its financial and regulatory reviews of companies seeking to be listed on the exchange. However, OCIE also reported that Amex was using its discretionary authority more often than was appropriate to approve initial listings that did not meet the exchange’s quantitative guidelines, and that it did so without providing sufficient disclosure to the investing public. OCIE reported that the percentage of companies Amex listed that did not meet the exchange’s initial quantitative guidelines increased from approximately 9 percent for the 20 months between January 1, 1998, and August 31, 1999, to approximately 22 percent for the subsequent 14.5 months ending on November 13, 2000. OCIE noted that although Amex’s listing guidelines are discretionary, investors rightfully presume that the companies listed on Amex generally meet its quantitative and qualitative guidelines.
In response to concerns that the investing public was not receiving sufficient information about the eligibility of companies to trade on Amex, OCIE recommended that Amex amend its rules to provide mandatory initial quantitative listing requirements. Until the mandatory listing requirements are in place, OCIE recommended that Amex provide some form of public disclosure to identify companies that do not meet its initial listing guidelines. For example, Amex could attach a modifier to the trading symbols of these companies. The report indicated that another alternative would be to issue a press release each time Amex lists a company that does not meet its quantitative guidelines. However, OCIE officials said that a press release was not the preferred form of public disclosure because it was a one-time occurrence, while a symbol modifier would accompany a listing until the company complied with Amex listing requirements.
OCIE also expressed concerns about Amex’s use of its discretionary authority in making continued listing decisions. The concerns it raised in its April 2001 inspection report were similar to those raised in a 1997 report. In both reports, OCIE concluded that Amex did not identify noncompliant companies in a timely manner and that it deferred delisting actions for too long and without good cause. In addition to citing lapses in Amex’s timely identification of companies that did not meet its continued listing guidelines, OCIE reported in 2001 that for 5 of 34 companies reviewed, or 15 percent, Amex either granted excessive delisting deferrals or did not begin delisting proceedings in a timely manner. Also, we learned from Amex that 71 companies—about 10 percent of the exchange’s 704 listings—did not meet all aspects of its continued listing guidelines as of July 31, 2001. Of these, 12 companies had been out of compliance with its guidelines for more than 2 years, and 20 companies had been out of compliance for between 1 and 2 years (see table 2).
In addition, under a November 2000 Amex rule change, listed companies were required to issue a press release to inform current and potential investors when Amex notified the companies of a pending delisting decision. According to Amex, the exchange had sent notices to 18 companies of potential delisting between the time of the rule change and August 30, 2001. Amex informed us that these companies had not been in full compliance with the continued listing guidelines for an average of about 6.5 months before receiving the notice.
In response to the concerns OCIE expressed in 1997 about Amex deferring delisting action without good cause, the exchange agreed to review on a quarterly basis the status of companies that did not meet its continued listing standards and to document its rationale for allowing noncompliant companies to remain listed. OCIE believed that by more closely scrutinizing the actions that companies were taking to comply with the exchange’s continued listing guidelines, Amex would be more likely to delist companies that were noncompliant for excessive periods. However, OCIE found in its most recent inspection that although Amex had performed the agreed-upon quarterly reviews, the exchange was still not taking timely action to delist noncompliant companies.
OCIE recommended in its 2001 inspection report, as it had in its 1997 report, that Amex identify in a more timely manner the companies that did not comply with its continued listing guidelines, grant delisting deferrals to noncompliant companies only if the companies could show that a reasonable basis existed for assuming they would return to compliance with the listing guidelines, document reviews of each company’s progress in coming into compliance with the listing guidelines, and place firm time limits on the length of delisting deferrals. The report also recommended that Amex append a modifier to the company’s listing symbol or devise an alternative means of disclosure to denote that a company was not in compliance with Amex’s continued listing guidelines.

		Amex Did Not Agree to Relinquish Its Discretionary Authority or to Modify Its Stock Symbols

