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Office of Budget

Fiscal Year 2005 Performance and Accountability Report
Published November 15, 2005

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OIG3. PROCUREMENT

VA faces major challenges in implementing and maintaining a more efficient, effective, and coordinated acquisition program. VA spends over $6 billion annually for pharmaceuticals, medical and surgical supplies, prosthetic devices, information technology, construction, and services.

In response to an OIG report issued in May 2001, the VA Secretary established a Procurement Reform Task Force. In May 2002, the Task Force made 65 recommendations to better leverage VA's substantial purchasing power and to improve the overall effectiveness of procurement actions. VA has been implementing the Task Force recommendations since June 2002. As of May 2005, there are 5 of the 65 Task Force recommendations that remain open. However, we continue to identify significant problems with VA acquisitions involving Federal Supply Schedule (FSS) contracts, procurements of health care services, VHA construction, Vocational Rehabilitation and Employment contracts, and acquisition support weaknesses associated with VA's recent effort to acquire an E-Travel service. We also continue to identify weaknesses in management of purchase cards and problems with inventory management as shown below.

3A. OIG Issue-FSS Contracts

Preaward and postaward reviews of FSS proposals and contracts continue to show that VA is at risk of paying excessive prices for goods and services unless VA strengthens contract development and administration. During the first half of 2005, preaward reviews of 15 FSS and cost-per-test offers resulted in recommendations that VA contracting officers negotiate reduced prices totaling over $1 billion. Vendors were not offering VA and other FSS customers most favored customer prices, when those same prices were offered to commercial customers purchasing under similar terms and conditions. As a result, VA and other FSS customers inappropriately paid higher prices than similarly situated commercial customers.

Postaward reviews conducted in the first half of 2005 resulted in cost recoveries associated with contractor overcharges of about $2.3 million. These included four OIG reviews of vendors' contractual compliance with the specific pricing provisions of their FSS contracts (recoveries of $1.7 million) and three drug pricing compliance reviews at pharmaceutical vendors (recoveries of $632,000) under Public Law 102-585.

VA's Program Response to OIG3A:

VA contracting officers are actively pursuing the OIG preaward audit recommendations and seeking better discounts, terms, and conditions than originally offered. Additional training has been provided to the contracting staff to reinforce the intent of the FSS program to seek "equal to or better than" most favored (non-federal, comparable) customer pricing during the negotiating process. In regards to postaward reviews conducted within the first 6 months of 2005, contracting staff has pursued the overcharges identified by the OIG. The contracting staff will continue to review active contracts to identify possible price violations and, when identified, will seek the OIG's services.

3B. OIG Issue-Contracting for Health Care Services

OIG reviews have continued to show a need for improvement in health care resource contracts awarded under 38 U.S.C. § 8153. Reviews in recent years have identified numerous problems with these contracts, including a lack of acquisition planning, conflict of interest violations, poorly written solicitations, inadequate contract negotiations, and poor contract administration. We also found that required legal, technical, and preaward reviews for price reasonableness determinations were not obtained and, when they were, the recommendations were not implemented. As a result, contracts were awarded that did not adequately protect the interests of VA or our veteran patients.

Our February 2005 summary report, Evaluation of VHA Sole-Source Contracts with Medical Schools and Other Affiliated Institutions (Report No. 05-01318-85), discussed issues that we identified during preaward reviews of proposals, postaward reviews, and reviews conducted as part of the OIG's Combined Assessment Program. This summary report focused our collective findings and recommendations since 2000 for improvement in the procurement of health care resources. The report addressed general contracting issues including poor acquisition planning, contracting practices that interfered with the contracting officers' ability to fulfill their responsibilities, and contract terms and conditions that did not protect VA's interest; contract pricing issues that resulted in VA overpaying for services; and legal issues, including conflict of interest violations, improper personal services contracts, terms and conditions that were inherently governmental, and contracts that were outside the scope of § 8153 authority. For example, in 2003 the VHA Resource Sharing Office reported that 99 contracts valued at $500,000 or more were awarded. Only 3 of the 99 were referred for a preaward review.

The Under Secretary for Health concurred with the report's findings and recommendations to improve VHA's award and administration of these contracts. The Under Secretary convened a workgroup who were tasked with the development of a VA directive to implement the recommendations. The draft directive has been approved by all VA entities and is awaiting the Secretary's signature. Currently, 32 of 35 recommendations remain open.

