A Federal Case

Private sector contracting professionals can learn from their federal counterparts

OK, let’s get it out on the table. You’re thinking, the federal government is big, bureaucratic, slow to respond to emergencies and out of touch with the times. Its buildings are old, supplies are cheap. Initiative? Creativity? Forget it. In short, there’s nothing the feds do that those in the private sector should copy. Right?

Well, it’s true that the feds are knee-deep in acronyms, and that the Federal Acquisition Regulation is 1,951 pages long! (Check it out for yourself at http://www.arnet.gov/far/current/pdf/FAR.book.pdf.) But JHC readers who take a closer look may find they have more in common with federal contracting professionals than they might think – and more to learn.

Federal contracting professionals wrestle with price vs. total cost and quality, customer service issues and contract compliance. Like all healthcare contracting professionals, federal contractors have a sense of mission. Not only must they care for the sick, but they must provide for the young men and women (and their families) who are in harm’s way on the battlefield. In recent years, their mission has expanded to include humanitarian relief efforts at home and abroad. Federal contracting professionals are also serious about their commitment to do business with small businesses.

“The federal contracting process is more complete [than that of the private sector],” says Michael O’Connor of The Colonial Group, Palatine, Ill., which helps manufacturers navigate the government contracting world. “The process also demonstrates fairness because the feds, by law, must give serious consideration not only to large businesses, but to small businesses and businesses owned by veterans, service-disabled veterans, women and minorities; as well as businesses in historically underutilized areas,” he says. “The biggest company doesn’t always win the contracts, because the government demonstrates responsibility toward socioeconomic contracting.

“Another differentiating factor is there seems to be less subjectivity in government contracting than in the for-profit and not-for-profit worlds,” adds O’Connor. “The federal government has a comprehensive checklist to determine value, leaving little to bias. Federal contracting officers look at more than the ‘price page’ when reviewing contract offers. They know best value cannot be determined by price and price alone.”

A matter of scale
It’s true that the feds operate on a different scale than do most JHC readers, and that can make any comparisons difficult. For example, in 2005, the Defense Supply Center Philadelphia (DSCP) – part of the Defense Logistics Agency – supplied and managed more than $12.7 billion worth of food, clothing and textiles, pharmaceuticals, medical supplies, and general and industrial items in support of America’s soldiers worldwide. The organization processed 28.6 million requisitions. The medical supply chain alone accounted for roughly $3.5 billion in 2005. Two hundred people (including administrative staff) are involved in contracting and supplier relations for medical products and equipment. Meanwhile, the National Acquisition Center of the Department of Veterans Affairs has more than 1,650 contracts and agreements, and annual sales of more than $13 billion.

The federal government is so big that when it experiences a sudden surge in demand for particular products, it can disrupt the nation’s supply chain for them. For example, when the military recently evaluated tourniquets for soldiers in the field, it made the decision to order 225,000 new ones. The medical supply chain sourced the items in a single day, and every soldier in Iraq and other areas was carrying one within two months. Developments like that call for planning, something that federal contracting professionals do well.

Always ready
The tourniquet situation demonstrates another aspect of federal contracting: The people in this business are driven by a sense of mission and readiness. “If you’re working at DoD and you’re not focused on readiness, you don’t belong here,” says Steve McManus, director, medical supplier operations, DSCP.

One of the first major deployments in support of ongoing operations in Iraq and Afghanistan was the hospital ship USNS Comfort from Baltimore, recalls McManus. On the evening of Dec. 27, 2002, DSCP got a call that the ship was to be deployed on Jan. 4, and that it would need to requisition 5,000 line items immediately. The department activated its phone tree and had notified 200 people by the next morning. “That’s the culture of the medical supply chain,” says McManus. “Our focus is on our mission and taking care of customer requirements. Nobody was saying, ‘I can’t do it because of family commitments,’ or ‘Will I get paid overtime?’” The ship was deployed by the 4th.

Needless to say, federal contractors have to balance the need for immediate access to medical products with the high cost of keeping them in inventory. “If you had looked at our process of 15 or 20 years ago, you would see that when we had a requirement out of the ordinary, we would go to the market, solicit quotes, etc.,” says McManus. “But since then, we have adopted a philosophy that we try to have everything covered. That’s not to say we never need to go to the market for quotes. But every time we do, it represents a failure of the process.”