As of September 7, 2001, OCIE and Amex were in ongoing discussions about the actions Amex would take to address OCIE’s recommendations. However, in responding to OCIE’s 2001 inspection report and in subsequent discussions with OCIE officials, Amex indicated that it did not want to relinquish its discretionary authority or to modify its stock symbols. Amex stressed the importance of being able to evaluate a company’s suitability for listing on a case-by-case basis. The exchange further responded that its published listing policies put potential investors on notice that Amex would evaluate an applicant based on a myriad of factors and might approve companies for listing that did not meet all of its quantitative guidelines. In addition, Amex cited the November 2000 rule change under which companies are required to issue a press release to inform investors of a pending delisting decision. Amex officials also told us that investors could obtain sufficient information about a company’s operating condition from other public sources, obviating the need for a stock symbol modifier or other public notice.
OCIE officials said that they believed additional disclosure to the investing public would be necessary until Amex turned its equity guidelines into firm standards. The officials remained concerned that individual investors were unaware that Amex’s listing guidelines provided broad discretion in making listing decisions. They emphasized that they were concerned about Amex’s discretion to list companies that did not meet its quantitative guidelines, stressing that they did not want to remove Amex’s discretion to apply additional or more stringent requirements in making listing decisions. Further, although the OCIE report acknowledged that alternative disclosure mechanisms existed, OCIE officials said that attaching a modifier to a stock’s listing symbol to indicate that a stock did not meet either the initial or continued listing standards would provide the broadest and therefore most preferred type of disclosure. For example, a company’s press release making public a delisting decision would not be a preferred form of disclosure because, depending on the circumstances, a company could remain out of compliance with Amex’s continued listing requirements for months or years without being subject to a delisting decision. To address this concern, NYSE requires a company to issue a press release when the exchange notifies the company that it does not meet the continued listing requirements. Nonetheless, a press release is a one-time notice and, as such, may limit potential investors’ awareness of a company’s listing status.
Amex also expressed concern that OCIE was imposing strict requirements on its market that would not be applicable to other markets. Amex specifically noted that neither the Nasdaq National Market nor NYSE appended a symbol to listed securities that did not meet their continued listing requirements. Amex officials told us that requiring Amex to do so could mislead investors into believing that other markets do not follow listing practices similar to those of Amex. Amex also said that a modifier would place an unwarranted negative label on the company and send an inappropriate message to the market. As noted above, companies listed on Amex have more closely resembled those listed on the Nasdaq SmallCap Market than those listed on the Nasdaq National Market. According to a Nasdaq official, the Nasdaq SmallCap Market has used a modified listing symbol for all companies that fall below its continued listing requirements since the market began operating in 1982, and 10 stocks had modified symbols as of August 15, 2001. Nonetheless, OCIE officials said that they are in the process of inspecting the listing programs at Nasdaq and NYSE and would, if they determined that companies were listed that did not meet the markets’ equity listing standards, recommend that stock symbol modifiers be used to identify such companies.
Finally, Amex said that a November 2000 rule change, as well as significant staffing changes that include a new department head, were having the effect of reducing the number of stocks approved for listing that did not meet the exchange’s quantitative guidelines. According to Amex, from November 1, 2000, through August 27, 2001, 6 of the 39 new listings—approximately 15 percent—were granted exemptions to the exchange’s quantitative listing guidelines. Five companies were approved for listing based on an appeal to the Committee on Securities, and one company was approved by the listing department staff because it had “substantially” met all of the exchange’s initial listing guidelines. According to Amex, the determination of substantial compliance was based on the fact that the applicant had met all the exchange’s guidelines, except that the company’s price at the time of approval was $2.9375, instead of the $3.00 minimum required by the guidelines. As discussed earlier, OCIE had found that 22 percent of new listings for a prior period had been granted exemptions. Amex officials said that they expected the downward trend to continue in the number of stocks approved for listing that did not meet the exchange’s quantitative guidelines. OCIE officials told us that they had considered the changes to the Amex listing program in making their recommendations.

		OCIE Planned to Report to the SEC Commissioners on Significant Recommendations That Amex Did Not Agree to Implement

In a 1998 report, we recommended that the SEC Chairman require OCIE to report periodically on the status of all open, significant recommendations to the SEC Commissioners. Our rationale was that involving the Commissioners in following up on recommendations would provide them with information on the status of corrective actions that OCIE had deemed significant. Also, because the Commissioners have the authority to require the SROs to implement the staff’s recommendations, reporting to them would provide the SROs with an additional incentive to implement these recommendations. After preparing its first annual report in August 1998, including both significant recommendations on which action had been agreed to but not completed and recommendations that had been rejected, OCIE determined that future reports would include only the status of significant recommendations that an SRO had expressly declined to adopt or had failed to adequately address. Reflecting the seriousness of their concerns about the open recommendations related to Amex’s use of its discretionary authority in making initial and continued listing decisions, OCIE officials told us that in the absence of an Amex agreement to adequately address these recommendations, OCIE would include them among the open significant recommendations to be reported annually to the SEC Commissioners.