VA's Program Response to OIG3B:

VA Directive 1663, Health Care Resources Contracting Buying, is expected to be published and released no later than during the first quarter of 2006.

3C. OIG Issue-Management of VHA Major Construction Contracts

Our February 2005 report, Audit of VHA Major Construction Contract Award and Administration Process (Report No. 02-02181-79), identified that VHA needed to improve the construction contract award and administration process to ensure price reasonableness, prevent excessive prices, and deter or avoid fraud, waste, abuse, and mismanagement. We reviewed over 30 major construction contracts and identified a risk for excessive prices involving projects valued at $133.6 million. We also identified about $960,000 in unused funds that should be returned to the construction reserve fund if no longer needed. Additionally, we made a series of recommendations to strengthen the construction contract process. Currently 3 of 17 recommendations remain open.

VA's Program Response to OIG3C:

Fourteen of the OIG's 17 recommendations were closed by the OIG as of August 2005, a result of actions VHA has taken to strengthen the construction contract process. The OIG final report was forwarded to all Office of Facilities Management (FM) staff, and it, along with the recommendations, were discussed in a mandatory national conference call in May 2005. The report and its recommendations have been the subject of subsequent calls and meetings. Several FM directives and manuals as well as the Project Managers Handbook have been revised with expected publication and issue in the first quarter of 2006. With these actions, VHA expects all remaining recommendations will be closed. FM's Quality Assurance Service, officially established in July 2004, has been implementing systematic reviews of and providing guidance to the FM staff concerning the quality of project management and contract administration. Project manager performance plans now include an item in the work plan indicating project managers will develop, monitor, and proactively control project schedules throughout the project. FM's quality assurance staff monitors this.

3D. OIG Issue-Vocational Rehabilitation and Employment Contracts

In February 2005, we issued the report Evaluation of VBA Vocational Rehabilitation and Employment Contracts (Report No. 04-01271-74). VA had awarded over 240 contracts to support veterans' access to evaluations, rehabilitation, training, and employment services. Based on contracting vulnerabilities identified, we concluded that VA was at risk of paying excessive prices for services on these contracts. Prices for similar services from the same contractors on prior contracts varied significantly. Base year price increases ranged from 23 to 314 percent. There was no evidence that VA conducted price reasonableness determinations to ensure the best prices were obtained, while information contained in contract specifications and the statement of work were vague and, in our opinion, subject to multiple interpretations. Voluntary price reductions received from 25 contractors showed that contracting costs could be reduced by as much as 15 percent, which would reduce VA's $45 million in expenditures by $6.8 million over the 5-year term of existing contracts. We made recommendations to replace the existing contracts and to strengthen management and oversight. Currently five of seven recommendations remain open.

VA's Program Response to OIG3D:

As of July 2005, five VR&E action items remain open. The following two items are pending issuance of a directive requiring: (1) files that are maintained by contracting staff include copies of contracts being used and (2) documentation supporting the selection of one contractor over another when higher prices are paid for services received. A draft directive was provided to the OIG on June 14, 2005, for review prior to finalization.

To address the OIG action item on determining price reasonableness, VR&E staff is conducting market research prior to making option renewal determinations. This information will be used to establish base-year prices and annual increases of VR&E contracts. The remaining two action items relate to internal and management controls. Contractors' performance and quality assurance reviews are performed quarterly to validate that corrective actions have been taken on identified deficiencies. All auditing functions of VR&E contracts will be reassigned to VBA's Finance Staff.

The projected completion date for these three action items is October 2006.

3E. OIG Issue-Contracting and Acquisition Support for Major System Development Initiatives

OIG completed reviews of two major VA system development initiatives in late 2004 and in 2005. These reviews involved procurement and deployment of the Core Financial and Logistics System (CoreFLS), and the implementation of VA's E-Travel service. During these reviews, OIG identified significant deficiencies, demonstrating that acquisition support activities and contract actions continue to remain high risk. Both reports indicate VA faces significant management challenges to ensure that these system development initiatives meet program goals, user expectations, and budget targets.

