Department of Veterans Affairs
 

Office of Inspector General
 

Review of VHA Sole-Source Contracts
 

with Affiliated Institutions
 

Report No. 09-00981-227 July 21, 2011
 VA Office of Inspector General
 

Washington, DC 20420
 
To Report Suspected Wrongdoing in VA Programs and Operations:
 

Telephone: 1-800-488-8244
 

E-Mail: vaoighotline@va.gov
 

Website: www.va.gov/oig/contacts/hotline.asp
 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

Contents
 

Executive Summary .................................................................................................i
 

Introduction.............................................................................................................1
 

Purpose ................................................................................................................1
 

Background..........................................................................................................1
 

Scope and Methodology......................................................................................2
 

Results and Conclusions .........................................................................................3
 

A.	 Contracting Issues..........................................................................................................4
 

1.	 Lack of Acquisition Planning ..................................................................................5
 

2.	 Contracting Officers Cannot Fulfill Their Responsibilities.....................................9
 

3.	 Physician Time and Attendance.............................................................................13
 

4.	 Requirements and Duties Not Clearly Defined .....................................................13
 

5.	 Pre-award Reviews Not Always Requested ..........................................................15
 

6.	 Interim Contracting Authority Misused.................................................................16
 

B.	 Pricing Issues ...............................................................................................................18
 

1.	 FTE Contracts Pricing Issues.................................................................................18
 

a) Use of National Salary Databases....................................................................18
 

b) Identification of Key Personnel .......................................................................20
 

c) Overhead Costs ................................................................................................20
 

d) On-Call Costs...................................................................................................23
 

e) Profit ................................................................................................................25
 

2.	 Procedure Based Contracts Pricing Issues.............................................................26
 

a) Proposed Costs Exceed Medicare Rates..........................................................26
 

b) CPT Prices Not Included in Pricing Schedule .................................................28
 

c) Mixed FTE and Procedure Based Contracts....................................................29
 

C.	 Other Issues..................................................................................................................30
 

1.	 Conflict of Interest .................................................................................................30
 

2.	 Prohibited Personal Services Contracts .................................................................31
 

Conclusions ............................................................................................................33
 

Recommendations .................................................................................................34
 

Acronyms ...............................................................................................................36
 

VA Office of Inspector General 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

Exhibits 

Exhibit A—OIG Healthcare Resource Reports Issued by VISN and
 

Academic Affiliates from October 1, 2006 to September 30, 2010 .......................37
 

Exhibit B—Excerpt from Evaluation of VHA Sole-Source Contracts with
 

Medical Schools and Other Affiliated Institutions, February 16, 2005,
 

Regarding Prohibited Personal Services Contracts.................................................44
 

Appendixes 

A. Management Comments....................................................................................55
 

B. OIG Contact and Staff Acknowledgements ......................................................66
 

C. Report Distribution............................................................................................67
 

VA Office of Inspector General 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXECUTIVE SUMMARY
 

Introduction 

On February 16, 2005, the Office of Inspector General (OIG) issued Report No. 

05-01318-85 titled Evaluation of VHA Sole-Source Contracts with Medical 

Schools and other Affiliated Institutions. This report detailed our collective 

findings on pre–award and post–award reviews of healthcare resource contracts 

during the period of fiscal years (FY) 2000 through 2004. In August 2006, the 

Secretary, Department of Veterans Affairs (VA), signed VA Directive 1663, 

Healthcare Resources Contracting—Buying, Title 38 U.S.C. § 8153. This 

Directive incorporated recommendations included in our 2005 report. The purpose 

of this report is to advise VA of our collective findings since VA Directive 1663 

became effective, report on the effectiveness of VA Directive 1663, and make 

recommendations for further improvement to protect the interests of veteran 

patients and the Government. From October 1, 2006 (FY 2007) through 

September 30, 2010 (FY 2010), the VA OIG’s Office of Contract Review 

conducted 131 pre-award reviews of healthcare resource proposals. The reviews 

identified $173.8 million in savings that could be achieved through contract 

negotiations. The $173.8 million represents 31 percent of the costs proposed by 

the vendors. 

Results 

We determined that the Veterans Health Administration (VHA) has not effectively 

implemented all the requirements set forth in VA Directive 1663. The primary 

reason for not fully and consistently implementing VA Directive 1663 is that VHA 

has not provided the necessary resources to the Medical Sharing Office (MSO) 

and the lack of training for VHA procurement and non-procurement staff. The 

MSO has responsibility for ensuring compliance with the requirements in 

Directive 1663. The MSO provides technical comments, coordinates with Patient 

Care Services, and grants approval for solicitations to be issued as well as final 

approval for contract awards. The MSO currently has a director and one analyst 

which, in our opinion, are insufficient to track, monitor, identify and resolve 

common issues; provide training; and consistently implement a nation-wide 

program of this magnitude.1 In addition, VHA has not developed and provided 

standardized training related to sole-source contracting with affiliates and the 

policy requirements in VA Directive 1663. Our pre-award reviews and 

interactions with procurement staff consistently demonstrate that procurement 

1 In June 2011, after our report was sent to the Under Secretary for Health for comments, the MSO added 

three staff. VHA has also authorized additional staff as described in their action plan in Appendix A. 

VA Office of Inspector General i 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

staff lack knowledge related to the requirements in VA Directive 1663 and 

healthcare contracting in general. 

The lack of resources and training has resulted in the continuance of many of the 

same issues identified in our 2005 report. While VA Directive 1663 has resulted 

in some improvement, the implementation and application the Directive is not 

consistent nation-wide. The issues we identified are categorized into the following 

three areas: Contracting, Pricing, and Other. 

Contracting Issues 

We identified issues in the following key contracting areas: 

1. Lack of Acquisition Planning. 

2. Contracting Officers Cannot Fulfill Their Responsibilities. 

3. Physician Time and Attendance. 

4. Requirements and Duties Not Clearly Defined. 

5. Pre-award Reviews Not Always Requested. 

6. Interim Contracting Authority Misused. 

Our pre-award reviews have shown that VHA consistently fails to adequately plan 

its healthcare resource contracts. The lack of planning has a negative impact on 

the procurement process and ultimate pricing. Adequate planning includes 

ensuring VA has a bona fide need for the resource, justifying the sole-source 

procurement, assessing the risk, and identifying and developing a backup plan for 

an alternate source if the need arises. Proper acquisition planning will also lend 

itself to the development of a clear statement of work (SOW) and identifying the 

responsibilities of the contractor. Poor acquisition planning is also related to our 

determination that interim contracting authority is misused by VHA procurement 

staff. The usual reason cited for using an interim contract is that there was not 

enough time to solicit and award a permanent contract. The failure to adequately 

plan the acquisition increases the need for use of interim contracts to provide 

uninterrupted services or to award a poorly written contract too quickly. This puts 

VA at a disadvantage during the negotiation process and in administering the 

contract. We also continue to see instances where Contracting Officers (CO) 

cannot perform their duties because of interference from non-procurement 

management officials. For example, we participated in a meeting where the 

Medical Center Director was clearly instructing the CO to award the contract 

without regard to VA policy. These actions have a significant negative effect on 

the procurement process as well as the ultimate prices paid by VA. 

VA Office of Inspector General i 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

Pricing Issues 

In addition to the negative affect that poor acquisition planning has on pricing, our 

pre-award reviews have identified common issues regarding contract pricing. 

VHA procurement officials continue to cite salary surveys as the basis for 

determining the proposed prices are fair and reasonable even when the actual 

salary data for the physician(s) providing the services demonstrate the proposed 

price and the information obtained from salary surveys are higher than the actual 

salary of the physician(s). VA Directive 1663 states that salary surveys should be 

used for market research purposes only and the awarded prices should reflect the 

salary and benefits of the personnel actually providing the services. In addition, 

affiliates routinely propose multiple physicians to fulfill a small full-time 

equivalent (FTE) requirement. VA Directive 1663 requires that individual rates be 

established by provider when multiple physicians will be performing under the 

contract. Notwithstanding this requirement, VHA entities routinely issue 

solicitations where the affiliate is only required to propose a single average rate for 

multiple physicians. We also continue to identify significant unsupported 

overhead and on-call costs proposed by the affiliates. Although there have been 

several instances where VHA was able to use the information provided in our preaward reports to successfully eliminate or significantly reduce the unsupported 

overhead and/or on-call costs, VHA continues to award prices that include 

unsupported overhead and on-call costs included in the majority of proposals from 

affiliates. 

Our pre-award reviews have shown a significant lack of compliance with the 

requirements contained in VA Directive 1663 for procuring healthcare services 

where the pricing is procedure based. VA Directive 1663 stipulates that procedure 

rates should not exceed the applicable Medicare rates unless there is adequate 

justification. However, proposed and awarded prices often exceed Medicare rates 

without justification. The Directive further stipulates that when services under 

procedure based contracts are performed at VA, the price will exclude the practice 

expense component (overhead) from the applicable Medicare rate for each 

procedure. Nonetheless, we find that proposed and awarded prices are not 

adjusted to exclude the practice expense component. We also found that it was 

common that solicitations issued by VA did not identify the applicable Current 

Procedure Terminology (CPT) codes or estimated quantities for each. CPT codes 

are the industry standard for describing the services provided by physicians. The 

codes were developed by the American Medical Association to record healthcare 

services in the United States. CPT codes are used by third party payers, including 

Medicare to establish rates for physician services. Therefore, absent codes and 

quantities for each, the CO cannot evaluate pricing or determine the value of the 

awarded contract. Also, without a pricing schedule showing each CPT code and 

awarded price, it is not possible for the Contracting Officer’s Technical 

VA Office of Inspector General ii 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

Representative (COTR) or CO to certify the invoices with any level of confidence 

that the affiliate has billed the correct price. We conducted one post-award review 

of a procedure based contract and found that the affiliate did not calculate and bill 

VA the correct Medicare rates per the contract. Neither the VHA COTR nor the 

CO were aware that the affiliate was overbilling under the contract because there 

was no price schedule showing unit prices for each CPT code. 

Other Issues 

Two other areas of continued concern are conflict of interest issues and prohibited 

personal services contracts. Our pre-awards have identified individuals with an 

apparent conflict of interest that were attempting to, or in fact were, participating 

in the contract with the affiliate. Examples include a VA employee who worked 

part-time at the affiliate who was signing off and validating the procedures that the 

affiliate performed under the contract. In another example, a VA employee, who 

also was a part-time employee of the affiliate, intended to participate in the 

negotiation of the contract with the affiliate. These straight forward examples are 

troubling and indicate that VHA has not provided the necessary training 

concerning conflict of interest issues. 

Also, in our 2005 report we recommended that VA pursue a legislative 

amendment that would grant VA statutory authority to award personal services 

contracts. Since adoption of Directive 1663, our recommendation remains the 

same. We believe these contracts meet the description of a personal service 

contract as described in Federal Acquisition Regulation (FAR) 37.101. We also 

have concerns that contract employees are engaged in inherently governmental 

functions, particularly when they are hired under contract to be the chief of the 

service or department. 

Recommendations 

We recommend that the Undersecretary for Health: 

1. Evaluate and determine the resources needed by MSO to uniformly implement 

and monitor compliance with the requirements set forth in Directive 1663 on a 

nation-wide basis. 

2. Develop and implement a central tracking system that captures and reports all 

healthcare contracting and spending with affiliates for healthcare services 

including interim agreements. 

3. Develop	 and provide comprehensive standardized training for VHA 

contracting staff regarding sole source contracting with affiliates and the 

requirements of Directive 1663. 

VA Office of Inspector General iii 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

4. Develop and provide comprehensive standardized training on the requirements 

of VA Directive 1663 to non-procurement staff who have responsibilities 

relating to sole source contracting with affiliates. 

5. Ensure VHA contracting staff adhere to all policy requirements contained in 

VA Directive 1663, including the following: 

a.	 Each procurement should be adequately planned.* 

b. A backup plan for an alternate source for services should be established. 

c.	 Contracts should be competed except where VA has established a need for 

services from a faculty member of the affiliate. 

d. Salary surveys should not be used to determine fair and reasonable pricing. 

e.	 The key personnel clause is contained in each FTE contract and properly 

identifies each physician.* 

f.	 Limiting overhead to costs directly associated with administration of the 

VA contract.* 

g. On-call costs are only permitted when physicians are actually compensated 

for being on-call.* 

h. Procedure based	 contracts should not be awarded at rates higher than 

Medicare unless clearly justified and should exclude the practice expense 

component when performed at VA.* 

6. Develop a standard that accurately defines the expected hours and workload 

from one FTE for each specialty that can be applied by the contracting staff to 

determine the number of FTE and hours to be procured under the contract.* 

7. Develop clear and well defined national standard SOWs for each specialty that 

can be tailored as needed to address specific procurement requirements if 

needed. 

8. Develop and require the use of a standard pricing schedule for procedure based 

contracts that require the listing of all CPT codes with estimated quantities and 

proposed prices for each code. 

9. Conduct an evaluation to determine the feasibility of using an administrator or 

intermediary to process billings for procedure based contracts performed at the 

affiliate similar to those used by Medicare administrators. 

10. Develop a more robust process to ensure compliance with conflict of interest 

laws and regulations and their applicability to all employees, particularly Title 

38 employees, who have a financial relationship with the contractor.* 

11. Seek a legislative amendment to 38 U.S.C. § 8153 and § 7409 to authorize VA 

to enter into personal services contracts when the services are to be provided at 

a VA facility.* 

* A similar recommendation was made in our 2005 report. 

VA Office of Inspector General iv 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

Under Secretary for Health Comments 

We provided our draft report to the Under Secretary for Health and we met with 

and discussed our findings and recommendations with VHA senior management. 

The Under Secretary provided a written response to our report on July 11, 2011. 

The Under Secretary concurred with our findings and with all eleven of our 

recommendations and provided an action plan to address the recommendations in 

our report. The Under Secretary noted that within the past year, the Veterans 

Health Administration had begun identifying some of these same concerns and 

had already taken action to address some of these issues. We believe the action 

plan is acceptable and we will follow up upon the implementation of the planned 

actions until they are completed. 

MARK A. MYERS
 

Director, Healthcare Resources Division
 

Office of Contract Review
 

VA Office of Inspector General v 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

INTRODUCTION
 

Purpose 

On February 16, 2005, the Office of Inspector General (OIG) issued Report No. 

05-01318-85 titled Evaluation of VHA Sole-Source–Contracts with Medical 

Schools and other Affiliated Institutions. The report detailed our collective 

findings on pre–award and post–award reviews of healthcare resource contracts 

during the period of fiscal years (FY) 2000 through 2004. In August 2006, the 

Secretary, Department of Veterans Affairs (VA), signed VA Directive 1663, 

Healthcare Resources Contracting—Buying, Title 38 U.S.C. § 8153. This 

Directive incorporated recommendations included in our report dated February 16, 

2005. The purpose of this report is to advise VA of our collective findings since 

VA Directive 1663 became effective, report on the effectiveness of VA Directive 

1663, and make recommendations for further improvement to protect the interests 

of veteran patients and the Government. 

Background 

Under its sharing authority in 38 U.S.C. § 8151–8153, the Veterans Health 

Administration (VHA) may enter into contracts for the purchase of healthcare 

resources with any healthcare provider. The law also gives VHA authority to enter 

into non-competitive sharing agreements (sole-source contracts) with an affiliated 

academic institution, a teaching hospital, or an individual physician or practice 

group associated with the medical school, or other affiliated institution. The 

purpose of the authority is to further one of VA’s statutory missions, which is to 

conduct an education and training program for health professions. Each year over 

50,000 medical students, residents, and fellows receive some or all of their clinical 

training in VA facilities through affiliations. VA is affiliated with 112 of the 

nation’s 130 allopathic medical schools and 24 of the 29 osteopathic medical 

schools. 

VA Directive 1663 requires a pre-award review by the OIG Office of Contract 

Review (OCR) for all sole-source proposals valued at more than $500,000. This 

was a continuance of VHA Directive 99-056, dated November 1999, which also 

required a preaward review of sole-source proposals valued at more than 

$500,000. Prior to 1999, preaward reviews of these proposals were conducted by 

another Government agency. During the period of October 2006 through 

September 2010 (FYs 2007 through 2010), OCR issued 131 pre-award reviews 

(Exhibit A). These 131 reports represent proposals valued at $555 million with 

$173.8 million (31 percent) in recommended cost savings. Of the 131 reports, 83 

resulted in awarded contracts with sustained cost savings of $56.6 (53.8 percent) 

VA Office of Inspector General 1 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

million of the $105.3 million of the potential cost savings identified in the 83 

reports. The remaining 48 contracts have not been awarded. In addition to the 

131 pre-award reviews, at the request of the contracting officer (CO) we 

performed one post-award review of a sole source contract with an affiliate. We 

found that the affiliate overbilled VA over $62,000 because the affiliate did not 

bill according to the terms of the contract. VA collected the overcharges. 

The sole-source solicitations that we reviewed fall into three primary categories: 

full-time equivalent (FTE) and procedure based contracts for services provided at 

a VA medical facility, procedure based contracts for services provided at the 

affiliate, and Community Based Outpatient Clinic (CBOC) contracts. VA 

Directive 1663 prescribes that contracts for care provided at a VA facility must be 

FTE based. However, a procedure based contract for services provided at VA can 

be awarded with approval from the Network Director that includes a written 

justification that demonstrates a procedure based contract is in the best interest of 

the Government. Procedure based contracts for services provided at the affiliate’s 

facility are usually based on Medicare Part A (hospital costs) and Part B 

(physician services). Pricing for procedure based contracts for services provided 

at the VA facility are based on Medicare Part B only. CBOC contracts are 

typically based on a capitated rate—a monthly or annual fee for each enrollee. 