	Amex Did Not Prepare Management Reports That Demonstrated the Effectiveness of Its Listing Program

Amex officials told us that the exchange was fulfilling its SRO responsibilities related to its equity listing operations in part by individually monitoring the status of companies that did not meet its continued listing guidelines and, beginning in January 2001, by summarizing related information in monthly reports to management. These monthly reports provided information on the output of the department’s activities, including the names and total number of companies that did not meet the continued listing guidelines, the reasons that individual companies did not meet the guidelines, the date of the latest conference with each company to discuss its listing status, the total number of such conferences held, and the total number of decisions made on the basis of these conferences.
The Amex listing department did not, however, prepare management reports that aggregated and analyzed overall statistics to measure program results over time. As a result, Amex could not demonstrate the effectiveness of its exceptions-granting policies or its initial and continued listing guidelines. For example, Amex did not routinely aggregate or analyze statistics on the percentage of applicants listed that were granted exceptions to initial or continued listing guidelines, or on the length of time that companies were not in compliance with the continued listing guidelines and their progress in coming back into compliance with them. Collecting and analyzing such data over time, especially in conjunction with the outcomes for these companies—whether they achieved compliance or were delisted—could provide Amex and OCIE with an indicator of the effectiveness of Amex’s process for granting exceptions. Analysis of this information could also help Amex and OCIE determine whether a significant difference exists between the outcomes for companies that meet the listing guidelines and those that do not. Also, although Amex told OCIE that it continually “monitors” to determine whether its guidelines need to be revised, Amex did not develop and aggregate statistics on the number of companies delisted or on the reasons for delistings, such as noncompliance with listing requirements or a move to another market. As indicated above, Amex provided us with some of this information in response to a specific request but also told us that the listing department did not routinely aggregate such information for management purposes. Collected and analyzed over time, this information could provide Amex and OCIE with an indicator of the effectiveness of Amex’s initial and continued listing guidelines and, therefore, could be useful in identifying appropriate revisions to them.
Other markets have developed this kind of management report. In response to concerns about the effectiveness of Nasdaq’s listing department, we recommended in 1998 that SEC require NASD to develop management reports based on overall program statistics. The resulting quarterly reports to senior Nasdaq management and OCIE include data on the number and disposition of listing applications, number and reasons for noncompliance with continued listing standards, disposition of companies that do not comply with the continued listing standards, requests for and results of hearings, status of companies granted temporary exceptions to the continued listing standards as a result of hearings, and number of and reasons for delistings. As a result of a 1998 OCIE recommendation, NYSE submits reports containing similar information to the NYSE Board of Directors and, upon request, to OCIE. According to an OCIE official, the resulting quarterly reports are useful for monitoring the listing activities of these markets.

	Conclusions

Amex’s use of its discretion to initially list and continue to list companies that do not meet the exchange’s quantitative guidelines for equities could mislead investors, who are likely to assume that the companies listed on Amex meet the exchange’s listing guidelines. Because investors are entitled to clear information for use in making investment decisions, they should be informed when listed companies do not meet these guidelines. Amex has reiterated its concern about the potentially negative impact of being the only market to publicly identify listings that do not meet its guidelines. The Nasdaq SmallCap Market already uses stock symbol modifiers for companies that do not meet its continued listing standards. Also, OCIE officials told us they would recommend that other markets disclose noncompliance with their continued listing standards. (OCIE did not identify noncompliance with initial listing standards as an issue.) Ultimately, Amex could avoid concerns about the negative impact of public disclosure by adopting firm quantitative guidelines. In the meantime, including the recommendations that Amex rejected in the OCIE annual reports to the SEC Commissioners—who have the authority to require their implementation—would provide an additional incentive for Amex to act.
Notwithstanding Amex’s expectation that changes to its listing program would result in diminished use of its discretion, the ongoing concerns about weaknesses in program operations and the potentially negative impact of exchange practices on public confidence warrant continued monitoring of Amex’s listing program. Both Amex and OCIE could use routine management reports that reflect the performance of the exchange listing program to improve oversight of the program. Amex officials did not use aggregated and analyzed information on the results of the listing process to help judge its overall effectiveness, including that of its exceptions-granting policies or its initial and continued listing guidelines. Such information would include, among other things, the number and percentages of companies listed that have exceptions to the initial and continued listing guidelines, the number and percentages of companies in each group that are delisted, the reasons for the delistings, and the turnover rate for listings. Aggregating and analyzing such information could help Amex and OCIE to identify and address weaknesses in Amex’s listing program operations.

