The development of a prime vendor system of pharmaceutical procurement and distribution in the Department of Veterans Affairs (VA) is described. The traditional system of pharmaceutical procurement and distribution in the VA required large stockpiles of the pharmaceuticals that had been needed the previous year, a system that was inefficient and full of hidden markups and other unnecessary fees. In late 1991, the VA began a pilot test of a prime vendor system, in which three wholesalers were selected to provide pharmaceuticals to 33 VA medical centers. Under the new system, pharmacies placed orders electronically, directly with the prime vendor, and payments were taken from funds obligated in advance. The benefits of the new system included reduced costs, faster turnaround of orders, higher fill rates, and higher satisfaction among users. In 1994, the VA ceased operation of its traditional depot system for pharmaceuticals. The implementation of a prime vendor procurement system for pharmaceuticals within the VA improved system responsiveness, increased satisfaction of system users, and reduced expenses.