Scope and Methodology 

This report is a summary of our findings over the past 5 years of the proposals 

submitted for pre-award reviews and the one post-award review. These reviews 

include a review of the solicitation, the proposal, other contract documents, 

documentation submitted by the affiliates to support the proposal and discussions 

with contracting and other personnel in VHA and at the affiliates. This report also 

includes information we have obtained from our numerous contacts with VHA 

COs and other procurement officials who frequently contact us for assistance in 

preparation of a solicitation or in negotiations. In addition, we serve in an 

advisory capacity to the VHA Medical Sharing Committee (committee). 

Our report is divided into three main topics: Contracting Issues, Pricing Issues, 

and Other Issues. The report structure mirrors that of the February 2005 report to 

facilitate a comparison of the findings and conclusions with those presented in the 

prior report. Relevant excerpts from the 2005 report regarding personal services 

contracts are included in Exhibit B. 

VA Office of Inspector General 2 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

RESULTS AND CONCLUSIONS
 

In August 2006, the VA Secretary signed VA Directive 1663, Healthcare 

Resources Contracting—Buying, Title 38 U.S.C. § 8153. This directive 

incorporated all of the recommendations included in our comprehensive report 

dated February 16, 2005, titled Evaluation of VHA Sole-Source–Contracts with 

Medical Schools and other Affiliated Institutions. Since VA Directive 1663 was 

issued, we have conducted a total of 131 pre-award reviews. Although VA 

Directive 1663 addressed most of the contractual and pricing issues that were 

raised in our 2005 report, we have determined that VA has not fully implemented, 

enforced, or consistently applied the requirements set forth in VA Directive 1663. 

This is of concern because many of the policies in VA Directive 1663 were not 

new; rather, they were contained in VA Manual M-1 Part I, Chapter 34 which was 

published in the 1980s. 

VHA has delegated responsibility and oversight of all contracts for healthcare 

resources—including sole source agreements with affiliated medical institutions— 

to the Medical Sharing Office (MSO) which is part of the VHA Procurement and 

Logistics Office. Based on our reviews, interactions, and observations, we believe 

the MSO has not been successful in implementing the provisions of VA Directive 

1663 because it has not been provided the necessary stability, resources, and 

support. Since VA Directive 1663 was issued in August 2006, there have been 

four directors of the MSO. Also, since November 2008 no staff has been assigned 

to the Director of the MSO with the exception of one analyst assigned as a 

technical reviewer who is located in Texas. The lack of stability and resources are 

indicators that VHA has not placed sufficient priority on implementing the 

Directive. Based on recent discussions with the MSO, VHA has authorized 

additional FTE to be assigned to the MSO office. The MSO director stated 

vacancy announcements have been issued to fill these positions and that these 

positions will be filled in the near future.1 

Since early 2007, the OIG’s OCR has served in an advisory role to the Committee. 

This Committee is chaired by the MSO Director and is comprised of members 

from various VHA organizations such as Patient Care Services, the Service Area 

Offices, procurement officials, and members from Academic Affiliations and 

General Counsel. The Committee was tasked to provide guidance on 

implementing Directive 1663 and address issues regarding contracting for 

Healthcare Resources; however, over the last couple of years the committee has 

increasingly been dealing with pressure from Association of American Medical 

Colleges (AAMC), via the Procurement and Logistic Office and VHA’s Office of 

1 In June 2011, after our report was sent to the Under Secretary for Health for comments, the MSO added 

three staff. VHA has also authorized additional staff as described in their action plan in Appendix A. 

VA Office of Inspector General 3 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

Academic Affiliations (OAA), to not only change VA Directive 1663, but allow 

AAMC to actively participate in the development and writing of VA policy as it 

relates to sole source contracting with affiliated medical schools. AAMC is an 

organization that represents the interests of the affiliates. While it may be 

reasonable to seek input from outside organizations before developing policy, we 

believe it is excessive to permit the AAMC or any other organization to actively 

participate in writing VA procurement policy. VHA managers have done little to 

insulate the MSO from the demands of the AAMC and its members, whose 

positions also favor those of the affiliates. 

Until recently, the MSO has not provided any significant training on Healthcare 

Contracting and VA Directive 1663 and has yet to provide routine, standardized, 

and comprehensive training on healthcare contracting. Based on our interactions 

with VHA contracting officials, it is apparent that a lack of knowledge and lack of 

clear guidance from the MSO is a significant issue in the area of sole source 

contracting in general and more specifically with compliance with VA Directive 

1663. VHA managers have recognized the need for training and even concurred 

in an OIG audit report, Audit of Veterans Health Administration Noncompetitive 

Clinical Sharing Agreements, Report Number 08-00477-211, issued on September 

29, 2008 to develop training in this area, but have yet to provide the training. 

VHA has been working with the VA Acquisition Academy for a couple of years, 

but still has not produced the standardized comprehensive training needed by 

contracting and other staff. We do note that two of the three VHA Service Area 

Offices’s recently held training for COs that addressed issues relating to healthcare 

resource contracting which is a good start. These facts and the fact that VHA 

began efforts to re-write VA Directive 1663 less than a year after it was issued 

indicate that implementing and complying with VA Directive 1663 has not been a 

high priority within VHA. As such, many of the issues raised in our 2005 report, 

such as contracting issues and pricing issues, have not been resolved. 

A. Contracting Issues 

Our 2005 report identified the following key contracting related issues with solesource contracts with affiliates: 

1. Lack of Acquisition Planning 

2. Contracting Officers Cannot Fulfill their Responsibilities 

3. Physician Time and Attendance Issues 

4. Requirements and Duties Not Clearly Defined 

5. Pre-award Reviews Not Requested 

Since VA Directive 1663 became effective in August 2006, our reviews show that 

there continue to be deficiencies in each of these areas. While some improvement 

VA Office of Inspector General 4 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

has been made in the area of acquisition planning and physician time and 

attendance, there continue to be significant issues regarding COs not being able to 

fulfill their responsibilities and contract requirements not being clearly defined. 

We continue to identify sole source contracts that have not been sent in for the 

required pre-award review as well. In addition to these issues identified in our 

prior report, we have also identified an additional significant issue regarding the 

misuse of interim contracting authority by VHA. 

1. Lack of Acquisition Planning 

Our 2005 report found that none of the contract files reviewed contained any 

documentation that showed there was an acquisition plan. An acquisition plan 

demonstrates that the CO has determined the need exists and has developed an 

overall strategy for the procurement. An adequate acquisition plan contributes to 

the overall success of the procurement including the negotiations and 

administration of the resulting contract. 

Since 2006, our reviews have shown that VHA has achieved some improvement in 

this area but that it still continues to be a problematic area. We selected a 

judgment sample of 27 contract files from the 72 pre-award reports that we issued 

during FYs 2008 and 2009 and conducted an in-depth review of the COs 

acquisition plans. The 27 contract files represented pre-award recommendations 

of $67.4 million. 

Our review found that 12 (44 percent) of the 27 files did contain an acquisition 

plan; however, there was no evidence of an acquisition plan in any of the remaining 

15 files (56 percent). The pre-award reviews for these 15 procurements represent 

$95.0 million in estimated contract value and $47.6 million (50 percent) in 

recommended cost savings. 

Evidence suggests a correlation between the development of an acquisition plan 

and achieving the cost savings recommendations in the pre-award reviews. Of the 

15 procurements where no acquisition plan was evident, only 50 percent of our 

recommended cost savings were sustained. In comparison, the sustained rate for 

the 12 procurements that did contain acquisition plans was about 69 percent of the 

recommended savings. This data suggests that the development of an acquisition 

plan can have a positive impact on the procurement process. We believe that the 

sustained rate of recommended cost savings would have been higher for the 15 

procurements that did not have an acquisition plan if they had had an acquisition 

plan. 

While the 12 solicitations that did have an acquisition plan showed a higher 

percent of sustained cost savings, our review of the acquisition plans identified 

VA Office of Inspector General 5 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

several common concerns. These concerns are: sole-source not properly justified, 

no alternate source or backup plan, and no risk assigned to the procurement. 

a) Sole Source Not Properly Justified. VA has statutory authority, Title 38 

U.S.C. § 8151–8153, to procure healthcare resources on a sole-source basis with 

an affiliated institution. VA Directive 1663 further states that VA must 

demonstrate the need for the services of a faculty member to justify a sole-source 

procurement with an affiliated institution. Typically, the services of an attending 

physician who is also a faculty member is required for resident supervision 

purposes when VA is a participating institution in the affiliate’s accredited 

residency program for the particular specialty that VA is procuring under the 

contract. VA’s participation can be verified on the Accreditation Council for 

Graduate Medical Education’s (ACGME) website. The requirement was included 

in the Directive to ensure that VHA entities maximized competition to achieve fair 

and reasonable pricing and only issue sole-source contracts to affiliates when 

necessary to meet VHA’s education mission. 

Most acquisition plans or justifications for sole source merely stated that the 

vendor is an affiliate; therefore, the procurement will be sole-source. We 

reviewed in detail the acquisition plans for sole-source justifications for all 72 

reports issued FYs 2008 and 2009 and found that none contained the justifications 

required by the Directive. For 33 (46 percent) of the 72 procurements, we found 

that VA was not a participating hospital in the residency program for the specialty 

being procured through a sole-source contract. In a few cases, the VA facility was 

a participating hospital in the primary specialty, but not the sub-specialty services 

that were being procured under the contract. For example, in one sole source 

procurement VA was a participating hospital in the affiliate’s general 

anesthesiology residency program but not a participating hospital for the critical 

care subspecialty program. 

Our review determined that VA was a participant in the affiliate’s residency 

program for the remaining 39 procurements; however, the acquisition planning 

and justification documents did not cite the residency program as the basis for the 

sole-source procurement. The justification for the sole-source procurement simply 

stated that the vendor is an affiliate but did not document that the services of a 

faculty member were required. These inadequate justifications indicate that the 

CO did not fully comply with the policy for a sole source contract as prescribed in 

VA Directive 1663. We recommend that training be developed that specifically 

addresses the significance of VA participating in a residency program and how it 

relates to Directive 1663 and the sole-source justification. 

b) No Alternate Source or Backup Plan Developed. Our detailed review of the 

27 solicitations and/or acquisition plans found that there was no evidence of any 

VA Office of Inspector General 6 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

backup plan if the services required could not be procured from the affiliate at fair 

and reasonable prices. We believe this is a material weakness in acquisition 

planning and the approach taken by VHA. VHA is at an immediate disadvantage 

during contract negotiations if the acquisition team has not developed any 

alternate plans or sources for the services and the services are needed to ensure 

care for VA patients. 

During our pre-award reviews, acquisition officials frequently told us that the 

services were necessary to provide patient care and that VA has nowhere else to 

go for the services that are being procured. While in some cases this may be true, 

there was little or no evidence of supporting market research and the statements 

appear to be generated by the program offices requesting the services. This 

atmosphere creates an environment where COs are unwilling or unable to make a 

fair and reasonable price determination and defend it—or even make a “no award” 

decision if necessary, because they are told patient care would be jeopardized and 

no backup plan or alternate sources have been developed. COs told us that they 

are often put in the position of awarding to the affiliate despite the fact that VHA 

has not conducted adequate and timely acquisition planning. Even in those cases 

where competition would be limited, a competitive solicitation is likely to generate 

more competitive pricing, even if there was only one offer. 

It is critical that the CO and the acquisition team work together to develop a 

backup plan and an alternate source for the services that are needed. Even a 

temporary backup plan can have a potential positive impact on the Government’s 

negotiation position if no long-term solution exists. 

Since adoption of VA Directive 1663, we have seen two examples where VHA 

officials researched and identified alternate sources and in both cases achieved 

positive results. In the first example the VA facility was procuring radiation 

therapy services using a procedure based contract. The affiliate’s proposed prices 

exceeded Medicare reimbursement rates without valid justification. The CO did 

not make the award. The CO re-issued the solicitation for full and open 

competition. In response, the affiliate submitted a proposal with rates lower than 

they had proposed under the sole-source solicitation. Another provider also 

submitted a proposal at rates lower than the affiliate. The CO awarded the 

contract to the provider who submitted rates lower than the affiliate. However, the 

affiliate filed a protest with the CO, and after review, the VHA CO and VA Office 

of General Counsel determined that the affiliate’s protest regarding an issue 

unrelated to price had merit and terminated the contract with the provider. After 

further consideration, VA decided to re-issue a sole-source solicitation to the 

affiliate. The CO awarded the contract to the affiliate at prices equal to Medicare 

rates which represented a cost savings of $750,000 from their original proposal. 

VA Office of Inspector General 7 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

In the second example, the VA facility was negotiating with an affiliate for 

radiology services. When negotiations became stalemated regarding on-call costs, 

the CO identified another vendor who was a Service-Disabled Veteran-Owned 

Small Business (SDVOSB), who was able to provide the required services at fair 

and reasonable prices. The CO awarded the contract to this vendor. The CO cited 

cost savings in excess of $200,000. VA realized additional savings because after 

one year with the SDVOSB contractor, the VA facility hired a radiologist who 

now performs the radiology services as a VA employee. 

These two examples, one where the affiliate ended up with the contract and one 

where they did not, demonstrate the importance of developing an alternative or 

backup plan to ensure the Government pays fair and reasonable prices for the 

services being procured. In both cases, the COs received support from 

management to pursue an alternative source. However, we often find that VA 

contracting officials get little to no support and even resistance from VA 

management to develop alternate sources for the service being procured from the 

affiliate. This lack of support leads to COs being prevented from fulfilling their 

duties and responsibilities, which is discussed later in this report. We recommend 

that training be provided in this area and that VHA require alternate source plans 

be established for each sole-source procurement as required by Directive 1663. 

c) No Assigned Risk. Sole-source contracting inherently has more risk than full 

and open competition. Risk relates to both the cost of the services or products as 

well as the quality and performance under the contract. The assessment of risk is 

important because it helps direct the course of the acquisition process and 

highlights the potential issue areas so that VA officials can take the necessary 

steps to reduce and manage the identified risk. Federal Acquisition Regulation 

(FAR) 7.105 states that the acquisition plan should discuss technical, cost, and 

schedule risks. 

Our review of the 12 procurements in FYs 2007 and 2008 that contained 

acquisition plans showed that the assigned risk for 10 of the plans was “none.” Of 

the two plans that addressed risk, only one identified any legitimate risk. The CO 

recognized that there was a risk that the workload could decrease below the 

estimates resulting in an actual FTE requirement that would be less than the 

contracted FTE level; therefore, there was a risk that VA could overpay for 

services. The second acquisition plan that addressed risk merely stated that if 

there was no award, VA would not be able to care for patients. This statement 

generally fits the approach taken in most of the sole-source procurements that we 

have reviewed—that the award has to be made regardless of cost because of 

patient care issues and there are no other alternative sources; therefore, the only 

risk that exists is if VA does not make an award. 

VA Office of Inspector General 8 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

If risks are not identified, VHA acquisition officials and management cannot take 

the steps necessary to mitigate and reduce the risk to VA and thus protect VA’s 

interests. It is not only important to identify the risks, but also to plan accordingly 

to reduce those risks. 

2. Contracting Officers Cannot Fulfill Their Responsibilities. 

In our 2005 report, we stated that COs were impeded in the performance of their 

duties by program and non-procurement management officials. FAR 1.602 states 

that only the Government CO can bind the Government in a contract and that they 

have the responsibility to ensure all laws, executive orders, regulations and all 

other applicable procedures, including clearances and approvals are followed. 

They are also tasked to ensure that the affiliate complies with all terms of the 

contract and to safeguard the interest of the Government in its contractual 

relationships. 

Our reviews of sole-source procurements with affiliates show that this problem 

continues to be a significant issue. We have observed specific examples where the 

CO was impeded in three primary areas: 1) the requesting service did not 

adequately define and/or provide support for the requirements; 2) VHA 

management did not provide the necessary support to comply with the 

requirements of Directive 1663; and, 3) VA officials provided assistance to the 

affiliate with their proposal including the proposed costs and during negotiations. 

a) Requirements Not Defined. We have consistently noted in our reports that 

solicitations do not contain accurate estimates for the requirements—especially for 

procedure based contracts. Of the 30 procedure based proposals we reviewed in 

FYs 2008 and 2009, only 12 (40 percent) included an accurate listing of Current 

Procedural Terminology (CPT) codes and estimated quantities. The remaining 18 

(60 percent) did not identify which CPT codes VA needed and/or the estimated 

quantities for each. When we requested that the CPT codes be identified as well 

as the estimated quantities, the typical response from COs was that it was too time 

consuming or too difficult to do. CPT codes and estimated quantities are 

necessary to establish pricing, obligate funds for the services, and properly 

administer the contract. It is the responsibility of the program office requesting 

the services to provide the requirements to the contracting entity. 