	Recommendations to the Chairman, SEC

As part of SEC’s ongoing efforts to ensure that Amex addresses weaknesses in the management of its equity listing program, we recommend that the Chairman, SEC,   direct Amex to implement mandatory quantitative equity listing requirements or provide ongoing public disclosure of noncompliant companies, and require Amex to report quarterly to its Board of Governors on the operating results of its equity listing program and make these reports available to OCIE for review. Such reports should contain sufficient information to demonstrate the overall effectiveness of the Amex equity listing program, including, at a minimum, that of its exceptions-granting policies and its initial and continued listing guidelines.

	Agency Comments and Our Evaluation

We obtained written comments on a draft of this report from Amex and SEC officials. The written comments are presented in appendixes I and II, respectively. Amex committed to taking action to address our recommendation for improving public disclosure of its listing requirements by replacing its discretionary guidelines with mandatory initial and continued listing standards (see appendix I, exhibits A and B).
Also in response to our recommendation, Amex committed to enhancing its management reports as they relate to its initial listing program. SEC officials commented that they were pleased that Amex would be making changes to its listing program that would address the findings and recommendations outlined in our report, and they said they would continue working with Amex to ensure that the proposed changes are implemented effectively.
Amex noted in its comment letter that its proposals are broad and that the various details would be finalized as part of the rule approval process, which involves SEC. In earlier discussions with Amex about its draft proposals, we expressed the view that Amex’s rules would provide for greater investor protection if they included specific time frames for notifying the public about material events related to a company’s listing status. For example, such time frames would provide for expeditiously notifying the public after Amex advises a company that delisting proceedings are to be initiated. We also observed that Amex had not established other critical time frames for procedures such as advising a company that it does not meet the exchange’s continued listing requirements. Amex indicated in its comment letter that it intends to include applicable time frames as it works out the details of its proposals. SEC officials told us that they would work with Amex to ensure that appropriate time frames are established.
In agreeing to enhance its management reports to address our recommendation, Amex acknowledged the potential value of these reports in light of proposed changes to its initial listing requirements. Under these proposed changes, companies could qualify for initial listing under Amex’s “regular” listing standards or, subject to mitigating circumstances, under its less stringent “alternative” standards. Amex committed to enhancing its management reports with information on companies that have been approved under the proposed alternative standards to provide for executive management review of the continued status of such companies, as compared with those approved for listing pursuant to its regular listing standards. Amex believes that its enhanced management reports should be useful in providing feedback on the application of the alternative standards to the Amex Board of Governors, Amex Committee on Securities, and SEC. SEC officials told us that they would use the enhanced reports to monitor implementation of the alternative standards. Although we support the changes proposed by Amex, we believe that the management reports would be of even greater use to Amex and SEC in their oversight if they included data on the effectiveness of Amex’s practices for continued listings in addition to data on the exchange’s exceptions-granting practices for initial listings. Our report discussed the kinds of aggregated and analyzed data that would be important to include in Amex’s management reports and that Nasdaq and NYSE include in their reports. Amex would benefit by working with SEC to ensure that the exchange’s reports contain similar information.