Our August 2004 report, Issues at VAMC Bay Pines, Florida and Procurement and Deployment of the Core Financial and Logistics System (CoreFLS) (Report Number 04-01371-177), concluded that VA did not adequately contract for or monitor the CoreFLS project or protect the Government's interests. VA did not allow sufficient time to conduct full and open competition to fulfill the requirements of the CoreFLS project, which was budgeted to cost VA over $300 million. VA's actions effectively made the CoreFLS project a sole-source award, with the award determination based solely on a very small portion of expected costs and services needed to implement and deploy a CoreFLS solution.

We identified systemic inadequacies in the contracting processes and serious weaknesses in contract development. These included statements of work that were nonexistent or not prepared independently, technical evaluations that were also inadequate or nonexistent, independent Government cost estimates that were missing, and multiple contract task orders that contained deficiencies. In fact, we concluded the type of task orders issued to the CoreFLS contractor were inappropriate for acquiring integrator services. We made 66 recommendations in the report. Twenty-nine of them relate directly to issues identified as major management challenges. Fourteen of these 29 recommendations remain open. We discuss three recommendations addressing contracting issues in the Financial Management section (4A), three recommendations on CoreFLS security issues in the Information Security and Systems section (5A), and the remaining eight recommendations in the same section (5B).

In our March 2005 report, Review of VA Implementation of the Zegato E-Travel Service (Report No. 04-00904-124), we identified that VA's E-Travel initiative duplicates the General Services Administration's (GSA) efforts to provide E-Travel service options that all Federal agencies must use. The project was not meeting VA's requirements and user needs effectively, and we identified contracting actions that did not adequately protect VA's interests. Also, we concluded that aspects of this project were fast-tracked and the initial award determination was based solely on a very small portion of expected costs and services. We made recommendations to the Assistant Secretary for Management to initiate timely actions to migrate to one of GSA's approved E-Travel options, which could save $7.4 million over the next 10 years. The Department's Chief Management Officer concurred with the report recommendations and VA initiated actions needed to strengthen the current contract, reduce contract costs, and effect a timely migration to one of GSA's E-Travel services. VA also initiated technical and legal reviews of the existing contracts to better protect its financial, performance, and contractual interests. These actions helped ensure the price reasonableness of current service levels until migration can be completed and position the Department to save the funds we identified once migration to a GSA-approved E-Travel service is complete. Although all 10 report recommendations remain open, we expect to close the report recommendations in the near future since the Department has taken most of the actions needed to meet the intent of our recommendations or is making significant progress toward implementing the open recommendations. However, we will continue to follow up on the corrective actions until they are completed.

Our findings showed that both of these projects lacked adequate control, risk management, and senior management oversight because acquisition activities were expedited, while key management and system development controls were omitted or weakened by actions associated with the accelerated pace. VA needs to use a more strategic and disciplined approach to improve acquisition and contract support activities for complex, expensive system development efforts.

VA's Program Response to OIG3E:

In April 2005 the Chief Information Officer sent a memorandum to the OIG requesting that the remaining recommendations regarding previous plans for implementation of a new integrated financial management system be closed since the Department was still evaluating what course of action would be most prudent for development and implementation of this type of system. VA has now initiated a 4-year remediation program to eliminate the existing material weakness-Lack of an Integrated Financial Management System. This new program will be referred to as VA's Financial and Logistics Integrated Technology Enterprise (FLITE)-the goal of which is to correct financial and logistics deficiencies throughout the Department. For FY 2006 and 2007, the work associated with FLITE will be primarily "functional" in nature, that is, oriented on planning and the standardization of financial and logistics processes and data. This effort will be led by the Assistant Secretary for Management and will be very labor intensive involving both contractors and Government personnel. During those fiscal years, a detailed review and analysis of software options will also occur and will include "pilot programs" as needed.

In 2004 implementation of the Zegato Travel System was halted and VA proceeded to initiate migration to one of the GSA-approved e-Travel Service (eTS) options in accordance with the President's Management Agenda. After a thorough evaluation by a VA-wide team of technical experts, including vendor demonstrations, hands-on testing of functionality, system performance, and comparative pricing, VA awarded a task order to Electronic Data Systems (EDS) from GSA's master contract in January 2005.

Shortly after awarding the task order, VA conducted "sandbox" testing to review the functionality of FedTraveler.com to ensure all items in the "request for quotes" were met. A gap analysis document was provided to EDS, listing all items found deficient by VA. All items are required to be completed before VA will implement FedTraveler.com.