As one example, a procedure based solicitation that included services for multiple 

specialties simply contained a 62-page listing of every possible CPT code without 

any defined quantities. VA resisted our requests to identify which CPT codes 

were expected to be used and the estimated quantities for each citing that there 

were too many CPT codes involved. Eventually, we were provided with the CPT 

codes and estimated quantities expected to comprise over 80 percent of the 

VA Office of Inspector General 9 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

contract billings. Because the affiliate was not provided estimated quantities in 

the solicitation, there was a considerable discrepancy between the costs proposed 

by the affiliate and the recommended costs in the OIG pre-award report. As a 

result, the CO encountered significant and unnecessary difficulties during 

negotiations because the affiliate proposal and OIG’s recommended costs were not 

based on the same numbers. Because of the confusion created by the 

discrepancies and other issues, a long term contract award was not awarded. 

Nonetheless, from September 2009, when we issued our report, VA continued to 

purchase services from the affiliate using purchase orders. Then on April 1, 2010, 

the facility began using interim contracts. VA plans to hire physicians by July 

2011 to handle the patient workload and use the affiliate for fill-in purposes only. 

The use of purchase orders and interim contracts for this period of time is 

inconsistent with longstanding VA policy. 

For FTE based contracts, we continue to identify issues concerning the level of 

FTE required by VHA to provide the services. VHA has not provided any 

guidance to contracting or program officials regarding how to define an FTE for 

contracting purposes. For Title 38 employees, VHA defines an FTE as simply 

2,080 hours per year. VHA uses the same number when contracting for healthcare 

resources which causes problems because the 2,080 hours does not take into 

consideration paid time-off for annual or sick leave, holidays, training, etc.—all of 

which need to be taken into consideration when determining the level of effort 

needed to provide the required services. For example, a solicitation states that 1.0 

FTE is required but VHA expects services to be provided every week day of the 

year, regardless of administrative leave or other paid time-off. This results in a 

discrepancy between the FTE requirement in the solicitation and the level of FTE 

actually needed by VHA and proposed by the affiliate. 

We also have found that regardless of the FTE requirement, affiliates often 

propose a list of multiple physicians who can or will fulfill the requirement on less 

than a full-time basis. In other words, the affiliate may propose two or more 

physicians to fulfill a requirement for 1.0 FTE. In these cases, the affiliate 

proposes an hourly rate for each hour worked under the contract. However, the 

physicians providing the services under the contract also provide services to the 

affiliate. We have found that VA typically does not take into consideration the 

hours that a physician actually provides to an affiliate to obtain the agreed-upon 

salary and benefits, which potentially results in VA overpaying for services. For 

example, it is routine for physicians in many specialties to work more than 40 

hours per week. Their fixed salary and benefits packages are based on the total 

number of hours required to provide services, not a 40 hour work week. If VA has 

a need for a physician for 20 hours per week, VA normally will define that as 0.5 

FTE requirement. If the physician routinely works 60 hours per week (20 at VA 

and 40 at the affiliate), that physician is not spending half his time at VA, but only 

VA Office of Inspector General 10 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

a third of his time. In these situations to avoid overpaying, VA needs to ensure 

that VA pays for a third, as opposed to half of this physician’s direct expenses. 

b) Lack of Support from VHA Management. We believe that COs generally 

do not have the full support from local VHA management in the negotiation and 

award, or no award, of sole-source contracts with affiliates. Our general 

observation is that local VHA managers are not supportive of the acquisition 

process as defined in VA Directive 1663. We have observed specific instances 

during the pre-award reviews, negotiation, and general assistance to COs where 

VHA managers took action that undermined the CO’s efforts. 

In one example, we were providing assistance to the CO during negotiations 

between VA and an affiliate for radiology services. Senior VHA management 

also took part in the negotiations including the Medical Center Director. In the 

negotiation meeting with the affiliate, the medical center director questioned 

decisions that the CO had made during the acquisition process including what his 

negotiation objectives were or should be. The Medical Center Director’s actions 

clearly undermined the CO’s authority and ability to do his job and demonstrated 

to the affiliate that local managers were not supporting the acquisition staff or the 

process. 

As another example, a CO had organized a VA only meeting to discuss certain 

issues surrounding a sole-source solicitation to be issued to an affiliate. The CO’s 

intent was to ensure that he was following all the requirements of VA policy 

including VA Directive 1663. He specifically had questions regarding the level of 

effort needed to meet the facilities requirements for the solicitation. Prior to the 

meeting, the CO had been trying, unsuccessfully, to identify the facilities 

workload, which should have been done by the program office requesting the 

services. Senior VA management, who participated in the conference call, 

included the Medical Center Director and the Veterans Integrated Service Network 

(VISN) Director. The Medical Center Director made it clear that he was not 

concerned with the nuances of VA policy nor did he give any legitimacy to the 

CO’s questions concerning what VA’s exact requirements were. He specifically 

stated that he just wanted the procurement pushed through and completed quickly 

even though the CO still had fundamental questions regarding the procurement. 

These and other statements by the Medical Center Director clearly showed that he 

was not concerned with ensuring that the contract was awarded properly or that 

VA paid fair and reasonable prices for the services rendered. 

Based on our experiences, including numerous discussions with CO’s and other 

procurement officials, we believe these examples are not exceptions, but may be 

commonplace in many VHA procurement offices. We have not only observed 

instances of VA managers not providing adequate support to the acquisition staff, 

VA Office of Inspector General 11 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

but have also observed them providing support to their affiliate in direct 

contradiction to the efforts of the VHA procurement staff. 

c) VA Officials Provide Inappropriate Support to Affiliates. Through our 

reviews we have found procurements in which VA officials have provided 

significant support to affiliates regarding their proposals and even proposed costs. 

There have also been instances of discussions between VA managers and officials 

representing the affiliate without the presence of the CO that are borderline 

negotiations, if not outright negotiations. This type of interaction between VA 

officials and the affiliate impinges upon the CO’s ability to perform their duties 

because the affiliates construe the assistance and discussions with non-acquisition 

VA officials as negotiations or at least agreement to what the basis of their 

proposal should be—including the basis for the proposed costs. Two of the most 

significant examples below illustrate this finding. 

During a site visit to an affiliate during a pre-award review of a proposal for 

orthopedic services, we determined that officials at the affiliate could not 

adequately support their proposed costs. We learned they had not completely read 

the solicitation and were not familiar with all of the requirements. When we 

further questioned the officials at the affiliate, we learned that a VA official 

representing VA management was directing the affiliate regarding what costs they 

should propose and that the CO had not been involved in these discussions. We 

determined that the proposed costs were significantly overstated. Our report 

questioned $1.5 million (48 percent) of the $3.1 million in proposed costs. VA 

ended up cancelling the solicitation and reissued a new solicitation for orthopedic 

services. 

In the second instance, we conducted reviews of several proposals submitted by an 

affiliate for contracts for multiple specialties where the VISN had appointed an 

individual to act as a liaison officer between the affiliate and VA. During the 

course of the review, we found that the proposed costs were actually developed by 

the VHA liaison officer. When OIG auditors questioned the liaison officer about 

her involvement, she actually used the word “negotiation” several times to 

describe her interactions with the affiliate. She told us that the nature of the 

discussions included how the services would be procured, how the schedule of 

services would be constructed, and what percentage of Medicare reimbursement 

rates would be appropriate. The VHA liaison officer also stated that she 

calculated and provided rates to the affiliate. Our review found that the affiliate 

submitted the numbers given them by the VHA liaison officer to the VHA CO 

with their proposal. 

These examples illustrate how difficult, and even impossible, it is for a CO to 

negotiate a contract when VHA officials have already had discussions and even 

VA Office of Inspector General 12 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

negotiations with the affiliate concerning the requirements, terms and conditions, 

and even prices. These actions lead the affiliate to believe it has an agreement on 

costs since the numbers came from VA and the net result is that the CO is debating 

the numbers with other VA officials and not the affiliate. During the pre-award 

review, the affiliate cannot adequately support their proposal because they have 

not actually developed the costs. 

We recommend that standardized training be developed for non-contracting VA 

officials who have involvement in the acquisition process. The training should 

educate officials on the general acquisition process and focus on the roles and 

responsibilities of contracting and non-contracting staff and common issues as 

they relate to sole-source contracting with affiliates. 

3. Physician Time and Attendance. 

All FTE contracts, regardless of the unit of payment (monthly, weekly, daily, or 

hourly), should require the affiliate and VA to maintain a system of tracking 

physician time and attendance, but particularly so when the unit of payment is 

hourly. It is even more critical when the contracted services are provided by 

providers who are also part-time VA employees. The only way that VA can 

certify that the services have been received is to be able compare the invoice from 

the affiliate to some authoritative record such as sign in/out sheets. We reviewed 

all FTE based procurements for FYs 2008 and 2009 and found that 33 of the 42 

FTE procurements required physician time and attendance record keeping. 

While we did not review the actual administration of the time sheets for these 

solicitations, we believe the record keeping as described in the solicitation is 

adequate, if implemented and managed correctly. During our site visits we have 

received feedback from contracted physicians that they feel that this process is a 

burden and that it detracts from patient care. However, when asked, they were 

unable to provide any support for their complaint that time and attendance record 

keeping is burdensome or that it detracts from or jeopardizes patient care. The 

only concrete explanation we received was from an affiliate was that physicians 

were uncomfortable with sign in and out sheets because they were concerned 

about any potential fraud investigation regarding time and attendance. Such a 

position makes little sense if physicians are accurately recording their sign in and 

out times and would only be of concern if the physicians were in fact falsifying 

time keeping entries. 

4. Requirements and Duties Not Clearly Defined. 

Through our reviews, we continue to regularly find and cite deficiencies with the 

statement of work (SOW) where the requirements and duties are not clearly 

VA Office of Inspector General 13 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

defined or there are vague, conflicting, and undefined statements regarding the 

requirements or duties. Although the solicitations undergo a legal and a technical 

review, these reviews appear to be insufficient with regard to substantive issues 

such as the sufficiency of the requirements. These issues are important for VHA to 

hold affiliates accountable. Some examples are as follows. 

	 A SOW for radiology services required the affiliate to “review 

consultations of procedures under this contract” and be responsible for 

“monitoring or performing and interpreting of aforementioned procedures.” 

As noted in our report to the CO, these statements were vague as to whether 

the affiliate was to be reviewing consultations, conducting consultations, 

and whether they were to monitor or perform the procedures. 

	 A SOW for implantation of Ventricle Assist Devices (VAD), was not clear 

on whether the VAD device was included or not included in the price. 

	 A SOW for an FTE based procurement to provide backup services when 

VA cardiologists are on leave or travel, used the term “per-procedure” in 

the SOW, but a list of procedures or estimated quantities were excluded. 

However, the SOW included a schedule of services broken out to a “fixed 

monthly” cost and an “as needed” cost, which was not only inconsistent 

with a “per-procedure” requirement, it was inconsistent with the basic 

requirement to provide backup services on an intermittent, as needed basis. 

The schedule of services and SOW were confusing as to exactly what was 

being procured and how VA intended to pay for the services. 

	 A SOW for orthopedic services indicated that VA intended to procure the 

services at a daily rate. We found that the SOW had conflicting times when 

the physician was expected to be present and there was no clause or other 

provision that allowed VA to adjust payment if the physician was not 

present the entire day. 

	 Another SOW stated the physician work hours were 8:00 a.m. to 4:30 p.m. 

Monday through Friday, which was inconsistent with the solicitation’s 

estimated requirement of only 0.6 FTE. 

	 A SOW for gynecological services, did not specify any work hours when 

the contract physicians were to be present nor did it list any major duties to 

be performed under the contract. 

	 A SOW for anesthesiology services required the affiliate to provide a 

physician who was to be dedicated to VA for the day. This was 

inconsistent with a provision in the statement of work that expressly 

allowed the physician to leave VA if his “duties” are complete. 

	 A SOW for radiology services that identified a Relative Value Unit (RVU) 

as the reimbursable unit for payment included an estimate for services 

ranging from 30,000 to 70,000 RVUs. This wide range is indicative of a 

VA Office of Inspector General 14 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

failure by the medical facility to adequately define the requirements and the 

affiliate to hire sufficient personnel to provide the services. 

	 The schedule of services in a solicitation for an FTE based contract for 

urology services estimated the FTE requirement between 1.6 to 2.7 FTE, 

which in and of itself is a large discrepancy making it difficult for the 

affiliate to meet the requirement. However, the discrepancy was even more 

significant because we also found that another part of the same solicitation 

stated the FTE requirement was between 0.5 to 1.8 FTE. 

	 A SOW for anesthesiology services included research duties as part of the 

requirements. However, the nature of the research was not specified, there 

was no defined time spent in research, and the language also permitted the 

research to be off VA premises, eliminating any monitoring or approval by 

VA. 

Where appropriate, we recommend that standardized SOWs or templates be 

established for each specialty that VA contracts for. The templates should be 

developed so that certain portions are standardized and other portions will require 

input to tailor it to the unique needs of each procurement. 

5. Pre-award Reviews Not Always Requested. 

Directive 1663 requires all sole source healthcare resource proposals valued at 

$500,000 or more to have a pre-award audit conducted by the OIG. Once the OIG 

completes its review the CO can finalize negotiation objectives and commence 

negotiations with the affiliate. When the timing of healthcare services is a 

compelling urgency that the contract is awarded without a pre-award audit, the 

directive requires the OIG to perform a post-award audit. 

It is difficult to get complete visibility on whether all sole source procurements 

over $500,000 are being sent in for a pre-award review because VHA has no 

reliable data source that identifies all sole source procurements. All healthcare 

resource solicitations are also supposed to be submitted to the MSO prior to 

issuing the solicitation and prior to final award. The MSO has historically 

maintained a log of all solicitations received. We obtained a copy of the log from 

the MSO for FYs 2007 through 2010. This list had a total of 178 unique sole 

source procurements equal to or greater than $500,000. We found that 118 (66 

percent) of these proposals were not sent in for pre-award review. The majority of 

the 118 proposals resulted in contract awards. Without an analysis of the support 

for the proposed costs, procurement officials have little to rely on except past 

prices, FSS prices, or salary surveys—all of which are unreliable and not intended 

to support a decision that the proposed pricing from an affiliate for a sole-source 

procurement is fair and reasonable. 

VA Office of Inspector General 15 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

Incidentally, we also found that 71 of 131 proposals submitted to the OIG for preaward review during the same period were not on the MSO’s log of sole-source 

procurements. This further highlights the fact that the database is not reliable 

because proposals are not being submitted to the MSO as required by policy. 

In addition, we also requested a listing of awarded healthcare service contracts 

from six VISNs that submitted no or a minimal number of audit requests to 

identify any sole-source awards equal to or greater than $500,000 that were not 

submitted for review. We received a response from four of the six and found only 

one instance of non-compliance for one of the VISNs. The contract award value 

was $650,000 and was for anesthesiology services. This sole-source contract was 

not submitted to the OIG for the required pre-award review. Our review of the 

contract in VA’s electronic contract management system (eCMS) found that it was 

incorrectly categorized as a competitive award. 

We also ran several other queries in eCMS; however, there is no single 

authoritative report to extract sole-source procurements with affiliates. It is very 

difficult to browse contracts and types of contracts in eCMS. However, in running 

various reports in eCMS and reviewing contract documents we found three 

additional sole-source awards equal to or greater than $500,000 that should have 

been submitted for pre-awards. For one of the sole source contracts it was even 

questionable whether it was a healthcare related service. It was valued at $3.5 

million and was awarded to a university that had no medical school and was for 

medical engineering consulting services. The contract appears to be outside the 

scope of § 8153 authority. The same VISN awarded another sole-source contract 

valued at $3.0 million to an affiliate for radiation therapy services without the 

required OIG pre-award review. The third example we identified in eCMS was a 

sole source award for heart transplant services that was not submitted for a preaward review as required. The value of this contract was $2.5 million. 

6. Interim Contracting Authority Misused. 

Directive 1663 authorizes interim contracts to provide required health care 

resources on an emergency basis for short-term needs, or as an interim measure to 

complete the contracting cycle for long term agreement. Under the interim 

contract authority, the CO is allowed to enter interim contracts of up to 180 days. 

Additional time can be approved in emergency situation on an exception basis but 

not to exceed one year. 

We determined that VHA has no reliable data on interim contracting authority— 

when it is used and more important why it is being used. Our reviews have shown 

most of the time interim contracts are used with the reason stated as “urgent” or 

“emergency” without further explanation or support for the urgent or emergency 

VA Office of Inspector General 16 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

nature of the situation or that patient care would be jeopardized if services are not 

continued. However, we have found that in most instances, interim contracting is 

being used because VA has not adequately planned ahead and/or started the 

acquisition process in a timely manner. The need for the types of services being 

procured is typically known well in advance and is not an unexpected or 

unanticipated requirement, especially when the services have been provided 

through contract for one or more years. 

We attempted to use eCMS to identify interim contracts by extracting healthcare 

contracts with effective contract dates less than one year in length for FYs 2008 

and 2009. Through this process, we identified 107 interim contracts. We 

requested the documentation for all 107 contracts and received responses for 70 

(65 percent). We did not receive any response to our request for information on 

the remaining 37 contracts. Our review of these 70 interim contracts found that 10 

(14 percent) had durations that exceeded one year. The length of these 10 

contracts ranged from 13 months to 30 months. In the case of a neurosurgery 

services interim contract with a VA affiliate, the CO issued two six month interim 

contracts as permitted by Directive 1663. However, the CO inappropriately 

extended the interim contract for an additional six months under contract clause 

FAR 52-217-8, Option to Extend Services, and disregarded Directive 1663’s 

interim contract authority. 

