State audit says Upstate Medical University not reviewing contracts enough

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O F F I C E O F T H E N E W Y O R K S T A T E C O M P T R O L L E R

Thomas P. DiNapoli

D IVISION OF STATE GOVERNMENT ACCOUNTABILITY

State University o New YorkUpstate Medical University

Contracts or Personal and

Miscellaneous Services

Report 2010-S-3



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Division of State Government Accountability 3

Table of Contents

Page

Authority Letter ......................................................................................................................... 5

Executive Summary ................................................................................................................... 7

Introduction ............................................................................................................................... 9Background .......................................................................................................................... 9Audit Scope and Methodology ......................................................................................... 10Authority ............................................................................................................................. 11Reporting Requirements ................................................................................................... 11

Contributors to the Report ............................................................................................... 12

Audit Findings and Recommendations ................................................................................. 13Justifcation o Service Contracts..................................................................................... 13Reassessment o Service Contracts .................................................................................. 15Recommendations ............................................................................................................. 16

Agency Comments ................................................................................................................... 17

State Comptroller’s Comments .............................................................................................. 21




Division of State Government Accountability

State of New YorkOf ce of the State Comptroller

January 26, 2011

Nancy L. Zimpher, Ph.D., Chancellor David R. Smith, M.D., Of ce o the PresidentState University o New York Upstate Medical University State University Plaza 750 East Adams Street353 Broadway Syracuse, New York 13210Albany, New York 12246

Dear Chancellor Zimpher and Dr. Smith:

Te Of ce o the State Comptroller is committed to helping State agencies, public authoritiesand local government agencies manage government resources ef ciently and e ectively and,by so doing, providing accountability or tax dollars spent to support government operations.Te Comptroller oversees the scal a airs o State agencies, public authorities and local

government agencies, as well as their compliance with relevant statutes and their observanceo good business practices. Tis scal oversight is accomplished, in part, through our audits,which identi y opportunities or improving operations. Audits can also identi y strategies orreducing costs and strengthening controls that are intended to sa eguard assets.

Following is a report o our audit o Contracts or Personal and Miscellaneous Services . Tisaudit was per ormed pursuant to the State Comptroller’s authority as set orth in Article V,Section 1 o the State Constitution and Article II, Section 8 o the State Finance Law.

Tis audit’s results and recommendations are resources or you to use in e ectively managing your operations and in meeting the expectations o taxpayers. I you have any questions aboutthis report, please eel ree to contact us.

Respect ully submitted,

Of ce o the State Comptroller Division o State Government Accountability

Authority Letter




State of New YorkOf ce of the State Comptroller

EXECUTIVE SUMMARY

Audit Objectives

One objective o our audit was to determine whether the State University o New York-UpstateMedical University (Upstate) justi ed the need to contract or personal and miscellaneousservices. Another objective was to determine whether Upstate periodically reassessed personaland miscellaneous services contracts to identi y what work could be de erred, eliminated, orreduced to save State unds.

Audit Results - Summary

Various directives rom the New York State Division o the Budget and the Governor’s Of ceinclude the need or State agencies to justi y their personal and miscellaneous service contracts(Service Contracts) and to reassess whether they can be de erred, eliminated or reduced tohelp achieve overall budgetary reductions and related cost savings. Tese directives haveadded signi cance because in August o 2008 the Governor required State agencies to achievespending reductions o 10.35 percent or State scal year 2008-09. On October 15, 2009, theGovernor also ordered State agencies to reduce their scal year 2009-10 operating budgets by another 11 percent. For the period April 1, 2006 through February 1, 2010, Upstate had 665active Service Contracts (excluding construction and commodities) totaling $499.8 million.

We reviewed a sample o 50 Service Contracts valued at $148.8 million and ound that Upstatedid not maintain suf cient documentation to justi y the need or 38 o the 50 contracts totaling$116.3 million. Upstate of cials told us the main reasons or the 38 contracts were to attractcandidates or needed medical positions at the hospital. For example, contracts are used toattract physicians or certain positions and provide compensation until the physician establishesa patient base and the associated revenue. Other contracts are to attract and compensate otherphysicians or services, such as those needed by a rauma 1 acility. However, even in caseswhere contracts cannot be eliminated, Upstate may be able to reduce the scope o work to

achieve savings. We believe that supporting documentation is necessary to adequately establishthat Upstate has reached the correct conclusions about the need or contractual services andthe extent o opportunity or reducing contract scope to achieve savings.