	Scope and Methodology

To describe the key differences between the Amex initial and continued equity listing guidelines and the equity listing standards of other U.S. stock markets, we compared the quantitative and qualitative guidelines and standards of the seven U.S. markets that are registered to trade stock and that have listing requirements. These markets include six national securities exchanges—Amex, the Boston Stock Exchange, the Chicago Stock Exchange, NYSE, the Pacific Exchange, and the Philadelphia Stock Exchange—and one national securities association, the Nasdaq Stock Market. The seventh national securities exchange, the Cincinnati Stock Exchange, trades only stocks that are listed on other exchanges and does not have listing standards. We also interviewed officials from SEC’s OCIE and from Amex, Nasdaq, and NYSE to gain a further understanding of the initial and continued listing requirements of each market. This report places greater emphasis on the results of our comparison of Amex guidelines with the standards of Nasdaq and NYSE, because about 98 percent of U.S. common stocks were subject to the listing requirements of one of these three markets at the time of our review.
In reviewing OCIE recommendations to Amex for improving its equity listing program, we discussed the contents of the April 2001 inspection report and Amex’s written response to it with officials of OCIE and Amex’s Listings Qualifications Department and Office of General Counsel, focusing on the areas of disagreement between OCIE and Amex. Additionally, we examined OCIE’s 1997 inspection report on Amex’s listing activities, Amex’s response, and associated correspondence to determine the nature of weaknesses identified in the OCIE inspection and how they were resolved. We also reviewed related GAO reports.
To examine how Amex monitors the effectiveness of its equity listing department operations, we interviewed Amex and OCIE officials. We also reviewed related GAO reports and examined the Nasdaq and NYSE quarterly management reports that are provided to OCIE.
We conducted our work in Chicago, IL; New York, NY; and Washington, D.C., from November 2000 through October 2001, in accordance with generally accepted government auditing standards.
As agreed with you, unless you publicly release its contents earlier, we plan no further distribution of this letter until 30 days from its issuance date. At that time, we will send copies to the Chairmen and Ranking Minority Members of the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services; the Chairman of the House Energy and Commerce Committee; and other interested congressional committees and organizations. We will also send copies to the Chairman of SEC and to the Chairman and Chief Executive Officer of Amex. Copies will also be made available to others upon request.
If you or your staff have any questions regarding this report, please contact me at (202) 512-8678, hillmanr@gao.gov, or contact Cecile Trop, Assistant Director, at (312) 220-7705, tropc@gao.gov. Key contributors include Neal Gottlieb, Roger Kolar, Anita Zagraniczny, and Emily Chalmers.

Appendix I: Comments From the American Stock Exchange

Appendix II: Comments From the Securities and Exchange Commission

Output:
What GAO Found

The Securities and Exchange Commission (SEC) has indicated that one-third of Amex's new listings did not meet the exchange's equity listing standards. Amex's listing guidelines address factors that are the same or similar to those addressed by other U.S. stock markets. Quantitative requirements addressed share price, stockholders' equity, income, and market value of publicly held shares. However, the minimum thresholds for meeting these requirements varied to reflect the differences in the companies that each market targeted for listing. The most significant difference between Amex's guidelines and the listing standards of other U.S. stock markets was that Amex was one of only two markets that retained discretion to initially list companies that did not meet all of its quantitative requirements. Amex had not implemented the Office of Compliance Inspections and Examinations' (OCIE) recommendations on the exchange's discretionary listing decisions. OCIE officials told GAO that in the absence of an Amex agreement to address the recommendations, they would include them among the open significant recommendations to be reported to the SEC Commissioners as a result of a 1998 GAO recommendation. The Commission can require Amex to implement OCIE's recommendations. Amex officials said that the exchange was fulfilling its self-regulatory organization responsibilities by individually monitoring the status of companies that did not meet its continued listing guidelines and by summarizing information in monthly reports to management.


Input:
	Background

In fiscal year 2000, VA’s pharmacy benefit provided approximately 86 million prescriptions at a cost of approximately $2 billion—or about 12 percent of VA’s total health care budget, compared to 6 percent of VA’s total health care budget a decade ago. VA provides outpatient pharmacy services free to veterans receiving medications for treatment of service- connected conditions and to low-income veterans. Other veterans who have prescriptions filled by VA may be charged a copayment for each 30- day supply of medication.
Like many health care organizations, VA uses several measures in an effort to improve quality of care and control pharmacy costs. These include (1) implementing a national formulary, which standardizes the list of drugs available; (2) developing clinical guidelines for prescribing drugs; and (3) using compliance programs, such as prior authorization, to encourage or require physicians to prescribe formulary drugs.
VA medical centers individually began using formularies as early as 1955 to manage their pharmacy inventories. However, it was not until 40 years later in September 1995, that VA established a centralized group to manage its pharmacy benefit nationwide. In November 1995, when VISNs were established, VA’s Under Secretary for Health directed each VISN to develop and implement a VISN-wide formulary. To develop their formularies, the VISNs generally combined existing medical center formularies and eliminated rarely prescribed drugs. In 1996, VA was required to improve veterans’ access to care regardless of the region of the United States in which they live. As part of its response, VA implemented a national drug formulary on June 1, 1997, by combining the core set of drugs common to the newly developed VISN formularies. VA’s formulary meets the Joint Commission for the Accreditation of Health Care Organizations’ requirements for developing and maintaining an appropriate selection of medications for prescribers to use in treating their patient populations.
VA’s formulary lists more than 1,100 unique drugs in 254 drug classes— groups of drugs similar in chemistry, method of action, or purpose of use. After performing reviews of drug classes representing the highest costs and volume of prescriptions, VA decided that some drugs in 4 of its 254 drug classes were therapeutically interchangeable—that is, essentially equivalent in terms of efficacy, safety, and outcomes. This determination allowed VA to select one or more of these drugs for its formulary so that it could seek better prices through competitively bid committed-use contracts. Other therapeutically equivalent drugs in these classes were then excluded from the formulary. These four classes are known as “closed” classes. VA has not made clinical decisions regarding therapeutic interchange in the remaining 250 drug classes, and it does not limit the number of drugs that can be added to these classes. These are known as “open” classes.
To manage its pharmacy benefit nationwide, VA established the Pharmacy Benefits Management Strategic Healthcare Group (PBM). PBM is responsible for managing the national formulary list, maintaining databases that reflect drug use, and monitoring the use of certain drugs. PBM also facilitates the addition and deletion of drugs on the national formulary on the basis of safety and efficacy data, determines which drugs are therapeutically interchangeable in order to purchase drugs through competitive bidding, and develops safeguards to protect veterans from the inappropriate use of certain drugs. VISN directors are responsible for implementing and monitoring compliance with the national formulary and ensuring that a nonformulary drug approval process is functioning at each of their medical centers. Although VISN and medical center directors are held accountable in annual performance agreements for meeting certain national and local goals, attaining formulary goals has not been part of their performance standards.