Another CO issued interim contracts for surgery and radiology healthcare services 

that were in effect for 30 months. The CO explained that the interim contracts 

were extended beyond one year because of the inability to award permanent 

healthcare service contracts. They explained that the delays were associated with 

not having the CO directly involved in the acquisition planning phase and the 

inability of the affiliate and the VA Medical Center’s (VAMC) to resolve 

disagreements over the terms of a permanent healthcare services contract. 

We also identified a couple of other “long-term” interim contracts that did not 

appear on our queries from the eCMS system. Our review of these interims 

showed that the affiliate typically requested and received a price increase every six 

months. One of the most egregious examples is an interim agreement that 

continued for more than five years for brachytherapy services. A detailed analysis 

of our findings regarding this interim contract is contained in an OIG report issued 

on May 3, 2010, Healthcare Inspection Review of Brachytherapy Treatment of 

Prostate Cancer, Philadelphia, Pennsylvania and Other VA Medical Centers. This 

interim contract was awarded after the affiliate had submitted a proposal in 

response to a solicitation for a long term contract. Although the pre-award report 

was issued to the CO just shortly after the 6-month interim contract should have 

expired, the contract was never negotiated. Instead, the CO continued to 

improperly extend the interim contract. When we questioned VA officials as well 

VA Office of Inspector General 17 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

as officials from the affiliate, no one was able to provide any concrete reason or 

explanation. There was no documentation of negotiation of prices or any 

determination that the prices were fair and reasonable. We also found that the CO 

approved significant price increases during the 5-year time period without any 

justification despite information in the pre-award report identifying fair and 

reasonable prices for the services. 

As another example, a VAMC needed radiology services from an affiliate, but had 

to award interim agreements for two years before a permanent healthcare service 

contract was awarded. The CO cited that they did not consider the steps and time 

involved with awarding a permanent healthcare service contract and were 

compelled to procure the services on an interim basis. 

We recommend that VHA develop and implement a tracking and monitoring 

system that gives complete visibility of all sole-source contracts and spending with 

affiliated institutions. This information is needed by VHA to ensure compliance 

with Directive 1663. 

B. Pricing Issues 

Our prior report identified several key issues regarding the awarded pricing for 

sole-source contracts with affiliates: 

FTE Contracts 

1. Use of National Salary Databases 

2. Identification of Key Personnel 

3. Overhead Costs 

4. On-Call Costs 

5. Profit 

Procedure Contracts 

1. Cost Exceeded Medicare Reimbursement 

2. Rates Not Properly Calculated 

3. Combination of FTE and Procedure Based in One Contract 

1. FTE Contracts Pricing Issues 

a) Use of National Salary Database. A significant finding regarding pricing in 

our 2005 report was that many COs were relying on the AAMC national salary 

database for medical college faculty to determine that proposed pricing was fair 

and reasonable. The 2005 review documented that it was common practice and 

even policy that VA used the salary database at the 75 percentile to determine 

VA Office of Inspector General 18 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

whether the proposed costs were fair and reasonable. The 2005 review found that 

the information in the database was not a reliable source of information on which 

to base fair and reasonable price determinations. We noted that in many instances 

the 75 percentile exceeded the costs proposed by the affiliates, which resulted in 

VA overpaying for the services. VA Directive 1663 requires that VA use actual 

direct costs to determine if proposed pricing is fair and reasonable. As stated in 

Directive 1663, salary surveys should be used only for conducting initial research 

and establishing the Independent Government Cost Estimate and to ensure that the 

affiliate’s actual costs are within acceptable limits. 

Based on our review of Price Negotiation Memorandums (PNMs), we continue to 

see examples where COs cite salary surveys as the primary basis for determining 

proposed prices are fair and reasonable. As one example, an affiliate included a 

26 percent overhead rate in their proposed salary amounts and $1,200 per day in 

on-call costs to provide neurosurgery services to VA. The OIG pre-award review 

determined these costs were not supported and recommended the CO not include 

them. The pre-award review determined the actual costs incurred by the affiliate 

to provide the services and recommended pricing that would result in saving of 

$3.8 million (62 percent) of the $6.2 million costs proposed by the affiliate to 

provide 1.28 FTE over a four-year period. A post-award review of the contract 

showed that the CO did not sustain any of the recommended cost savings because 

she relied on salary and market surveys to determine the offered prices—even 

though they included unsupported overhead and on-call costs—were fair and 

reasonable. 

In another example, VA paid $300,000 more than actual costs for radiotherapy 

services because they used salary surveys to determine prices were fair and 

reasonable. In fact, the OIG review determined that the affiliate’s proposed prices 

for radiotherapists were based on salary surveys and not actual costs. We 

reviewed payroll and other records and found that the proposed costs exceeded the 

affiliate’s actual costs by $300,000. However, based on the salary survey, the VA 

CO determined the prices were fair and reasonable and awarded prices based on 

the salary survey. 

Salary surveys do not necessarily reflect all the factors, such as subspecialties, 

faculty position, experience, and credentials, that are needed to establish whether 

proposed prices are fair and reasonable. VA Directive 1663 states that the use of 

salary surveys should be limited to market research but the contract should reflect 

the actual salary and benefits of the personnel providing the services. The actual 

salaries and benefits should be compared to the market survey for the purposes of 

ensuring that the actual costs are within reason and are not significantly higher 

than the market survey. This approach is not new; it has been a long standing VA 

policy that predates VA Directive 1663 by more than a decade. However, the 

VA Office of Inspector General 19 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

common use of salary survey information is to make fair and reasonable 

determinations regarding the proposed prices—even when those prices exceed the 

affiliate’s actual direct costs. We recommend that VHA contracting staff be 

trained in the proper use of salary surveys and ensure salary surveys are not used 

as the basis for determining the proposed prices are fair and reasonable. 

b) Identification of Key Personnel. VA Directive 1663 mandates that all FTE 

based contract solicitations require the offeror to identify key personnel proposed 

to provide the required services and their qualifications. 

We reviewed the SOWs for 49 FTE based solicitations’ to determine if key 

personnel were identified. We found that 38 (78 percent) of the 49 required the 

contractor to identify the physicians who were to provide services under the 

contract. We did not find any reference to key personnel for the remaining 11 

solicitations. These findings show a significant improvement since our prior 

report. 

Identifying the key personnel is not only important for privileging purposes but 

also important in establishing fair and reasonable prices. It is common for an 

affiliate to identify multiple physicians and even an entire pool of physicians who 

will provide services to VA—even when the FTE requirement is small or just a 

partial FTE. In many of our reviews we have found significant variances in 

salaries. We have seen differences as high as $230,000 in the annual salary of the 

lowest paid physician compared to the highest paid physician. It is important that 

VA knows how many physicians will be providing services at VA for pricing 

purposes because if an affiliate is proposing numerous physicians with differing 

salaries, then VA will need to establish individual rates for each physician to 

protect the Government’s interests. This is to eliminate the risk that an affiliate 

can include high paid physicians to increase the average hourly rate but yet, 

because they control who will actually work at VA, send over the physicians who 

receive lower compensation packages. 

c) Overhead Costs. For FTE-based contracts, general department or university 

overhead and other indirect costs are unallowable under Directive 1663. VA’s 

policy of not paying general overhead, but only costs directly associated with 

administering the contract was not a new policy under Directive 1663. This was 

the policy of VA in the previous policy document VA Manual M-1, Part I— 

Medical Administration Activities, Chapter 34—Medical Sharing. Chapter 34 

stated that the “primary principle should be for VA to reimburse the affiliate for all 

expenses associated with the contract.” Another section of Chapter 34 stated that 

“there is little or no administrative overhead” because the fact that VA is a single 

payer and pays the full price—there are no co-pays and deductibles to collect from 

patients and no bad debt to write-off. 

VA Office of Inspector General 20 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

Disallowing overhead is consistent with 38 U.S.C. § 7409 which allows VA to use 

cost reimbursement type contracts. VA would only reimburse the affiliate for 

those costs actually incurred to provide services under the contract. Our reviews 

have consistently found that most of the overhead costs proposed by affiliates are 

not applicable to the VA contract. These usually come in one of three different 

forms: university overhead, department overhead, or a Dean’s Tax. While an 

education component exists between VA and the affiliates, the main reason for the 

healthcare contracts for physician services is VA’s simple need for physician 

services. There is a bona fide need for clinical services from a physician to 

provide patient care services. As such, the general university overhead rate is nonapplicable to the contract. Our reviews regarding department overhead have 

consistently found that the department overhead rates are non-applicable to the 

VA contract because the university department at issue is typically a clinical 

department. That is, the department at the university exists to provide medical 

care to their patient population. Therefore, the overhead costs of the department 

exist and directly relate to providing medical care to their own patients at their 

own clinic or facility. VA is incurring the same clinical overhead expenses in the 

operation of their own clinical department. Lastly, the Dean’s Tax is similar to a 

university overhead rate and relates to predominantly indirect education costs of 

running a university and not providing clinical services at VA. 

From our pre-award reviews of 41 FTE-based contracts, we found that 29 (71 

percent) included overhead costs. Of the 29 proposals with overhead, the OIG did 

not question overhead costs for only three contracts. For eight reviews, the OIG 

allowed some indirect costs because the affiliate provided support that those 

specific overhead cost components were related to the physician’s work at VA. 

We disallowed overhead costs in the remaining 17 reviews. 

Our review of contract awards for the 30-month period ending May 2010 found 

that VA COs sustained approximately 48 percent of our recommended cost 

savings regarding overhead. The only basis and support that the COs had 

available to them to negotiate the proposed overhead costs completely away or 

downward has been the OIG pre-award reports. A few of the positive examples 

where VA was able to significantly reduce the proposed overhead costs are: 

	 An affiliate proposed $1.4 million in overhead costs to provide 

ophthalmology services to VA. The OIG report questioned all proposed 

costs because the affiliate could not provide any detail or support for the 

costs. During negotiations the CO made it clear that only overhead costs 

that are related to the VA contract would be allowed. The affiliate provided 

additional documentation during negotiations upon which the CO awarded 

only $348,000 in overhead costs as opposed to the proposed $1.4 million. 

VA Office of Inspector General 21 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

	 An affiliate proposed $247,763 in overhead costs to provide ophthalmology 

services to VA. Our review questioned $117,763 of the proposed costs and 

recommended overhead costs related to administration of the VA contract 

not to exceed $130,000. The VHA CO used our report and negotiated the 

overhead costs down to $130,000. 

	 An affiliate proposed $184,375 in overhead costs to provide Medical 

Officer of the Day services. The affiliate failed to support any 

administrative costs during the pre-award review; therefore, the OIG report 

questioned all of the proposed overhead costs. The CO was able to 

negotiate the proposed costs down to $27,295 after she made the affiliate 

quantify the administrative work related to providing services at VA. 

Based on our review of PNMs, we determined the majority of the sole-source 

contracts awarded to affiliates contain unsupported overhead costs. The table 

below is a simple snapshot for contracts awarded in 2009 that contained proposed 

overhead. While the average sustained rate is approximately 48 percent when 

looking at a larger period of time, that percent is skewed by some high dollar 

procurements where VA has had some success in reducing the overhead costs. 

The reality is that the data shown in the table is representative of the typical 

contract that contains proposed overhead. The table shows that for the majority of 

sole-source contract awarded to affiliates, VA allows overhead when proposed by 

an affiliate without any justification. We believe this is related to the issues 

discussed in Section A of this report concerning VA officials providing 

inappropriate support to affiliates. 

Overhead Costs for Awarded Contracts that Contained
 

Proposed Overhead
 

2009
 

OIG 

Recommended Awarded 

Proposed Overhead Overhead Overhead 

Costs Costs Costs 

1 60,000 0 60,000 

2 297,384 0 191,478 

3 89,600 0 0 

4 12,076 0 3,180 

5 184,375 0 27,295 

6 15,257 7,000 15,257 

7 84,240 0 84,240 

8 453,624 365,937 453,624 

9 209,686 0 209,686 

VA Office of Inspector General 22 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

It has been suggested that VA accept the overhead rates accepted by Medicare and 

other payees. This would be acceptable if the services were being provided at the 

affiliate. However, when services are provided at a VA facility, those costs are 

not incurred by the affiliate. In fact, if VA was to pay this level of overhead, it 

would be paying twice because VA is incurring similar costs to operate the facility 

where the services are being provided. 

We recommend that VHA enforce the provision in VA Directive 1663 that 

prohibits general overhead costs. The only overhead costs that should be allowed 

are those administrative costs that are directly related to providing services to VA 

under the contract. 

d) On-Call Costs. Directive 1663 stipulates that on-call costs should not be 

separately broken out unless the physician(s) obtains separate on-call pay from the 

affiliate. Unsupported on-call costs account for a significant amount of the 

recommended savings identified in our pre-award reviews. Our reviews of 

proposals with on-call costs have found that in the majority of these cases the 

physicians did not receive separate on-call compensation and the affiliate was 

unable to demonstrate any additional costs incurred to provide on-call services 

under the contract. In reality, profit to the affiliate was disguised as charges for 

on-call services. 

We analyzed all the awarded contracts for which we conducted a pre-award 

review in FYs 2008 through 2010. There were a total of 57 awards made. Twelve 

of the proposals for the 57 awards contained on-call costs of $12.7 million in total. 

The OIG pre-award reviews for these 12 proposals recommended only $565,000 

in on-call costs ($12.1 million in potential cost savings). Our reviews found that 

the overwhelming majority of the proposed costs for on-call coverage were not 

supported by actual costs. The OIG pre-award reviews determined that most 

salary agreements explicitly stated that the salary paid to the physician by the 

affiliate is inclusive of on-call compensation—no additional compensation for 

required on-call work. Discussions with one affiliate found that on a rare occasion 

they do hire physicians and agree that the physician will not have to serve call 

time. In this situation, the salary will be lower for that physician because the 

normal salary includes compensation for the on-call hours that a physician has to 

provide. However, this affiliate and others want to charge VA for any on-call 

coverage provided to VA. When VA agrees to pay additional on-call costs for 

physicians who receive a salary that is inclusive of on-call compensation, then VA 

is essentially paying twice—paying a portion or all of a physicians’ salary that is 

reflective and inclusive of on-call hours and then paying additional costs for oncall hours. There were instances where the OIG did in fact recommended on-call 

costs be included for a total of $565,000. In those instances, the affiliate 

demonstrated they actually paid additional compensation to physicians when they 

VA Office of Inspector General 23 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

worked a call shift. Our review of the PNMs for these 12 proposals found that the 

CO sustained $9.8 million, or 80 percent of the recommended savings; however, 

VA still awarded $2.9 million in unsupported on-call costs. 

In awards where VA was able to sustain significant savings, the only data and 

information the COs had to refute and negotiate away the on-call costs was the 

information and analysis contained in the pre-award review done by the OIG. 

Two of the most significant examples of success were proposals for 

ophthalmology services. 

In the first example, our review determined that the affiliate proposed $560,000 

per year to provide on-call services. The contract was for a base year and four 1­

year options for a total of five years. This represented a total of $2.8 million in 

proposed on-call costs. Upon review of all the physician salary agreements and 

the on-call policy of the affiliate, we determined that the physicians’ salaries were 

inclusive of any on-call work—no additional compensation was provided for oncall hours. During negotiations the CO clearly informed the affiliate that the 

proposed costs were not only unreasonable, but unsupported by actual costs. The 

CO outlined the requirements in VA Directive 1663 and articulated which costs 

were supported by actual costs and what VA’s negotiation objective was. The 

affiliate agreed to remove the proposed on-call costs as well as about $250,000 

thousand in unsupported overhead costs. The CO did agree to an 18 percent profit 

(about $650,000), but sustained overall about $3.1 million in savings on on-call 

and overhead costs. VA Directive 1663 does allow profit but discourages it and 

requires that it be a separate line item, which was the outcome in this case. 

In our second example, we questioned all of the $1.9 million for the proposed oncall costs for an Ophthalmology services contract. Because the affiliate’s 

ophthalmologists are not provided on-call pay as part of their salary, we 

disallowed the proposed on-call costs as required under VA Directive 1663. The 

CO also was successful in disallowing the proposed on-call costs during 

negotiations. As stated earlier, the only information that the CO had to support her 

negotiation objectives was the information and analysis in our audit report. 

While there are some positive examples where VA has eliminated or reduced 

unsupported on-call costs, VHA has awarded unsupported on-call costs for 

numerous contracts. For example, in our review of a proposal for radiology 

services, we questioned the affiliate’s proposed on-call costs. Subsequently, the 

contract was not awarded because the affiliate refused to provide services without 

being compensated for on-call services. The solicitation was later amended 

requiring an all inclusive firm priced for each procedure. The affiliate revised 

proposal included their estimated 23.3 percent above their calculated per 

procedure costs as compensation for on-call availability requirements. During our 

VA Office of Inspector General 24 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

follow-up review, the affiliate refused to provide us documentation to evaluate 

their proposed 23.3 percent on-call rate. As stated in VA Directive 1663, on-call 

costs are allowed if the providers are actually paid additional for on-call services 

and the prices are negotiated as a separate line item and not part as an all inclusive 

rate. Therefore, we questioned $1.2 million pertaining to the affiliate’s proposed 

23.3 percent on-call rate. The CO attempted to negotiate the contract and 

requested the affiliate provide documentation to support on call compensation. 

Although the CO acknowledged our findings, the contract was awarded simply 

because VA lacked any other options for radiology services. 