Upstate’s State budget was cut $26 million (26 percent) during the three scal years 2008-09through projected 2010-11. In addition, Upstate experienced mandatory cost increases (e.g.,contractual salary increases and utility cost in ation). Of cials stated that in response to the

Executive Summary



8

Of ce of the New York State Comptroller

reduction in its State unding they implemented a number o initiatives to increase revenue andcut costs. Upstate of cials also cited savings o about $1.7 million rom contract cuts.

We noted that Upstate did not document that it had reviewed all current and planned ServiceContracts, as part o its budget reduction e orts. Such an analysis is essential to ensure that

management has identi ed all opportunities where the scope o contract work may be de erred,eliminated or reduced to generate cost savings. I Upstate had been able to cut its averagespending on Service Contracts by just the 10.35 percent savings goal or overall budgetary reductions, it could potentially save about $4.6 million annually.

We made two recommendations or improving Upstate’s administration and monitoring o Service Contracts. Upstate of cials generally agree with the recommendations.

Tis report, dated January 26, 2011, is available on our website at:http://www.osc.state.ny.us.Add or update your mailing list address by contacting us at: (518) 474-3271 orOf ce o the State Comptroller

Division o State Government Accountability 110 State Street, 11 th FloorAlbany, NY 12236




Introduction

Te mission o Upstate is to improve the health o the communities they

serve through education, biomedical research, and health care. Educatingmore than 1,200 students in their our colleges, Upstate is Central New York’s only academic medical center. In addition, Upstate’s University Hospital, is a 409-bed inpatient care acility and Central New York’s only level 1 trauma center which o ers several health care services unique tothe region. Upstate also hosts 450 graduate physicians in their residency and ellowship training programs and provides continuing education topractitioners. Annually, University Hospital and the outpatient clinicssee about 140,000 patients. Upstate’s aculty members that maintaina clinical practice are organized along department lines in 18 medicalservice groups. Tese aculty members have admitting privileges toUniversity Hospital.

According to Upstate records, it had 665 active Service Contracts(excluding constr uction and commodities) totaling $499.8 million duringthe period April 1, 2006 through February 1, 2010. Te contr acts are orsuch services as on-call physician services and medical direction, stand-by contracts or temporary clerical and medical personnel, ood service,security, parking management, advertising, and equipment maintenance.

Te ollowing directives issued rom the New York State Division o theBudget and the Governor set orth expectations or State agencies tomake sure that expenditures, including Service Contracts, are justi edand are periodically reassessed:

• State Budget Bulletin H-1025, which became e ective July 31, 2003,requires agency management to review all contra cts (both new andrenewals), including those that involve service delivery to a ectedcitizens, to ensure that lower priority, overlapping or otherwiseinef cient activities are eliminated. Tis Bulletin was in e ect untilSeptember 2009.

• State Budget Bulletin B-1178, which became e ective April 21, 2008,requires agency management to scrutinize all programs and operationsto identi y opportunities to eliminate less important activities andspending on non-essential items. It urther requires agencies todevelop plans to identi y cost-savings and recurring savings. In thisregard, under B-1178, agencies are required to scrutinize spending

or contractual services among several other items. Furthermore,B-1178 requires agencies to develop plans that include a ramework

Background

Introduction



10


or continuing scal year 2008-09 savings through to scal year 2011-12.

• State Budget Bulletin B-1183, which became e ective August 21, 2008,requires State agencies to review all agency programs and operationsto identi y opportunities or eliminating less-essential activities andspending on non-essential items.

• On June 4, 2008, the Governor issued Executive Order No. 6 (Order)requiring State agencies not to enter into Quali ed Personal ServicesContracts (e.g., engineering, research and analysis, data processing)exceeding $1 million or more in personal service costs over any 12-month period unless the agency rst determined that: (a) thecontractor can carry out the task more ef ciently or e ectively thanState employees; (b) the contractor can carry out the task or a lowercost than State employees; or (c) the contract is necessary to protectthe public health or sa ety, or or some other compelling reason.

Both the Budget Bulletins and the Order have added signi cance, giventhe State’s increasing scal dif culties. In this regard, in August 2008,the Governor directed that State agencies evaluate all programs andoperations to identi y opportunities to eliminate less-essential activitiesand achieve spending reductions o 10.35 percent in State scal year2008-09. As part o this responsibility, State agencies were to develop adetailed plan that described the agency’s proposed process or reviewing/approving non-personal service spending. Agencies were expected tobalance personal service and non-personal service reductions so as tonot disproportionately impact either, and to ensure recurring savings inboth categories.