To cover its needs, DSCP has a plethora of agreements on which to draw at all times. Its Distribution and Pricing Agreements, or DAPAs, establish the selling price of a product through one of the Department of Defense’s prime vendors. DoD also draws upon the Department of Veterans Affairs’ Federal Supply Schedule Service, which includes more than 1,400 agreements for various commodity groups, including medical equipment and supplies, pharmaceuticals, in-vitro diagnostics, etc. In addition, DSCP has a number of “corporate exigency contracts” to cover those situations in which a sudden product demand by the government could disrupt the commercial supply chain. The government doesn’t pay for the inventory, but does, in essence, pay for an option to purchase it at specified quantities.

“When we have huge requirements due to an event like Katrina or a troop deployment, we can execute against those contracts and have massive amounts of material delivered in a short period of time,” says McManus.

In some cases, federal contracts are mandatory for the military and veterans. But, as IDN contracting professionals know, there’s no such thing as black-and-white.

“Going back almost 20 years ago, we were considered to be a mandatory source of products,” says McManus. “But you can acquire a very dangerous mindset that way. There’s really no such thing. There are a thousand ways to get around a mandatory source.” Acknowledging that fact, the DSCP in the early 1990s set about to change its focus. “We wanted to make our processes and choice of vendors so attractive and easy to use that our customers wouldn’t want to go anywhere else,” says McManus. Instead of tabulating sales as a sign of strength, DSCP now looks at sales as opportunities to serve its customers. Clinicians participate in every decision-making process. “We couldn’t really operate without clinical participation.”

Underscoring its emphasis on customer service, the organization recently underwent a self-described “dramatic organizational transformation” by organizing each of its four supply chains (food, clothing, medical, and construction and equipment) into two complementary parts, one focusing on the customers and their needs, the other on suppliers and the rest of the industrial base. Today, if a DoD customer needs products from DSCP as well as, say, the Defense Supply Center Columbus (the source for construction and electronic spare parts) or the Defense Supply Center Richmond (the source for repair parts and operating items, as well as aviation weapon systems and environmental logistics support), that customer can work with one person at DSCP, who will facilitate the acquisition of products from all the different business units.

Like DSCP, the contracting professionals at the VA’s National Acquisition Center in Hines, Ill., a western Chicago suburb, attempt to keep their eyes on their customers. NAC is responsible for supporting the healthcare requirements of the VA as well as other government agencies, including the Department of Defense, Bureau of Prisons, Public Health Services and others. NAC operates two services or divisions – the Federal Supply Schedule Service and National Contract Service.

The Federal Supply Schedule Service draws up agreements primarily for recurring items used throughout the federal healthcare system. These agreements are multiple-award, indefinite delivery/indefinite quantity, and are national in scope. They are overarching agreements against which orders may be placed, explains Carole O’Brien, director of the Federal Supply Schedule Service. “It’s an open program,” she says. “We try to put as many vendors on contract and increase product availability, so that our customers will have the widest breadth of choice.” Clinical input is minimal in FSS agreements, because of the wide variety and nature of products under contract, she says. VA facilities are expected to use Federal Supply Schedule agreements when possible.

However, things are different at the National Contract Service of the VA’s National Acquisition Center, which bears responsibility for the med/surg and pharmaceutical prime-vendor distributor programs; direct delivery of high-tech medical equipment, such as CT, MRI and ultrasound; VA’s standardization program for pharmaceuticals, prosthetics and med/surg items; contracting for the VA’s Consolidated Mail Outpatient Pharmacies; and pharmaceutical repackaging. Unlike the Federal Supply Schedule agreements, the contracts entered into by the National Contract Service are more binding. In fact, the med/surg and pharmacy prime vendor programs are mandatory. Virtually all pharmaceuticals are purchased through the prime vendor contract. The percentage is somewhat less on the med/surg side, with 60 percent going through a distributor. This is due to a number of things, including the fact that the program is newer, local warehouses are available at some medical centers, and not all med/surg items are available through distributors.

