Introduction: Provided to Dwight Deneal, Director, Office of Small Business Programs, Defense Logistics Agency to explain SDV-MPG members challenges working with DLA’s MSPV Program and requesting a meeting to discuss.

CURRENT CHALLENDGES OF SDVOSB’s WORKING WITH CARDINAL

AND DEFENSE LOGISITCS AGENCY

SERVICE DISABLED VERTERANS MEDICAL PRODUCTS GROUP(SDV-MPG)

July 2022

 

BACKGROUND: The Defense Logistics Agency, on behalf of the Department of Defense and the Armed Services manages a Medical Surgical Prime Vendor Program (MSPV) to provide medical and surgical products at reasonable costs by aggregating volume, to the services and other customers. DLA does this by establishing Distribution and Pricing Agreements (DAPAs) with suppliers of products at prices deemed fair and reasonable to the government. DLA then enters into firmed fixed price contracts with major distribution contractors for the warehousing and distribution of medical products around the globe. These are called “Prime Vendor” contracts. The distributors (Prime Vendors) then enter into agreements with the DAPA holders to stock and distribute products to DLA customers. Fees for these services are negotiated between the DAPA holders and the prime vendors. One of DLA’s major prime vendors is Cardinal Health.

ISSUE: In April 2022, Cardinal Health send letters/emails to many service-disabled veteran-owned small businesses which are DAPA holders stating that “it is imperative that we are appropriately compensated for the services we provide.” Cardinal further stated that effective May 2nd, 2022, it was increasing distribution fees by 3 percent, enforcing the use of EDI, and enforcing accountability of service level commitments. These are UNILATERAL decisions by Cardinal not open for negotiation. Cardinal further has a history of taking discounts on invoices from DAPA holders with no explanation nor identification of customer or contract vehicle negatively impacting the cash flow of small business DAPA holders. The result is that DAPA holders lose money on each order filled. DAPA holders are often forced to remove items from the DAPAs resulting in reduced choice for DoD clinicians of needed products and less small business participation in DLA contract opportunities. In addition, it empowers Cardinal to favor suppliers that pay Cardinal higher rebates or higher fees, which constitutes a conflict of interest in their management of the DLA medical supply chain. Invariably those suppliers that are paying Cardinal higher fees or rebates are large business concerns that conduct significant commercial business volumes with Cardinal and for whom Cardinal is already stocking medical products independent of DLA’s requirements. Those large business suppliers and Cardinal can thus “game” the system at the taxpayer’s expense as rest assured the fees being paid to Cardinal by the large business suppliers are being borne by DLA customers and the taxpayer.

In discussions with DLA Troop Support, SDV-MPG has been told the only relief DLA can provide is to allow DAPA holders to “adjust their prices to cover their PV assessed supplier fees.” Our experience is that it takes a minimum of 60 days for price increases to be approved while Cardinal has initiated the increased distribution fees for over 60 days already. Also, our members experience has been that Troop Support has been denying the price increase requests submitted, including those which provided the documentation of the distribution fee increase from Cardinal. This has resulted in members removing hundreds of items from DAPAs. Large business suppliers do not appear to face these same delays in approving price adjustments or product additions.

SUMMARY: DLA has effectively put small business DAPA holders and the taxpayers in a “lose/lose” situation. DAPA holders are at the mercy of the prime vendors who can raise fees to any level and any time unilaterally with little to no warning and with no apparent accountability to DLA. The prime vendors benefit from this action by limiting the products they must stock and distribute supplies from large businesses with whom they have an expansive commercial market relationship and for whom they are already stocking and distributing products in the commercial market. If DLA consistently denies price increase requests from small business DAPA holders, the only suppliers that will be left standing are large business suppliers. Is it any wonder small business participation has dropped over 40 percent in DoD in the last 10 years? The quality of DoD healthcare delivery will only decline as required and necessary products are unavailable on DAPAs.

REQUESTED ACTION: We respectfully request that DLA’s OSDBU immediately review this issue with procurement leadership at DLA Troop Support Command to implement corrective action to accomplish the following:

Restrict Cardinal from increasing fees on small business DAPA holders unless it is demonstrated that those same fees are being imposed on all other DAPA holders.

Require DLA contracting personnel to recognize that prices are going up in virtually all commodity classes and that price increases are warranted even if they exceed historical experience. Recently GSA issued a directive to all Federal Supply Schedule contracting officers to confirm that recurring price increases are entirely permissible and that historical limitations on the level of price increases available under their contracts are being lifted. See https://www.gsa.gov/cdnstatic/MV-22-02.pdf. DLA must do the same.

Require DLA contracting personnel to promptly (within days of the request) grant suppliers with requested price increases where suppliers can document that their distribution fees have been increased by a DLA prime vendor.