Executive Summary

The Office of Inspector (OIG) conducted this audit to evaluate the effectiveness of performance monitoring of noncompetitive clinical sharing agreements to specifically determine if Veterans Health Administration (VHA) controls over performance monitoring ensured that VA received the services it paid for.

Sharing agreements are written contracts that allow VA to buy, sell, or exchange health care resources and services with non-VA facilities. Title 38 of the United States Code (USC), Section 8153, "Sharing of Health Care Resources," authorizes VA to enter into noncompetitive sharing agreements with affiliated institutions and other entities associated with these affiliated institutions. In practice, many high cost sharing agreements are noncompetitive agreements through which VA buys clinical services from affiliated medical schools and entities associated with medical schools, such as university hospitals, clinical departments, and medical practice groups.

At the end of fiscal year (FY) 2007, Veterans Integrated Service Networks (VISNs) reported having 669 noncompetitive clinical sharing agreements valued at $575 million. Of these 669 agreements, 178 (27 percent) agreements, each valued at $100,000 or more, were for surgical and anesthesiology services provided at VA medical centers and healthcare systems (referred to as VAMCs in this report). These 178 noncompetitive agreements had a total value of about $200.6 million and included three general types of agreements—121 agreements based on full-time equivalent employees (FTE) for which VA measures performance in terms of hours or days, 55 per-procedure agreements for which VA measures performance in terms of the number and types of procedures performed, and 2 capitation-based agreements for which VA measures performance in terms of the number of patients served.

VA has two offices that provide policy direction to contracting activities. At the Department level, VA’s Office of Acquisition and Logistics develops policy for VA-wide acquisition activities. It manages VA’s Contracting Officer Certification Program and warrants all VA contracting officers. This office also manages other acquisition training, including continuing education for contracting staff. Within VHA, the Prosthetics and Clinical Logistics Office (PCLO) Medical Sharing Team provides "day-to-day" policy direction and technical assistance to the VISNs, where VHA’s contracting activities are located, and to the VAMCs, which receive and monitor the contracted services.

VA Directive 1663, "Health Care Resources Contracting—Buying, Title 38 U.S.C. 8153," dated August 10, 2006, describes the major rules for buying health care resources and services. In addition, because sharing agreements are contracts, they must also comply with certain provisions of the Federal Acquisition Regulation (FAR) and VA Acquisition Regulation (VAAR). FAR and VAAR require contracting officers to ensure compliance with sharing agreement terms and allow contracting officers to appoint contracting officers’ technical representatives (COTRs) to monitor contractor performance and certify contractor invoices for payment.

Our audit focused on surgical and anesthesiology noncompetitive clinical sharing agreements that were in effect on September 30, 2007. The surgical agreements included all surgical specialties, such as orthopedics, ophthalmology, urology, and cardiac surgery. We selected surgical and anesthesiology agreements because they represent the largest portion—in number and dollar value—of all clinical sharing agreements. We conducted onsite work at eight randomly selected VAMCs. At each VAMC, we reviewed all surgical and anesthesiology sharing agreements valued at $100,000 or more. In all, we reviewed a total of 58 agreements, including 34 FTE-based agreements and 24 per-procedure agreements. None of the eight VAMCs used capitation-based agreements to acquire surgical or anesthesiology services. We limited our review to only those services that contractors provided onsite at VAMCs. We conducted our audit work from November 2007 through May 2008.

VHA lacks reasonable assurance it received the services it paid for because performance monitoring controls over noncompetitive clinical sharing agreements are not effective. Strengthening controls over performance monitoring of noncompetitive clinical sharing agreements could save VHA about $9.5 million annually or $47.4 million over 5 years. Of the estimated savings, only about $96,000 in charges resulting from calculation errors may be recoverable because the terms of most of the sharing agreements we reviewed did not include provisions for adjusting payments. We found performance monitoring weaknesses for all 58 surgical and anesthesiology sharing agreements we reviewed at the 8 VAMCs. As a result, for 30 (52 percent) of the 58 agreements, VAMCs overpaid contractors because COTRs did not verify that VAMCs received the services required at the prices specified.

In addition to performance monitoring issues, we also found that during negotiations of per-procedure sharing agreements, VISN contracting officers agreed to pay at least full Medicare rates. However, the full Medicare rates include a practice component for overhead charges that contractors do not incur when they provide services at VAMCs. Excluding the Medicare practice component, as required by VA policy,

VHA needs to strengthen controls over sharing agreement performance monitoring to ensure VAMCs receive the services they purchase. Performance monitoring for all 58 agreements at the 8 VAMCs needed improvement. As a result, for 30 sharing agreements (17 FTE-based and 13 per-procedure agreements), VAMCs overpaid contractors for services that were not provided, not needed, or incorrectly billed. For the FTE-based sharing agreements, COTRs did not monitor clinical staff levels provided, and for the per-procedure sharing agreements, COTRs did not always ensure that services were received or were needed, and they did not verify that contractors correctly calculated their Medicare-based charges.