	National Formulary Standardization Not Yet Achieved

While VA has made significant progress in establishing a national formulary, its oversight has not been sufficient to ensure that it is fully achieving its national formulary goal of standardizing its drug benefit nationwide. In our January 2001 report, we found three factors that have impeded formulary standardization: (1) medical centers we visited omitted some national formulary drugs from their local formularies, (2) VISNs varied in the number of drugs they added to local formularies to supplement the national formulary without appropriate oversight, and (3) medical centers inappropriately added or deleted drugs in closed classes. Nevertheless, most prescribed drugs were on the national formulary, and prescribers and patients were generally satisfied with the national formulary.
The first factor impeding standardization is that medical centers omitted some national formulary drugs from their local formularies. Almost 3 years after VA facilities were directed to make all national formulary drugs available locally, two of the three medical centers we visited in spring of 2000 omitted required drugs from the formularies used by their prescribers. At one medical center, about 25 percent (286 drugs) of the national formulary drugs were not available as formulary choices. These included drugs used to treat high blood pressure, mental disorders, and women’s medical needs. At the second medical center, about 13 percent (147 drugs) of the national formulary drugs were omitted, including drugs used to treat certain types of cancer and others used to treat stomach conditions.
From October 1999 through March 2000, health care providers at these two medical centers had to obtain nonformulary drug approvals for over 22,000 prescriptions for drugs that should have been available without question because they are on the national formulary. Our analysis showed that at the first center, over 14,000 prescriptions were filled as nonformulary drugs for 91 drugs that should have been on the formulary.At the other medical center, over 8,000 prescriptions for 23 national formulary drugs were filled as nonformulary drugs. If the national formulary had been properly implemented at these medical centers, prescribers would not have had to use extra time to request and obtain nonformulary drug approvals for these drugs, and patients could have started treatment earlier.
The second factor impeding standardization is the wide variation in the number of drugs added by VISNs to their local formularies. VA’s policy allowing VISNs to supplement the national formulary locally has the potential for conflicting with VA’s goal of achieving standardization if it is not closely managed. From June 1997 through March 2000, the 22 VISNs added a total of 244 unique drugs to supplement the list of drugs on the national formulary. As figure 1 shows, the number of drugs added by each VISN varies widely, ranging from as many as 63 to as few as 5. Adding drugs to supplement the national formulary is intended to allow VISNs to be responsive to the unique needs of their patients and to allow quicker formulary designation of new drugs approved by the Food and Drug Administration (FDA). VA officials have acknowledged that this variation affects standardization and told us they plan to address it. For example, PBM plans to more quickly review new drugs when approved by FDA to determine if they should be added to the national formulary.
The third factor is that medical centers we visited inappropriately modified the national formulary list of drugs in the closed classes. Contrary to VA formulary policy, two of three medical centers added two different drugs to two of the four closed classes, and one facility did not make a drug in a closed class available. Moreover, the Institute of Medicine (IOM) found broad nonconformity at the VISN level.Specifically, IOM reported that 16 of the 22 VISNs modified the list of national formulary drugs for the closed classes. This also undermines VA’s ability to achieve cost savings through its committed-use contracts.
While VA has not yet fully achieved national formulary standardization, most prescribed drugs were on the national formulary. From October 1999 through March 2000, 90 percent of VA outpatient prescriptions were written for national formulary drugs. The percentage of national formulary drug prescriptions filled by individual VISNs varied slightly, from 89 percent to 92 percent. We found wider variation among medical centers within VISNs—84 percent to 96 percent.
Of the remaining 10 percent of prescriptions filled systemwide, VA’s national database could not distinguish between nonformulary drugs and drugs added to local formularies by VISNs and medical centers to supplement the national formulary. VA’s PBM and the IOM estimate that drugs added to supplement the national formulary probably account for about 7 percent of all prescriptions filled, and nonformulary drugs account for approximately 3 percent of all prescriptions filled. VA officials told us that they are modifying the database to enable them to identify which drugs are added to supplement the national formulary and which are nonformulary. This will allow them to better oversee the balance between local needs and national standardization.
Prescribers we surveyed reported they were generally satisfied with the national formulary. Seventy percent of VA prescribers in our survey reported that the formulary includes the drugs their patients need either to a “great extent” or to a “very great extent.” Approximately 27 percent reported that the formulary meets their patients’ needs to a “moderate extent,” with 4 percent reporting that it meets their patients’ needs to a lesser extent. No VA prescribers reported that the formulary meets their patients’ needs to “very little or no extent.” This is consistent with IOM’s conclusion that the VA formulary “is not overly restrictive.”
Veterans also appear satisfied with their ability to obtain the drugs they believe they need. At the VA medical centers we visited, patient advocates told us that veterans made very few complaints concerning their prescriptions. In its analysis of patient complaints, IOM found that less than one-half of 1 percent of veterans’ complaints were related to drug access. IOM further reported that complaints involving specific identifiable drugs often involved drugs that are marketed directly to consumers, such as Viagra. Our review also indicated that the few prescription complaints made were often related to veterans trying to obtain “lifestyle” drugs or refusals by VA physicians and pharmacists to fill prescriptions written by non-VA health care providers. VA may fill prescriptions written by non-VA health care providers only under limited circumstances, for example, when the veteran is housebound and receives additional compensation because of a service-connected disability.

