Introduction: SDV-MPG letter to VA MSPV contracting officer on concerns raised by the publication of the draft RFP for MSPV-Gen Z.

December 6, 2022

BY EMAIL: Ashley.Nguyen@va.gov

 

Ashley Nguyen, Contracting Officer, 36C10X

Strategic Acquisition Center – Frederick

Department of Veterans Affairs

5202 Presidents Court, Suite 103

Frederick, MD 21703

 

           Re:  MSPV-Gen Z Draft RFP.

 

Dear Ms. Nguyen:

 

I hope you and your team had an excellent Thanksgiving holiday. 

 

As you know, the undersigned has the privilege of serving as the Executive Director of the Service Disabled Veteran Medical Products Group (SDV-MPG), a not-for-profit industry group that represents numerous medical product suppliers that are owned and controlled by Service Disabled Veterans (SDVs).  The mission of the SDVMPG is to advocate on behalf of service-disabled veteran and veteran owned small businesses.  In particular, we are focused on ensuring that VA procurements for medical products, equipment, and supplies comply and conform with the Veterans First Contracting program requirements under which the VA is obligated to provide procurement preferences to SDV-owned businesses where appropriate.  We are very pleased that we have been able to have an open and transparent dialogue with VA leadership and procurement officials, to specifically include you and your team, related to promoting opportunities for SDV-owned firms in support of the VA’s Medical Surgical Prime Vendor (MSPV program).  No less than eleven of our member companies currently hold one or more MSPV supply Blanket Purchase Agreements (BPAs) with the VA through which the VA is committed to sourcing medical products for distribution under the MSPV program.  The SDVMPG and its member companies very much look forward to continuing to build on this success for the benefit of both the VA and veteran-owned small businesses.

 

The purpose of this letter is to identify our remaining significant concerns related to the statement of work and solicitation requirements that the VA recently announced that it proposes to use to award nationwide IDIQ contracts with large business distributors under the MSPV-Gen Z program.  Previously, we had identified concerns set forth in prior draft RFPs issued by your office.  We fully acknowledge that the current draft RFP for MSPV-Gen Z posted on November 18, 2022, addresses and resolves some of our prior concerns.  For that, we very much thank you and the VA leadership.  Unfortunately, there remain three unresolved and core concerns that have not been ameliorated by the current Draft RFP.  This letter addresses those concerns in detail and provides suggestions for resolving the concerns.  Our goal is to be an effective partner to the VA in arriving at a rational and legally sustainable procurement approach for MSPV-Gen Z.  Please note, however, that we are sharing these statements of concern with the key Congressional committees that have oversight over VA operations to ensure that they have an opportunity to consider these concerns as well.  In addition, due to the gravity of these concerns identified, we are prepared to seek appropriate legal relief if our concerns are not resolved.  We very much hope that will not be necessary. 

 

Member Companies Affected by Our Concerns

 

The following member companies of the SDVMPG hold supply BPAs with the VA in support of the VA’s MSPV programs are as follows:  1) AvMedical, LLC, 2) Americare, LLC, 3) Global Procurement Supply, Inc., 4) TrillaMed, LLC, 5) Marathon Medical, LLC, 6) L-1 Enterprises, LLC, 7) Academy Medical, LLC, 8) QB Medical, LLC, 9) Pro-Alliance, Corp.; 10) Stay Safe Solutions, Inc. and 11) RC Consolidated Services, LLC.  Each of these companies is authorized to supply products for distribution through the MSPV-Gen Z distribution contracts and will be adversely affected or prejudiced if the VA does not address the concerns identified herein.  Each of these companies has authorized me to submit this letter on their behalf.

Statement of Concerns

Our outstanding concerns fall into three somewhat overlapping categories:

  1. The VA is perpetuating fundamental Organizational Conflicts of Interest (OCIs) that arise when MSPV distributors are also permitted to act as MSPV suppliers under the MSPV.

 

  1. The VA is permitting MSPV Distributors to prejudicially leverage their Prime Vendor status to capture vast amounts of non-MSPV open market medical supply orders without any competition and without evaluating whether those orders should be set aside for or awarded to SDV-owned firms.

 

  1. The VA position that MSPV product suppliers are bona fide subcontractors to the MSPV Distributors is invalid and must be rectified. The VA may not throw its small and SDV-owned business suppliers into the wolf’s den by forcing the suppliers to resolve all their MSPV business issues with a Government agent that has a profit motive to deny them business opportunities and deny them payments they are owed.