FTE-Based Sharing Agreement Monitoring. Inadequate monitoring of sharing agreements at the eight VAMCs resulted in overpayments of about $3.5 million for clinical services that were not provided in FY 2007. For the 34 FTE-based sharing agreements, COTRs generally ensured that monthly charges by the contractors conformed with contract prices, but they did not determine the actual amount of time contract providers had worked or whether the hours worked were meeting the hours that contractors were required to provide. Of the eight VAMCs, three had no monitoring procedures in place at all; three used clinical reports to determine contractor performance, but did not have procedures to reconcile the workload in clinical reports to the time requirements in the sharing agreements; and the other two used contractor time records to monitor sharing agreements, but did not have procedures to verify the accuracy of the time records.

Per-Procedure Sharing Agreement Monitoring. Ineffective monitoring of per-procedure sharing agreements resulted in overpayments of about $682,000 for clinical services that were not provided, not needed, or incorrectly billed in FY 2007. While COTRs generally verified that contractors had performed the clinical services they billed for, two VAMCs paid about $586,000 for services not received or not needed. One VAMC paid for clinic treatments the contractor did not provide. Another VAMC paid for clinical services that the sharing agreement did not clearly require and the VAMC did not need. In addition, three VAMCs overpaid about $96,000 because contractors charged incorrect rates and the COTRs did not effectively review the charges before certifying contractor invoices.

We attributed the sharing agreement monitoring deficiencies at the eight VAMCs to three factors: (1) sharing agreements did not specifically and accurately state performance requirements, (2) VISN officials did not adequately oversee COTR activities, and (3) COTRs did not have sufficient training to monitor clinical service sharing agreements.

Sharing Agreements Did Not Specifically and Accurately State Performance Requirements. COTRs were unable to adequately monitor performance because the performance requirements were not clearly specified in the sharing agreements. Contractor performance requirements should be detailed enough for COTRs, as well as contracting officers and contractors, to know at a minimum what types of services will be provided, who will provide the services, and the rates to be charged. In addition to the vague performance requirements, inaccurate performance requirements for FTE-based sharing agreements also negatively impacted the COTRs’ abilities to effectively monitor these agreements. Sharing agreement requirements that accurately reflect the service needs of the VAMC are especially important when agreements have no provisions allowing COTRs to adjust contractor payments based on the actual work performed.

VISN Officials Did Not Adequately Oversee COTR Activities. As part of their contract administration responsibilities, FAR and VAAR require contracting officers to ensure that contractors comply with the terms of agreements. Contracting officers may do this by delegating COTRs at the VAMCs to monitor contractor performance and certify invoices for payment. Ideally, sharing agreement performance monitoring should be a team effort between the contracting officer, the COTR, and VISN and VAMC management. For 57 of the 58 contracts we reviewed, VISN contracting officers had appointed COTRs. However, the contracting officers did not provide the COTRs clear guidance about their responsibilities, nor did they implement procedures to routinely review the COTRs’ monitoring activities to ensure they were effective. Furthermore, management officials at the VISNs did not establish any procedures to evaluate the effectiveness of sharing agreement performance monitoring activities.

The terms and conditions in 21 of the 24 per-procedure sharing agreements stated that the contractors would charge VAMCs 100 percent or more of Medicare Part B rates for each procedure performed. This means that under the terms of the sharing agreements, the VAMCs are required to pay for all three components of the procedures—work, malpractice, and practice. However, when VISN contracting officers negotiated the sharing agreements, it was not appropriate to agree to the full Medicare rates because these rates include the practice component, which factors in costs for maintaining a practice, such as renting office space, buying supplies and equipment, and paying for other facility-related costs. The practice component is not applicable for services provided at VAMCs since the VAMCs, not the contractor, incur all facility-related costs included in this component.

VA Directive 1663 explicitly requires VAMCs to exclude the practice component from reimbursements. Ensuring that VISN contracting officers negotiate per-procedure sharing agreement rates that exclude the Medicare Part B practice component could save VHA about $2.5 million annually or $12.4 million over 5 years.

Strengthening performance monitoring controls over noncompetitive clinical sharing agreements could save VHA about $9.5 million annually or $47.4 million over 5 years. In FY 2007, insufficient monitoring of surgical and anesthesiology sharing agreements resulted in VAMCs overpaying $4.1 million for services that were not received, not needed, or incorrectly billed. For the 34 FTE-based sharing agreements, most COTRs did not monitor clinical staff levels provided, and for 21 of the 24 per-procedure sharing agreements, COTRs did not verify that contractors correctly calculated Medicare-based charges prior to certifying contactor invoices for payment. Furthermore, strengthening procedures for negotiating per-procedure sharing agreements to ensure VAMCs are only required to pay for the Medicare Part B work and malpractice components—and not the practice component—could save VA about $2.5 million annually or $12.4 million over 5 years.

The Under Secretary for Health agreed with the findings and recommendations of the report and provided acceptable implementation plans. The Under Secretary also agreed with the monetary benefits of $59.8 million. (See Appendix C, pages 21–24, for the full text of the Under Secretary’s comments.) In response to the audit recommendations, the Under Secretary agreed to establish standard procedures, VISN level oversight controls, and COTR training for sharing agreement monitoring. He also agreed to implement procedures that ensure the accuracy of Medicare-based charges is verified, to require VISN contracting officers to begin immediate recovery of the overpayments we identified, and to ensure that per-procedure sharing agreements for onsite clinical services exclude the Medicare practice component from contract rates. We will follow up on the implementation of the planned improvement actions.