	Approval Processes for Nonformulary Drugs Have Weaknesses

While the national formulary directive requires certain criteria for approval of nonformulary drugs, it does not prescribe a specific nonformulary approval process. As a result, the processes health care providers must follow to obtain nonformulary drugs differ among VA facilities regarding how requests are made, who receives them, who approves them, and how long it takes to obtain approval. In addition, some VISNs have not established processes to collect and analyze data on nonformulary requests. As a result, VA does not know if approved requests meet its established criteria or if denied requests are appropriate.
Both the people involved and the length of time to approve nonformulary drugs varied. The person who first receives a nonformulary drug approval request may not be the person who approves it. For example, 61 percent of prescribers reported that nonformulary drug requests must first be submitted to facility pharmacists, 14 percent said they must first be submitted to facility pharmacy and therapeutics (P&T) committees, and 8 percent said they must first be sent to service chiefs. In contrast, 31 percent of prescribers reported that facility pharmacists approve nonformulary drug requests, 26 percent said that facility P&T committees approve them, and 15 percent told us that facility chiefs of staff approve them. The remaining 28 percent reported that various other facility officials or members of the medical staff approve nonformulary drug requests. The time required to obtain approval for use of a nonformulary drug also varied depending on the local approval processes. The majority of prescribers we surveyed (60 percent) reported that it took an average of 9 days to obtain approval for use of nonformulary drugs. But many prescribers also reported that it took only a few hours (18 percent) or minutes (22 percent) to obtain such approvals.
During our medical center visits, we observed that some medical center approval processes are less expeditious than others. For example, to obtain approval to use a nonformulary drug in one facility we visited, prescribers were required to submit a request in writing to the P&T committee for its review and approval. Because the P&T committee met only once a month, the final approval to use the requested drug was sometimes delayed as long as 30 days. The requesting prescriber, however, could write a prescription for an immediate 30-day supply if the medication need was urgent.
In contrast, another medical center we visited assigned a clinical pharmacist to work directly with health care providers to help with drug selection, establish dose levels, and facilitate the approval of nonformulary drugs. In that facility, clinical pharmacists were allowed to approve the use of nonformulary drugs. If a health care provider believed that a patient should be prescribed a nonformulary drug, the physician and pharmacist could consult at the point of care and make a final decision with virtually no delay.
Prescribers we surveyed were almost equally divided on the ease or difficulty of getting nonformulary drug requests approved. (See table 1.)
Regardless of whether the nonformulary drug approval process was perceived as easy or difficult, the majority of prescribers told us that their requests were generally approved. According to our survey results, 65 percent of prescribers sought approval for nonformulary drugs in 1999. These prescribers reported that they made, on average, 25 such requests (the median was 10 requests). We estimated that 84 percent of all prescribers’ nonformulary requests were approved.
When a nonformulary drug request was disapproved, 60 percent of prescribers reported that they switched to a formulary drug. However, more than one-quarter of the prescribers who had nonformulary drug requests disapproved resubmitted their requests with additional information.
For patients moving from one location to another, the majority of prescribers we surveyed told us that they were more likely to convert VA patients who were on a nonformulary drug obtained at another VA facility to a formulary drug than to request approval for the nonformulary drug. (See table 2.)
Contrary to the national formulary policy, not all VISNs have established a process for collecting and analyzing data on nonformulary requests at the VISN and local levels. Twelve of VA’s 22 VISNs reported that they do not collect information on approved and denied nonformulary drug requests. Three VISNs reported that they collect information only on approved nonformulary drug requests, and seven reported that they collect information for both approved and denied requests. Such information could help VA officials to determine the extent to which nonformulary drugs are being requested and whether medical center processes for approving these requests meet established criteria. In its report, IOM noted that inadequate documentation on such matters could diminish confidence in the nonformulary process.