As a third example, an affiliate proposed $1,200 per day for on-call services in 

their offer to provide Neurological Surgery services. We questioned $1,752,000 in 

proposed on-call costs because we found that the affiliate did not have a policy 

requiring them to pay their physicians additional pay for on-call coverage nor did 

the physician’s employee agreement letters require additional pay for on-call 

coverage. Despite the affiliate not having a on-call payment policy, the CO 

awarded the contract with a $1,000 per day which equated to $1,460,000 in total 

on-call costs. 

We recommend that VHA document that on-call costs are in fact paid to the 

physicians performing the call. When on-call compensation is already built into 

the physician’s salary agreement, then any additional compensation by VA to the 

affiliate for on-call service is merely embedded profit to the affiliate. 

e) Profit. VA Directive 1663 states that profit should be aggressively 

discouraged when contracting with affiliated institutions because the medical 

schools receive other benefits by being affiliate of VA such as the training of 

residents at VA facilities. Since VA Directive 1663 was issued in 2006, we 

identified nine sole-source proposals that identified profit as a proposed cost. 

In one instance, an affiliate included a five percent profit in their proposed costs. 

The affiliate told us that the $244,000 in profit was intended to cover any 

unexpected expenses incurred relating to contract performance. Our pre-award 

review questioned the line item cost because it did not represent an actual cost but 

was a contingency cost which is an unallowable cost per the provisions of FAR 

31.205-7. The CO used these findings during negotiations which resulted in the 

affiliate revising its proposal to exclude profit. Also, based on our 

recommendations, the CO added an Economic Price Adjustment clause to the 

solicitation, which would allow price increases in the future if the affiliate 

provided sufficient justification. 

It is more common for, affiliates to embed or disguise profit in one or more of the 

“cost elements” in the proposal. Profit is usually found in unsupported overhead 

VA Office of Inspector General 25 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

and on-call costs. If an affiliate is unable to demonstrate that the proposed 

administrative costs directly relate to providing services at VA, those costs 

essentially represent profit. Likewise, when an affiliate includes on-call costs in 

their proposal but is unable to provide any supporting evidence that the amount 

relates to costs incurred to provide the services, such as the funds are used to 

provide additional compensation to physicians for being on-call or otherwise 

expended to provide on-call services, this cost is actually profit to the affiliate. 

We have observed that several COs are allowing profits in place of proposed costs 

that were questioned by the OIG. In the case of several healthcare service 

contracts awarded to an affiliate, VHA COs included profit as part of the contract 

costs. The awarded costs for profit ranged from 5 to 18 percent of the awarded 

contract costs. Upon questioning, the COs told us that the profit was granted to 

substitute for the indirect costs that were disallowed as a result of the OIG’s preaward review. Although the COs attempted to negotiate using the OIG 

recommendation of disallowing overhead, the university refused to remove these 

costs because they claimed that it would be lower than actual costs. The affiliate 

threatened to cease providing healthcare services at VA if they were not 

compensated for disallowed costs identified during the pre-award review. 

Although it is highly unlikely that the affiliate could cease providing services at 

VA because of the requirements of the ACGME approved medical training 

programs, VA COs capitulated and awarded contracts that include significant 

profits to the affiliate. 

In a pre-award review for Ophthalmology and Ophthalmic imaging services, the 

OIG questioned $3,270,439 (47 percent) of the $6,891,029 in proposed costs. 

Although the CO did an excellent job and negotiated the contract’s costs to 

$4,192,730, (a 39 percent savings), the awarded contract’s Schedule of 

Supplies/Services and Price/Costs identified 18 percent profit, approximately 

$572,140, which is significantly lower than 36 percent profit requested by the 

affiliate. The CO stated that it was in the best interest of the Government to allow 

the 18 percent profit in order to award the contract. 

2. Procedure Based Contracts Pricing Issues 

a) Proposed Costs Exceeded Medicare Rates. Thirty of the 72 pre-award 

reviews that were conducted in FYs 2008 and 2009 were procedure based 

procurements. Seventeen (57 percent) of the 30 proposals included proposed costs 

that exceeded the full Medicare reimbursement rate. Thirteen of the 17 proposals 

contained prices that were simply a markup of Medicare while the remaining four 

proposals were at Medicare rates but inappropriately included the practice expense 

component. VA Directive 1663 states that pricing for services provided at VA on 

a per-procedure basis needs to be based only on the work and malpractice 

VA Office of Inspector General 26 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

components of Medicare Part B and not include the practice expense component 

which is the overhead component. The practice expense component, which can 

comprise 30 percent or more of the full reimbursement rate, is not to be included 

because it reimburses the provider for costs such as office space, supplies, support 

staff, etc., related to that procedure. VA incurs these costs directly to provide the 

services. Paying the full Medicare rate would result in VA paying twice for 

products and services. The Directive further states that any proposals that include 

pricing greater than the Medicare rate must have adequate documentation 

justifying the increased rate. For all reviews we found no valid justification for 

any markup in the Medicare rates or justification for inclusion of the practice 

expense component. 

During our reviews we have asked affiliates and other vendors to provide 

justification for charging more than the full Medicare rate. Responses have varied 

but often cite prices paid by private insurers. However, in 11 years that the VA 

OIG has been conducting pre-award reviews, only one vendor (that was not an 

affiliate) agreed to provide data to support their assertion. In that particular preaward review, we did rely on the private insurance prices to make 

recommendations regarding prices. In other reviews, we have been told that the 

proposed pricing (i.e., percent over the Medicare rate) was calculated to ensure 

payment covered the FTE costs associated with providing the services. This raises 

the question whether there was adequate justification for a procedure based 

contract to begin with. During a recent review, the affiliate justified the higher 

rate because the workload did not provide sufficient reimbursement for the time 

period VA required the providers to be present at the medical center. This 

problem demonstrates poor acquisition planning. 

For example, an affiliate proposed 136 percent of the Medicare Part B, Physician 

Fee Schedule, rate for each required radiological procedure performed at a 

VAMC. Our pre-award review questioned the proposed costs because the affiliate 

did not provide adequate justification to support charging 136 percent of the full 

Medicare rate. The affiliate’s methodology assumed the same cost escalation for 

all procedures without justifying the reason that any specific procedure should cost 

more than Medicare Part B rates and VA Directive 1663 allow. 

After the OIG review, the affiliate submitted a revised proposal based on 130% of 

Medicare Part B rates for all procedures. The affiliate also maintained that they 

could not accept anything less than 130% because they would be losing money 

and stated that Medicare has not kept up with inflation. As part of contract 

negotiations, the CO analyzed Medicare Part B rates paid by other VAMC's for 

radiology services. The CO’s analysis found that no radiology service contracts 

awarded by other VAMC’s were less than 110 percent of Medicare and in most 

instances, were paid 115-135 percent above Medicare Part B rates. Despite our 

VA Office of Inspector General 27 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

recommendation to the contracting officer, the CO awarded the contract based on 

a price using the 130 percent of Medicare Part B rate. The analysis was flawed 

because the CO did not require the affiliate to validate its claim that they were in 

fact losing money. The CO simply compared the proposed prices to other VA 

radiology contracts; however, there was no validation of the price analysis that 

was done for any of those contracts. Although affiliates have argued that 

Medicare rates are not sufficient compensation, they fail to note that VA pays 100 

percent of the fee whereas Medicare only pays 80 percent and they must incur 

additional administrative costs to collect the remaining 20 percent from the 

patient. 

A concern directly raised by one affiliate and indirectly by other affiliates 

regarding procedure contracts at VA is that the quantity of procedures is not 

sufficient to cover their FTE cost. This is because VA requires a physician to be 

present for set hours which forces the affiliate to make an FTE commitment to 

VA; however, VA is only reimbursing the affiliate for the number of procedures 

performed. In one specific instance the affiliate stated they needed a markup of 

Medicare because they were concerned the necessary volume of procedures was 

insufficient and their dedicated FTE cost would not be covered. This argument 

was consistent with other affiliates that have attempted to justify their markup 

based on their FTE commitment as compared to the volume and revenue of the 

estimated procedures to be performed. When an affiliate is required by the SOW 

to have a certain number of physicians present at VA for a certain amount of time 

and there is not sufficient volume of procedures to cover their FTE costs, then the 

concerns of the affiliate is valid. Rather than attempt to estimate number of 

procedures and FTE to arrive at some markup of Medicare, we recommend that 

VA simply award an FTE based contract in these situations where affiliates 

express concern about the volume of procedures. In the alternative, VA should 

review their past workload to develop a more accurate requirement. 

b) CPT Prices Not Included in Pricing Schedule. 

Our reviews consistently identify solicitations that do not list CPT codes, estimates 

for the number of procedures expected to be performed, and/or a calculated price 

for each procedure. In fact, a procedure based contract that actually lists CPT 

codes in the pricing schedule with individual prices and estimated quantities is the 

exception to what we have found. 

The typical price schedule in a per-procedure contract solicitation simply requires 

the affiliate to state their offered “prices” as a single percentage of Medicare. The 

price schedule typically is formatted as follows: 

Orthopedic Procedures Percent of Medicare Estimated Quantity Total Cost 

CPT 50010-53850 110% 750 $422,044 

VA Office of Inspector General 28 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

This type of schedule does not quantify the individual CPT codes so that VA will 

have a reliable estimate of total cost and contract award. This type of schedule 

does not provide a definitive price schedule showing price for each CPT code so 

that the COTR or CO may certify invoices and verify that the correct price has 

been billed by the affiliate. This makes it difficult to award and administer the 

contract as the unit pricing is not clearly identified. 

The importance of having a CPT listing was highlighted in a post-award review 

we conducted in 2008 of a procedure based contract for urological services. The 

schedule of services simply stated that the awarded prices were 100 percent of 

Medicare reimbursement rates geographically adjusted for the region. There was 

no pricelist in the contract showing the CPT codes and the awarded price for each. 

During the post-award review we determined that the affiliate had not computed 

the CPT rates correctly and submitted incorrect rates and invoices to VA. We 

determined that the affiliate failed to geographically adjust the rates as stipulated 

in the contract. When we discussed our findings with VHA officials, they stated 

that they had no way of knowing whether or not they were billed the correct rates 

since there was no price list to compare the invoiced rates to and they had no 

expertise in calculating Medicare reimbursement rates. They stated they relied on 

the affiliate to calculate the correct rates. 

When we discussed our findings with officials at the affiliate, they stated that they 

were not experts in calculating Medicare reimbursement rates either. They have 

billing and coding experts who know how to accurately bill Medicare in terms of 

using the correct CPT codes, but when they send the invoice to Centers for 

Medicare and Medicaid Services (CMS) the invoice merely lists their usual and 

customary charges. CMS then calculates the correct Medicare reimbursement 

rates and adjusts the invoice accordingly. Because VA did not include a CPT 

listing in the pricing schedule with unit prices there was no price list for VA to use 

to verify that the rates were accurate. As a result, VA overpaid a total of $62,000 

for urological services. 

c) Mixed FTE and Procedure Based Contracts. Seven pre-award reviews 

were of proposals that included costs that were based on a combination of FTE 

and per-procedure. Our reviews found that none of the proposals included 

provisions to ensure that VA did not overpay for services. Typically the procedure 

component was for surgical procedures done in an operating room setting and the 

FTE portion was for staffing the weekly or daily clinic. Normally, Medicare sets a 

global period for surgical procedures that may be as high as 90 days. This means 

that any normal post-operative care for that procedure that occurs in the stated 

time frame is performed at no additional cost—all post-operative care costs are 

factored in the cost of the procedure. If a contractor is paid the full global rate for 

VA Office of Inspector General 29 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

a procedure and then the veteran patient receives their post-operative care in a 

clinic setting that is staffed by a contracted physician, then VA is essentially 

paying twice for the post-operative care. We determined that none of the six 

proposals had any provisions to ensure VA did not pay twice for any costs related 

to pre-operative or post-operative care. Based on our review and discussions with 

procurement officials, we believe the main reason is that they were simply 

unaware of the potential that VA could overpay when FTE and procedure 

contracts are combined because they lack understanding that the Medicare rate is 

inclusive of normal post-operative care and where that post-operative care was 

taking place. 

To address these issues we recommend that VHA provide specific training on 

procedure based contract issues and how Medicare reimbursement rates are 

calculated and what they include. We recommend that VHA require all procedure 

based contracts to include a pricing schedule identifying the CPT codes and 

estimated quantity for each CPT code. To address administrative issues regarding 

payment, we recommend that VHA conduct an evaluation to determine the 

feasibility of using a third party administrator to process billings for procedure 

contracts performed at the affiliate in a similar fashion as the Medicare 

administrators. 

C. Other Issues 

We have identified two additional important issues regarding the awarded pricing 

for sole-source contracts with affiliates: 

1. Conflict of Interest 

2. Personal Services Contracts 

These two issues were also identified in our 2005 report. Based on our pre-award 

reviews since the adoption of Directive 1663, conflicts of interest issues continue 

to be cited as a problem area. Also, we still recommend that VA seek legislative 

authority to award personal services contracts. 

1. Conflict of Interest 

As cited in VA Directive 1663, an employee is prohibited by law from participating in 

the procurement for healthcare resources if the employee has certain relationships as 

listed in VHA Handbook 1660.3, with non-VA parties involved in the procurement. 

From the sample of 106 reports (FYs 2008 to 2010), 14 reports identified an 

individual(s) with a potential conflict of interest, which represents a decrease from the 

2005 report. In most instances, the conflicts of interest were the result of a VA 

official named in the healthcare resource solicitation as participating in the award or 

VA Office of Inspector General 30 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

administration of the contract who also had a financial interest with the contractor, 

usually through a faculty appointment and/or as a part-time employee of the affiliate. 

Noted examples of conflict of interest findings were as follows. 

	 A VA Chief of Radiology signed off on procedures performed under the 

proposed contract although he worked part-time for the affiliate. 

	 A part-time physician at VA was a dual employee who also worked part-time 

at for the affiliate. He was one of the proposed contract physicians providing 

healthcare services at the VA Medical Center. In addition, as a VA employee, 

he planned to participate in the negotiations. As stated in Directive 1663, the 

general rule is that part-time VA physicians should not provide the same 

services under contract for which they receive VA pay. However, under 

special circumstances, a waiver may be approved by the Medical Center 

Director in conjunction with the regional office of general counsel. 

These two examples of conflicts of interest violate 18 U.S.C §208 and 5 C.F.R. 

§2635.402, which prohibits an employee from participating personally and 

substantially in an official capacity in any particular matter in which their interests are 

imputed to them under this statue has a financial interest. 

Procedure based contracts are of special concern when the service is being rendered at 

VA and there are VA employees involved who have a faculty appointment or other 

relationship with the affiliate. VA’s Office of General Counsel has issued an opinion 

that states there is a conflict of interest when there is a procedure based contract at VA 

and dual appointed employees are involved. This conflict exists even when the VA 

employee is working as VA employee because his or her actions have a direct and 

predictable financial impact on the affiliate. Essentially, the VA physician is in a 

position to do fewer procedures thus increasing the workload for the affiliate to 

perform under the contract which increases the revenue under the contract. 

2. Prohibited Personal Services Contracts 

FAR 37.104 prohibit agencies from entering into personal services contracts 

unless specifically authorized by statute. A personal service contracts is defined in 

FAR 37.101 as “...a contract that by its express terms or as administered makes 

the contractor personnel appear, in effect, Government employees.” Neither § 

8153 nor § 7409 specifically authorizes VA to enter into personal services 

contracts. VHA and OGC have determined that contracts awarded pursuant to § 

8153 or § 7409 cannot be for personal services. 

In our 2005 report, we concluded that the sole-source contracts for physician 

services awarded under § 8153 were for all practical purposes personal services 

VA Office of Inspector General 31 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

contracts (the full text regarding this issue is included in Exhibit B). This was 

determined by applying the six guidelines set forth in FAR 37.104: 

 Performance is on site.
 

 Principal tools and equipment are furnished by the Government.
 

 Services are applied directly to an integral effort of the agency, or an
 

organizational subpart, in furtherance of the mission. 

 Comparable services meeting comparable needs are performed in the same 

agency using civilian personnel 

 The need for the service provided can reasonably be expected to last more 

than one year. 

	 The inherent nature of the service or the manner in which it is provided 

reasonably requires, directly or indirectly, Government direction or 

supervision of contractor employees in order to (1) adequately protect the 

Government’s interests; (2) retain control of the function involved; or (3) 

retain full personal responsibility for the function supported in a duly 

authorized Federal officer or employee. 

A “yes” to one or more of these factors should raise the question whether the 

solicitation will result in a prohibited personal services contract. Our 2005 report 

determined that for most of the contracts we reviewed, the response would be 

“yes” to most questions. Our report also discussed that the duties described in the 

SOW typically can be defined as inherent governmental functions which gives 

credence that these contracts are in fact personal services contracts. Our report 

also raised concerns regarding liability issues and the ability of the Government to 

effectively defend itself under the Federal Tort Claims Act. 

The Under Secretary for Health concurred with our recommendations to seek 

legislation to amend Title 38 to authorize VA to enter into personal services 

contracts when the services are to be provided at a VA facility. The Under 

Secretary for Health stated that VHA will, in collaboration with the Department, 

develop the request. 

While VA did submit a legislative proposal prepared by the OIG to OMB, VHA 

also objected to the proposal stating that moving from non-personal services 

contracts to personal services contracts would not be cost effective. However, 

VHA officials did not adequately support their claim. We believe that sole-source 

contracts with affiliates have the potential to decrease because malpractice costs 

would be removed from the contract. More importantly, it would allow VA to 

better supervise and manage the care provided to veterans in VA hospitals. 

