Introduction: Provided by SDV-MPG members to Senate and House Veterans Affairs Committee staffs to provide background on the issues faced by service-disabled veteran-owned small businesses in operating as a “distributor” under VA’s MSPV program.
RISKY BUSINESS
THE PLIGHT OF A SERVICE-DISABLED VETERAN-OWNED SMALL BUSINESS PARTICIPATING
IN VA’S MEDICAL/SURGICAL PRIME VENDOR PROGRAM
Presented by
THE SERVICE-DISABLED VETERAN MEDICAL PRODUCTS GROUP
August 2022
SUMMARY: The service-disabled veteran-owned small business (SDVOSB) community has been involved and interested in the success of the VA Medical/Surgical Prime Vendor Program (MSPV) program since its inception. This involvement was heightened with the passage of Public Law 109-461 in 2006 and implemented in 2011 which established the VETS First contracting program as well as the U.S. Supreme Court decision in Kingdomware Technologies, Inc. vs. United States; No. 14-916, June 16, 2016.
Over the years, the VA Office of Inspector General and the Government Accountability Office have issued numerous reports critical of the VA’s supply chain and the associated inefficiencies. The issues always center around poor management, lack of accountability and the lack of management information systems to track and monitor contracting activities at VA medical facilities. This increases the level of risk for all parties associated with VA’s acquisition process. Unfortunately, as pointed out below, the preponderance of the risk falls on those least prepared to assume the increased risk, the service-disabled veteran-owned small businesses. This is further disheartening given VA’s mission of “caring for him who bore the battle”.
BACKGROUND: For approximately the past 7 years, VA has attempted to develop and manage an effective and efficient Medical/Surgical Prime Vendor (MSPV) program. The goal of the program is to provide clinically vetted commercial medical products to VA medical facilities on a “just-in-time” delivery basis utilizing vendors possessing private sector stocking and distribution expertise. Under this approach, VA pays distribution fees to commercial distributors to maintain and distribute significant medical product inventories as appropriate to support the core medical supply needs of VA medical facilities around the country. A secondary goal is to establish a “formulary” or catalog of VA’s recurring core medical supplies that are priced to VA based on volume purchasing principles and which provide the basis for electronic placement of recurring product orders from VA product suppliers through the prime vendors and thereby reduce VA’s historical dependence on the use of government- issued credit cards to purchase products on a low volume basis. VA has deployed several versions of MSPV, all of which have provided some benefit, but which have failed to attain VA’s original goals.
Although each version of MSPV has brought improvements to VA (see SDV-MPG paper of February 2022) major issues still exist mainly due to VA’s inability to manage the program and hold prime vendors and VA staff accountable to follow the MSPV contracts as well as the VETS First program. Prime vendor contractors are all large for-profit businesses whose first responsibility is to their shareholders. VA lacks a mechanism and staff to ensure procurement rules are followed.
PRE-AWARD RISKS
1. VA continually declines to address or confirm whether the prime vendor contracts are contracts for “distribution” or contracts for “distribution and supply”. Prior to 2016, the prime vendor program and the prime vendor contracts were established as “distribution” contracts. In other words, VA entered into direct contracts with the product suppliers for the products that were approved under the MSPV formulary, and a separate contract with the prime vendors for the stocking and distribution of those products from distribution centers owned and managed by the prime vendors. In March 2018 however, VA acknowledged that its previous efforts to reduce the size of the MSPV formulary to achieve “strategic sourcing” pricing objectives had failed because its formulary was too narrow to support the core supply needs of many VA medical facilities and in response authorized and directed its then 4 prime vendors to leverage their existing commercial networks to provide sources and prices for additional products that were needed to significantly expand the prime vendor formulary. All existing and future suppliers of formulary items to VA were obligated and directed to sell their products directly to the 4 prime vendors. This change was found by the U.S. Court of Claims (Electra-Med vs. United States) (N. 18-927C) to be illegal. VA’s actions to modify the prime vendor contracts resulted in suppliers of products to VA being deemed “subcontractors” to the prime vendors thus losing legal protections afforded them as prime contractors to VA. When one of the prime vendors (American Medical Depot) declared bankruptcy as a result of alleged non-payment by VA, suppliers of products ordered by AMD and accepted and used by VA facilities were not paid millions of dollars for the supplies furnished to VA. Although products were delivered and consumed by VA, VA refused to pay, and VA;’s position is “we are not responsible for AMD’s failure to pay”. Thus, all the risk associated with non-payment by VA’s prime vendors is borne by the suppliers even though the suppliers are contracted by VA to supply products that support the MSPV formulary.
2. VA establishes the MSPV formulary as Indefinite Delivery, Indefinite Quantity contracts that undergo price competition based on the premise that VA has vast requirements for the products. In order to qualify for these contracts SDVOSB suppliers that are not themselves product manufacturers must obtain “letters of commitment” from their suppliers to confirm that VA’s supply needs will be met. These contracts, however, have little or no guarantee of sales. Indeed, whether a particular supply item is deemed a “core item” to be used by VA medical facilities is largely determined by the VA medical facilities themselves in coordination with the prime vendors. Historically, VA greatly overestimates its demand for products. The supplier is therefore exposed to the risk of obtaining a supply allocation, financing that allocation, purchasing and if necessary, storing products that VA may ultimately never order.