	Plans for Improving Oversight Are Progressing

We are encouraged by VA’s actions, but it is too early to tell how successful it will be in addressing our recommendations for improving its management and oversight of the national formulary. To improve standardization of its formulary, we recommended that VA establish (1) a mechanism to ensure that VISN directors comply with VA’s national formulary policy and (2) criteria that VISNs should use to determine the appropriateness of adding drugs to supplement the national formulary and monitor the VISNs’ application of these criteria. VA’s PBM has developed changes to its database that will provide comparative national data on VISN, nonformulary, and national formulary drug use. PBM also plans to share these data, including identification of outliers, with all 22 VISNs and coordinate with VISN formulary leaders to facilitate consistent compliance with national formulary policy. In addition, VA (1) drafted criteria for VISNs to use to determine the appropriateness of adding drugs to supplement the national formulary list, which it intends to include in a directive; (2) is developing a template for VISNs to document all VISN formulary additions; and (3) intends to review more quickly all new FDA- approved drugs for inclusion in the national formulary.
To improve its nonformulary drug approval process, we recommended that (1) VA establish a process to ensure timely and appropriate decisions by medical centers and (2) veterans be allowed continued access to previously approved nonformulary drugs, regardless of where they seek care in VA’s health care system. In addressing these recommendations, VA plans to incorporate into its revised formulary directive the fundamental steps that all medical centers must take in establishing and reporting their nonformulary activities. VA also plans to include in its revised formulary directive a specific requirement that approved nonformulary medications will continue if a veteran changes his or her care to a different VA facility.

Output:
Why GAO Did This Study

Although the Department of Veterans Affairs (VA) has made significant progress establishing a national formulary that has generally met with acceptance by prescribers and patients, VA oversight has not fully ensured standardization of its drug benefit nationwide. The three medical centers GAO visited did not comply with the national formulary. Specifically, two of the three medical centers omitted more than 140 required national formulary drugs, and all three facilities inappropriately modified the national formulary list of required drugs for certain drug classes by adding or omitting some drugs. In addition, as VA policy allows, Veterans Integrated Service Networks (VISN) added drugs to supplement the national formulary ranging from five drugs at one VISN to 63 drugs at another. However, VA lacked criteria for determining the appropriateness of the actions networks took to add these drugs. In addition to problems standardizing the national formulary, GAO identified weaknesses in the nonformulary approval process. Although the national formulary directive requires certain criteria for approving nonformulary drugs, it does not prescribe a specific nonformulary approval process. As a result, the processes health care providers must follow to obtain nonformulary drugs differ among VA facilities on how requests are made, who receives them, who approves them, and how long it takes to obtain approval.

What GAO Found

GAO found that the length of time to approve nonformulary drugs averages nine days, but it can be as short as a few minutes in some medical centers. Some VISNs have not established processes to collect and analyze data on nonformulary requests. As a result, VA does not know if approved requests meet its established criteria or if denied requests are appropriate. This testimony summarizes the December 1999 report, HEHS-00-34 and the January 2001 report, GAO-01-183 .