VA Office of Inspector General 32 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

CONCLUSIONS
 

VHA has not invested the resources necessary to implement the policy 

requirements contained in VA Directive 1663. VHA has not provided training to 

the contracting and non-contracting staff to ensure responsible officials understand 

the requirements and policy of VA regarding sole-source contracts with affiliated 

institutions. We have determined there has been no consistent nation-wide 

implementation and application of VA policy regarding sole-source contracting 

with affiliates. As a result, some affiliates have been permitted to charge VA 

unsupported overhead while others have not. Some affiliates have been permitted 

to include unsupported on-call costs while other affiliates have not. Some 

affiliates have been permitted to charge prices at higher than Medicare rates for 

procedure based contracts while others have not. The lack of consistency for these 

and the other issues identified in this report creates confusion and lacks a unified 

approach to sole-source contracting with affiliates nation-wide which was the one 

of the main objectives for Directive 1663. We recommend that VHA agree with 

our findings and concur with our recommendations to take immediate and 

concrete steps to uniformly implement and strengthen VA policy contained in 

Directive 1663. 

VA Office of Inspector General 33 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

RECOMMENDATIONS
 

We recommend that the Undersecretary for Health: 

1. Evaluate and determine the resources needed by MSO to uniformly implement 

and monitor compliance with the requirements set forth in Directive 1663 on a 

nation-wide basis. 

2. Develop and implement a central tracking system that captures and reports all 

healthcare contracting and spending with affiliates for healthcare services 

including interim agreements. 

3. Develop	 and provide comprehensive standardized training for VHA 

contracting staff regarding sole source contracting with affiliates and the 

requirements of Directive 1663. 

4. Develop and provide comprehensive standardized training on the requirements 

of VA Directive 1663 to non-procurement staff who have responsibilities 

relating to sole source contracting with affiliates. 

5. Ensure VHA contracting staff adhere to all policy requirements contained in 

VA Directive 1663, including the following: 

a.	 Each procurement should be adequately planned.* 

b. A backup plan for an alternate source for services should be established. 

c.	 Contracts should be competed except where VA has established a need for 

services from a faculty member of the affiliate. 

d. Salary surveys should not be used to determine fair and reasonable pricing. 

e.	 The key personnel clause is contained in each FTE contract and properly 

identifies each physician.* 

f.	 Limiting overhead to costs directly associated with administration of the 

VA contract.* 

g. On-call costs are only permitted when physicians are actually compensated 

for being on-call.* 

h. Procedure based	 contracts should not be awarded at rates higher than 

Medicare unless clearly justified and should exclude the practice expense 

component when performed at VA.* 

6. Develop a standard that accurately defines the expected hours and workload 

from one FTE for each specialty that can be applied by the contracting staff to 

determine the number of FTE and hours to be procured under the contract.* 

7. Develop clear and well defined national standard SOWs for each specialty that 

can be tailored as needed to address specific procurement requirements if 

needed. 

* A similar recommendation was made in our 2005 report. 

VA Office of Inspector General 34 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

8. Develop and require the use of a standard pricing schedule for procedure based 

contracts that require the listing of all CPT codes with estimated quantities and 

proposed prices for each code. 

9. Conduct an evaluation to determine the feasibility of using an administrator or 

intermediary to process billings for procedure based contracts performed at the 

affiliate similar to those used by Medicare administrators. 

10. Develop a more robust process to ensure compliance with conflict of interest 

laws and regulations and their applicability to all Title 38 employees who have 

a relationship with affiliates.* 

11. Seek a legislative amendment to 38 U.S.C. § 8153 and § 7409 to authorize VA 

to enter into personal services contracts when the services are to be provided at 

a VA facility.* 

* A similar recommendation was made in our 2005 report. 

VA Office of Inspector General 35 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

ACRONYMS 

AAMC Association of American Medical Colleges 

ACGME Accreditation Council for Graduate Education 

CBOC Community Based Outpatient Clinic 

CMS Centers for Medicare and Medicaid Services 

CO Contracting Officer 

Committee Medical Sharing Office Committee 

COTR Contracting Officer's Technical Representative 

CPT Current Procedure Terminology 

eCMS Electronic Contract Management System 

FAR Federal Acquisition Regulations 

FTE Full Time Equivalent 

FY Fiscal Year 

MSO Medical Sharing Office 

OAA Office of Academic Affiliations 

OCR Office of Contract Review 

OIG Office of Inspector General 

PNM Price Negotiation Memorandum 

SDVOSB Service-Disabled Veteran-Owned Small Business 

SOW Statement of Work 

U.S.C. United States Code 

VA Department of Veterans Affairs 

VAMC VA Medical Center 

VHA Veterans Health Administration 

VISN Veterans Integrated Service Network 

VA Office of Inspector General 36 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

OIG Healthcare Resource Pre-award Reports Issued by VISN and
 

Academic Affiliates
 

From October 1, 2006 - September 30, 2010
 

EXHIBIT A
 

VISN's Academic Affiliates OIG Reports Issued 

VISN 1: VA New England Healthcare System 

Boston University School of Medicine 0 

Tufts University School of Medicine 0 

Harvard Medical School 0 

Dartmouth Medical School 0 

University of Massachusetts Medical School of Worcester 0 

Boston University School of Medicine 0 

Brown University Program in Medicine 0 

University of Massachusetts Medical School 0 

University of Connecticut School of Medicine 0 

Yale University School of Medicine 1 

1 

VISN 2: VA Healthcare Network Upstate New York 

Albany Medical College of Union University 0 

State University Of New York At Buffalo School Of 

Medicine 0 

University of Rochester School of Medicine and Dentistry 0 

State University Of New York Upstate Medical University 0 

0 

VA Office of Inspector General 37 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

OIG Healthcare Resource Pre-award Reports Issued by VISN and
 

Academic Affiliates
 

From October 1, 2006 - September 30, 2010
 

EXHIBIT A
 

VISN's Academic Affiliates OIG Reports Issued 

VISN 3: VA NY/NJ Veterans Healthcare Network 

Mount Sinai School of Medicine of City University of New 

York 0 

State University of New York Health Science Center at 

Brooklyn College of Medicine 1 

UMDNJ-New Jersey Medical School 1 

UMDNJ-Robert Wood Johnson Medical School 0 

New York Medical College 0 

New York University School of Medicine 1 

State University Of New York at Stony Brook, School of 

Medicine 1 

4 

VISN 4: VA Stars and Stripes Healthcare Network 

West Virginia University School of Medicine 1 

Temple University School Of Medicine 0 

Pennsylvania State University College of Medicine 0 

Allegheny University of the Health Sciences/MCPHahnemann School Of Medicine 0 

University of Pennsylvania School of Medicine 0 

University of Pittsburgh School of Medicine 6 

Allegheny University of the Health Sciences/MCPHahnemann School Of Medicine 0 

Jefferson Medical College of Thomas Jefferson University 0 

University of Maryland School of Medicine 0 

7 

VISN 5: VA Capitol Healthcare Network 

University of Maryland School of Medicine 2 

George Washington University School of Medicine 2 

West Virginia University School of Medicine 1 

Howard University College of Medicine 0 

Georgetown University School of Medicine 0 

5 

VA Office of Inspector General 38 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT A
 

OIG Healthcare Resource Pre-award Reports Issued by VISN and
 

Academic Affiliates
 

From October 1, 2006 - September 30, 2010
 

VISN's Academic Affiliates OIG Reports Issued 

VISN 6: VA Mid-Atlantic Healthcare Network 

Duke University School of Medicine 3 

University of North Carolina at Chapel Hill School of 

Medicine 0 

Eastern Virginia Medical School of the Medical College of 

Hampton Roads 0 

Virginia Commonwealth University, Medical College of 

Virginia 4 

University of Virginia School of Medicine 0 

Wake Forest University School Of Medicine 0 

7 

VISN 7: The Southeast Network 

Emory University School of Medicine 1 

Medical College of Georgia 2 

University Of Alabama School Of Medicine 8 

Medical University of South Carolina School of Medicine 2 

Mercer University School of Medicine 0 

University of Alabama School Of Medicine 0 

Morehouse School of Medicine 0 

13 

VISN 8: VA Sunshine Healthcare Network 

University of South Florida College of Medicine 1 

University of Florida College of Medicine 3 

University of Miami School of Medicine 3 

University of Puerto Rico School of Medicine 0 

University of South Florida College of Medicine 0 

7 

VA Office of Inspector General 39 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT A
 

OIG Healthcare Resource Pre-award Reports Issued by VISN and
 

Academic Affiliates
 

From October 1, 2006 - September 30, 2010
 

VISN's Academic Affiliates OIG Reports Issued 

VISN 9: VA Mid-South Healthcare Network 

Marshall University School of Medicine 0 

University of Kentucky College of Medicine 1 

University of Louisville School of Medicine 3 

University of Tennessee College of Medicine 2 

East Tennessee State University, James H Quillen College of 

Medicine 0 

Meharry Medical College School of Medicine 2 

Vanderbilt University School of Medicine 1 

9 

VISN 10: VA Healthcare System of Ohio 

Ohio University, College of Osteopathic Medicine 0 

A.T. Still University, School of Osteopathic Medicine 0 

University of Cincinnati College of Medicine 1 

Case Western Reserve University School of Medicine 0 

Ohio State University College of Medicine 1 

Wright State University School of Medicine 1 

3 

VISN 11: Veterans in Partnership 

University of Michigan Medical School 4 

Michigan State University Kalamazoo Center for Medical 

Studies 0 

University of Illinois College of Medicine 0 

Wayne State University School of Medicine 1 

Indiana University School of Medicine 9 

14 

VA Office of Inspector General 40 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT A
 

OIG Healthcare Resource Pre-award Reports Issued by VISN and
 

Academic Affiliates
 

From October 1, 2006 - September 30, 2010
 

VISN's Academic Affiliates OIG Reports Issued 

VISN 12: VA Great Lakes Healthcare System 

Loyola University of Chicago, Stritch School of Medicine 1 

Medical College of Wisconsin 2 

Northwestern University Medical School 0 

University of Wisconsin Medical School 1 

Rosalind Franklin University of Medicine & Science 0 

University of Illinois College of Medicine 1 

5 

VISN 15: VA Heartland Network 

University of Missouri, Columbia School of Medicine 2 

University of Kansas School of Medicine 0 

Saint Louis University School of Medicine 0 

Southern Illinois University School of Medicine 0 

Saint Louis University School of Medicine 0 

Saint Louis School of Pharmacy 1 

Washington University School of Medicine 0 

3 

VISN 16: South Central VA Healthcare Network 

Tulane University School Of Medicine 0 

University of South Alabama College of Medicine 0 

Baylor College of Medicine 0 

University of Mississippi School of Medicine 1 

University of Arkansas College of Medicine 3 

University of Oklahoma College of Medicine 0 

Louisiana State University 2 

University of Oklahoma College of Medicine 4 

10 

VA Office of Inspector General 41 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT A
 

OIG Healthcare Resource Pre-award Reports Issued by VISN and
 

Academic Affiliates
 

From October 1, 2006 - September 30, 2010
 

VISN's Academic Affiliates OIG Reports Issued 

VISN 17: VA Heart of Texas Healthcare Network 

University of Texas Southwestern Medical School at Dallas 11 

University of Texas Medical School at San Antonio 1 

Texas A & M University College of Medicine 0 

12 

VISN 18: VA Southwest Healthcare Network 

University of New Mexico School of Medicine 2 

Texas Tech University Health Science Center School of 

Medicine 0 

University of Arizona College of Medicine 1 

3 

VISN 19: Rocky Mountain Network 

University of Colorado School of Medicine 4 

University of Utah School of Medicine 2 

6 

VISN 20: Northwest Network 

University of Washington School of Medicine 0 

Oregon Health Sciences University School of Medicine 1 

1 

VISN 21: Sierra Pacific Network 

University of Hawaii John A Burns School of Medicine 0 

University of California, Davis School of Medicine 0 

Stanford University School Of Medicine 2 

University of Nevada School of Medicine 3 

University of California, San Francisco School of Medicine 0 

5 

VA Office of Inspector General 42 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT A
 

OIG Healthcare Resource Pre-award Reports Issued by VISN and
 

Academic Affiliates
 

From October 1, 2006 - September 30, 2010
 

VISN's Academic Affiliates OIG Reports Issued 

VISN 22: Desert Pacific Healthcare Network 

University of Nevada School of Medicine 3 

Loma Linda University School of Medicine 0 

University of California, California College of Medicine 0 

University of California, San Diego School of Medicine 0 

University of Southern California School of Medicine 0 

University of California, Los Angeles School of Medicine 0 

3 

VISN 23: VA Midwest Healthcare Network 

University Of North Dakota School Of Medicine 0 

University of Minnesota Medical School 2 

University of South Dakota School of Medicine 0 

University of Iowa College of Medicine 3 

Creighton University School of Medicine 1 

University of Nebraska College of Medicine 3 

9 

All Healthcare Reports issued by OIG 127 

All Other Reviews - Non-Affiliate, CBOCs, and competitive 

bids 4 

Total Healthcare Resource Reports Issued by OIG 131 

VA Office of Inspector General 43 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

Prohibited Personal Services Contracts 

A personal service contracts is defined in FAR 37.101 as “...a contract that by its 

express terms or as administered makes the contractor personnel appear, in effect, 

Government employees.”1 FAR 37.104 prohibits agencies from entering into 

personal services contracts unless specifically authorized by statute. Neither § 

8153 nor § 7409 specifically authorizes VA to enter into personal services 

contracts to obtain health care resources. Accordingly, VHA and OGC have 

determined that contracts awarded pursuant to § 8153 or § 7409 cannot be for 

personal services.2 

Under non-personal services contracts, the personnel rendering the services are 

not subject by the contract’s terms or by the manner in its administration, to the 

supervision and control usually prevailing in relationships between the 

Government and its employees. FAR 37.104(d) identifies six factors that provide 

guidance in determining whether a services contract is personal in nature: 

 Performance is on site. 

 Principal tools and equipment are furnished by the Government. 

 Services are applied directly to an integral effort of the agency, or an 

organizational subpart, in furtherance of the mission. 

 Comparable services meeting comparable needs are performed in the same 

agency using civilian personnel. 

 The need for the service provided can reasonably be expected to last more 

than 1 year. 

 The inherent nature of the service or the manner in which it is provided 

reasonably requires, directly or indirectly, Government direction or 

supervision of contractor employees in order to (1) adequately protect the 

Government’s interests; (2) retain control of the function involved; or (3) 

1 See also, Matter of: Nuclear Regulatory Commission Licensing Examiners, 70 Comp. Gen. 682, (1991)
 

(A personal services contract is a contract that by its express terms or by the way in which it is
 

administered makes it appear that the contractor personnel are federal employees.)
 2 The Secretary does have authority to enter into contracts for personal services under 38
 

U.S.C. §513, which provides: “The Secretary may, for purposes of all laws administered 

by the Department, accept uncompensated services, and enter into contracts or 

agreements with private or public agencies or persons. . ., for such necessary services 

(including personal services) as the Secretary may consider practicable.” 

VA Office of Inspector General 44 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

retain full personal responsibility for the function supported in a duly 

authorized Federal officer or employee. 

A “yes” to one or more of these factors should raise the question whether the 

solicitation will result in a prohibited personal services contract. All of the 

solicitations that we reviewed which were issued pursuant to § 8153 authority for 

services to be provided at VA facilities met the first five factors in these 

guidelines. An analysis of the statement of work (SOW) and the administration of 

the contracts shows that they also met the sixth factor. Although all of the factors 

are not required for a contract to be considered an improper personal services 

contract, OGC has concluded that the key issue in these cases is whether the 

Government will “...exercise relatively continuous supervision and control over 

the contractor personnel performing the contract.” 

We referred a solicitation to OGC for an opinion whether the contract, if awarded, 

would be a prohibited personal services contract. The solicitation required the 

services of a nurse practitioner and a technician for the Cardiology Service who 

would be under the supervision of the chief of the service. The solicitation further 

stated that services provided would be under the “direction of the VA Chief of 

Staff and the Chief, Cardiology Service.” OGC agreed that an award would result 

in a prohibited personal services contract. 

To avoid the personal services prohibition, the OGC opinion advised that the 

contract must state that the “Government may evaluate the quality of professional 

and administrative services provided, but retains no control over the medical, 

professional aspects of the services rendered (e.g., professional judgments, 

diagnosis for a specific medical treatment),” and cited FAR 37.401 (b) as the 

regulatory authority. After reviewing FAR 37.401, we concluded that the language 

cited by OGC was not required for contracts awarded under § 8153 authority. The 

FAR provision cited by OGC specifically relates to contracts awarded under the 

authority of 10 U.S.C. §2304 and 41 U.S.C. §253.3 OGC further advised: “to be 

consistent with the FAR the solicitation should provide that the nurse practitioner 

and pacer technician will be under only the administrative direction of the 

Cardiology Chief, and state expressly that they will not be under his medical or 

professional supervision.” 

3 FAR 37.401 states: “Agencies may enter into non-personal health care services contracts with physicians, 

dentists, and other health care providers under authority of 10 U.S.C. §2304 and 41 U.S.C. §253.” 