Work is ongoing on additional implementation activities. Migration of the first site is scheduled for the first quarter of 2006. Senior management officials and the eTS Steering Committee are overseeing eTS project management and migration activities.

3F. OIG Issue-Government Purchase Card Activities

VA management controls over purchase card transactions need improvements so that VA leverages buying power to the maximum extent possible and captures available discounts. In our April 2004 report, Evaluation of the Department of Veterans Affairs Purchase Card Program (Report No. 02-01481-135), we identified additional opportunities to ensure that purchase cards are used properly. Of the eight recommendations, the one to develop and implement procedures and checklists for approving officials to use in monitoring cardholders' use of cards remains unimplemented.

During 2005, OIG CAP reviews continue to show that VA needs to improve controls for the effective administration of the Government purchase card program. We identified program deficiencies at VBA and VHA facilities during CAP reviews. Deficiencies included insufficient supporting documentation, problems with reconciliations and certifications, single purchase limits that were not enforced, expensive or unusual procurements made on behalf of veterans, use by unauthorized individuals, split purchases, failure to use national contracts, a lack of training, and inadequate separation of duties between billing officers and purchase card coordinators.

VA's Program Response to OIG3F:

To address the OIG's concerns, VA's Office of Business Oversight (OBO) began using data mining techniques to identify potentially questionable purchase card transactions. Beginning in 2005, transactions identified as questionable have been provided to station Agency/Organization Program Coordinators for research and validation. If transactions are verified as being improper, such as splitting purchases, OBO notifies facility directors to take appropriate administrative and personnel action and provide a response on corrective measures taken to prevent reoccurrence. OBO provides status updates to the VA Chief Financial Officer (CFO) as well as Administration CFOs on a quarterly and annual basis, with overall program recommendations provided at the end of the fiscal year.

OBO also performs site reviews at VHA and VBA facilities and examines purchase card processes and procedures, such as reconciliations and certifications. A sample of purchase card transactions is tested for validity of supporting documentation and purchase limits. Any findings are formally reported to facility directors with recommendations for corrective action. Findings are also summarized in an annual report, with program-wide recommendations directed to appropriate VA officials.

The following desk guides for the purchase card program have been signed and placed on the VHA CFO Web site at http://vaww.cfo.med.va.gov/173/accnt_deskguides.asp:

  • Purchase Card Approving Official -- Issued April 12, 2005.
  • Purchase Card Cardholder -- Issued April 12, 2005.
  • Purchase Card Program Coordinator -- Issued June 14, 2005.
  • Purchase Card Dispute and Fraud -- Issued July 20, 2005.

The last desk guide to be issued is entitled Purchase Card Accruals and Audits. This will be distributed to the field in the first quarter of 2006. The desk guides provide guidance to those who use the Government purchase card.

VHA Handbook 1730.1, Use and Management of the Government Purchase Card, was signed on June 17, 2005, by the Under Secretary for Health. The handbook updates and clarifies procedures for the use of the Government purchase card for VHA facilities and program offices; defines the establishment of local facility quarterly monitors of purchases made with the purchase card; indicates discrepancies should be corrected immediately; and requires certification of the report by the facility CFO, Agency/Organization Program Coordinator, Logistics Officer, or equivalent.

In addition, during the past year the VHA Chief Logistics Officer Purchase Card Workgroup developed a white paper with recommendations for improving the procedures and controls and to decrease risk in the purchase card program. As a result of this initiative, a number of software system upgrade requests were submitted to the VHA Data Validation workgroup for implementation to improve the automated record of purchase card transactions. Other recommendations of this workgroup are in process, such as the identification of best practices and the evaluation of training needs.

During 2005 VBA continued to emphasize to regional office staff the importance of following the guidance set forth in VBA Handbook 4080. The handbook, which incorporated prior OIG recommendations and suggestions, was released to the field in June 2004. The handbook includes a purchase card checklist as well as an approving official's review guide to aid in monitoring cardholders' purchase card use. VBA teams used a purchase card checklist in 2005 during regional office reviews.

With the changing requirements and new initiatives associated with the purchase card program, VBA management has been proactive in communicating information to all purchase card coordinators and will continue to provide the necessary tools to support the oversight of this program.