 

Discussion

  1. The VA is perpetuating fundamental Organizational Conflicts of Interest (OCIs) that arise when MSPV distributors are also permitted to act as MSPV suppliers under the MSPV program.

 

It was recently confirmed that two of the VA’s current Prime Vendors, Cardinal and MedLine, simultaneously hold MSPV Supply BPAs to offer their own branded products to VA facilities through the MSPV Program.  In other words, on the one hand, they are supplying medical products to the VA, and on the other hand, they are providing distribution and supply chain management services to the VA in relation to their own products.  In short, they are completely at liberty to order products from themselves.

 

But the problem is far greater than that.  The Prime Vendors not only provide distribution services, they also perform supply chain management services to the VA facilities they support.  As part of those supply chain management services, they are authorized to work with the facilities to determine which supplies will comprise the facilities’’ “Core List’ of products.  The “Core List” products are those products that will be stocked by the Prime Vendor on a recurring basis for delivery to each VA customer.  While VA facilities may also order other products (i.e., “Non-Core List” products) from time to time, the frequency of the ordering of those products is far less certain.  Indeed, products that are not listed on a facility’s Core List are unlikely to be ordered by that facility on any material basis.  Consequently, only those MSPV Suppliers whose products are maintained on a facility “Core List” are likely to get any meaningful business.  It is therefore very problematic that the Prime Vendors have been empowered by the VA’s MSPV-GEN Z SOW to directly engage with VA facilities to construct that facility's “Core List.”  Clearly, they have a strong profit motive for ensuring that their own branded products are maintained on the “Core List” to the exclusion of their competitors’ products.

 

This arrangement violates FAR Part 9.5 regarding Organizational Conflicts of Interest (OCIs).  OCIs are broadly defined in the FAR to include situations where a prospective contractor possesses either an unfair competitive advantage in the procurement of supplies or services or will maintain divided loyalties in performing their contractual obligations.  One such example of an OCI is ‘the existence of conflicting roles that might bias a contractor’s judgment.”  FAR 9.505(a)(1).  Here, a Prime Vendor that is authorized to supply its own products through the MSPV-GEN Z program will maintain divided loyalties and reside in a conflicting role where it is empowered to construct or assist in constructing a VA facility “Core List” of supplies.  Yet the RFP specifically puts such a Prime Vendor is precisely that conflict role.[1]  This is improper.  As FAR explicitly states, “contracting officers shall analyze planned acquisitions in order to – (1) identify and evaluate potential organizational conflicts of interests as early in the acquisition process as possible; and (2) avoid neutralize or mitigate significant conflicts of interests before contract award.”  FAR 9.504(a).  This has not occurred with respect to the MSPV-GEN Z draft procurement.  It is therefore incumbent on the VA to assess and negate the fundamental OCI that arises from a Prime Vendor’s ability to propose and deliver its own branded products before continuing with this procurement.  We offer suggestions for how this problem should be addressed below.

 

Special Note:  We understand that the VA issued an OCI waiver during the previous MSPV 2.0 procurment (which has since been abandoned) to specifically authorize Prime Vendors to serve in dual roles as both MSPV suppliers and MSPV distributors.  See Owens & Minor Distribution, Inc., B-418223.5 et. al., February 3, 2021.  This waiver was not publicized as part of that procurement.  We request that you inform us whether the VA has issued a similar OCI waiver, or intends to issues such a waiver, with respect to the planned MSPV-Gen Z procurement. We also request that we be provided a copy of any such OCI waiver to enable us to understand and assess how the VA believes it is or would be in the VA and the taxpayer’s interest to allow MSPV distributors to operate with clear conflicts of interest.

 

  1. The VA Permits MSPV Distributors to leverage their Prime Vendor status to capture vast amounts of non-MSPV businesses on a sole-source, non-competitive basis. This prejudices SDV-owned businesses that are entitled to both the opportunity to compete for such business and a preference in the award of such orders.

The purpose of the MSPV Distribution program is to designate medical product distributors (i.e., Prime Vendors) that are capable of performing and empowered to perform distribution and supply management services to those supplies that are authorized for procurement under the MSPV Program.  Those supplies have been identified by the VA through a separate competitive process where the VA determined that the offered products were desirable for sourcing purposes by teams of VA clinicians/health care experts and that the prices offered for the products are fair and reasonable.  Those supplies have been captured in a series of BPAs awarded by the VA to many suppliers, comprising approximately 74,000 SKUs as of November 2022.  The supplies listed on these BPAs and the MSPV Supply List, are the only supplies that the Prime Vendors are authorized to order for and deliver to VA medical facilities.  Indeed, the VA’s current draft SOW makes clear that Prime Vendors may not offer, order, or deliver supplies under the MSPV-Gen Z prime contract that are not included in the MSPV Supply List.