VA Office of Inspector General 45 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

OGC noted in the opinion that the typical language recommended in these 

agreements includes the term “under the direction of” a VA employee, in lieu of 

“under the supervision of” a VA employee. To explain the distinction OGC stated: 

“Supervision implies a superior-subordinate relationship, and a continuous 

oversight of the professional services provided. Whereas, “direction” implies that 

the contractor will be told what to do, as opposed to how to do it.” 

Notwithstanding whether FAR 37.401 is applicable to § 8153 contracts, based on 

our review of the FAR and our discussions with VHA personnel, we have 

concluded that merely using the correct verbiage in the contract document does 

not alter the fact that these are personal services contracts because contract 

employees are supervising VA employees. FAR 37.101 defines a “non-personal 

services contract” as: 

“[A] contract under which the personnel rendering the services are not 

subject, either by the contract’s terms or by the manner of its 

administration, to the supervision and control usually prevailing in 

relationships between the Government and its employees. (Emphasis 

added.) 

The regulation makes it clear that the words used in the contract are not the only 

determinant of whether the contract is a personal or non-personal services 

contract; the manner in which the contract is administered is equally important.

4

Merely changing words without changing the relationship between VA and the 

contract employees does not resolve the issue of whether these are personal 

services contracts. 

When asked, VA medical center personnel have been unable to explain to us the 

difference between the words “direction” and “supervision”, as they impact on the 

relationship between VA and contract personnel. Responses ranged from (1) there 

was no difference between the terms, to (2) the distinction that VA could not 

terminate the contract employee’s employment if it provided direction, not 

4 See also, FAR 37.104 (c)(1), which states: “An employer-employee relationship under a services contract 

occurs when, as a result of (i) the contract’s terms and conditions or (ii) the manner of its administration 

during performance, contractor personnel are subject to the relatively continuous supervision and control of 

a Government officer or employee.” 

VA Office of Inspector General 46 
 

Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

supervision. We do not believe that this latter distinction is sufficient to render 

these contracts non-personal services contracts. 

Although VA cannot terminate the contractor’s employment with the affiliate, 

VHA Handbook 1100.19, “Credentialing and Privileging,” issued on March 6, 

2001, requires VA medical centers to credential and privilege all contract 

physicians. For quality assurance and reprivileging purposes, performance of 

contract employees is monitored through VA’s quality assurance programs, in 

which contract employees are required to participate, and VA has the authority, 

and a duty, to reduce or revoke privileges and report such changes to state 

licensing boards and the National Practitioner Data Bank. 

In addition to FAR 37.104(d), VAAR 837.104 provides: “Personal service 

contracts having an employer-employee relationship shall not be awarded but will 

be consummated in accordance with VA Manual MP-5, Parts I and II. VAAR 

837.104(b)(1)-(5) also provides additional relevant considerations for determining 

whether there is an employee-employer relationship that would make the contract 

a prohibited personal services contract: 

 The contract does not call for an end-product, which is adequately 

described in the contract. 

 The contract price or fee is based on the time actually worked rather than 

results to be accomplished. 

 Office space, equipment, and supplies for contract performance are 

furnished by VA. 

 Contract personnel are used interchangeably with VA personnel to perform 

the same function. 

 VA retains the right to control and direct the means and methods by which 

the contractor personnel accomplish the work. 

All five considerations are applicable to the solicitations we have reviewed for 

services to be provided at VA with the exception of those for which payment is 

strictly procedure based. For strictly procedure based contracts, the contract price 

or fee is not based on time actually worked. 

VAAR 837.403 requires the contracting officer to insert an “Indemnification and 

Medical Liability Insurance” clause in all non-personal health care services 

contracts. The clause states, in part: 

VA Office of Inspector General 47 
 

Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

“The Government may evaluate the quality of professional and 

administrative services provided but retains no control over professional 

aspects of the services rendered, including by example, the Contractor’s or 

its health-care providers’ professional medical judgment, diagnosis, or 

specific medical treatments.” 

Other factors, either individually or combined, that lead us to conclude that these 

are personal services contracts include: 

 The providers are not identified to the patients or to other VA personnel as 

contract employees and are not required to identify themselves as contract 

employees in VA medical records. The fact that VA and contract 

employees are performing the same functions side-by-side in VA medical 

centers further blurs any distinction. 

 Differentiating between VA employees and contract employees is more 

difficult when the individuals providing the services are working part-time 

as VA employees and part-time as contract employees performing the same 

job duties for the same patient population. VA personnel have told us that 

these dual employees are identified by their VA credentials at all times. 

 We have been told by OGC and Assistant United States Attorney Offices 

that ambiguity in the status of these providers has led to confusion in the 

processing of claims filed pursuant to the provisions of the Federal Tort 

Claims Act. 

 The contracts require that the services performed by the contractor will be 

performed in accordance with VA policies, procedures, and the regulations 

of the medical staff by-laws of the VA facility. To ensure quality patient 

care is provided in VA facilities, VA must be responsible for the 

supervision, direction, and oversight of the contractor to ensure compliance. 

 Contracts routinely contain a requirement that contract employees 

participate in VA administrative activities, as do VA employees, some of 

which are performing the same duties and responsibilities. For example, 

one proposal provided that the contract employees would “monitor and 

advise in the development of quality control equipment or in evaluations of 

current quality control protocols” and “membership on Ad Hoc or 

VA Office of Inspector General 48 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

departmental or medical center committees as necessary.” There is no 

distinction between the roles of a contract employee and a VA employee in 

performing these duties. 

 VA, not the contractor, makes decisions regarding whether patients are 

eligible for treatment and, in some circumstances, VA controls what 

treatment can be provided. The contractor does not have authority to deny 

treatment or authorize treatment beyond what VA determines the patient is 

eligible to receive. Patient complaints regarding treatment received by a 

contract employee are addressed by VA, not the contractor, and VA can 

take corrective action. 

We believe that the provisions in these solicitations that make them personal 

services contracts, as described above, are necessary to ensure that VA provides 

quality patient care to veterans. We also believe that, because the Government is at 

risk for liability for services provided under these contracts, it is in the best 

interests of the taxpayer for VA to maintain supervision and control over the 

services provided under these contracts. As such, we recommend that VA review 

the provision of 38 U.S.C. §513 to determine whether VA has authority to enter 

into personal services contracts awarded to affiliates pursuant to the sole-source 

authority in § 8153 and § 7409. If §513 is not a viable option, VA should seek a 

legislative amendment to 38 U.S.C. § 8153 and § 7409 to authorize VA to enter 

into personal services contracts when the services are to be provided at a VA 

facility.5 

Inherently Governmental Functions 

OMB has established executive policy relating to service contracting and 

inherently governmental functions to assist Executive Branch officers and 

employees to avoid the unacceptable transfer of official responsibility to 

Government contractors. Prior to May 23, 2003, this policy was contained in 

Office of Federal Procurement Policy (OFPP) Policy Letter 92 -1. On May 23, 

2003, revised OMB Circular A-76, “Performance of Commercial Activities,” was 

issued and superceded Policy Letter 92-1. The solicitations we have reviewed both 

pre-date and post-date revised OMB Circular A-76. 

5 Such authority would not be unprecedented. The Secretary of Defense and the Secretary of Homeland 

Security have authority to enter into personal services contracts to carry out health care responsibilities in 

their medical treatment facilities. See, 10 U.S.C. § 1091. 

VA Office of Inspector General 49 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

OMB Policy Letter 92-1 and OMB Circular A-76 both define an inherently 

governmental function as “...a function that is so intimately related to the public 

interest as to mandate performance by Government employees.” OMB Policy 

Letter 92-1 stated that it applied to non- personal services contracts. Personal 

services contracts that are really personnel appointments were excluded from 

coverage of the policy letter. Neither personal services nor non-personal services 

contracts are addressed in the revised OMB Circular A-76. Appendix A of the 

Policy Letter 92-1 contained an illustrative list of functions considered to be 

inherently governmental functions. The list is not included in OMB Circular A-76, 

which provides that “inherently governmental activities require the exercise of 

discretion” and “...that the use of discretion shall be deemed inherently 

governmental if it commits the Government to a course of action when two or 

more courses of action exist and decision making is not already limited or guided 

by existing policies, procedures directions, orders, and other guidance that (1) 

identify specified ranges of acceptable decisions or conduct and (2) subject the 

discretionary authority to final approval or regular oversight by agency officials.” 

In reviewing contract solicitations, we have identified contract requirements that 

appear to be inherently governmental functions. Our concerns include the 

direction and supervision of VA employees and involvement at the same level of 

participation as other VA employees in VA operations, such as quality assurance 

activities and VA committees. Contract providers also have broad discretion in 

making decisions relating to the care and treatment of veterans that result in 

expenditures of VA resources. For example, the following extracts are from the 

contract requirements in a solicitation issued by the VA Medical Center, Miami, 

Florida, to the affiliate for anesthesia services: 

 For Pain Management Services - “The anesthesiologist directs and 

coordinates the intensive pain rehabilitation and pain management 

program. He/she will serve as chairperson of the Pain Management 

Committee and as a member of the Hospice Committee, the Tumor 

Board team and the Operative and Invasive Procedures Committee.” 

 For the Surgical Intensive Care Unit: 

 “The anesthesiologist directs and coordinates the Surgical 

Intensive Care Unit and functions as the Unit Director.” 

VA Office of Inspector General 50 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

 “The anesthesiologist designated as the Unit Director will insure 

that all administrative requirements related to Medical Center 

policies and procedures and JCAHO standards are implemented.” 

 The anesthesiologist will participate as assigned to Medical 

Center Committees and task forces.” 

 “All services include the following clinical tasks or other duties as assigned 

by VA but are not limited to:6 

 Direction and assistance support of CRNAs, anesthesia 

assistants, staff anesthesiologists and other anesthesia service 

personnel.7 

 Educational training and supervision of residents, medical 

students and CRNAs. 

 Participation in service specific and Medical Center quality 

improvement programs and activities. This may include 

monitors for appropriateness, length of stay, incident reports, 

review of resident supervision, outcome measurements, access to 

levels of anesthesia care, patient satisfaction, effectiveness postprocedure pain control, reporting of adverse events.” 

 “All services include the following administrative tasks and other duties as 

assigned by VA but are not limited to: 

 Review and approve the regular weekday operating room 

schedule. 

 Make daily operating room assignments and other duty 

assignments for all anesthesiology service staff recognizing their 

scopes of practice and level of responsibility. 

 All anesthesia services are to be performed either by the contract 

physician or with the contract physician providing professional 

6 The fact that the duties and responsibilities can be assigned by VA also raises the issue of whether this is
 

an improper personal services contract.

7 These individuals are VA, not contractor employees.
 

VA Office of Inspector General 51 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

direction to VA anesthesia CRNA staff or to the house staff at 

levels 1 and 2.” 

This solicitation was one of the most comprehensive that we have reviewed and 

was written to ensure quality patient care. Nonetheless, the duties and 

responsibilities described above are inherently governmental functions and clearly 

make it an improper personal services contract. The contract anesthesiologists not 

only participate in, but even chair, VA committees, and there is no differentiation 

between the duties, responsibilities, and level of participation by VA employees 

on these committees and the contract employees. Providing direction/supervision 

to the CRNAs and other VA employees is an inherently governmental function.8 

As another example, in the contracts described previously, in which the two VA 

medical centers contracted for the same physician to provide services in their 

facility as the Chief of Radiology Service, the SOWs in both contracts9 required 

the contract employee to exercise full line authority and responsibility for the 

management of the service, report to the Chief of Staff, and provide professional 

supervision of radiology physicians and supervisors of technical and 

administrative sections. Clearly, these contracts were personal services contracts, 

and these requirements were inherently governmental functions. 

We also question whether providing direction/supervision to residents and medical 

students, who technically are not Government employees but for whose actions the 

Government accepts liability and responsibility, would also constitute an 

inherently governmental function. 

Contract physicians providing services in VA medical centers have broad 

discretion in making decisions regarding patient care. For example, these 

physicians write orders for medications, x-rays, other diagnostic and surgical 

procedures, and follow-up care, etc. that are provided at the Government’s 

expense. In addition, they request equipment and supplies that VA must provide. 

OMB’s Policy Letter 92-1, paragraph 3, prohibiting contracting for inherently governmental 

functions did not apply to services obtained by personnel appointments or advisory 

committees. Revised OMB Circular A-76 does not address this issue specifically. However, 

assuming the same is true under OMB Circular A-76, legislative changes to § 8153 and § 

8 OFPP Policy Letter 92-1, Appendix A, paragraph 7.
 9 Although the contracts were awarded by two VA medical centers, the requirements and other specific
 

terms and conditions were identical.
 

VA Office of Inspector General 52 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

7409 to permit these contracts to be personal service contracts would alleviate concerns 

about contract duties and responsibilities that are necessary to provide quality patient care, 

but are inherently governmental functions that cannot be obtained under contract. 

Liability Issues 

VAAR 837.403 requires the contracting officer to insert an “Indemnification and 

Medical Liability Insurance” clause in all non-personal health-care services 

contracts, which requires the contractor to provide and maintain professional 

liability insurance for the employees providing services under the contract. The 

contractor is also responsible for providing worker’s compensation, 

unemployment and other similar benefits. 

In FY 2003 and the first quarter of FY 2004, we reviewed 19 proposals, valued at 

$32,301,512, for services to be provided at VA in which prices were determined 

on an FTE basis. Of this amount, $1,063,588 (3.3 percent) was related to medical 

malpractice insurance.10 During this same time period, we reviewed 12 procedure 

based proposals, only 5 of which identified a contract value for medical 

malpractice insurance. The value of the five proposals was $15.2 million. 

Approximately 7 percent of the average RVUs assigned to physician costs under 

Medicare Part B relate to the medical malpractice component. 

Although the contract provision requiring the contractor to provide medical 

malpractice coverage is intended to protect the Government from liability claims 

relating to services provided under the contract, we have identified three concerns. 

The first is whether the provider can be readily identified as a contract employee, 

particularly when the provider is caring for patients as both a VA employee and a 

contract employee. Our second concern relates to the liability in tort claims when 

the acts or omissions of a medical student, resident, or fellow is at issue, and that 

individual is under the direct supervision of a contract employee. Third, because 

care and treatment provided at a VA medical center often involves interactions 

between the patient and various health care personnel, it may be difficult for 

liability purposes to separate the acts or omissions of a contract provider and a VA 

employee. 

The Government accepts liability for the acts or omissions of medical students, 

residents, and fellows who provide care to veterans as part of an accredited 

training program with a VA affiliate. Although these individuals are not VA 

10 The medical malpractice component of the proposals ranged from 0 percent to 11.07 percent. 

VA Office of Inspector General 53 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

EXHIBIT B
 

Excerpt from Evaluation of VHA Sole-Source Contracts with Medical Schools and
 

Other Affiliated Institutions, February 16, 2005, Regarding Prohibited Personal
 

Services Contracts
 

employees, the Government accepts liability because they provided care under the 

supervision of a VA employee when the alleged act or omission occurred. Under § 

8153 contracts, contract employees provide direct supervision for medical 

students, residents, and fellows who are part of the affiliate’s medical training 

program. Yet, we have not seen any contract under which the affiliate is 

responsible for negligence by a medical student, resident, or fellow under the 

supervision of a contract employee. Our concern regarding increased liability for 

the Government is intensified by the fact that the alleged act or omission that 

resulted in harm may have occurred because of inadequate or non-existent 

supervision. It will be difficult for the Government to claim that the liability rests 

with the contract employee unless it can be shown that the contract employee was 

directly involved in the act or omission at issue. Even assuming the Government 

prevails in showing that the liability rests with the contractor, the Government still 

would have incurred significant litigation costs. 

With a legislative change permitting personal services contracts for those awarded 

under the authority of § 7409 and § 8153, VA could accept the risk of liability for 

these contract providers, since the individuals would be considered to be 

Government employees. As such, VA would no longer have to pay for medical 

malpractice coverage, which would result in a significant cost savings to the 

Government. 

VA Office of Inspector General 54 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A 

MANAGEMENT COMMENTS 

Department of 

Veterans Affairs Memorandum 

Date: July 11, 2011 

From: Under Secretary for Health (10) 

Subj: OIG Draft Report, Review of Sole-Source Contracts with Affiliated Institutions (VAIQ 7121924) 

To: Director, Healthcare Resources, Office of Contract Review, Office of Inspector General (55) 

1. I have reviewed the draft report and concur that the Office of Inspector 

General (OIG) has identified current concerns as well as past issues with 

compliance required by Department of Veterans Affairs Directive 1663, Health 

Care Resources Contracting – Buying Title 38 U.S.C. 8153. 

2. It is important to note that the Veterans Health Administration has within the 

last year, after also identifying significant concerns about healthcare contracting 

and spending with affiliates for healthcare services, taken aggressive action to 

address these issues. Steps include: 

 Bolstering leadership and employment in the Medical Sharing Office; 

 Instituting new processes and procedures for tracking this healthcare 

contracting and spending; 

 Improving training; 

 Beginning to develop updated standard operating procedures for 

acquisition planning, establishment of backup plans for alternate sources 

for services, additional scrutiny of sole source justifications, and 

implementation of new checklist processes. 

3. The OIG report includes suggestions that need attention. It is important to 

note that several issues may require serious discussions with the OIG review 

team to develop practices and processes that ensure solid procurements using 

sole source contracts. VHA is dedicated to work with OIG to develop and 

implement practical and sound solutions that will work effectively. 

VA Office of Inspector General 55 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A
 

Page 2. 