One objective o our audit was to determine whether the UpstateMedical University (Upstate) justi ed the need to contract or personaland miscellaneous services (Service Contracts). Another objective wasto determine whether Upstate periodically reassessed Service Contractsto identi y what work could be de erred, eliminated or reduced to saveState unds. For the purposes o our audit, Service Contracts are thosein which the majority o the costs associated with the contracts are orservices and labor. We did not include contracts or commodities or

capital construction. Our audit period was April 1, 2006 through April10, 2010.

o achieve our objectives, w e interviewed Upstate personnel, andreviewed contracts and other supporting documentation provided by Upstate. We also reviewed relevant State laws, the Order and BudgetBulletins. We selected a judgmental sample o 50 Service Contractstotaling $148.8 million that were primarily State- unded (50 percent or

Audit Scope andMethodology




higher) rom the population o 665 con tracts active during our auditperiod. We based our selection on the type o service to include a mixo di erent services, and dollar amount, with most contracts sampledover $250,000. Te selection includes contracts or physician services,temporary medical and clerical staf ng, transcription services, ood

service, security services, janitorial, outpatient pharmacy , workers’compensation billing and collection, advertising, and other services.

We conducted our per ormance audit in accordance with generally accepted government auditing standards. Tose standards require thatwe plan and per orm the audit to obta in suf cient, appropriate evidenceto provide a reasonable basis or our ndings and conclusions based onour audit objectives. We believe that the evidence obtained provides areasonable basis or our ndings and conclusions based on our auditobjectives.

In addition to being the State Auditor, the Comptroller per orms certainother constitutionally and statutorily mandated duties as the chie scalof cer o New York State. Tese include operating the State’s accountingsystem; preparing the State’s nancial statements; and approving Statecontracts, re unds, and other payments. In addition, the Comptrollerappoints members to certain boards, com missions and publicauthorities, some o whom have minority voting rights. Tese dutiesmay be considered management unctions or purposes o evaluatingorganizational independence under generally accepted governmentauditing standards. In our opinion, these unctions do not a ect ourability to conduct independent audits o program per ormance.

Tis audit was per ormed pursuant to the State Comptroller’s authority as set orth in Article V, Section 1 o the State Constitution and Article II,Section 8 o the State Finance Law.

A dra t copy o this report was provided to State University o New Yorkand Upstate of cials or their review and comment. Teir comments wereconsidered in preparing this nal audit report and are included at the endo the report along with the State Comptroller’s Comments addressingcertain items in the Upstate Medical University’s response.

Within 90 days o the nal release o this report, as required by Section170 o the Executive Law, the Chancellor o the State University o New York shall report to the Governor, the State Comptroller, and theleaders o the Legislature and scal committees, advising what steps weretaken to implement the recommendations contained herein, and whererecommendations were not implemented, the reasons why.

Authority

Reporting Requirements



12


Major contributors to this report include Carmen Maldonado, Steve Goss,Roger Mazula, Wayne Bolton, Raymond Barnes, and Bruce Brimmer.

Contributors tothe Report




Audit Findings and Recommendations

We selected a sample o 50 State- unded Service Contracts and reviewed

available documentation to determine whether the need or the servicesand the decision to contract or services was justi ed with supportingdocumentation. We ound that Upstate justi ed the need or 12 contractstotaling $32.5 million. Tese generally represented large dollar contracts

or physician services, workers’ compensation billing and collection,data collection, and student nu rsing. However, Upstate did not havedocumentation showing that it ormally evaluated the justi cation orthe rem aining 38 contracts totaling $116.3 million, pri or to enteringinto the contracts. Tese contracts involve temporary medical andclerical staf ng (17) , physician services (3), outpatient pharmacy (1),transcription services (1), staf ng provided by a Medical Service Group(1), janitor ial services (1), ood services (1 ), security (1), records release(1), advertising (6), snow plowing (1), student instruction (2), andequipment maintenance (2).

Upstate manager s told us the main reasons or the 38 contracts we re toattract candidates or needed medical positions, t o obtain services thatare needed immediately, and to obtain some services not available in-house. Fo r example, contracts are used to attract physician s or certainpositions and provide compensation until the physi cian establishes apatient base and the asso ciated revenue. Other contracts are used toattract and compensate phy sicians, such as those needed by a rauma1 acility, and to obtain certain services when State positions cann ot be

lled promptly due to lack o an active Civil Service list.