Unfortunately, the VA has left its back door completely open.  While the VA’s procurement documents prohibit Prime Vendors from ordering non-MSPV Supply List supply items (i.e., open market items) under the terms of the MSPV-Gen Z contract, there is no prohibition or mechanisms in place that prevents Prime Vendors from sourcing and supplying medical supply to the VA facilities they service as Prime Vendors on an open market basis.  Indeed, one Prime Vendor, in particular, maintains both a Prime Vendor account (PV Account) which each facility that it services as a Prime Vendor, as well as a separate non-prime vendor account for the same facilities (Non-PV Account).  See Exhibit 1 hereto.  The existence of the Non-PV Accounts then enables the Prime Vendor to accept direct orders from that same facility for non-MSPV supply items without any competition.  The order simply gets issued directly to the Prime Vendor.  An example of one such order appears at Exhibit 2 hereto.  If you search for this order on SAM.gov you will find that no solicitation of any kind was ever issued to solicit this order, which is valued at $96,650, which is well above the micro-purchase threshold of $10,000 where no competition is required.  The direct placement of this order to the Prime Vendor clearly violates the Competition in Contracting Act (CICA), as well as the Veterans First Contracting Program as the VA made no effort to determine whether the supplies included in this order were available at fair and reasonable prices from SDV businesses.

We believe this order is one of many hundreds of unlawful, non-competitive direct orders made by VA facilities to a Prime Vendor for the simple reason that the Prime Vendor is there in their facility providing supply management support services, and has put in place Non-PV accounts through with they can readily perform and bill for the ordering and delivery of a vast amount of open market suppliers.  This is plainly unlawful and is highly prejudicial to our member companies who in many instances can supply the open market items at fair and reasonable prices.  It is therefore incumbent upon VA to lock this back door and take action to ensure that no future direct open market orders are perpetuated.  We provide specific recommendations for rectifying this situation below.

 

  1. MSPV Suppliers are not bona fide subcontractors and may not be viewed as or treated as such for purposes of the MSPV-GEN Z program.

 

Under the FAR, a “subcontract” is defined as follows:

Subcontract means any contract as defined in subpart  2.1 entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders.

See FAR 44.101.

 

A “contract” under the FAR is further defined as follows:

 

Contract means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them.

 

We have requested on many occasions that the VA acknowledge whether MSPV Suppliers are deemed “subcontractors” for purposes of the MSPV Program.  The issue is significant because our member companies have frequently encountered situations where the Prime Vendors have disregarded and violated MSPV program requirements and the terms of their MSPV Distribution contracts to the prejudice of the suppliers.  Such violations include consistently refusing to assign PVONS to member companies to enable them to receive MSPV orders, short-paying them on MSPV orders, providing false or misleading chargeback reports of orders that have been placed and the prices owed for such orders, late payments, and in the case of one MSPV that has subsequently been liquidated through the U.S. Bankruptcy Courts, stiffing the suppliers on millions of dollars of orders for which the ordered supplies were delivered to the VA.  These outcomes are not acceptable, particularly in the case of SDV businesses that the VA is supposed to nurture and support.  In effect, the VA is using the Prime Vendors as a wedge and shield to render the VA in any way accountable for the failure of their Prime Vendors to perform their MSPV distribution obligations.[2] 

 