“We get clinician input on anything we standardize on,” says Ron Jenkins, NAC assistant director, speaking of the National Contract Service. “If we standardize on wound care products, we get wound care nurses and physicians involved, because we’re using selective products for the use in the VA and we’re excluding others.” The branch makes use of “integrated process teams,” consisting of clinicians, program managers and contracting officers and specialists, to make product decisions. “When we make a decision, we want to make sure the entire VA can support it,” he says.

Even so – and this may ring true for other JHC readers – actual compliance can fall short of the goal. “Some of the problems stem from our communication system,” says Jenkins. “An agreement can be awarded, but there are instances where the facilities tell me they didn’t know about it. So there are communication issues and preference issues.”

The government now tries to purchase as many products and services from the commercial marketplace, or what Jenkins calls “commercial off-the-shelf items.” And that’s a different approach than in years past.

“The way we used to do things, we would spec out everything,” says Jenkins. “We would tell [the vendor] about the box we wanted the products to come in. In fact, we almost took ownership of creating that box. Now, we try to stick with product descriptions. If we want a tongue depressor, I’ll tell you I want a wood one that’s X inches long. That’s all the information you need. I won’t tell you that I want that tongue depressor made out of a certain kind of wood, or with a certain coating, unless we absolutely need to. We trust the commercial market and the FDA – if the product needs FDA approval – to put out a quality product with a minimum amount of specifications.”

That cuts down – though it doesn’t eliminate – the need for extensive clinical involvement in many product decisions. “Our clinicians are trying to set a standard of care that they feel is high, and they try to keep in mind that better care might cost more money; but their primary goal is to select quality products. Also, we want consistency across the system, so that a veteran going into a VA hospital in New York will get the benefit of the same quality products as in Los Angeles or Florida.”

Quality, price and best value
Indeed, federal contracting professionals speak often about the need to balance price and quality. “Our … starting point is ‘We want pricing equal to or better than your best commercial price,’” says O’Brien. That said, she and her team recognize that the Federal Supply Schedule agreements are non-binding on the VA medical centers and the local and regional clusters of these facilities (called VISNs, or Veterans Integrated Service Networks), and so might not be able to command the same pricing as contracts with an organization with 100 percent commitment levels.

Vendors with Federal Supply Schedule agreements are free to offer FSS customers – such as VA facilities or VISNs – lower prices or other incentives in exchange for higher levels of commitment. Such agreements are called incentive agreements or blanket purchase agreements.

The NAC and DSCP are upfront with vendors when they’re seeking low price or what they call “best value,” which the DSCP (in materials to vendors) defines as “any competitive negotiated acquisition where the contracting officer uses discriminating factors, in addition to price, in the evaluation of proposals and award of a contract.” “Best value” is often invoked for sophisticated items and pieces of equipment, and some services, such as distribution.

“This transition to using best-value contracts goes back 20 years or so,” says McManus. “At this point, it’s part of the culture. If you went to a contracting officer and said, ‘Would you consider only low bid for diagnostic imaging?’ they’d look at you as if you were out of your mind.”

Vendors, and those who represent them, say that “best value” isn’t just lip service. In fact, they say things are pretty well spelled out.

“The government hangs its hat on the terms ‘fair and reasonable,’” says Gary Gustafson, president, Preferred Marketing Programs, which trains companies to improve their effectiveness in sales to the government. “In many cases, the government wants to make sure it is treated fairly in comparison to the commercial sector. The government can choose a product on low price based on the fact it is a commodity type product, but they will disclose that to a potential bidder. They will say something like, ‘Lowest price technically accepted.’ A best value could be on a bid request. If it is not, vendors should ask. Best value deals are most often spelled out as far as criteria.”

It is that forthrightness that vendors appreciate when dealing with the government, says Gustafson. “You know where you stand. There are checks and balances; you can check out competitive prices. And if they do something wrong, they have to fix it.

“They’ll tell you exactly what’s on their mind. They’ll tell you, ‘Low price is it.’ But if they’re looking for best value, they’ll tell you exactly what that means. Nobody gets tricked with the government.”