O the 38 contracts, 17 totaling $37.1 million are or temporary sta tocover employee leave and vacancies so that patient care is not negatively impacted. About $14 million had been spent on these contracts atthe time o our audit. (Four o the 17 contracts or $4.4 million had nospending and one contract or $3.7 million had expired.) Upstate of cialsdid not provide documentation to support the need or the services andthe decisions to obtain the services via outside vendors. Tey also did not

provide any documentation to indicate they reviewed alternatives such ashiring State employees part-time or per diem. In response to our requests

or any documentation, Upstate of cials prepared an analysis that showedtheir actual cost during 2009 o using temporary staf ng contracts was$1.38 million less than it would have been or State employees. Clearly this in ormation could not have been used to justi y the decision thatcontracting out or these services was the best method. Furthermore, theanalysis is incomplete because there is no indication that Upstate of cials

Justifcation o

Service Contracts

Audit Findings and Recommendations



14


assessed obtaining these services in another manner such as hiring Stateemployees on a part-time or per diem basis.

Upstate of cials indicated that using temporary sta provides exibility because they only use the sta when they are needed. However, our

review o the use o temporary sta showed that 24 contract sta worked,or were expected to work continuously or one year or longer in thesame work assignment. One contract sta worked hal -time or overthree years in the same assignment. Upstate of cials in ormed us the 24sta worked extended periods o time because it is more cost-e ectiveto reassign trained temporary sta to various departments than to trainnew temporary employees. Upstate of cials note that they have hired 6o the 24 contract sta as State employees. Te use o contract sta orextended periods o time does not appear to be in line with the intent thatthe contracts are used so that Upstate did not have to hire employees.Instead, these “temporary” employees remained or at least one year. Webelieve that Upstate should periodically analyze whether hiring Stateemployees on a part-time or per diem basis is more appropriate thancontinuing long-term assignments o temporary contract sta . We alsonote that all o the in ormation regarding costs was done in response tothe auditors’ request and not part o the original decision to contract out

or services.

Our sample also included contracts or our services received on acontinuous basis: operating room cleaning ($1.3 million), security services ($18.5 million), ood and nutritional services ($21.6 million), andretail pharmacy ($250,000) including the lease o space to the pharmacy

or $12,000 per year. In response to our request or in ormation about thedecision to contract or services, Upstate of cials prepared cost analyses

or cleaning operating rooms, security services and ood and nutritionservices contracts. Te cost analyses showed it was about $30,000 lesscostly to contract or the cleaning operating rooms, about $500,000cheaper to contract or security services, and about $1.27 million lesscostly to contract or ood and nutrition services. Upstate did not providecost analyses or the retail pharmacy contract. However, they told us itis better to contract because they could not obtain access to pre erredpricing on drugs and Upstate is not licensed as a retail pharmacy.

Notwithstanding, there is no contemporaneous documentation that waspart o the decision to contract out or services. Such an analysis couldhave included retraining Upstate employees who clean the acility toclean the operating rooms.

While there are times when it is necessary to hire outside serviceproviders, a documented analysis is important to ully support thatUpstate’s conclusions are correct and that opportunities and options




or cost savings have been ully considered. Upstate did not alwaysdocument and retain such analysis, nor did it prepare such analysisprior to entering into the contract. In the absence o such analyses, wequestion whether contracting out or certain services was necessary andcost-e ective. Upstate of cials state that, other than the provisions o

EO6, they are not aware o any speci c requirements that they prepareand maintain documentation to support their decision-making process.However, documenting the basis or contracting deci sions is a goodbusiness practice.

Based upon our review o Upstate’s e orts to scrutinize Service Contractspending, we believe additional savings opportunities may be possible.During the two years ended June 30, 2009, Upstate spent an averageo $44.6 million annually on Service Contracts. Upstate’s practice is toreview all contracts when it renews or bids a new contract. We oundthat Upstate had cut some Service Contracts in response to State undingreductions. However, Upstate did not provide documentation to supportthat it had reviewed all current and planned Service Con tracts, as part o its budget reduction e orts. Such an analysis is essential to ensure thatmanagement has identi ed all opportunities where the scope o contractwork may be de erred, eliminated or reduced to generate cost savings.