OIG Draft Report, Review of Sole-Source Contracts with Affiliated Institutions 

(VAIQ 7121924) 

4. The report1 suggests that there has been pressure from the Association of 

American Medical Colleges (AAMC) and some of its member universities to 

influence VA’s sole source contracting policy. My reaction is that whereas it 

would be inappropriate to allow AAMC to participate in the development and 

writing of VA policy it is both reasonable and necessary to seek input from key 

stakeholders such as the AAMC during policy development so that stakeholder 

interests are identified and considered in advance and the potential impact of 

policy on VA’s statutory academic mission is taken into account. VHA often 

consults with a variety of stakeholders, including our academic partners, prior to 

finalizing policies and procedures to maximize policy feasibility. This does not 

mean that a stakeholder’s interest should or would be put above VHA or 

Veterans’ needs. 

5. Thank you for the opportunity to review the draft report. Attached is the 

Veterans Health Administration’s corrective action plan for the report’s 

recommendations. If you have any questions, please contact Linda H. Lutes, 

Director, Management Review Service (10A4A4) at (202) 461-7014. 

(original signed by:) 

Robert A. Petzel, M.D. 

Attachment 

1 Pages 3 and 4, “Since early 2007...of the affiliates.” 

VA Office of Inspector General 56 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A 

VETERANS HEALTH ADMINISTRATION (VHA)
 

Action Plan
 

OIG Draft Report, Review of Sole-Source Contracts with Affiliated Institutions 

(VAIQ 7121924) 

Date of Draft Report: April 25, 2011 

Recommendations/ Status Completion 

Actions Date 

Recommendation 1. We recommend that the Undersecretary for Health evaluate and 

determine the resources needed by MSO to uniformly implement and monitor 

compliance with the requirements set forth in Directive 1663 on a nation-wide basis. 

VHA Comments 

Concur 

The Veterans Health Administration (VHA) recognizes the need for additional resources 

and three additional staff reported June 2011. The individuals are being hired as GS-14, 

Lead Negotiators, for each Service Area Organization (SAO). 

Completed 

Also, VHA leadership has approved three additional positions in the Medical Sharing 

Office (MSO) to support the oversight and compliance of healthcare contracting required 

by Veterans Affairs (VA) Directive 1663, Health Care Resources Contracting – Buying 

Title 38 U.S.C. 8153. This will result in a total of 10 full-time equivalents (FTE) to 

support the VHA Medical Sharing/Affiliate Program. 

Completed 

Recommendation 2. We recommend that the Undersecretary for Health develop and 

implement a central tracking system that captures and reports all healthcare contracting 

and spending with affiliates for healthcare services including interim agreements. 

VHA Comments 

Concur 

A MSO Review/Approval Tracking System that allows the MSO to track all healthcare 

procurements processed in accordance with VA Directive 1663, to include selling, 

interim contract requests, and transplant contracts, has been completed. 

VA Office of Inspector General 57 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A
 

Completed 

In addition, MSO has assigned a management analyst with sole responsibility to generate 

reports using the data systems such as Electronic Contract Management System (eCMS), 

Federal Procurement Data System (FPDS), Micro Strategy, Zycus. The analyst will 

extract data, monitor and validate that procurements are being processed in accordance 

with VA Directive 1663. 

Completed 

Also, the MSO Office of Inspector General (OIG) Tracking Log has been created to 

allow VHA through the MSO to monitor and track procurements requiring OIG preaward review in accordance with VA Directive 1663. This system also allows MSO to 

identify lag time from the date a proposal is received from an affiliate to the date it is 

submitted to OIG for pre-award review. This information will be used to implement 

MSO intervention plans when a VA Medical Center (VAMC) or an affiliate is not 

responsive to procurement processes. Both systems were launched May 9, 2011, and are 

fully operational. 

Completed 

Recommendation 3. We recommend that the Undersecretary for Health develop and 

provide comprehensive standardized training for VHA contracting staff regarding sole 

source contracting with affiliates and the requirements of Directive 1663. 

VHA Comments 

Concur 

VHA through the MSO is assisting VA Acquisition Academy (VAAA) in developing 

course work for the first official Healthcare Contracting Course. In the interim, two 

VHA Contracting Officers (CO) have been designated as instructors to address current 

educational needs. Pilot classes, two classroom and two on-line sessions, are being 

conducted in summer 2011. 

In process December 31, 2011 

MSO has supported the SAOs in augmenting healthcare training at the SAO Healthcare 

Symposiums. A symposium was held in January and March of 2011 to support the 

healthcare teams for SAO East and Central. 

Completed 

The MSO Re-Design Plan provides for conducting monthly training sessions via Live 

Meeting and teleconference to provide real-time training on processes, trends, and any 

deficient areas identified by the MSO Director and reported to the Chief Procurement and 

VA Office of Inspector General 58 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A 

Logistics Officer. This monthly training also provides an opportunity to conduct cross 

functional training with other support partners such as Patient Care Services (PCS), OIG, 

VA Office of General Counsel (OGC), Regional Counsel, etc. First sessions are 

scheduled for summer 2011. Training will be documented and monitored by the SAO 

Training Officers and the MSO. 

Ongoing December 31, 2011 

Recommendation 4. We recommend that the Undersecretary for Health develop and 

provide comprehensive standardized training on the requirements of VA Directive 1663 

to non-procurement staff who have responsibilities relating to sole source contracting 

with affiliates. 

VHA Comments 

Concur 

VHA will conduct a needs assessment to identify the appropriate non-procurement staff 

requiring training or informational briefings. In addition, VHA will determine training 

delivery methods and implement standardized guidance supported by live training or 

face-to-face training efforts across VHA. 

In process. Action plan with timelines to be completed NLT December 31, 2011. 

Recommendation 5. We recommend that the Undersecretary for Health ensure VHA 

contracting staff adhere to all policy requirements contained in VA Directive 1663, 

including the following: 

a. Each procurement should be adequately planned. 

VHA Comments 

Concur 

VHA will follow VA Directive 1663 requirements. VHA, through the VHA Acquisition 

Quality Director, is currently developing a VHA Standard Operating Procedure (SOP) for 

acquisition planning. An acquisition planning guide will define roles and responsibilities 

of VAMC program officials and contracting officials to ensure a procurement integrity 

protocol is established. The MSO Director is developing supplemental guidance to 

address unique issues related to sole source procurements with an affiliate. This will be 

included in the SOP and the acquisition planning guide. Also, field program training 

conducted by the SAO and Network Contracting Activity (NCA) Contracting Training 

Officers will follow. 

In process December 31, 2011 

VA Office of Inspector General 59 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A
 

b.	 A backup plan for an alternate source for services should be established. 

VHA Comments 

Concur 

VHA will follow VA Directive 1663 requirements. An SOP is being developed to 

identify the formats and templates. These templates will required a detailed explanation 

of the alternate source plan as required by VA Directive 1663. 

In process December 31, 2011 

c.	 Contracts should be competed except where VA has established a need for services 

from a faculty member of the affiliate. 

VHA Comments 

Concur 

VHA will follow VA Directive 1663 requirements. The current MSO review process 

includes detailed scrutiny of sole source justifications to ensure compliance with VA 

Directive 1663. The justifications require VAMC leadership to identify patient care, 

educational, and research program impacts as well as general value to VA (e.g., the 

collateral value of VA’s longstanding partnership with the academic community) to 

support sole source procurement recommendations. 

In process December 31, 2011 

d.	 Salary surveys should not be used to determine fair and reasonable pricing. 

VHA Comments 

Concur 

VHA will follow VA Directive 1663 requirements. VHA would like to note that this 

needs additional attention. In order to address this and other related issues, a workgroup 

has been convened with representatives from the VHA Office Academic Affiliations 

(OAA), the MSO, PCS, SAO Price Analysts, and VHA Field COs to focus on how to 

achieve consistent costing and contracting practices and address other topics such as 

educational indirect costs and payment for on-call coverage. This group will analyze the 

strategies and costing issues used by the MSO negotiation teams and recommend 

methods and tools required to determine fair and reasonable price as it applies to the 

Federal Acquisition Regulations and Standard Cost policies. Then, policy changes would 

be considered and implemented as needed. As a measure of improvement and 

compliance, the documentation requirements have been defined to support fair and 

reasonable price determination in the Price Negotiation Objective Memorandum which is 

VA Office of Inspector General 60 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A 

incorporated as part of the official contract file and support of the Price Negotiation 

memorandum. 

VHA will consult with OIG to ensure that concerns outlined in this report are addressed. 

In process Workgroup Recommendation issued to USH NLT December 31, 2011 

e.	 The key personnel clause is contained in each FTE contract and properly identifies 

each physician. 

VHA Comments 

Concur 

VHA will follow VA Directive 1663 requirements. A quality control checkpoint will be 

added to the VHA Healthcare Contract Review Checklist to ensure incorporation of this 

clause on all contracts. In addition, this topic has been included in the VAAA Healthcare 

Contracting Course. 

In process December 31, 2011 

f.	 Limiting overhead to costs directly associated with administration of the VA contract. 

VHA Comments 

Concur 

VHA will follow VA Directive 1663 requirements. While the current directive limits 

overhead to costs directly associated with administration of the VA contract and OIG’s 

review indicates concerns about whether this is followed at all times, VHA would like to 

note that this needs additional attention. In order to address this, the workgroup 

established to focus on how to achieve consistent costing and contracting practices will 

also analyze overhead costs and the methods and tools required to determine fair and 

reasonable price as it applies to the Federal Acquisition Regulations, Standard Cost 

policies, and VHA policy including a revision to VA Directive 1663 which is currently in 

process. 

VHA will consult with OIG to ensure that concerns outlined in this report are addressed. 

In process Workgroup recommendations issued to USH NLT December 31, 2011 

VA Office of Inspector General 61 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A 

g.	 On-call costs are only permitted when physicians are actually compensated for being 

on-call. 

VHA Comments 

Concur 

VHA will follow VA Directive 1663 requirements. While the current directive only 

permits on-call costs when physicians are actually compensated for being on-call, and 

OIG’s review indicates concerns about whether this is followed at all times, VHA would 

like to note that this needs additional attention. In order to address this, the workgroup 

established to focus on how to achieve consistent costing and contracting practices will 

also analyze the on-call issues and develop recommendations about identifying the 

limitations as they apply to on-call that will be considered in a revision of VA Directive 

1663 which is currently in process. 

VHA will consult with OIG to ensure that concerns outlined in this report are addressed. 

In process Workgroup recommendations issued to USH NLT December 31, 2011 

h. Procedure based contracts should not be awarded at rates higher than Medicare unless 

clearly justified and should exclude the practice expense component when performed 

at VA. 

VHA Comments 

Concur 

VHA will follow VA Directive 1663 requirements. As a measure of improvement, the 

new negotiation process has incorporated a standardized Price Negotiation Objective 

Memorandum that allows for adequate documentation regarding final decision to award 

above the Medicare rates if the negotiation circumstances require such a determination. 

In addition, this subject has been included in the VAAA Healthcare Contracting Course 

and will be a focus topic for the MSO Monthly Augmentation Training to be scheduled 

first quarter of Fiscal Year 2012. 

MSO is also coordinating with the VAAA to discuss developing a new curriculum about 

healthcare cost and pricing. 

In process December 31, 2011 

VA Office of Inspector General 62 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A
 

Recommendation 6. We recommend that the Undersecretary for Health develop a 

standard that accurately defines the expected hours and workload from one FTE for each 

specialty that can be applied by the contracting staff to determine the number of FTE and 

hours to be procured under the contract 

VHA Comments 

Concur 

To address this issue, VHA’s MSO will partner with appropriate stakeholders to identify 

how best to establish parameters that contracting staff can use to determine the number of 

FTE and hours to be procured under a contract. It is important to recognize that 

achieving this goal will be complicated given the many specialties and unique situations 

involve with providing health care. This is also to be considered in a revision of VA 

Directive 1663 which is currently in process. 

VHA will consult with OIG to ensure that concerns outlined in this report are addressed. 

In process Recommendations are to be issued to USH NLT December 31, 2011 

Recommendation 7. We recommend that the Undersecretary for Health develop clear 

and well defined national standard SOWs for each specialty that can be tailored as needed 

to address specific procurement requirements if needed. 

VHA Comments 

Concur 

In November 2010 the VHA Medical Sharing Committee started to identify specialty 

areas for standardizing Performance Work Statements (PWS) and Quality Assurance 

Surveillance Plans (QASP). The committee provides guidance on all proposed contract 

sharing agreements that are competed or sole sourced with affiliates and other healthcare 

providers. Guidance provided includes instruction on compliance with statutory and VA 

policy requirements, clinical soundness, patient safety, quality and cost effectiveness of 

sharing agreements. 

In April 2011, the Community Based Outpatient Clinic (CBOC) and Radiation Oncology 

(Off-site/On-site) templates were completed. They are posted on the MSO Share Point 

for use by VHA field contracting officials and programs. The next Medical Sharing 

Committee reviews will be Interventional Radiology, Neurology, and Orthopedic. This 

will be an on-going effort. 

Ongoing 

VA Office of Inspector General 63 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A
 

Recommendation 8. We recommend that the Undersecretary for Health develop and 

require the use of a standard pricing schedule for procedure based contracts that require 

the listing of all CPT codes with estimated quantities and proposed prices for each code. 

VHA Comments 

Concur 

VHA agrees that it is important to evaluate how best to use CPT codes in future 

contracts. To accomplish this, MSO will partner with appropriate stakeholders to 

develop action plans, solutions, and implementation plans. Because some services are 

not routinely billed utilizing CPT codes, these services will need to be identified and 

guidance established for the field. In other cases, using CPT codes may not be the most 

advantageous way to contract for specific services. Other alternatives will need to be 

developed in these cases. During this evaluation process, VHA will consult with OIG to 

ensure that concerns outlined in this report are addressed. 

In process Recommendations are to be issued to USH NLT December 31, 2011. 

Recommendation 9. We recommend that the Undersecretary for Health conduct an 

evaluation to determine the feasibility of using an administrator or intermediary to 

process billings for procedure based contracts performed at the affiliate similar to those 

used by Medicare administrators. 

VHA Comments 

Concur 

Statutory requirements and other issues about using an administrator or intermediary to 

process billings for procedure based contracts as used by Medicare administrators may 

affect how VHA can use these processes. The MSO Director and appropriate 

stakeholders will examine this issue and provide recommendations to the USH. 

In process Recommendations are to be issued to USH NLT December 31, 2011 

Recommendation 10. We recommend that the Undersecretary for Health develop a 

more robust process to ensure compliance with conflict of interest laws and regulations 

and their applicability to all employees, particularly Title 38 employees, who have a 

financial relationship with the contractor. 

VHA Comments 

Concur 

VHA’s MSO has implemented a Negotiation Kick-Off Checklist which requires each CO 

to conduct a Conflict of Interest (COI) assessment. If a member of the negotiation team 

VA Office of Inspector General 64 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX A 

is found to have a COI, the MSO requests assistance from VAMCs within that specific 

VISN to support the procurement effort. If the VISN does not have the availability of a 

physician within that specialty, then assistance is requested from another VISN and VHA 

Central Office. This process is being included in the VHA Healthcare SOP referenced 

previously. 

A team will be formulated with representatives from OAA, VHA senior leadership, VHA 

VISN Chief Medical Officers (CMO), OGC, and MSO to discuss a revision of VHA 

Handbook 1660.3, Conflict of Interest Aspects of Contracting Scare Medical Specialist 

Services, Enhanced Use Leases, Healthcare Resource Sharing, Fee Basis and 

Intergovernmental Personnel Act Agreements (IPA), to clarify the COI verification 

process for any person involved in the procurement process. 

In process Action plan recommendations to USH NLT December 31, 2011 

Recommendation 11. We recommend that the Undersecretary for Health seek a 

legislative amendment to 38 U.S.C. § 8153 and § 7409 to authorize VA to enter into 

personal services contracts when the services are to be provided at a VA facility. 

VHA Comments 

Concur 

Due to the significant impact on several program areas, representatives from OGC, OAA, 

VHA senior leadership, and MSO will discuss the potential risks for awarding these types 

of contracts and formulate recommendation to the USH. 

In process Recommendations are to be issued to the USH NLT December 31, 2011 

Veterans Health Administration 

July 2011 

VA Office of Inspector General 65 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX B 

OIG CONTACT AND STAFF
 

ACKNOWLEDGMENTS
 

OIG Contact	 For more information about this report, please contact the 

Office of Inspector General at (202) 461–4720 

Acknowledgments	 Maureen Regan 

Scott Coker 

VA Office of Inspector General 66 
Review of VHA Sole-Source Contracts with Affiliated Institutions 

APPENDIX C 

REPORT DISTRIBUTION
 

VA Distribution 

Office of the Secretary 

Veterans Health Administration 

Veterans Benefits Administration 

National Cemetery Administration 

Assistant Secretaries 

Office of General Counsel 

Non-VA Distribution 

House Committee on Veterans’ Affairs
 

House Committee on Appropriations, Subcommittee on Military Construction,
 

Veterans Affairs, and Related Agencies 

House Committee on Oversight and Government Reform 

Senate Committee on Veterans’ Affairs 

Senate Committee on Appropriations, Subcommittee on Military Construction, 

Veterans Affairs, and Related Agencies 

Senate Committee on Homeland Security and Governmental Affairs 

National Veterans Service Organizations 

Government Accountability Office 

Office of Management and Budget 

This report is available at http://www.va.gov/oig/publications/reports-list.asp 

VA Office of Inspector General 67