This posture by the VA is not lawful. MSPV suppliers are not subcontractors because the suppliers are not “furnishing supplies or services for performance of a prime contract or subcontract.”  Instead, they are furnishing supplies in response to orders placed under BPAs awarded by the VA.  In placing those BPAs, the Prime Vendors are acting as agents of the VA, not as prime contractors.  Indeed, there is no prime contract in place between the suppliers and the Prime Vendors.  Furthermore, while the VA mandates that the Prime Vendors and the suppliers enter into commercial supply agreements, these agreements are not “contracts” because there is no “mutually binding legal relationship” between the Prime Vendors and the suppliers.  Indeed, these commercial supply agreements, which are consistently drafted by the Prime Vendors for their exclusive benefit, do not commit the Prime Vendors to order any amount of supplies from the suppliers.  They also grant the Prime Vendors the right to unilaterally change the prices that the Prime Vendors may pay the suppliers, to return products to the suppliers at the supplier’s cost for any reason, and to render payments to the suppliers at the Prime Vendor’s leisure.  In short, the commercial supply agreements are wholly illusory in nature, and cannot serve as the basis for holding that the suppliers act and serve as “subcontractors” to the Prime Vendors.  It's that simple.  We, therefore, require that the VA acknowledge that Prime Vendors are agents of the VA, that the VA will be obligated to pay for supplies ordered by the Prime Vendors as required by the BPAs and applicable law, that the Prime Vendors may not order product and then propose to return for any reason at the Suppliers’ cost (the Prime Vendor is being paid by the VA to manage this risk).  The failure to render this acknowledgment will result in a declaratory judgment action seeking a legal declaration that the MSPV-GEN Z program is a subterfuge designed to enable the VA to avoid its legal obligations to its bona fide suppliers.

 

Recommendations

 

We offer the following recommendations to rectify these concerns:

 

  1. The VA must and should update VHA Directive 1761, entitled Supply Management Operations, to specify that VHA facilities may not place open market orders for non-MSPV supplies with Prime Vendors without complying with CICA and the Vets First Program requirements. All Non-PV accounts between Prime Vendors and ordering facilities must be eliminated.

 

  1. The VA must and should provide for independent reviews above the facility level with respect to all open market medical supply orders exceeding the Micro-Purchase Threshold to ensure that CICA and Vets First Program requirements are being fulfilled for such open market orders.

 

  1. The VA must either a) bar Prime Vendors from supplying their own products in support of the MSPV Program or b) ensure that Prime Vendors are not able to favor their products through the Program, specifically concerning the determination of “Core Products Lists” as the facility level. In this regard:

 

  1. All Suppliers should have the opportunity to make the case for the inclusion of their products on a facility’s Core Products List. This will eliminate the unfair competitive advantage Prime Vendors have concerning their ability to offer their own products to VA customers.

 

  1. The inclusion of a Prime Vendors' own branded or white label product on a facility’s Core Product List should be supported by a Determination and Finding that such inclusion is warranted to fulfill the facility's medical supply needs. These D&Fs should be rendered by the VISN Contracting Office that has contracting cognizance for that facility.

 

  1. The VA should establish a separate “Backup” prime vendor for the specific purpose of processing all orders for products that are either the branded or white label product of another Prime Vendor. Back-up Prime Vendors should not be a Prime Vendor that is offering their own branded or white-label products through the MSPV Supply List.[3]

 

  1. If a Prime Vendor declines to stock certain products on the Core List, or maintain a meaningful ordering basis for Non-Core List suppliers, those orders should likewise be referred to the Backup Prime Vendor.

 

  1. If the VA has issued or has deterimed to issue an OCI waiver in accordance with FAR 9.503, the VA should publicize that determination for public and congressional comment.

 

  1. The VA should specifically acknowledge that the Prime Vendors are agents of the VA and that all orders fulfilled by MSPV Suppliers based on Prime Vendor orders are binding commitments by the VA for which the Suppliers may look to the VA for recourse if the Prime Vendors fail to timely or properly perform their supply chain management functions.

 

Thank you for your consideration of this matter.

Sincerely,

 

[1]The draft RFP contains other instances where those Prime Vendors that supply their own branded products under the MSPV Products List will have a clear conflict of interest.  For example, the Prime Vendor may delay or neglect to assign a PVON to those suppliers that have BPAs to supply competing products, thereby delaying or preventing any orders to be place with those supplies.  Likewise, with respect to Non-Core Products, the Prime Vendor may simply decline to stock the competitors’ products, and then inform the facility that the product is not available and tender its own branded product as a substitute.   We have seen many occurrences of this situation under the current MSPV-NG Bridge program.

[2]Significantly, in the case of American Medical Depot (AMD), the now bankrupt prime vendor that caused substantial financial losses to our member companies, a VA OIG report found that the VA contracting and program office for the MSPV-Bridge program possessed ample information that AMD was in breach of its performance obligations, yet did not nothing to address or rectify the situation, thus causing our member companies large financial losses through sheer neglect.

[3]Back-up prime vendors were initially proposed under an earlier draft solicitation for MSPV-GEN Z.  We urge the VA to reinstate this approach.  It provides for greater supply chain elasticity, and will provide a hedge to prevent Prime Vendors from declining to stock the products of suppliers for their own financial interests.