Upstate of cials stated that they constantly analyze costs to determinei there are ways to save money, but it is not documented. For example,when a new contract is bid or renewed, they review whether it is cheaperto do it in-house or to contract out. Upstate’s State budget was cut$26 million ( 26 percent) during the three scal years 2008-09 throughprojected 2010-11. In addition, Upstate experienced mandatory costincreases (e.g., cont ractual salary increases and utility cost in ation).Of cials stated that in response to the reduction in its State undingthey implemented a number o initiatives to increase revenue and cutcosts. Tese included reduced contract labor, ocused administrative and

acility program reviews to identi y cost savings, and across-the-boardreduc tions o departmental O PS allocations by 10 percent. Departmentmanagers then reviewed their projected needs and made managerialdecisions to reduce certain costs, including some contracts. However,Upstate does not maintain a listing o all c ontracts that were terminated

or revised to achieve cost savings.

Upstate of cials cited savings o about $1.7 million rom contract cuts,including estimated savings o $60,000 by replacing a cleaning contractwith State employees, and the Upstate library withdrew rom onecontract and expects to save about $2 04,000 during calendar year 2010.In our sample o contracts we identi ed three one-year advertisingcontracts that were terminated due to budget constraints. Upstate

Reassessment o Service Contracts



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of cials reported that this re sulted in savings o about $100,000. Anotherthree-year contract in our sample or a spine surgeon was terminateda ter its rst year saving $1.3 million.

Upstate of cials a lso noted that they have reduced the use o temporary

staf ng obtained rom contractors. While Upstate did not provide anestimate o the cost savings rom reducing temporary staf ng, Upstaterecords show a decline in temporary sta use during our audit period.We note that in September 2009, the hospital expanded, creating a need

or additional staf ng. Upstate of cials told us that contract staf ngwas used until the need or permanent employees could be assessedand employees hired. As o June 3 , 2010, there were 294 (248.92 F E)positions approved or the hospital expansion, with 11 (7.2 F E) stillopen. However, Upstate of cials note that additional positions could beadded, which will urther reduce the use o temporary staf ng.

We also ound that Upstate did not identi y what recurring savings itwould achieve in scal years 2009-10 and 2010-11, including what ServiceContracts would be impacted. In October 2009, the Governor againcalled or agencies to reduce spending in uture scal years–this timeby more than 11 percent. Given the State’s scal crisis, Upstate of cialsshould reassess all Service Contracts. I of cials conduct a top-to-bottomreview o every current and planned contract, it is possible that they may identi y other alternatives or opportunities to achieve savings or con rmthat Service Contracts are appropriate. We previously noted that duringthe two years ended June 30, 2009, Upstate spent an average o $44.6million annually on Service Contracts. While management might not beable to eliminate any o these contracts, it is possible that some could bescaled back to achieve additional savings. I Upstate had been able to cutits average spending on these contracts by just the 10.3 percent savingsgoal or overall budgetary reductions, it could potentially save about $4.6million annually.

1. Communicate to appropriate sta the requirement to support ServiceContracts with written justi cations o the need or the service, theappropriate level o service, and the decision that there is a need tocontract out or services.

2. Instruct managers to periodically reassess all Service Contracts toidenti y opportunities to de er, eliminate, reduce or bring them in-house, and to document and retain their determinations.

Recommendations




Agency Comments

Agency Comments

*

Comment1

*Comment

2

* See State Comptroller’s Comments, page 21.



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*Comment

2

*Comment

3

*Comment

4

* See State Comptroller’s Comments, page 21.




State Comptroller’s Comments

1. In the absence o documentation indicating that any ormal evaluations were done,Upstate managers did provide us with verbal explanations regarding why they believedcertain contracts were necessary. However, these explanations were provided inhindsight and are not a substitute or documented analysis that should be per ormedprior to making a decision to contract or services.

2. At the time a decision was made to contract or these services, Upstate of cials hadnot per ormed a cost-bene t analysis o their planned approach and had not obtainedin ormation on wage rates that would be paid to State employees or temporary sta involved in providing the services. While of cials may be con dent that savings haveresulted rom their decision, they lack assurance that even greater savings would nothave been realized through part-time, per diem, or seasonal hiring o State employees.

3. Of cials are correct that there is no law or regulation requiring a documented justi cation or every contract. However, we maintain that good business practicesinclude preparation o documentation showing that all appropriate actors are properly considered and evaluated when making decisions to contract.

4. Te process that of cials describe pertains to how Upstate monitors the use o contractsa ter the contracts have been established.

State Comptroller’s Comments

State audit says Upstate Medical University not reviewing contracts enough

Documents

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