3G. OIG Issue-Inventory Management

OIG reviews of inventory management practices have identified significant management challenges involving various supply categories and excessive expenditures of hundreds of millions of dollars. Our August 2004 Bay Pines/CoreFLS report concluded that in spite of repeated notices by VHA of the need for an efficient inventory management program, the VAMC did not fully or adequately implement VA's Generic Inventory Program (GIP) to manage inventories, which contributed to the failed conversion of inventory data to CoreFLS. This review highlighted problems with VA's inventory management and showed VA needs to ensure that all facilities have certified the accuracy and reliability of GIP data to prevent the problems encountered at Bay Pines from occurring at other sites.

In 2005, CAP reviews continue to identify systemic problems with inventory management caused by inaccurate information, lack of expertise needed to use GIP, and failure to use the system at some supply points in medical centers. The 30-day maximum supply level used in our audits and CAPs was originally developed with the participation and agreement of OA&MM and VHA, and remains a reasonable standard for most recurring medical, prosthetic, engineering, and operating supply requirements. Current OIG reviews provide for exceptions to the standard, such as items that have long ordering lead times, infrequent but necessary use, order quantities larger than a 30-day supply, and earmarked emergency stockpiles. CAP reviews conducted in 2005 found management of supply inventories was deficient at 36 of 38 facilities tested. VA continues to face significant challenges in deploying an accurate inventory management information system nationwide, along with ensuring the accuracy of inventory management information needed for decision-making. By improving inventory management practices nationwide, VA can potentially reduce excess inventories and reduce funds tied up in maintaining excess inventories.

VA's Program Response to OIG3G:

The Office of Acquisition and Materiel Management (OA&MM) has taken the following actions to address inventory management issues in VA:

  • Developed a national item file that will force standardized identification for supplies and ensure that all items are accounted for in perpetual inventory accounts. Further development and maintenance of the file was recently transferred to VHA.

  • Sponsored materiel management seminars that promote the use of and include technical training for GIP.

  • Transferred the supply, processing, and distribution (SPD) program to VHA for more authority in its management. SPD manages the largest amount of medical supplies in VHA facilities and has been repeatedly cited in CAP reviews for deficient inventory management practices.

OA&MM agrees that much improvement is needed regarding inventory management. However, the office questions the 30-day stock standard used by the OIG in conducting CAP reviews. For most items, a 30-day stock is a good limit for proper inventory management; however, many items cannot be held to this standard including stand-by supplies available for rare occurrences, items that require long lead times for replenishment, and supplies that are packaged in quantities greater than 30-day supply. VA recommends that the OIG not apply the standard to every item.

In February 2004 VA created the Office of Business Oversight (OBO) to conduct oversight and monitoring of financial, capital asset management, acquisition, and logistics activities across the Department. In 2005 OBO conducted logistics business reviews at 10 VA medical centers not reviewed by the OIG in 2005. OBO determined GIP was not fully implemented at 5 of the 10 facilities reviewed. The remaining five had implemented GIP but were not effectively using it to manage supply inventories.

OBO conducts physical inventories and reviews supply management practices in clinical areas. OBO also provides training, including best practices, to inventory management personnel to ensure familiarity and compliance with VA and VHA directives.

In 2006 OBO will double the number of logistics business review site visits. OBO anticipates the increased reviews will provide greater oversight, monitoring, and improvement of the inventory management practices in VA.

The VHA Chief Logistics Officer (CLO) continues to monitor inventory issues through the use of internal/external reviews and an online database where medical centers enter inventory information. Inventory information is collected and analyzed to determine compliance with VHA Handbook 1761.2, Inventory Management.

Continued progress is being made in areas of inventory management and the maintenance of GIP. To date, all inventories have been certified as implemented. Inventories are being monitored to ensure continued use of GIP, lower levels of inactive and long supply stock, and overall lower dollar value of inventory.

Problems identified by CAP reviews require stations to address their specific issues with corrective action plans, which are followed up by the CLO. The CLO is also writing a new directive that addresses various inventory problems. The directive, which will be completed by the first quarter of 2006, identifies opportunities for more focused training, targeting critical areas identified in the reviews.

Actions currently underway to address the recommendations include:

  • Creation of standardized business processes for inventory management.
  • Creation of a national report server.
  • IFCAP (VA field station procurement ordering, accounting and distribution system)/GIP programming changes.
  • Separate performance measures for recurring stock vs. just-in-case stock.
  • Rewrite of VHA Handbook 1761.2, Inventory Management.
  • GIP continuing education.