3. VA has never through formal policy, defined how contracting officers are to determine a price that is “fair and reasonable” to the government. Therefore, VA contracting officers look for the “lowest possible price” never considering life cycle costs or quality of contractor performance. VA has also never established a reasonable “price differential” it will pay to award a contract to a service-disabled veteran-owned small business. That renders the legally mandated preference for SDVOSB suppliers under VETS First a mirage because the SDVOSB suppliers are, in many instances, being required to offer VA the lowest price available in the marketplace. In addition, many times, VA contracting officers determine price reasonableness based on outdated pricing or pricing under contracts with materially different terms and conditions.
PRE-DELIVERY RISKS
1. Before delivery of products to a prime vendor, suppliers must establish “commercial agreements” with the prime vendors that govern their relationship. VA’s position is these are agreements between two non-government entities, so VA is not involved. The prime vendors set all the terms for fees, delivery, stocking and insurance requirements. The suppliers are given a “take it or leave it” offer from the prime vendors. The agreements never favor the product suppliers. For example, under these agreements, prime vendors seek the right to return product that is not ordered by VA within a ninety-day period after it is taken into inventory by the prime vendor from the product suppliers, even though the prime vendors are responsible for coordinating with VA facilities on their true level of requirements.
2. Prime vendors are expected to determine what products to stock based on historical usage data from each VA medical facility. This process, however, is highly imprecise for two reasons. First VA facilities, often delay providing this data to prime vendors to avoid the inflexibility built into the prime vendor formulary and contracts. Second, prime vendors often prefer to by-pass formulary suppliers in favor of non-formulary suppliers with whom they have preferred pricing or rebate relationships. Prime vendors accomplish this by declining to assign in the prime vendor ordering system a “Prime Vendor Ordering Number” (PVON) for products. Once the PVON is established, prime vendors are required to order the specific product from the supplier who was awarded the formulary contract (BPA) for that item. Prime vendors can and do delay establishing the PVON and provide VA with a different product for which the prime vendor can gain more profit.
CONTRACT PERFORMANCE RISKS
1. Many times, prime vendors do not order products from the required formulary BPA holders and report to VA the product is “out of stock”. The prime vendor will then substitute their own branded product or the product of a third party that offers advantageous rebates giving the prime vendor higher margins. Products awarded to BPA holders have been subject to both rigorous price competition and clinical reviews. Substitution of products based on prime vendor created “out-of-stock” assertions robs VA of the benefits of the clinically driven and competitive sourced formulary selection process and robs SDVOSB suppliers of business they lawfully and competitively earned through the BPA award process.
2. Product prices have been established by VA upon the awarding of formulary BPAs for products. BPAs are priced based on a set maximum distribution fee that may be charged by the prime vendors to the suppliers. Many times, however, prime vendors add fees, invent new fees and increase fees to the point that each order results in a loss to the BPA holder. This is unstainable and results in BPA holders having to decline orders.
3. Prime vendors are required to stock a supply of all products on the “core item list” as established by VA facilities. Purchasing and stocking of supplies cost money. Many times, prime vendors receive orders from VA facilities, but do not have the product in stock. Prime vendors will then direct BPA holders to “drop ship” the products from the BPA holder’s facility directly to VA. The BPA holders then incur additional shipping expenses which the BPA holder is not reimbursed as this cost is also not included in the BPA price of the product. Yet the prime
vendors may still charge VA its contractual distribution fee for the product even though it did not incur any expense to get the product delivered to VA.
4. Prime vendors will order and hold products for inordinate amounts of time, sometimes after product expiration dates. The prime vendors will return products to BPA holders expecting BPA holders to accept the useless products and reimburse the prime vendors. Prime vendors control the entire process at the expense of the BPA holders.
5. Prime vendors place their employee representatives in many VA medical facilities. These representatives have access to all VA purchasing data and, in many instances, control the purchasing of all products regardless of whether the products are on the MSPV formulary. Many of these employees have VA email addresses and telephone numbers. They are allowed to establish separate “accounts” at each VA medical facility thereby controlling all VA purchases with no competition contrary to many procurement regulations, including VETS First.
6. VA formulary BPAs provide for price increases at the discretion of VA. Many of the BPA prices are over 2 years old. The high rate of inflation now causes BPA holders to lose money on each order as VA cannot process price increases in a timely manner.
POST DELIVERY RISKS
1. Prime vendors as a matter of doing business regularly “deduct” from invoices a certain percentage, up to 5%, of the money owed to the BPA holders whether warranted or not. This causes financial strain on BPA holders cash flow as well as requires BPA holders to balance their books multiple times.
2. Prime vendor contracts are considered “mandatory use” contracts. VA, however, has no systems/personnel in place to monitor the usage of the program. Many products on the MSPV formulary are purchased “open market” resulting in lost sales to BPA holders and in some instances VA paying 25-50% more for the item and also charged freight.
CONCLUSION
SDVOSBs participating in VA’s MSPV program are being compelled to absorb a disproportionate risk in seeking to participate in VA’s medical supply chain due to poor program design and management practices of VA. VA will not define the relationships between the parties to ensure that a robust supply of product is maintained and continues to ignore conflicts within its medical supply and distribution base when conflicts arise. Prime vendors as large businesses exist to make money for themselves and their shareholders and they neither understand nor care about business “relationships “with small businesses and the harm their business practices bring to others. Yet VA does not intervene to ensure that its supply chain is managed efficiently, ethically or in accordance with legal mandates.
The federal government has experienced a 50% decline in the number of small businesses doing business with the government over the past decade. Given the risks to small businesses in the federal marketplace as described in this paper is it any wonder? This Administration has identified the growth of the industrial base in “critical” industries as a primary national goal. Healthcare is identified as a critical national security industry requiring new thinking. One way to accomplish these goals is to fix the VA’s MSPV program.